Question

Read the case Michael Mortimer (2003), The Impact of TNC Strategies on Development in Latin America and the Caribbean, Overseas Development Institute. Scenario: You are a junior Minister in the Ministry of International Business. You are asked to write a draft policy paper on policies and development strategies your government will implement to (i) increase FDI, (ii) protect the domestic economy from the deleterious effects, and (iii) improve the mutual benefits for the host country and TNC.

Answer 1

We identified various FDI policies across the entire policy spectrum in the second
section and their implications for the relationship between FDI and human capital. In
this section we discuss how FDI policy affects human capital formation and income
inequality using the framework discussed in the previous section. We analyse
whether FDI policy affects the supply of, demand for and bargaining position of
skilled and less skilled workers, as this is crucial in determining implications for
income inequality. We discuss three categories of FDI policies: FDI attraction, FDI
upgrading and linkages. FDI policies are then divided into whether they affect the
demand (D) or supply side (S) of labour, or industrial relations (IR).
4.1 FDI attraction: demand side measures
We analyse four different FDI policies that can affect the relative demand for skills:
specific targeting, grants, fiscal incentives and international agreements. Some
countries (Ireland, Singapore, Malaysia, Costa Rica, etc.) have been trying to attract
high-tech and skill-intensive electronic TNCs and have built strong and flexible
institutions to achieve this. Investment promotion agencies (Ireland’s IDA,
Singapore’s EDB) trying to attract asset-seeking TNCs have consistently targeted
specific sectors to build industry clusters (including pro-active planning of
infrastructure and business parks) that draw on specialised labour skills and R&D
centres. Wells and Wint (1990) show that FDI-promotion policy works. Using crosscountry
study in 1985, the presence of a promotional body in the US raised total
inward FDI flows in developing countries by 30 per cent. The effectiveness of FDI
attraction strategies is likely to differ by country, and depends partly on financial
resources, organisational structure and method of implementation. General promotion
is considered much less effective than targeting specific TNCs.