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Abstract
Based on a historical survey, the article argues that during their early stages of development, now-developed countries systematically discriminated against foreign investors. They have used a range of instruments to build up national industry, including: limits on ownership; performance requirements on exports, technology transfer or local procurement; insistence on joint ventures with local firms; and barriers to ‘brownfield investments’ through mergers and acquisitions. We argue that, only when domestic industry has reached a certain level of sophistication, complexity, and competitiveness do the benefits of non-discrimination and liberalisation of foreign investment appear to outweigh the costs. On the basis of this, the article argues that the currently proposed multilateral investment agreement at the World Trade Organisation is likely to harm the developing countries’ prospects for development.
Cet article basé sur une enquête historique argumente que, durant les premières étapes du développement, les pays actuellement développés prenaient systématiquement des mesures discriminatoires envers les investisseurs étrangers. Ils utilisaient une série d'instruments pour permettre à l'industrie nationale de se développer: limitations sur la propriété; conditions de performance touchant les exportations, transferts de technologies ou approvisionnement local; joint-ventures en participation avec les entreprises locales; limitations au rachat d'entreprises existantes (brownfield investments) à travers des fusions ou acquisitions. Nous soutenons que les bénéfices de la non-discrimination et de la libéralisation des investissements étrangers n'en dépassent les coûts qu'au moment où l'industrie domestique est arrivée à un certain niveau de sophistication, de complexité et de compétitivité. Sur la base de cette découverte, l'article argumente que l'accord multilatéral sur les investissements, proposé actuellement par l'Organisation Mondiale du Commerce, risque de léser les perspectives de développement des pays en développement.
Notes
Ha-Joon Chang is at the Faculty of Economics and Politics, University of Cambridge. The article draws on a joint research project with Duncan Green of the Catholic Agency for Overseas Development (CAFOD), whose result was published as an article titled, ‘The Northern WTO Agenda on Investment: Do as we Say, Not as we Did’ by the South Centre, Geneva, and CAFOD, London, in June 2003. While the material in the present article is from the author's contribution to the joint project, the author's intellectual interaction with Duncan Green during their joint work makes it difficult to separate neatly the individual contributions. The author thanks him very much for his partnership, intellectual and political. The author also thanks the South Centre and the Rockefeller Foundation for their support for the project. Also thanked is the Korea Research Foundation for research support through its BK21 programme at the Department of Economics, Korea University, where the author was a visiting research professor when the first draft was written. The author has benefited greatly from comments by Sanjaya Lall, Lynn Mytelka, Rajneesh Narula, and Rajah Rasiah in producing the final version of this contribution.
1. Even until as late as 1914, when it had caught up with the UK and other leading nations of Europe, the US was one of the largest net borrowers in the international capital market. The authoritative estimate by Wilkins [Citation1989: 145, Table 5.3] puts the level of US foreign debt at $7.1 billion, with Russia ($3.8 billion) and Canada ($3.7 billion) trailing in distance. Of course, at that point, the US, with its estimated lending at $3.5 billion, was also the fourth largest lending country, after the UK ($18 billion), France ($9 billion), and Germany ($7.3 billion). However, even after subtracting its lending, the US still has a net borrowing position of $3.6 billion, which is basically the same as the Russian and the Canadian ones.
2. However, the Second Bank of the USA was only 30% owned by foreigners, as opposed to 70% in the case of the First Bank of the USA, its predecessor (1789–1811) [Wilkins, Citation1989: 61].
3. Wilkins [Citation1989: 84, n. 264] says that similar remarks were made by politicians in the debate surrounding the renewal of the charter of the First Bank of the USA.
4. At the time the territories were North Dakota, South Dakota, Idaho, Montana, New Mexico, Utah, Washington, Wyoming, Oklahoma, and Alaska. The Dakotas, Montana, and Washington in 1889, Idaho and Wyoming in 1890, and Utah in 1896 acquired statehood, and thus stopped being subject to this Act.
5. The 1866 law said that ‘[t]he mineral lands of the public domain … are hereby declared to be free and open to exploration by all citizens of the United States and those who have declared their intention to become citizens, subject to such regulations as may be prescribed by law, and subject also to the local customs or rules of miners in the several mining districts’ [Wilkins, Citation1989: 128].
6. According to the authoritative study by the IMF published in 1984, the average share of the SOE sector in GDP among the industrialised countries as of the mid 1970s was 9.4%. The share was 10.3% for West Germany (1976–77), 11.3% for the UK (1974–77), and 11.9% for France (1974) – all above this average.
7. In Germany, corporations are governed not simply by the board of directors, but also by the supervisory board, which contains an equal number of representatives from the workers and from the management (with the casting vote on the management side). This is called the co-determination system and has been a foundation stone of Germany's ‘social market economy’ after the Second World War.
8. During the 1970s and 1980s, Germany's FDI as a share of Gross Domestic Capital Formation (of course, the two numbers are not strictly comparable) was just 1–2%, whereas the corresponding figure ranged between 6 and 15% in the UK. The figures are calculated from various issues of the UNCTAD World Investment Report.
9. The 16 countries are, in alphabetical order, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, West Germany, the UK, and the US.
10. Despite the massive external shock that it received following the collapse of the Soviet Union, which accounted for over one-third of its international trade, Finland ranked at a very respectable joint-fifth among the 16 countries in terms of per capita income growth during the 1990s. According to the World Bank data, its annual per capita income growth rate during 1990–99 was 2.1% (the same as that of the Netherlands), exceeded only by Norway (3.2%), Australia (2.6%), and Denmark and the US (2.4%).
11. From the twelfth century until 1809, it was part of Sweden, then it existed as an autonomous Grand Duchy in the Russian empire until 1917.
12. See: www.investinfinland.fi/topical/leipa_survey01.htm, page 1. Interestingly, the government investment-promotion agency, Invest in Finland, emphasises that ‘Finland does not “positively” discriminate foreign-owned firms by giving them tax holidays or other subsidies not available to other firms in the economy’ [www.investinfinland.fi/topical/leipa_survey01.htm, page 2].
13. Interestingly, according to McCulloch and Owen [Citation1983: 342–Citation3 ] the same survey reveals that over one-half of all foreign subsidiaries in Korea and Taiwan benefit from some form of investment incentive. This is high even by the standards of the developed countries, which were in the 9–37% range as reported in table 6.1 of CitationYoung et al. [1988 : 200 ] (Japan 9%, Switzerland 12%, Canada and France 18%, Germany 20%, Belgium 26%, Italy 29%, UK 32%, Australia 37%). Given that Korea and Taiwan are countries that were also infamous for imposing tough performance requirements (see below), this piece of evidence, together with the Irish example, suggests that both carrots and sticks are needed for a successful management of FDI.
14. In light of the fact that Ireland was already a country with a high level of performance requirement for TNCs before these changes (see above), it seems reasonable to conclude that performance requirements for the recipients of state grants (domestic or foreign) must have become even greater.
15. For example, the Korean government chose in 1993 the Anglo-French joint venture (GEC Alsthom) organised around the producer of the French TGV (high-speed passenger train), as the partner in its new joint venture to build the country's fast train network. This was mainly because it offered more in terms of technology transfer than did its Japanese and German competitors who offered technologically superior products [Financial Times, 23 August 1993, as cited in Chang, Citation1998: 108].
16. For example, the 1962 Guidelines subjected industries such as refrigerators, air conditioners, transformers, televisions, radios, cars, motorcycles, tractors, and diesel engines to local content requirements [Wade, Citation1990: 150–51, f.n. 33 ].