FDI and growth
The missing links between foreign investment and development: lessons from Costa Rica and Mexico
Why FDI has not led to development in Costa Rica and Mexico
Authors:
E. Paus; K. Gallagher
Publisher:
Global Development and Environment Institute, Tufts University, 2006
A developing country will derive long-lasting development benefits from FDI only if there is the right coincidence between its location-specific assets and Transnational Corporations’ (TNCs) global interests, and the right match between the country’s national linkage capability and TNCs’ strategic interest in domestic sourcing.
This paper argues that Costa Rica and Mexico have been very successful in attracting high-tech FDI due to the cumulative results of past development policies, proximity to the U.S., and trade arrangements. However, a combination of pervasive market failures, government inaction, and changes in TNC strategies explains why the two countries have not been able to reap lasting benefits from high-tech FDI.
The paper concludes that:
- pro-active government policies have to be an integral part of any FDI-linked development strategy
- pro-action is needed to attract FDI, to promote indigenous linkage capability, and to enhance key location-specific assets on an on-going basis in the context of a coordinated policy framework
- firms in developing countries need time to respond to the competition from transnational corporations (TNCs) and to reap the benefits from spillovers.
