What are the Politically Correct Limits for Accepting Foreign Direct Investment?

In Le Kahuin N°18 of last April, we discussed Imperialism whose main form of expansion is foreign direct investment (FDI).

We confined ourselves to examining the concept from the angle of the capital-exporting country. Here we approach the problem from the point of view of the recipient countries, mainly the underdeveloped ones where investments can materialise as subsidiaries of multinational firms (MNFs).

This is the case when the participation of foreign investment is in the majority, otherwise, if it is in the minority, it is in the form of joint ventures. It should be noted that there are also other forms of penetration or presence of MNFs, which are more overlapping, without necessarily involving a capital contribution.

This is the case of national companies that operate with royalties from foreign companies providing the technology and other modes of operation and are remunerated with a percentage of sales. Another form is licensing, where the foreign company cedes the use of its brand and provides technical assistance to the domestic company in exchange for a percentage.

A final form that we will mention is international subcontracting, where the national company adds value to components that it imports temporarily from the FMN and then re-exports transformed, in order to integrate them into the firm’s value chains.

These are the main ones, without prejudice to other forms resulting from combinations of the above.

Foreign direct investment can therefore be understood for two reasons: for its contribution in capital investment–which is scarce in underdeveloped countries–and for its contribution in technology, which is scarce due to the low level of local science and technology.

These two factors are to economic growth and development what pisco and lemons are to pisco sour: essential and decisive.

Hence the tendency of practically all countries in the world, whatever their system, to resort to FDI by generating attraction measures. In developed economies, this is development itself, offering a solvent market with convenient profit expectations.

In underdeveloped economies, it is necessary to offer incentives and guarantees to attract FDI. Let us recall that in 1921, even the USSR itself proposed to embrace FDI in the framework of the New Economic Policy (NEP). It was adopted under the leadership of Lenin, given the complex situation after the Revolution, the civil war and the First World War, and then abandoned by Stalin.

Closer to home, we have seen that socialist Cuba has also resorted to FDI, especially in its most dynamic sector, tourism.

We recall these two examples, not to mention the People’s Republic of China, to temper the semi-sacred character of the justified repudiation of imperialism in the forces of progress and the susceptible recourse to it under certain conditions.

Globally, we tend to condemn all forms of presence of the USA and the former European colonial empires, Britain, France, Germany and Italy in our underdeveloped countries. But it is not only the provenance of FDI that incites us to distrust.

In a country in transformation, or even more so when changing the system and relations of production, introducing capitalist companies in search of surplus value appears, a priori, as a major contradiction. There are other disadvantages that have been highlighted by numerous studies. The main one has been to obtain additional guarantees of overprotection of investments in the host countries.

Investor countries have systematically taken advantage of free trade agreements by introducing protective clauses, not only against possible nationalisations, which would be understandable, but also against any governmental measure that could affect profitability (e.g. measures against environmental deterioration that could increase production costs).

The cherry on the cake is the externalisation of justice in case of disputes. The national justice system is incompetent in this matter, transferring the resolution of possible disputes to private arbitration tribunals, without even contemplating an impartial international tribunal.

The precedent erected against FDI seems rather loaded, but even so, without being masochistic, it can be suggested that FDI is not always negligible, without forgetting that what is withdrawn in profits tends, in the long term, to exceed what is invested and that investor countries tend to be net importers of capital.

At the heart of the problem may be the context in which these FDIs are made:

In the vast majority of Third World countries the local bourgeoisies and/or the state lack a national development project. They care little about development, it is the appetite for quick and risk-free profit that characterises them for the most part.

Exporting capital to tax havens and accumulating profits is a common practice, as well as concentrating on finance, internal and external trade and other actions that do not generate a material product. Sectors linked to the productive sector are linked to primary, extractive or agricultural activities, often export-oriented.

In this context, FDI replaces or adds to the shortcomings of the State and the bourgeoisie, with the disadvantages already mentioned.

Our main interest is to question the role that FDI could play in a totally different context, that of a country undergoing social transformation.

By definition in this case the state has a preponderant role in the economy with redistributive objectives and the satisfaction of basic needs. The bourgeoisie cannot be expected to play a major role in the implementation and fulfilment of these objectives.

FDI associated with the state appears in these circumstances as a credible alternative. Knowing that foreign capitalists share neither the model nor its objectives, it will be necessary to be more vigilant in this partnership. Accept its cost, which is exclusively limited to obtaining profits for investors within the commonly accepted margins. This is a return of between 5% and 10%, which is justifiable if one considers that the foreign contribution has brought about a leap in economic development that would not otherwise have been possible.

This article has been originally published in Spanish in the journal of Chilean diaspora in france “Kahuin.”

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