Foreign Direct Investment. Six Country Case Studies.(Book review)

Foreign Direct Investment. Six Country Case Studies YA Wei and VN Balasubramanyam (eds) Edward Elgar: Cheltenham, UK, 2004, 204pp.

This book contains six papers on foreign direct investment (FDI) in Ireland, China, India, Malaysia, Mexico, and Sub-Saharan Africa, originally presented at a conference in September 2002. The authors examine the determinants of FDI and its impact on economic development, employment, technology transfers, and trade. Every chapter is followed by very challenging comments from discussants.

Frances Ruan describes the exceptionally successful experience of Ireland. Because of data limitations, her discussion of FDI impact centres on manufacturing sector. Can Irish industrial policies be copied successfully elsewhere? Commentator Peter Buckley summarises key elements behind Irish success with attracting FDI: a favourable institutional environment, consistency of policy, openness, focus on the regional (EU) market, and attention to comparative advantage, as determined by MNC's, not the government.

Yingqi Annie Wei analyses FDI in China. Why is China so successful in attracting FDI? After discussing national versus regional aspects that affect Chinese FDI inflows, she argues for transaction costs and domestic financing constraints as the primary explanations for high FDI inflows. But the distribution of FDI across regions and sectors is pretty uneven. With regard to relationship between FDI and technology spillovers, trade, and economic growth, Wei observes that evidence is very mixed. More rigorous empirical analyses as well as theoretical models designed specifically for China would be useful, in addition to using firm-level data, as suggested by a discussant, Yasheng Huang.

A second paper by V.N. Balasubramanyam and Vidya Mahambare discusses FDI in India. Why has the liberalisation in 1991 failed to attract more FDI? Comparing India and China, the authors provide several reasons why Chinese success with FDI inflows might not be a proper model for India. They argue that factor and product market distortions generated by the overall domestic policies--for example, excessive delay and red tape--are the major reasons for relatively low FDI inflows. These domestic market distortions should be eliminated first, because without major adjustments in domestic policy, opening the doors widely to FDI will not be very successful. Discussant Sanjaya Lall, however, warns that a desire to attract more FDI does not mean that India should adopt completely 'distortion free' policy.

Nigel Driffield, Roger Clarke, and Abdul Halim Mohd Noor discuss FDI in Malaysia during four industrialisation stages. They describe the role of FDI in Malaysian electrical and electronics industry, particularly its impact on technological development. Although Malaysia has managed to attract huge amounts of FDI, discriminatory government policies seem to limit spillovers to domestic firms. The authors also discuss other possible causes of weak technology spillovers and provide several suggestions for future policy changes. The authors and discussant review several policy alternatives.

David Griffiths and David Sapsford focus on how Mexico's joining NAFTA has affected FDI inflows. The authors believe that FDI has increased employment, exports, and technology spillovers to Mexican firms. In a very interesting discussion, they analyse the impact of FDI on regional disparities between the northern and southern parts of Mexico. Existing evidence showing positive FDI productivity spillovers has used cross-sectional industry-level data; however, firm-level panel data studies for Mexico are missing. Since panel data studies in other developing countries often find no or negative productivity spillovers from FDI, similar panel data analyses using Mexican data should be conducted. While we have several analyses of various channels of FDI spillovers, we still do not know how to increase these spillovers. Frederic Sjoholm comments that even if FDI does not generate positive technology spillovers, government should still try to attract FDI, since it can benefit a host country via increased tax revenues, employment, or exports.

Mohammad Salisu analyses determinants, efficacy, and FDI policies in Sub-Saharan Africa, where inflows are much behind those of the other developing countries. There is also a very little research on this region. Moreover, data on African FDI inflows are hard to interpret, owing to massive devaluations. So far, most African FDI is concentrated in the mineral--and oil-based economies, though recently several other countries--including Uganda, Mauritius, Mozambique, and Ghana--have increased FDI inflows, primarily, thanks to their macro-economic and political stability, trade reforms, and institutional changes. Nigeria demonstrates some of the major impediments to attracting FDI to Africa, especially corruption. To attract more FDI, the author concludes, Africa needs comprehensive social reform and reduction of bureaucratism. In this process, partnerships with international donor communities, such as The New Partnership for Africa's Development (NEPAD), might play a crucial role.

The book is very well written and organised; it is an excellent reference not only for researchers and policy makers, but also for those doing business in developing countries.

Renata Kosova

The George Washington University, Washington, DC, USA