Foreign Investment Rules in the World Economy: Leaving Room for Development?

1. Foreign Investment Rules in the World Economy: Leaving Room for Development? Kevin P. Gallagher Global Development and Environment Institute www.ase.tufts.edu/gdae

2. Three Key Points • Investment rules do not bring investment in and of themselves • Foreign investment does not automatically bring growth and sustainable development • Global investment regime is needed but current proposals will not foster sustainable development

3. Foreign Investment and Foreign Aid, 1990 to 2000 1,600,000 1,400,000 1,200,000 1,000,000 $US millions 800,000 600,000 400,000 200,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

4. Foreign Investment Trends in Context Developing country share of World Inflows has been small—only 25% of the total 3 nations receive the bulk of developing country investment (China, Mexico, Brazil) Foreign aid outweighs 55 of the 70 poorest countries Investment rules don’t necessarily increase the amount or quality of investment Investment flows have been sharply decreasing since 2000

5. World Investment, 1990 to 2002 1,600,000 1,400,000 1,200,000 1,000,000 World Inflows ($millions) 800,000 Developed Countries Developing Countries 600,000 400,000 200,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002*

6. 10 Largest Developing Country Recipients of FDI inflows ($US billions) Top 10 (1990-2000) Top 10 2001 ave China* 43.4 China* 69.7 Brazil 12.0 Mexico 24.7 Mexico 10.1 Brazil 22.5 Argentina 7.2 Bermuda 9.9 Singapore 7.1 Poland 8.8 Malaysia 4.7 Singapore 8.6 Bermuda 4.7 Chile 5.5 Poland 3.7 Czech Republic 4.9 Chile 3.3 Taiwan 4.1 South Korea 3.2 Thailand 3.8 Top 10 total: 99.5 162.5 Total For Developing Countries: 130.9 200.9 Top 10 share: 76% 81% Top 3 share: 50% 58%

7. FDI follows growth: the peer-reviewed literature Size of the market Proximity to markets Growth rate of host economy Relative wages Macroeconomic stability 

8. FDI doesn’t automatically create growth: the recent peer-reviewed lit • 15 most recent studies found • 3 “no” correlation • 2 “yes” correlation • 10 (growth occurred when nations had corresponding national policies to harnessFDI)

10. FDI and Corporate Social Responsibility Hundreds of billions invested in CSR funds worldwide ($1.2b DSI) 18 of the 25 largest US firms in the world do not pass socially responsible investment screens 24 of the 42 largest US firms in Latin America do not pass socially responsible investment screens Intel, Xerox, and Hewlett-Packard are seen as “leader” investors in their overseas operations Alcoa, Monsanto and Eastman Kodak are seen as “laggard” investors

11. Not More but Better:Case Study Evidence • Joint venture agreements • Local content standards • Home office/country policies • Advocacy efforts

12. Pressing for Sustainability in Investment Rules • Make sustainable development, not simply increases in investment, the goal of investment agreements • Protect national “policy space” (performance requirements etc) for developing countries • Negotiate separate framework agreement on investment at regional, bilateral, or global levels (not in the WTO)

13. A “Better” Approach to Investment Rules • Preserve the right to regulate • Post-establishment rights only • FDI only • Non-discrimination—clearly defined and according to national regulations • No extension of performance requirements • Dispute settlement—state-to-state

15. Environmental Kuznets Curve 250 - 200 - 150 - Pollution 100 - 50 - 0 - 0 5000 10000 15000 20000 25000 GDP per Capita

16. Empirical Evidence of EKC • Only applies to criteria air pollutants in developed countries • Turning points much higher than previously estimated • Does not apply to historical time-series in single countries • Can be explained by factors other than income