Towards a New Model of Cooperative Development: Enhancing and Leveraging the Benefits of FDI for Emerging Economies
Ciesluk, Sylvia
2007
- Submitted in partial fulfillment of the degree of Master of Arts in Law and Diplomacy at the Fletcher School of Law and Diplomacy. Abstract: Over the past 25 years, economists and national leaders have shifted their views on development in a significant way. From the first development model which rejected foreign capital and relied on direct state control, to an abrupt change to a second model that ... read morehailed liberalization and private enterprise as the keys to achieving economic prosperity and rising living standards. Along with the liberalization of state controls on economic activity and international trade, foreign direct investment (FDI) was now hailed as the best medicine for a backward economy. However, just as the first model fell into disfavor, uncertainty over the second model is rising. This result can to a large degree be explained by the situation today in which developing countries are attracting an increasing amount of FDI year aft! er year, yet there is a sense that many are failing to realize the expected development benefits of foreign capital inflow. The paper explores how the current views toward foreign investment and development are changing. Part I sets the stage by exploring the history of attitudes toward FDI with respect to development. This section describes how and why foreign investment has rapidly increased in the developing world. It also surveys the current debate over the potential of FDI to contribute to development and the opposing view that most of these contributions go unrealized. Scholars and practitioners offer a number of reasons and theories why this later outcome may be so. The hypothesis set out at the outset of this study establishes that the reason expected spillovers to a developing host economy may not occur is partly due to a low level of absorptive capacity in the host country but also largely hinged on the quality level of the investment. This hypothesis is tested in the final part of this section with a case study of FDI and its impacts on human capital development in Kazakhstan. Part! II begins a search for solutions to this problem of how to ensure that FDI will create development benefits. Investors into foreign markets have always followed a simple formula, maximize return and minimize risk. Here, I explore the options available to host countries to follow a similar formula, maximize return to their country and minimize the negative risks of FDI as well as the role of international institutions, home governments and foreign investors.read less
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