How to deal with the “black box” of foreign investment and development? A case study in the Dominican Republic and a methodological proposal

Abstract

This article proposes an analytical framework for the study of the effects of foreign direct investment (FDI) on development. This case-by-case approach, based primarily on qualitative techniques, is aimed at assessing the final effects of FDI on the different aspects of socioeconomic development, as well as constructing a narrative of what occurs inside the “black box” of FDI and development. As a research tool for analysing specific investment projects, it has been used to guide a series of case studies between 2010 and 2013 (in this case, the tourism sector in Dominican Republic), showing that relevant policy-oriented conclusions can be drawn by analysing FDI using this methodology.

Résumé

Cet article présente un cadre d'analyse pour l’étude des effets de l'investissement direct étranger (IDE) sur le développement socioéconomique. Cette approche au cas par cas, qui repose principalement sur des méthodes qualitatives, vise à évaluer les effets de l'IDE sur différents aspects du développement socioéconomique ainsi qu’à structurer un récit sur les relations entre l'IDE et le développement. Elle a servi d'outil de recherche pour analyser une série de projets d'investissements entre 2010 et 2013. Nous présentons ici une de ces études de cas qui porte sur le tourisme en République dominicaine, afin de montrer que des orientations politiques pertinentes peuvent être tirées de l'analyse de l'IDE en utilisant cette méthodologie.

Keywords:

• methodology
• economics
• foreign direct investment
• development
• Dominican Republic
• tourism

Acknowledgements

A preliminary version of the analytical framework was presented at EADI/DSA Conference “Rethinking Development in an Age of Scarcity and Uncertainty. New Values, Voices and Alliances for Increased Resilience”, held in York, 19–22 September 2011. A revised version was presented at SASE 24th Annual Conference “Global Shifts: Implications for Business, Government and Labour”, held in Cambridge, 28–30 June 2012. The authors are grateful for useful comments by other speakers and discussants. We also thank Theodore Moran for brilliant suggestions. The authors are also grateful to reviewers of this article for very useful comments and suggestions that have definitively contributed to improve our work.

This study is a result of a research program coordinated by Elcano Royal Institute. The results included in this article come from different research projects of the program. Funding for these projects has been provided from different sources: the Spanish Ministry of Foreign Affairs and Cooperation; the Spanish Agency for International Development Cooperation; and the Carolina Foundation.

Notes

1. On the effects of foreign investment on development, see García (2006); Ramírez Cendrero (2006); and Zilinske (2010). On effects on both home and host economies, see Lipsey (2002).

2. Akinlo (2004); Alfaro et al. (2004, 2010); Batten and Vo (2009); Blomström, Lipsey, and Zejan (1994); Borensztein, De Gregorio, and Lee (1998); Carkovic and Levine (2005); Choong, Lam, and Yusop (2010); Chudnovsky and López (2007); Dutt (1997); Hermes and Lensink (2003); Nunnenkamp (2004); Obwona (2001); Saggi (2000); Wang and Wong 2009; Zhang 2001.

3. Aitken and Harrison (1999); Blalock and Gertler (2005); Blomström and Persson (1983); Blomström and Sjöholm (1999); Borensztein, De Gregorio, and Lee (1998); Chudnovsky and López (2007); De Mello (1999); Dunning (1994); Fu and Diez (2010); Girma, Gong, and Goerg (2008); Girma and Gong (2008); Haddad and Harrison (1993); Javorcik (2004); Kugler (2000, 2006); Jordaan (2005); Marin and Sasidharan (2010); Padilla-Pérez (2008); Paus and Gallagher (2008); Ren and Hao (2010); Takii (2005); Zhang et al. (2010). See also a survey by Görg and Greenaway (2002).

4. Ang (2009); Balsvik (2011); Chakraborty and Nunnenkamp (2008); Chudnovsky and López (2007); Hagemejer and Kolasa (2011); Sadik and Bolbol (2001); Wang and Wong (2009).

5. Ndikumana and Verick (2008).

6. Blomström and Kokko (1997); Chudnovsky and López (2007).

7. Dragin, Jovicic, and Boskovic (2010).

8. Ali, Fiess, and MacDonald (2011).

9. Choi (2006); Nunnenkamp (2004); Tsai (1995).

10. Noteworthy: Blalock and Gertler (2005) complement the analysis of survey data with interviews with firm managers in order to assess vertical technological transfer in Indonesian factories. This qualitative and quantitative approach proves to be a good example of the explanatory potential of case studies based on a mix of different research methodologies.

11. See, for instance, Alfaro et al. (2010); Ang (2009); Batten and Vo (2009); Borensztein, De Gregorio, and Lee (1998); Choong, Lam, and Yusop (2010); Dunning (1994); Dutt (1997); Hermes and Lensink (2003); Jordaan (2005); Marin and Sasidharan (2010); Padilla-Pérez (2008); Paus and Gallagher (2008); Takii (2005); UNCTAD (2003); Wang and Wong (2009); Zhang et al. (2010).

12. Henderson et al. (2002); Bell and Marin (2004); Lauridsen (2004); Lorentzen and Barnes (2004); Mytelka and Barclay (2004); Rasiah (2004); Scott-Kennel (2004); Meyer and Sinani (2009); Castellani (2012); Morrissey (2012); Zanfei (2012).

13. This idea has also been explored by Paz (2002) and Ramírez Cendrero (2006).

14. Actually, Rugraff, Sánchez-Ancochea, and Sumner (2009a) compile several works with a wide geographical coverage, including case studies on Costa Rica (Sánchez-Ancochea 2009), India (Pedersen 2009; Tiwari 2009; Haakonsson 2009), Africa (Crabtree and Sumner 2009), Central Europe (Rugraff 2009), South Africa and Mali (Mainguy and Jeppesen 2009), Vietnam (Vind 2009), and Ghana (Larsen, Yankson, and Fold 2009). This book also takes into account the sector differentiation, with case studies on different sectors: electronics (Vind 2009); mining (Larsen, Yankson, and Fold 2009); and the pharmaceutical industry (Haakonsson 2009).

15. For a detailed guide of how to conduct a case study and how to interpret its results, see Schrank (2006a, 2006b).

16. For further discussion on this issue, see Olivié, Pérez, and Macías (2011).

17. For a precise definition of each of these variables, see Olivié, Pérez, and Macías (2011).

18. See Olivié, Pérez and Macías (2011).

19. According to this author, case studies contribute to general knowledge (1) by generating new hypotheses through the observation of cases that do not fit in an existing theory; (2) by testing an existing theory in a most/least likely case; (3) as a plausibility probe, before engaging in a costly and time-consuming research effort (Levy 2008, 5–6).

20. For further thinking on the “metaphorical” or “prototypical” value of paradigmatic case studies, see Flyvbjerg (2006).

21. Mechanisms are typified sequences of events that can be triggered in diverse scenarios, appearing as the consequence of the confluence of different factors.

22. Following Dexter's (2006) definition and recommendations for conducting qualitative research. Piore's (2006) requisites for case studies have also been respected.

23. See the 2013 Corruption Perception Index at http://www.transparency.org/cpi2013

24. For further elaboration on policy-oriented conclusions, see Pérez (2011).

25. In the early 1980s, FDI inflows were less than USD100 million; by the end of the 2000s they were more than USD1 billion. FDI has been present in the tourism sector since the 1980s and grew an average of 12 per cent per year between 1993 and 2006. Between 2001 and 2006, tourism represented the main sector in terms of FDI inflows, accounting USD1.174 billion, out of a total USD5.724 billion. It is estimated that foreign investment accounts for more than 60 per cent of total cumulative investment in the sector (UNCTAD 2009).

26. According to UNDP (2005) the tourism sector was 15 times larger in 2003 than 20 years earlier, when foreign investors first arrived, and its contribution to the GDP grew in that time from 1 per cent to 8 per cent. In terms of employment, this represented more than 140,000 jobs.

27. See http://www.asonahores.com/

28. See http://www.ecologyandsociety.org/vol18/iss4/art73/#environmenta8 and http://pdf.wri.org/working_papers/coastal_capital_dominican_republic_summary_es.pdf.

29. According to statistics provided by the Central Bank of the Dominican Republic, direct employment by hotels in the early 1980s, before the arrival of foreign investors, was below 10,000 people. Three decades later it was above 50,000 people. http://www.bancentral.gov.do/estadisticas_economicas/mercado_trabajo/.

30. According to OMLAD (2009), while only 32 per cent of the total Dominican labour force is women, in the hotel sector they represent more than 50 per cent.

31. Between 1981 and 2003, tourism production increased at a yearly rate of 9.4 per cent, while employment in the sector increased at 5.9 per cent. Tourism's contribution to the GDP rose from 1.3 per cent in 1980 to 6.8 in 2000 (UNDP 2005, 76). According to Fanelli and Guzman (2008), there has been a drastic change in the country's profile of comparative advantages which, from a sector approach, is related to the transfer of resources from export-oriented agriculture to more productive sectors like free zone industries and tourism.

Additional information

Biographical notes

Iliana Olivié is senior analyst in international cooperation and development at Elcano Royal Institute in Madrid, where she also coordinates the Elcano Global Presence Index project. She is a professor at the Department of Applied Economics I (International Economy and Development) at Complutense University in Madrid, where she lectures postgraduate courses on macroeconomic analysis and development theories and policies.

Aitor Pérez holds a degree in international economics (University of Zaragoza and Paris – II), and a Masters in European studies (Royal Institute of European Studies, Zaragoza). He also works as a consultant for development NGOs and agencies, and is associate analyst in international cooperation and development at Elcano Royal Institute in Madrid.