Good for the Goose, Bad for the Flock? FDI in Developing Countries (with special focus on India) Nita Rudra, University of Pittsburgh Siddharth Joshi, Indian Institute of Management, Bangalore
Puzzle: Limited research on how FDI affects the poor? • Political economy has yet to uncover the many complexities of FDI • Existing literature: FDI affects growth, inequality, labor rights, wages, and employment. • But these can improve without impacting quality of life of majority of population in developing countries (Sen 1987, 2003) • Point: we have limited understanding of how FDI impacts the well-being of host populations
Research focus: The links between FDI, water, and the poor • Study of FDI impacts on poor should focus on water because: • It is the poor who lack access in developing countries • It provides a more complete picture of well-being of the poor • Existing research on water access has neglected the role of international economic factors • It is a precise way to unravel (some of) the complexities of FDI and its effects on host populations
Argument in Brief: FDI contributes to water crises • FDI helps improve the well-being of the poor only under certain circumstances: low socioeconomic diversity • Much of the rapidly expanding sectors attracting FDI in developing countries are highly water intensive or water-polluting, or both • FDI= key mechanism for tech transfer and best practices • BUT foreign investors have limited incentive to treat water as a valuable resource • AND governments have limited incentives in diverse countries to regulate MNC activities or implement comprehensive water policies
3. Theoretical foundation: FDI as a factor in water access • OLI framework: host countries must offer locational advantages to firms (Dunning 2001, 1998, 1973) • The Pollution Haven Hypothesis: developing countries have a comparative advantage in ‘dirty’ products • Findings: Free trade is good for the environment (Bhagwati 2004, Frankel 2003, de Soysa and Neumayer2005, Birdsall and Wheeler 1993, Grossman and Krueger 1994, Amtweiler , Copeland and Taylor 2001) Issues . . . • Focus on atmospheric pollution • Neglect extent of water consumption • Most focus on trade effects
3. FDI could help…but limited incentives • Much of the expanding sectors for FDI in developing countries are water-intensive and/or water-polluting (electric and electronic products, machinery, automotive products, metals, food and beverages) • Spread of best practice is unlikely: • South-South FDI on the rise • Most FDI in developing countries is market-oriented • Lower consumer awareness in internationally and domestically
3. Weak government regulations As multinational firms demand greater access to water and increase water pollution, potable water declines • Weakly enforced water regulations (supply and usage) • Low tariffs=> prevents cost recovery to provide access to gen pop • Corruption: Rent seeking occurs as governments underreport water use, accepting bribes to cover wastewater discharge and pollution ( Global Corruption Report 2004) H1: FDI will have an adverse impact on access to potable water
3. But FDI does not hurt water access in all countries Government preferences are related to level of inequality and ethnic diversity : • Richer groups in unequal countries prefer the status quo, and hold more political sway relative to larger group of disadvantaged poor(logic based on Alesina, Baqir, and Easterly 1999) • Rich already have access to potable water in developing countries; they benefit the most from water subsidies (Human Development Report 2006, World Bank 2005). • Reforms would result in higher costs for themselves and multinationals • This group of elites favor multinationals (Pandya 2010) • Ethnic diversity increases chasm between elites and masses • In more equal countries, larger middle classes shares an economic interest in regulating MNCs and comprehensive water policies.
3. FDI impacts will be conditioned by government preferences • High inequality is associated with weak conflict mediating institutions(World Development Report 2005, Acemoglu, Johnson and Robinson 2001, Engerman et al 2002, Easterly, Rizen and Woolcock 2006) • Reasons: historical • inequality lends itself to a power structure that is crystallized in institutions • Political elites systematically neglect subordinate groups in unequal societies H2: FDI will slow access to potable water in countries with high socioeconomic diversity
3. Case study: India • Increases confidence that a link between FDI and India’s water crisis • Additional causal mechanisms: • FDI does have environmentally friendly technologies, but insufficient • FDI boosts productivity and output of local firms (Haskel, Pereira and Slaughter 2002).
5. Conclusions and Contributions • FDI can adversely affect water access in countries with skewed distributions of income • Potential contributions to debates in CPE, IPE and IE: • Do multinationals flock to developing countries because of weak regulations (PHH)? • Likely • Contribution: Need to consider water pollution and water consumption • Does global market integration undermine government control? • FDI pressures can reinforce government inaction • Contribution: different mechanisms at play • Does FDI help the poor? • In homogenous developing countries; some political responses to globalization can be predicted on the basis of inequality and ethnic heterogeneity • Contribution: impacts of openness may be conditioned by class cleavages