NEPAD: drawing lessons from theories of foreign direct investment.

Kebonang, Zein

Abstract

The New Partnership for Africa's Development (NEPAD) contends that increased levels of foreign direct investment (FDI) inflows are crucial if Africa is to achieve sustainable development and poverty reduction. Consistent with this view, NEPAL) calls African countries to create and adopt enabling environments within which FDI can flourish. Although reliance on FDI as a source of growth may be a pragmatic one, drawing on a review of the theories of FDI, this paper argues that whilst FDI can indeed be a source of good, it can equally be a source of economic harm. Consequently, in embracing FDI, NEPAD must have a regulatory mechanism in place to ensure that only FDI that meets the developmental objectives of the hosts state is welcomed.

INTRODUCTION

In its base document, the New Partnership for Africa's Development (NEPAD) emphasizes the importance of Foreign Direct Investment (FDI) to Africa's long-term development. To fill its identified resource gap of 12 percent of its GDP (or US$64 billion), NEPAD contends that African economies must grow by at least seven percent annually. Although this growth is to be achieved through more international aid, debt cancellation, increased domestic savings, and improved public collection systems, FDI is deemed to be a more viable strategy. However, despite the centrality of FDI to NEPAD, there is no general agreement about the desirability or impact of FDI on host economies. In exploring and evaluating NEPAD's position in respect of this matter, this paper kicks the debate by giving a brief review of the different theories of FDI. It looks in particular at the classical, dependency and middle path theories of FDI and the lessons that NEPAD can draw from them.

THEORIES OF FOREIGN DIRECT INVESTMENT

The Classical Theory of FDI

Reduced to its basic form, the classical theory marks a shift from earlier doctrinal objections held by many developing countries on the role played by multinational corporations (MNCs) in their economies. MNCs were viewed as inimical to the economic development of the developing countries. Based on this assertion, MNCs were either discriminated against or their role in the host economy severely restricted or limited (Seid 2002:15; Markusen and Venables 1999:336; Lall 1996; Muchlinski 1995:8; Kennedy 1992:67, OECD 1990). This assertion also provided a justification for the expropriation of foreign companies or assets. As illustrated in Table 1.1 below, the 1950s, 1960s and 1970s represented a period of uncertainty for foreign investors. Many of their assets or investments were either expropriated or nationalized by host states.

The expropriation of MNCs by many developing countries particularly during the early days of their independence symbolized a rejection by these countries of being externally dependent upon "foreigners" (Kennnedy 1992:74). As Kobrin (1984) observes:

 The end of the colonial era and the rise of Third World
 assertiveness and independence during the late 1960s and early
 1970s influenced the preference for expropriation as opposed to
 regulatory control of behavior ... There was a tendency on the part
 of many countries to use foreign investment as a symbol of Western
 industrialization and Western colonialism; expropriation
 represented a rejection of the general context as well as of the
 specific enterprise (quoted in Kennedy 1992:74).

However, the hostility directed at MNCs in the 1950s and 1970s has largely waned. Rather than strangle the development of FDI on the basis that it is a source of foreign domination and control, many countries have now come to recognize that positive economic gains can be achieved from the presence of FDI (Kobrin 2005:3; Gao 2005:158; Markusen and Venables 1999:336; UNCTAD 1999:4; Lall 1996:44; Muchlinski 1995:9). This change in attitude can be attributed to, inter alia, the slowdown of growth in the world economy in the mid-1970s, change in political leadership and the scarcity of financial capital in the wake of the debt crisis of the early 1980s (UNCTAD 1999:29; Muchlinski 1995:10). Since the 1990s, following the disappearance of commercial bank lending for most countries, FDI has become the largest single source of finance for developing countries (Kobrin 2005:3; Aitken and Harrison 1999:605; Rodriguez-Clare 1996:852). Just about every government is involved in trying to attract more FDI by promulgating laws and regulations that are investor friendly. Despite, for instance, the likelihood of harmful tax competition resulting from tax concessions given to MNCs, the 1991 UNCTAD report reveals that between 1977 and 1987 both developed and developing countries changed their respective tax subsidy policies in an attempt to entice MNCs (UNCTAD 1991; OECD 1998; see, also, Kebonang 2001). These changes in tax policy, although wasteful (as they simply confer a windfall on MNCs), demonstrate clearly the importance countries now attach to FDI.

The Classical Theory in Context

In broad terms, classical theorists advance the claim that FDI and multinational corporations (MNCs) contribute to the economic development of host countries through a number of channels. These include the transfer of capital, advanced technological equipment and skills (Gao 2005:158; Mody 2004:195; Asheghian 2004; Girma, Kneller and Pisu 2003; Kohpaiboon 2003:55; Hermes and Lensink 2003; Seid 2002:30; Keller 2001; Shihata 1991:487; Balasubramanyam, Salisu and Sapsford 1996:95; Hymer 1970:443), the improvement in the balance of payments, the expansion of the tax base and foreign exchange earnings, the creation of employment, infrastructural development and the integration of the host economy into international markets (Li and Liu 2005:404; Janeba 2004:367; Amiti and Wakelin 2003:102; Sornarajah 1994:39; Muchlinksi 1995: 91). These claims about FDI have been amplified by the phenomenal economic growth of the newly industrialized countries, Hong Kong, Taiwan, Singapore and South Korea, especially in the 1980s and early 1990s (Muchlinski 1995:99; Ulmer 1980:458) and more recently by China's impressive economic growth (Cheung and Lin 2004:30; UCTAD 2003:40; World Bank 2003:151).

With its emphases on the importance of FDI and limited state role, the classical doctrine has been propagated in recent years by international institutions and organizations like the United Nations (UN), the World Bank, the International Monetary Fund (IMF) and the International Labor Organization (ILO). The United Nations for instance, endorsed FDI at its 2002 Monterrey Conference held in Mexico, as an important and vital complement to national and international development efforts.

FDI and the Spillover Channels

According to proponents of the classical theory, the benefits from FDI are derived through positive spillovers (see, for instance, Cheung and Lin 2004; Girma, Kneller and Pisu 2003; Gorg and Strobl 2002; Lensink and Morrissey 2001; Markusen and Venables 1999; Aiten, Hanson and Harrison 1997). In this matrix, MNCs are an important source of these spillovers. They provide information relating to new technologies, new markets, new customers and management techniques from which domestic firms benefit (Greenaway, Sousa and Wakelin 2001; Sousa, Greenaway and Wakelin 2000). This information spillover from MNCs occurs through imitation, competition, linkages and/or training (Cheung and Lin 2004; Hermes; Gorg and Greenaway 2001; Lensink and Morrissey 2001; Gorg and Strobl 2002; Markusen and Venables 1999). By imitating the more advanced technologies and managerial skills of MNCs, and through the movement of highly skilled staff from MNCs to domestic firms, local firms are forced to catch up and become more productive (Gorg and Strobl 2002; Lensink and Morrissey 2001:3; Aitken and Harrison 1999:605).

In addition, the entry of MNCs in local markets increases the level of competition in the domestic market and encourages domestic firms to become more efficient (Lensink and Morrissey 2001:3). Exposure to best practices and to greater competition leads to improvements in productivity (Girma, Kneller and Pisu 2003:3). In instances where the MNC is export-oriented, domestic firms may likewise be encouraged to be export oriented (Greenaway, Sousa and Wakelin 2001; Aiten, Hanson and Harrison 1997:128). Furthermore, through linkages with indigenous suppliers MNCs sustain domestic firms by creating demand for domestically produced intermediate goods (Gorg and Strobl 2002; Lensink and Morrissey 2001:3).

Positive spillovers from MNCs also arise from the training provided to locals. These benefits are in the form of improved human resource development, better managerial abilities and improved industrial discipline and administrative organization (Lensink and Morrissey 2001:3). The introduction of new technology may require that training be given to employees. For employers, be they MNCs or domestic firms, self-interest simply dictates that they provide such training (Lensink and Morrissey 2001:4).

FDI and the Uncertainty of Spillovers

Although the classical theory seems to paint an overwhelmingly positive picture about the benefits that can be derived from FDI, empirical evidence on the subject is mixed. Some studies have found a positive spillover effect, some no effect and others a negative spillover effect (see, for instance, Gorg and Strobl 2002; Gorg and Greenaway 2001; Markusen and Venables 1999; Aitken and Harrison 1999; Aiten, Hanson and Harrison 1997; Killick 1973). What in fact emerges from a reading of the literature is that for every argument in favor or against FDI, there is also a counter argument. For instance, whilst Todaro (1989:475) finds that FDI helps in accumulating foreign exchange and hence contributes to the country's balance of payment, Sharan (1978) observed that between the period 1964-1971, FDI had a negative impact on India's balance of payment.

A study carried out by the Research and Information System (RIS) for the non-aligned and other developing countries based in India has found the evidence of the effect of FDI on domestic investments to be mixed (OECD 2002: 4). Taking a sample of 98 Asian countries covering 1980-98, the study found that in India, Fiji, Papua New Guinea, Philippines and Singapore, FDI crowded out domestic investment. But in Pakistan, China, Indonesia, Malaysia and Turkey FDI flows appeared not to have any effect on domestic investment. In Bangladesh, Korea, Nepal, Sri Lanka and Thailand, FDI was noted to have a positive effect by bringing in domestic investment (OECD 2002:4).

Despite the general contribution to employment, MNCs, particularly when they are capital rather than labor intensive, can aggravate the problem of unemployment. Such MNCs increase demand for skilled labor and drive up wage rates. In the process they crowd out domestic firms which cannot afford to compete for such skilled labor (Lipsey and Sjoholm 2004:422; Gorg and Greenaway 2001). Feenstra and Hanson (1997:391) note, for instance, that between 1975 and 1988, the entry of FDI in Mexico led to a wage increase and demand for skilled labor and a decline in the employment of unskilled labor. Similarly, a study by Ohiorhenuan (1983:164) found that in Nigeria, not only did MNCs import inappropriate technology but they also exacerbated the problem of unemployment because unlike the relatively labor intensive local firms, they were more technology driven and therefore required less labor.

A number of scholars, among them Li and Liu 2005; Le 2004; Nunnenkamp 2004; Alfaro 2003; Seid 2002; Borensztein, De Gregorio and Lee 1998; Balasubramanyam, Salisu and Sapsford 1996; Khan and Reinhart 1990 and Hirschman 1958, in acknowledging the importance of FDI and its welfare contribution to the host economy, share the view that the benefits derived from FDI depend on the existence of a number of factors. These factors range from the economic policies pursued by the host state, the sectors in which investment is made, the political risks present, availability of effective institutions and the presence of developed financial markets, to the stock of human capital availability. These factors constitute what is called the "absorptive capacity" of a host country.

Borensztein, De Gregorio and Lee (1998:117) argue, for instance, that whilst FDI contributes to economic growth in larger measure than domestic investment, the absence of or low levels of human capital may undermine that contribution. They maintain that FDI contribution to economic growth is greatly enhanced by its interaction with the level of human capital in the host country. This is because the application of advanced technology requires the presence of a sufficient level of human capital, without which the absorptive capability of the host country is greatly reduced. They conclude that FDI enhances growth only in countries with a sufficiently qualified labor force (see, also, Xu 2000; Li and Liu 2005).

Meanwhile, Le (2004:589) finds that private investment leads to economic growth and prosperity provided that there are stable socio-political institutions, certainty in macroeconomic policies and flexibility in the financial market. He identifies three types of political risks that may adversely impact private investment, namely socio-political instability, regime change instability and policy uncertainty. He argues that in order to provide a sound environment to attract and maintain a stable flow of private investment in the economy, governments should be able to design and implement consistent policies that deal with these types of political risks.

The view that the growth impact of FDI depends on the characteristics of the country in which FDI takes place is now widespread. According to Nunnenkamp (2004:673), benefits derived from FDI depend on whether the host country environment is conducive to the overall investment, economic spillovers and income growth. Unless there are developed local markets and institutions, investment-friendly policies and administrative framework, as well as complementary factors of production, there will be modest gains derived from FDI (Nunnenkamp 2004:673; see, also, Khan and Reinhart 1990:25).

In parity, Balasubramanyam, Salisu and Sapsford (1996:95) argue that the usefulness of FDI in promoting economic growth depends on the economic policies being pursued by the host country. Balasubramanyam et al. (1996) take the view that openness to trade is central in harnessing the positive growth effect of FDI. They identify two types of trade policies that have a bearing on the effectiveness of FDI in promoting economic growth. These are the Import Substitution (IS) and the Export Promotion (EP) policies. According to Balasubramanayam et al, an IS policy is unlikely to promote FDI or provide an economic climate conducive to the efficient operations of foreign firms, as such policies restrict competition from both domestic and foreign sources. However, EP policies, with their emphasis on the neutrality of policy, the free play of market forces and competition, provide an ideal climate for the exploitation of the potential of FDI to promote growth (Balasubramanayam et al 1996:96; see, also, Gorg and Greeanway 2001; Miller and Upadhyay 2000).

Hermes and Lensink (2003:142) on the other hand suggest that the impact of FDI on the economic growth of the host state depends on the existence of a viable financial system. They see a developed financial system as a prerequisite for FDI to have positive spillovers. According to them, a developed financial system not only enhances the efficient allocation of resources but also improves the absorptive capacity of the host country with respect to FDI inflows (Hermes and Lensink 2003:143; see, also, Alfaro, Chanda, Ozcan and Sayek 2004).

Equally, the sector in which investment is made influences the types of gains obtained from FDI. The oft-cited benefits of FDI such as technology and managerial skill transfer are usually more pronounced in the manufacturing rather than in primary sectors of the economy such as agriculture and mining (Alfaro 2003). The absence of linkages in the primary sectors with the rest of the economy limits the contribution that FDI can make to economic growth. According to Hirschman (1958:110; see, also Alfaro 2003), 'the grudge against what has become known as the 'enclave' type of development is due to this ability of primary products from mines, wells, and plantations to slip out of a country without leaving much of a trace in the rest of the economy'.

Finally, the type of FDI made also determines what benefits are derived from it. Maswood (2000: 217) makes a distinction between two types of FDI: speculative and productive foreign investment. He asserts that speculative FDI, which is often accompanied by short-term capital flows, can undermine national monetary and economic objectives and be harmful to the economy as a whole. Productive FDI is different in that it normally represents a long-term commitment to the host economy (Maswood 2000: 217; see also Ulmer 1980: 462). Between these two types of FDI, speculative investment needs to be subjected to more regulation if potential harm to the economy is to be avoided. Likewise, Seid (2002: 125-27) argues that FDI, being by its very nature profit-driven, may pay a scant regard to labor, consumer or environment concerns in the host country. For this reason, he contends that FDI must be regulated if optimum results are to be obtained from it. According to Seid (2002: 116), unrestricted FDI entry into the host market is not desirable as it restricts the host country's ability to determine the level and type of FDI suitable for it.

The Dependency Theory

Despite the centrality of FDI to NEPAD, enthusiasm about FDI is not widespread. Some commentators such as Bond (2002) and Tandon (2002) among others have either impliedly or expressly questioned the need for FDI. Bond (2001; 2002) sees for instance, multinational corporations as agents of 'global apartheid' responsible for Africa's worsening economic state, whilst Tandon (2002) argues that what Africa needs is 'self-reliance and not FDI reliance'.

The above views, which implicitly suggest that FDI is exploitative, find sympathy in the depedency theory of FDI. Drawing from the experience of Latin American countries, proponents of this theory argue that relations of free trade and foreign investment with the industrialized countries are the main causes of underdevelopment and exploitation of developing economies (Wilhelms and Witter 1998:8; Dos Santos 1970). This theory focuses largely on the relationship between the center and periphery. Well-developed and industrialized countries are deemed to constitute the center and the least developed countries the periphery. In this regard, FDI is seen as a conduit through which the center exploits the periphery and perpetuates the latter's state of underdevelopment and dependence.

Instead of promoting economic development, the argument goes, foreign investment strangulates such development and perpetuates the domination of the weaker states by keeping them in a position of permanent and constant dependence on the economies of the developed states (Sornarajah 1994:43). MNCs are accused of being "imperialist predators' that exploit developing countries and exacerbate their underdevelopment (Alfaro 2003). These views are largely informed by the fact that multinationals

have often been involved in the exploitation of natural resources with no corresponding benefits for host economies (UNCTAD 1999). The depedency theory is therefore very much a reaction against this "extractive nature" of FDI.

Under the dependency theory, FDI is considered to promote dependence and underdevelopment through its promotion of specialization in production and exports of primary products; increased reliance by least developed countries (LDCs) on foreign products and capital intensive technology; diffusion of western values and elite consumption; acute growth inequality in income distribution and rising unemployment and destruction of indigenous production capacity (Gorg and Strobl 2002; Girma and Wakelin 2000; Markusen and Venable 1999; Aitken and Harrison 1999; Biersteker 1987; Lall 1975). The crowding-out or displacement of indigenous production necessarily eliminates the development of the national entrepreneurial class and hence "excludes the possibility of self-sustained national development" (Biersteker 1978:7). This dependency is also worsened by the remittance or repatriation of profit, royalties, interest payments, declining reinvestment and lack of local economic spin-off, which taken together lead to a 'decapitalization' of the host economy (Dos Santos 1970: 233; Rojas 2002; Biersteker 1978).

These surplus transfers reduce funds available for domestic investment in the less developed countries (Rojas 2002). As a result developing countries are compelled to seek new forms of foreign financing--be it in the form of aid or loans to finance their development or cover existing deficits, in the process they create a perpetual state of dependency (Dos Santos 1970: 233). Accordingly to address this problem, the dependency theorists contend that the solution to underdevelopment requires closing developing countries to international investment and trade (Wilhelm and Witter 1998: 8). Because of the perceived exploitative nature of FDI, the dependency and underdevelopment it engenders, proponents of the dependency theory are in unison in calling for the adoption of state policies that are deliberately discriminative of FDI in order to foster the development of local industries and promote self-reliance (see, Tandon 2002; Wilhelms and Witter 1998: 8; Blumenfeld 1991: 63). Only by this means, so they contend, can developing countries or governments acquire the autonomy and freedom to achieve structural changes and economic diversification free from constraints on their development (Blumenfeld 1991: 63).

The Decline of the Dependency Theory

Despite its near reverence especially in the 1960s and 70s, the theoretical dominance of the dependency theory over state policies has become limited. More countries are now competing for FDI to stimulate economic growth and development. Governments which were once hostile to foreign investors are now actively seeking and competing for them (Girma, Kneller and Pisu 2003; Blomstrom and Kokko 2003). Laws and regulations that are investor friendly have proliferated. Between 1991 and 2001, for instance, a total of 1,393 regulatory changes were introduced in national FDI regimes, of which 1,315 (or 95 percent) were in the direction of creating a more favorable environment for FDI (World Bank 2003:122). Countries, such as Ghana, that once experimented with the dependency theory have achieved neither prosperity or greater economic independence. Rather they have experienced much poverty, misery and greater dependence on international aid and charity (Ahiakpor 1985:546).

The Intervention/Integration/Middle Path Theory

The intervention or integrative school attempts to analyze FDI from the perspective of the host country as well as that of the investor. It incorporates arguments from both the classical and dependency theorists. The theory posits that foreign investment must be protected but only to the extent of the benefits it brings the host state and the extent to which foreign investors have behaved as good corporate citizens in promoting the economic and social objectives of the host country (Sornarajah 1994:49). The theory calls for a mixture of intervention (regulation) and openness in dealing with foreign investment and cautions against too much openness and too much regulation or intervention (Seid 2002: 23). The theory recognizes that there are instances where the market is better placed to act and other instances where government intervention is necessary. What is needed therefore is a balancing act between those activities that can best be handled by the market and those that can be done by the government.

In many ways, the middle path/integration theory represents a convergence between Adam Smith's case in favor of a laissez-faire approach and Keynes' argument in favor of government intervention in the market. Whilst Adam Smith in his Wealth of the Nations believed that except for intervention in providing public works and institutions, the role of the state in the market must be minimized (Hollander 1972:256; Ginzberg 1934:22; Viner 1928:138), Keynes, who was greatly influenced by the effects of the US Great Depression of the 1930s, strongly believed that government participation in the market was crucial to stimulate the economy.

The notion that governments and markets are complements and not substitutes stands in stark contrast to earlier views which held the position that the existence of one required the diminution of the other. In the 1950s and 1960s, the state in many developing countries was the primary player in economic matters (Rodrik 1997:412). Following the debt crisis of the 1980s, major reforms were introduced which sought to limit and confine the role of government to the provision of public goods such as securing property rights, maintaining macroeconomic stability and providing education and the necessary infrastructure (Rodrik 1997:412; Whiteley 1986:175). This idea of a limited government role in the market, often dubbed the "Washington Consensus", was and has been actively promoted by the World Bank and IMF.

The term 'Washington Consensus', coined originally in 1990 by John Williamson to describe a set of market reforms that Latin American economies could adopt to attract private capital following the debt crisis of the 1980s, called for reforms in at least ten key areas (Clift 2003:9; Williamson 2000:251). These areas were fiscal discipline, tax reform, interest rate liberalization, a competitive exchange rate, trade liberalization, a reduction of public expenditure, liberalization of inflows of foreign direct investment, privatization, deregulation and secure property rights (Maxwell 2005; Williamson 2000:252-53; Clift 2003:9). In essence, these reforms require the state, beyond its provision of the necessary market institutions, to play a minimal role in the market. Although initially targeted at Latin American countries, these reforms have become a common prescription that is advanced by the World Bank/IMF for developing countries.

Ironically, even as it acknowledged the complementary roles between the state and markets in promoting economic growth, the World Bank maintained in its 1991 Development Report that state interventions even when market-friendly should be reluctantly pursued. Markets were to be allowed to work unless it was demonstrably better for government to step in (World Bank 1991:5). Although important, the state's role in economic development in this 'market-friendly' approach is to be limited to providing social, legal and economic infrastructure and to creating a suitable climate for private enterprise (Singh 1994:1812). This "market-friendly" approach, which requires a limited government role has been found wanting following the East Asian economic success or miracle.

In its 1993 Report, the World Bank acknowledged that the economic success of East Asian countries, particularly Hong Kong, South Korea, Singapore and Taiwan, came not simply because these countries had the basics right (stable macroeconomic policy, high savings rates and investment rates, physical and human capital, economies that were export oriented, and the use of incentives and application of selective import barriers) but because in most of these economies the government intervened systematically and through many channels to foster development and in some cases to develop specific industries (World Bank 1993; Rodrik 1997:413; Singh 1994:1811; Harris and Schmitt 2001:294; Rueschemeyer and Putterman 1992: 253; Selden 1992: 171).

The East Asian miracle has led Haggard and Kaufman (1992:222) to argue that what the Asian success demonstrates is that market institutions and state power are not inversely related: "the expansion of the first does not require a diminution of the second". In more recent studies, Liew (2005: 332) shows that China's rapid economic growth has resulted not from less state control or rapid or "big-bang" liberalization approaches often prescribed by the IMF/World Bank but from intense state intervention and ownership of enterprises.

It would appear that the current intellectual debate about markets and governments no longer revolves around whether the existence and success of one requires the exclusion of the other. There seems to be a meeting of the minds, with advocates from both sides of the debate recognizing that the two complement each other. In discussing the role of the state vis-a-vis the market, Dixit (1996) argues:

 One must accept that markets and government are both imperfect
 systems; that both are unavoidable features of reality; that the
 operation of each is powerfully influenced by the existence of the
 other; and that both are processes unfolding in real time, whose
 evolution is dependent on history and buffeted by surprise (quoted
 in Rodrik 1997:414).

What is now clear from the debates is that although the market accomplishes a number of things critical for economic efficiency, such as co-ordinating the activities of a multitude of economic units, there are certain shortcomings that cannot be addressed by the market. As Reuschemeyer and Putterman (1992: 258) and Bruton (1992:102) argue, 'markets and competitive markets in particular, are not the natural outgrowth of civil societies undisturbed by state intervention ... in fact, efficient markets require strong state action'. The need for a complementary role between the market and state has been amply demonstrated in recent years by the failure of Russia's market reforms. The transition of Russia's economy from a command to a free market economy failed as a result of the general neglect of the role of the state and the consequent lack of attention to the building of institutions necessary for supporting the market-oriented reforms which were being undertaken at the time (Stiglitz 1999: 579; Herrera 1999).

Markets failures notwithstanding, government interventions may also be inefficient. As Whiteley (1986:174) remarks, a state can intervene in the economy to make things worse; it can protect 'sunset' industries rather than 'sunrise' industries; it can give monopolistic privileges to support groups and it can invest in the wrong areas, where state capacity is weak, state intervention can do more harm than good (World Bank 1997). A study by Papanek (1992:156) found, for instance, that excessive state intervention in the economies of India, Pakistan, Sri Lanka and Bangladesh deterred economic growth and development in these countries.

NEPAD and the Lessons from the FDI Theories

What are the lessons that NEPAD can draw from the above theories of FDI? First, the classical theory which informs NEPAD's position on FDI requires that there must be minimal government intervention. But as the dependency theory shows, unless properly regulated, FDI can worsen the problem of under development, through the crowding out of domestic firms and repatriation of profits. As Ulmer (1980:462) points out:

 It would be ridiculously naive to suppose that multinationals are
 at all times and in all places an unqualified force for the good.
 They are simply business institutions, which is to say cold and
 generally implacable seekers of profit. In any particular case,
 strictly business operations may or may not be fully compatible
 with the public welfare.

The challenge for NEPAD is therefore to ensure the proper regulation of FDI. This requires that there must be no unlimited right of entry for FDI. Rather, investors must be screened so that only genuine ones are welcomed. This will ensure that the kind of investment that is allowed in, is one that can complement the developmental objectives of host states.

Apart from the need to regulate FDI, what is also clear is that FDI can contribute to economic growth through capital flows, technology transfer, and employment creation. These benefits are not, however, automatic. As Kokko (2002) points out, 'there is strong evidence pointing to the potential for significant spillover benefits from FDI, but also ample evidence indicating that spillovers do not occur automatically' (quoted in Nunnenkamp 2004: 668). The benefits derived from FDI depend on the sector in which investment is made and on the level of economic development of the host country. Investment in the primary sector has fewer positive spillovers than investment in the manufacturing sector. For NEPAD, this calls for promoting investment that will enahance the growth of the secondary industries. In this way, real employment, technological and infrastructural benefits can be experienced.

Much of the foreign investment coming to Africa is primarly geared towards Africa's primary sector. This kind of investment has led not only to what is called the 'resource curse' but has also promoted poor leadership and entrenched neo-patrimonial practices. Additionally, as the dependency theory shows, reliance on the primary sector has rendered states dependent on such a sector vunerable to fluctuating demands and unfavorable trade terms. As a result, the development of countries that rely on the production of primary commodities is inextricably influenced by the specific demands of countries that import these primary products. Countries that only rely on a limited number of commodities for their economic existence tend not to diversify. A familiar pattern of commodity-dependence is institutionalized.

As a means of achieving economic independence, the depedency theory calls for the promotion and protection of domestic industries against FDI. This import substitution strategy has been discredited and no longer offers a viable alternative to development. Although a case can be made for protecting infant industries, this must not be at the expense of shutting out foreign investors. In fact, countries that have experimented with the import substitution strategy have achieved neither economic prosperity nor development. Empirical evidence attests to the fact that countries that are open to foreign investment grow faster than those closed to it. Being open to FDI does not mean that it should not be regulated. For NEPAD, this calls for a rethink of its classical or neo-liberal stance. Active state participation will be necessary to guard against harmful corporate practices and to ensure that FDI contributes to identified state development objectives.

Between the positions advanced by the classical and dependency theories, the middle path theory takes an accommodating position. It recognizes that states and markets cannot do without each other. They are complements, "each providing a check on and facilitating the functioning of the other" (Stiglitz 1999:579). How and where the state or market should intervene is a matter to be assessed on a case by case basis.

CONCLUSION

As we have seen, the empirical evidence on the impact of FDI is mixed. However, the existence of conflicting empirical evidence on the impact of FDI does not imply that there are no benefits to be derived from FDI. What the evidence points to is in fact that the benefits derived from FDI are dependent on the existence or absence of certain factors. These include skilled labor, developed financial markets and institutions, conducive government policies and the level of economic development. Nonetheless, as much as FDI can be a source of good, it can also be a source of economic harm. FDI may contribute to underdevelopment if the profits from FDI are not reinvested in the host country. Some types of FDI may add to environmental degradation. FDI may also contribute to poor leadership. The challenge for NEPAD is to attract the kind of investment that will contribute positively to the host country's economic development. This means that NEPAD must develop a monitoring mechanism by which it can screen and monitor all FDI coming to Africa to ensure that only genuine investors are assisted and welcomed. There should be no unrestricted entry of FDI. Unless FD! is aligned with the development objectives of host countries, there will be no added value in having FDI. However, when all things are considered, when regard is had to Africa's level of underdevelopment, the reliance by NEPAD on FDI is a pragmatic one.

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ZEIN KEBONANG

University of Botswana, Gaborone, Botswana

Table 1.1
Countries that Expropriated Foreign Investments

Country Years No of Firms
 Nationalized

Algeria 1965-1978 107
Angola 1975-1978 128
Benin 1974 10
Burma 1962-1983 24
Chile 1970-1973 46
Congo 1970-1977 31
Egypt 1956-1967 70
Ethiopia 1975-78 105
Guinea 1959-1979 7
India 1967-1975 58
Iraq 1968-1977 8
Jamaica 1972-1977 12
Libya 1969-1974 33
Madagascar 1975-1978 50
Morocco 1965-1978 30
Mozambique 1975-80 43
Nigeria 1967-1974 35
Peru 1968-1975 47
Somalia 1970 10
Sri Lanka 1971-1976 254
Sudan 1970-1978 25
Trinidad & Tobago 1969-1981 10
Uganda 1970 9
Tanzania 1963-1978 27
Yemen 1969-1978 30
Zambia 1964-1980 21
Total 1404

Source: Data taken from Kennedy (1992: 73). Table slightly modified.