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Center for Economic Policy Analysis

Foreign direct investment (FDI) is commonly seen by economists and policy makers as a premier agent, not only of globalization, but also of economic growth and development. In fact, in light of the Asian and South American financial crises, in which portfolio flows proved to be flighty and unreliable, FDI is now treated more than ever as the capital flow of choice.

FDI has thus become one of the most sought-after commodities in the global economy, the object of enormous investments of time and resources by policy makers who want to attract it, and the subject of an enormous amount of research and debate concerning its nature and impact. It is not surprising, then, that the role of foreign direct investment in the People’s Republic of China (PRC)1 provides fertile ground for studying the dynamics of FDI and globalization.

The PRC has attracted a large amount of FDI over the last decade, the most of any developing country, and in recent years, it was among the top four recipients of FDI in the world. FDI flows to the PRC have occurred in a context of intense global competition for foreign investment by many countries, including developing countries in Asia. And the entry

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of China into the World Trade Organization (WTO) may dramatically affect the types and quantity of FDI flowing to China, and the government’s ability to manage and direct it. Indeed, many competitors in Southeast Asia and elsewhere worry that the PRC’s entry will lead to an acceleration of investment flows to the PRC and a corresponding reduction in flows to themselves.

Hence, China provides more than just a case study of foreign investment; understanding the dynamics of FDI in China is essential to understanding the dynamics of FDI in the world economy as a whole. Globalization and FDI There are two, broad competing visions of globalization in general and the role of FDI in particular (Crotty, Epstein and Kelly 1998). One is the “neo-liberal vision,” which treats FDI as an agent for spreading capital, technology and management skills across the globe and, therefore, as a crucial agent for economic growth and development.

According to this view, any government that wants to partake of these benefits of FDI must implement a set of policies and institutional innovations, including openness to investment, modest regulation, government transparency, modest tax rates, and investor guarantees. The second vision is not as sanguine about the impact of globalization and FDI. Rather than envisioning a “race to the top” or a “convergence,” as forecast by neo-liberal adherents, this group fears a “race to the bottom. ” According to this view, global competition for FDI places an enormous amount of bargaining power in the hands of multinational corporations (MNCs) and their allies in the International Monetary Fund (IMF), U. S.

Treasury and World Bank. This competition, in turn, forces countries to lower regulations, taxes, environmental protections, wages and working conditions in order to attract and retain capital. The result is a leveling down of wages, social protections and government control across the globe (Barnet and Cavanaugh 1994; Greider 1997).

These two views – neo-liberal versus race to the bottom – have become 1 Hong Kong’s return to Chinese rule in 1997 has not altered its status as a distinct administrative and economic entity, so it is treated separately from the PRC in this paper. increasingly polarized, fought out in academic circles, policy fora and in the streets during annual meetings of the IMF, WTO and other global institutions. As for policy, race to the bottom adherents argue for constraints on FDI in order to protect the living standards of workers in the developed economies, and to restrict the alleged exploitation of workers and communities in the developing world.

By contrast, proponents of the neo-liberal view, and many academics and policy makers from developing countries, insist that proposed constraints on foreign investment are self-serving: they only raise the living standards of workers in the developed world at the expense of workers in developing countries. Crucial to this policy debate is an empirical question: Does FDI in fact raise the living standards of communities in the developing world? If FDI does make a substantial contribution to growth and development, as the neo-liberal advocates assume, then there may be a trade-off between protecting workers in the North and those in the South.

However, if the race to the bottom view is correct and FDI in the current context does not help the majority of citizens in either developing or developed countries, then regulating FDI – for example by imposing codes of conduct or living wage legislation – might be in the common interests of workers in both North and South. As we have argued elsewhere, the impact of FDI will depend greatly on the institutional context in which it takes place (Braunstein and Epstein 1999; Crotty, Epstein and Kelly 1998).

As in the race to the bottom view, we see bargaining power between MNCs and governments, communities and workers as an essential determinant of the ability of countries and communities to benefit from FDI. In principle, under the right institutional circumstances, countries or regions could exert bargaining power over MNCs, and regulate them in such a way as to generate significant benefits for their communities. The questions are: what are the right circumstances?

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