FDI, a trap in delusion

(Submitted by Mikky)
So delusions make you believe what you see, how about opening our eyes and rehash our economic sensibilities. The developing countries are on a road to development. True. For them to reach the point of economic transition seems a distant dream. Well my question is, how long is the road to development ? Foreign Direct Investment is the direct pouring of  factors of production by a foreign country in the host country. Investments that come into the developing countries through these means are generally preferred more than FII’s (Foreign Institutional Investor) which are potentially unreliable forms of investment for economic development of a nation.
EU Foreign Direct Investment [SEMINAR]
EU Foreign Direct Investment [SEMINAR] (Photo credit: ALDEADLE Alliance of Liberals and Democrats for EU)

 
The developing countries possess the cheapest forms of labour which makes them so attractive to the globalized players as their services are offered dead cheap, yet skillful. The attractiveness is not my dealing, the question is why is the transferred technology so obsolete ? Schumpeter’s economics tells us that development is through innovation. When the FDI pours in along with newer technologies from the distant parts of the world, it helps the host ( developing country) to fill in it’s economic gap.  FDI that fills in  these gaps by providing them the work, seem to do the magic by showing them a statistical growth, growth in terms of numbers. This doesn’t necessarily mean that these countries are on a road to development because the withdrawal (which isn’t practical) of these assets mean that they fall back to their low rate of growth. The development in these economies isn’t internalized. They remain and remain dependent heavily on International Trade
   
The technology transferred is usually obsolete, chiefly the low-end electronics and medium level of technologies like automobiles. While the patenting in the developing countries are also from the FDI based industries, it does look like the technology flow is one sided. The receiving end thus bound to the obsolete technology, apparently. If innovation is the way to wave the growth curve, the tech transfer which also pushes the curve upwards seems virtual, delusional and hollow. The manufacturing of low-end commodities only increases the “hollowness” of economic development. 

Technology Map - Tutornet
Technology Map – Tutornet (Photo credit: steven w)
 
Following this mode of development is a stop-gap initiative. Until the developing countries do not get the full scale of newer technologies the development that they currently see in statistics will not materialize and will not be helpful in turning them into a developed country. To be the leader, you cannot be a follower. Innovation must take place in developing countries, investment in research is imperative and the transfer of labor to higher and much higher forms of production is the pathway for glory which can be viable through domestic innovations or full technology transfers. 
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©The Idea Bucket, 2013. Submitted by Mikky.
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6 Comments

  1. I apologise for comments above the english language is one loved by the law and politicians because it is so undefinable in so many context. What you are writing about is a mechanism, and it is exploitation from only the point of view of the underpaid country and worker on the factory floor. It is investment from the opposite perspective, of making money or influencing the country into which the investment flows; to stop building armies perhaps or allowing the building of pipelines across its country. Thank you for your explanation, it filled a few knowledge holes for me and again I apologise for the politiking, never personally exploited, rattle of the dying engine of protest. Anyone who uses the word exploit should go and work in a mine for a year, or perhaps be grabbed off the streets of China because they are disabled and forced to work cleaning out charcoal brick ovens.

  2. Interesting, and true, observation. There is no question that foreign companies export obsolete equipment and technologies and make up for the inefficiency with cheaper and more plentiful labor. That is not a bad thing because the obsolete is still better than the locally available. That seems to be positive just not perfect.
    Seen your way, the developing nation will always be second best. That cannot work. They cannot stay there or else. They would be better of being 5th best. It is like poker. The only expensive hand is the second best one.
    There is, of course, a solution. It involves three parts.
    Part one, have a high rate of savings, earned by using the better but not best technologies available, to invest in newer or locally developed innovative technologies. All developed countries at one time or another had a high savings rate. You cannot get to the leading edge without capital. Money, skills, attitude and time. I expect that India China and maybe Indonesia will grow into the modern world much more quickly than Europe or the Americas did. They have the advantage of seeing what did not work. Mistakes of others are cheap experience.
    Part two, find niches that can be exploited. No big company is good or even adequate at everything. Being the best in a small growing market is easier in the beginning because big companies can’t be bothered. It is like judo. You use their strength and momentum against them. You cannot compete with a large generalist unless you also, are one. Build capital in the niche and then decide.
    Part three – don’t build obsolete infrastructure. The world today punishes slow communication, poor education, poor training and unreliable power. Probably more than that. Have as little of the weak areas as you can.
    People are naturally impatient. Particularly young people. Try to add reasonable time frames to your strategic goals. It will help you avoid changing your plan before it has had time to develop fully. You reach a condition called the despair curve if you fail here.
    Good luck with it, but I think you and the others here probably don’t need luck. You appear pretty skilled and vibrant.

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