engleski

FDI and growth : what is missing?

The economic transformation in former socialist countries (so called transition countries) implies fundamental re-allocation of resources (structural economic change) which means also re-industrialization and modernization of these countries on market-oriented neo-liberal paradigm through the process of globalization. In this sense globalization means process of adoption of the "rules of the game" which have been created by supranational financial and economic institutions as well as developed countries with strong belief that it will accelerate the process of economic restructuring and provide conditions within the transition countries for economic convergence or "catch-up" with EU countries. Nevertheless, it should be pointed out that the neo-liberal globalization scenario, as a specific combination of free international trade and free capital flows has not, so far, generated economic growth at global level. In addition, it has not reduced the inequality of income and wealth among the countries, as it had been the case after the World War II (Went, 2002). This scenario raises a number of socio-economic issues, starting from social acceptability of such development paradigm up to the purely economic and technical questions regarding the financing of this fundamental, large-scale transformation. Indeed, development financing seems to be one of the major obstacles to this ambitious agenda. Namely, the transformation of these economies requires mobilization of huge resources sufficient to enable reforms and, at the same time, restructuring process. "Financing gap" thus occurs due to the undeveloped and under-capacitated institutions, mismanagement, transitional crisis and poorly domestic resources. Domestic savings, especially private, is obviously not sufficient to finance needed investments and hence high growth rates. On the other hand, external sources of investment are often not available considering macroeconomic and overall fundamentals in these countries (acting as a barrier to the access to the international capital markets). Within the framework of strong trade liberalization and complementary liberalization of capital flows, with dominant private international financing funds and limited sources of official assistance, FDI appears as an important catalyst with respect to the financing of development in these countries. Microeconomic effects as well as reasons of the FDI inward are relatively well analyzed, from both theoretical and empirical aspects, in a large number of studies. However, increasing inflow of the FDI in the countries in question during the last decade has drawn the attention to the macroeconomic impacts of the FDI on (those) host countries. The impact of FDI on the dynamics of growth (and vice versa) has been of particular interest because no consensus has yet been reached on the permanent as well as transitional effects of FDI on growth. In theory, the influence of the FDI on the current account, balance of payment, in foreign debt as well as on export has been assumed as positive in transition countries. Nevertheless, some recent studies brought this impact into the question. Furthermore, even the possibility of economic convergence (catch up) through the liberalization of trade and capital flows in the countries in transition (developing countries in general) has been investigated. The role of the FDI in spurring economic growth is possible but not automatic. Indeed, possible negative spillover effects, negative impact on growth and undesirable course of development, raise a number of issues related to the strategy of the FDI attraction, possible incentives in competing for FDI, as well as the options and forms of governmental FDI promotion measures, capability of the FDI alone to increase growth rate and other options available to the government to support development (new role of government in developmental policy) etc. Having had an overview of the above issues in the first part of the paper, the second chapter brings about the basic theoretical and empirical insights on the role of the FDI related to the macroeconomic fundamentals and the growth of the economies in transition. Apparently, FDI have had rather different impacts in different countries due to a variety of factors (inherited conditions, achieved level of development, length of the transitional crisis, quality of the macroeconomic environment, size of the country etc.). At this point, it should be stressed out that the contribution of inward FDI to the host country's economic growth does not depend only upon local conditions, but also on the channel of the FDI inflows in the transition countries (referring primarily on the difference between the takeovers through privatization, i.e. mergers and acquisitions (M&A), dominant in these countries, and the greenfield investments) as well as on the economic sector which the FDI is directed to. In fact, the benefits of FDI vary greatly across the sectors ; there is a strong positive correlation between FDI in manufacturing and growth, while, on the other hand, the relationship between FDI in primary and tertiary sectors and growth rate is much weaker. Studies on positive impact of FDI are mainly based on microeconomic insights into the increase of efficiency of the FDI companies, particularly in the secondary – manufacturing sector (which is, in principle, export oriented). Therefore, generalizing, the impression is gained about the overall positive effect of FDI on economic growth. Consequently, there is an affirmative general attitude towards FDI attraction, regardless of the target (host) economic sector. Still, although FDI companies are usually more efficient than domestic firms, this fact alone can merely effect the economy as a whole and its growth. Indeed, de-industrialization of the economies in transition produced a growth patter that could be the crucial factor in terms of economic stability and growth rate in the medium-term. Such insights are of the utmost importance for the future FDI attraction policies in the countries in transition since, having in mind the liberalized capital flows, further endowment and imbalances of current account should be strongly avoided in some of the countries (Croatia, for example). Indeed, the heterogeneous group of the economies in transition should not focus on size of attracted FDI (regardless of the targeting economic sector) and hence suffer internal competition (spending rare and limited national resources), but on the modes of increasing the developmental effects of the FDI, implying primarily clear reform and development strategies and consequent different channels of the FDI attraction (Greenfield investments). The growth led FDI scenario seems of utmost importance for these countries, especially the transition countries of the “ first wave” (particularly Hungary, Czech Republic and Poland). However, in the case of the transition economies of the SEECs (including Croatia) it would be rather unreasonable to expect the FDI led growth scenario to kick-off the development process (especially without a firm and transparent development strategy). FDI, as a form of long-term financing, does not enter an economy when the host country desires so, but when the investors clearly recognize their interests within the development strategy of the country. Within such a context, the re-industrialisation process in the transition economies (including Croatia) could be seen as a desirable export-driven development strategy, capable not only to attract FDI but also to ensure their full positive developmental effects. The third part of the paper examines the FDI from the standpoint of modern theories of growth. More precisely, the possibility of the economic convergence within the framework of the neo-liberal liberalization policy has been analyzed and brought into the question. Indeed, politics and EU accession conditions on one hand, and development policies of the countries in transition, on the other hand, are often not harmonized ; moreover, they are sometimes even conflicting. The authors hence argue that the accent is more on formal than real convergence. Thus, the necessity of creation of specific policies and programs tailored by EU and international financial institutions (IFIs) to foster development in the transition economies is emphasized.

FDI; growth; institutional capacity; catch-up; convergence

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