On Maquila, Diamonds and Telecom: Building a Theoretical Classification of FDI in Developing Countries

This paper builds on a previous methodological proposal for analyzing the development effects of FDI in host economies. The starting point for this FDI-D framework is the cumulated information provided by econometric literature on the variables at work when FDI inflows into a developing country. Our methodological proposal assumes the complexity of the FDI-D link –therefore categorizing this sequence in a three steps chain of factors, mechanisms and processes–. Factors are (i) the features of the economic structure of the host economy (trade openness, human capital, physical infrastructures…); (2) those of its institutional framework (fiscal pressure and progressivity, norms on universal coverage…); and (3) the characteristics of the investment project (its dependency on local assets, whether it is a labour or capital intensive production…). Different combinations of factors may lead to different mechanisms (direct employment, crowding in, clean technologies absorption, net exports…) that will ultimately have an impact on diverse development processes (structural change, contribution to public goods, goods and services provision, changes in labour structure, balance of payments equilibrium).

The 53 variables of the FDI-D methodological framework can combine in a finite but high number of ways. The framework admits thousands different combinations of factors –features of the institutional framework and the economic structure of the host economy and characteristics of the investment project–. Any of these combinations could, in principle, trigger mechanisms in various ways; leading to diverse effects in any of the 5 outcome variables. The number of possible sequences –defined as the ‘path’ from a certain combination of factors to the variation of the process variable– framed in this methodological proposal are counted in hundreds of thousands.

With such numbers, it becomes extremely difficult to expect –on the basis of this framework– a given effect of FDI. Therefore, effects of FDI on development are hard to predict and, actually, there is not one general theory on FDI and development on which basis we could expect a certain behaviour of the variables of the framework –despite the existence of partial theories such as the Investment-Development Path built by Narula and Dunning–.

The aim of this presentation is to identify a complete series of ‘frequent patterns of FDI-D’ in developing countries. Each sequence will consist of a precise FDI-D path including a combination of factors, the mechanisms triggered and the processes variables affected. This (1) would allow us to expect a series of mechanisms and development processes for a given combination of factors; therefore building middle-ground theory on FDI and development. Moreover, this theoretical result would have policy implications as (2) it could be a tool for policy makers –administrations of host and home countries, companies, civil society organisations…– for establishing the incentives for maximizing ‘development-friendly’ FDI projects. A tentative list might include the maquila –outward-oriented, labour intensive FDI with a positive impact on jobs but no technological upgrading–, the diamond –extractive, capital intensive industries in weak institutional frameworks– and the telecom types –FDI providing basic services and crowding out local companies–.