Foreign investments, privatization, and political conflict in developing countries

Rothgeb, John M Jr

This research examines the relationship between direct foreign investment and political protest in developing countries. A cross-national design is employed to investigate how investments in manufacturing and in mining interact with a society's historical relationship to the world system, its contemporary relationship to the world system, its economic structures, and its rate of social change to affect protest. The results show that manufacturing investments in new states and that are from the former colonial overlord are associated with lower levels of protest, while mining investments from a single foreign national source and in societies with high income inequality and a strong local capital structure are related to more protest. In countries with a large working class, both manufacturing and mining investments are associated with higher levels of protest.

THE RESEARCH PROBLEM

Recent research suggests that direct foreign investments affect political conflict in developing societies.1 Four categories of variables often are depicted as affecting this association: (1) a society's historical relationship to the world system, (2) the contemporary relationship to the world system, (3) the domestic economic structure, and (4) the degree of social change. This research systematically examines the impact of these variables on the association between foreign investments and political conflict in poor countries. Two reasons point to the need for this analysis. First, most of the tension in the contemporary international arena originates in developing countries, and second, many development plans stress foreign investments as the foundation for overcoming poverty. If these plans also increase political conflict, then their overall value for developing societies may be questionable.

In the pages that follow, the variable clusters mentioned above are described briefly, and a cross-national research design is used to examine how they affect the association between foreign investments and political conflict.

HISTORICAL RELATIONSHIP

TO THE WORLD SYSTEM

A society's historical relationship to the world system refers to its past interactions with other international actors. One category of such interactions has to do with imperialism. Some scholars maintain that people in newly independent states see foreign investments as a continuation of imperialism, especially when the investments are from the country that once held the new state as a colony (Leslie, 1987:132; Rothgeb, 1996:98). Under these conditions, foreign investments are described as leading to conflict. Other scholars argue that international structures created to assist former colonies, such as the British Commonwealth and the Lome Conventions, foster a climate that welcomes foreign investments as engines of prosperity and results in fewer political tensions (see Babarinde, 1994).

CONTEMPORARY RELATIONSHIP

TO THE WORLD SYSTEM

A country's contemporary relationship to the world system pertains to its current interactions with other interactional actors. Many scholars assert that for developing countries one important interaction variable is whether its contacts are highly concentrated. In a seminal article on the structure of the international system, Galtung (1971:89-90) maintains that less developed societies are more easily dominated when they are caught in a feudal structure that limits their international contacts to a single advanced state. Lipson (1985:105) and Rothgeb (1987:233) note that when foreign investments are from a single foreign national source, similar feelings of domination may occur that can lead to more conflict.

DOMESTIC ECONOMIC STRUCTURES

These variables refer to the production and distribution of resources in a society and to the roles played by actors who compete for those resources. The literature suggests that three such variables are important: (1) income inequality, (2) domestic capital structures, and (3) the size of the working class. Ugorji (1995:554) notes that when incomes are skewed toward an elite, foreign investments often are seen as favoring that elite. Jackson, et. al. (1978:631) and O'Donnell (1988:13) maintain that the disadvantaged resent this and that it leads to conflict.

Local capital and labor play another role. Onis (1991:250) reports that local entrepreneurs regard foreigners as usurping opportunities that belong to indigenous businesses. The Turkish financial community's view that foreign investors inflated local property values is offered as an example. As far as labor is concerned, Ugorji (1995:552) points out that the working class provides a fertile ground for organizing opposition to foreign investments, noting the fear among Nigerian workers that foreign investments benefit a small proportion of the working class while at the same time pushing local employers into insolvency.

Therefore, higher levels of direct foreign investments may interact with low incomes for the poor, a dearth of local capital, and a large working class to produce more conflict.

SOCIAL CHANGE

Social change variables pertain to whether a society is undergoing transformations that alter the lifestyles and physical distribution of its population. Two such changes relate to urbanization and industrialization. Kornhauser (1959:94) and Migdal (1974:196) see these forces as creating instability by exposing people to unfamiliar non-traditional situations, which can lead to alienation and extremism. Rothgeb (1987:233) maintains that the probability of trouble is highest when there is a large foreign presence of the sort that accompanies foreign investments, for multinational firms often are "regarded as introducing foreign values into the host society, thus undermining local culture and creating ... social problems." Thus, higher levels of direct foreign investment may interact with rapid urbanization and industrialization to create conflict.

SECTORAL LOCATION

Many scholars also assert that the sectoral location of foreign investments affects conflict. Investments in primary sectors, such as mining, often are depicted as creating trouble because local residents may perceive such investments as removing the homeland's resources without adequate compensation (see Vernon, 1977:149; Kobrin, 1987:634). When foreign investments are in manufacturing, a different scenario emerges, because such investments may be perceived as spurring development (see Kobrin, 1987; Rothgeb, 1989). Additionally, foreign manufacturers often enhance the incomes of local firms by using them as suppliers and distributors (Reuber, 1973; Frank, 1980). Hence, while mining investments are described as increasing conflict, manufacturing investments may dampen it.

SUMMARY

The preceding discussion suggests a positive relationship between foreign investments and domestic conflict when:

(1) the society is newly independent,

(2) the investments are primarily from the former colonial overlord country,

(3) the investments are primarily from a single foreign national source,

(4) the society's income distribution favors the wealthy,

(5) there is a scarcity of local capital,

(6) there is a large working class,

(7) there is rapid growth in urbanization, and there is rapid growth in industrialization.

Two alternative hypotheses also were suggested that point to a negative relationship between foreign investments and conflict when a society is newly independent or when the investments are predominantly from the former colonial overlord. Additionally, it may be hypothesized that investments in mining produce more conflict than do those in manufacturing. These propositions are tested in the following sections.

RESEARCH DESIGN

This analysis uses a cross-national design that examines the 84 developing countries analyzed by Rothgeb (1989:137). The dependent variable is political protest, which is organized non-violent behavior devoted to changing policy (see Gun and Lichbach, 1986).2 Protest was measured as value 10 on the Conflict and Peace Data Bank (COPDAB) domestic scale (see Azar, 1980).3 Value 10 includes such acts of protest as demonstrations, political strikes, and distributing anti-government propaganda. The conflict scores were computed as the protest events divided by the total events coded by COPDAB for each state. Separate scores were computed for each time period examined. Proportions were used so that states with large total numbers of events would not automatically have high scores.4

The stock of foreign investment in mining and manufacturing was the independent variables.5 Foreign investment was measured as the holdings in 1970 US dollars of non-nationals in mining and manufacturing divided by the gross domestic product (GDP) from each sector. The OECD (see references) supplied the data.

Government strength and repression were control variables because Muller and Seligson (1987) claim they affect conflict, and host country size was included as suggested by Rothgeb (1989).6 Total government expenditures divided by GDP (obtained from US ACDA, 1985) measured strength; repression was measured as such COPDAB events as imposing curfews, forbidding public meetings, and arresting opposition leaders, and size was the logarithm of population (obtained from UN, 1980a).

The above hypotheses indicate foreign investments and protest are related under the following interactive conditions: (1) a country is newly independent, (2) the former colonial overlord is the largest source for foreign investments, (3) investments are primarily from a single foreign national source, (4) there is high income inequality, (5) there is a scarcity of local capital, (6) the working class is large, (7) there is rapid urbanization, and (8) there is rapid industrialization.

Foreign investment from the largest foreign source was measured as the percentage of investments from all sources. The overlord variable was based on identifying that largest source. Date of independence was used to determine a country's age. Inequality was the share of a society's total income going to the poorest 20 percent of the population. Capital was measured as gross domestic fixed capital formation (GDFCF) as a percent of GDP. The percent of the labor force in industry measured the size of the working class. Urbanization was the change over time in the percent of the population living in urban areas, and industrialization was the change over time in the percent of the labor force in industry. The investment data were from the OECD; independence was from Banks (1980); inequality, urbanization, and industrialization were from the World Bank (1983), and GDFCF was from the UN (1980b).

Interaction terms were constructed to test the hypotheses. First, dummy variables were set up with a value of 1 when a country had the condition and a value of 0 when the condition was absent. Hence, when investments were primarily from the colonial overlord, a value of 1 was assigned to the dummy and a 0 to other cases. The new state variable involved assigning a 1 to countries achieving independence after 1945 and a value of 0 to others.7 For the remaining dummy variables, states with a value exceeding the median received a 1, and those below the median received a 0.8 The values of manufacturing and mining investments were multiplied by these dummy variables to create the interaction terms.

RESULTS

Table 1 shows that for new states and for those with investments that are primarily from the former colonial master, manufacturing investments display consistent negative associations with protest, and, with the exception of negative relationships in 1967-1969 and 1976-1978 for the colonial master term, the mining variables have no effect on protest. These results indicate both that the ties between the former metropole and developing countries create a favorable climate for foreign manufacturing ventures, and that mining investments do not produce the suspicion many scholars describe.

Table 2 shows that while manufacturing investments do not interact with inequality or the degree of concentration from a single foreign source to affect protest, mining investments do interact with these variables to produce conflict. In 1967-1969 and 1976-1978, higher mining investments in countries with low incomes for the poor were associated with more protest. Additionally, higher mining investments that are predominantly from one foreign source are related to more protest in every period except 1970-1972. This provides evidence that under some conditions mining investments are more controversial than those in manufacturing.

Table 3 indicates that the capital interaction term for manufacturing is not related to conflict, but that the mining term is positively associated in 1967-1969 and 1973-1975. This implies that while local capitalists regard foreign mining firms as competitors, they see foreign manufacturers as a source of business opportunities, as described above. As far as the labor interactions are concerned, both the manufacturing and mining terms display strong and consistent relationships with protest, which suggests that foreign investments in countries with a large industrial working class create a potent atmosphere for protest.

The final results in Table 4 pertain to urbanization and industrialization. With the exception of a weak positive association for the manufacturing industrialization term in 1973-1975, and for the mining industrialization term in 1976-1978, these variables are not related to conflict. Hence, these social forces do not seem to affect foreign investment and protest.

SUMMARY AND CONCLUSIONS

The fundamental result from this research is that sectoral location has an impact on how foreign investments affect conflict. Manufacturing investments were negatively related to protest in new states and in former colonial possessions, implying that the arrangements created between excolonies and their erstwhile overlords produce favorable climates for investments in this sector. For their part, mining investments were positively related to protest when: (1) the concentration from one foreign source was high, (2) income inequality was high, and (3) the local capital base was large. The latter two effects, however, only were found in selected time periods, indicating that time-specific factors alter how inequality and capital availability affect the association between mining investments and protest. Future research should consider this issue carefully.

This research also found that foreign investments in both manufacturing and mining were positively related to protest when the local working class was large. There are several possible explanations for this result. One is the need to protect jobs that might be eliminated by competition from multinational corporations. Another is the desire to obtain additional economic benefits, such as higher wages. Finally, a large foreign presence might introduce new conceptions of legal and political rights that lead to protest. Each of these possibilities should be explored in future research.

To conclude, the most important implication of this research for economic planning in developing countries is that societies with a large working class can expect foreign investments to generate considerable political controversy. Another implication is found in the differences between manufacturing and mining investments. Manufacturing investments generally seem to mute conflict, while mining investments seem to increase the probability of trouble, especially when the investments are from one foreign source, income inequality is high; and there is a strong local capital structure.

1 Direct foreign investments are property owned by non-nationals with managerial control of their assets. Political conflict is action by nongovernmental actors seeking to change either public policy or the composition of the government.

2 Rummel (1966) and Tanter (1966) show that political conflict has two other dimensions, turmoil and internal war. The former is spontaneous, poorly organized, and violent. The latter includes violent organized attempts to remove the government. Research indicates that foreign investments primarily affect protest. Hence, the focus on this type of conflict (see Rothgeb, 1996: 125-30).

3 COPDAB was used because it avoids problems associated with coding from a single source. See Rothgeb (1996: 57-58) for a discussion of events data coding problems.

4 Gurr and Lichbach (1986) argue in favor of weighted scores. Rothgeb (1996: 58-59) found that measures weighted by population produce the same basic results as the measure used herein.

5 Stock of foreign investment is the total value of the holdings of foreigners. Flows of foreign investment are new investments entering a country over time. Replicating the analysis with Rothgeb's (1989) measure of flows showed that flows had little effect on the results for any of the other variables.

6 Additional analysis controlling for trade as a percent of GDP, per capita income, and changes in terms of trade did not affect the association between foreign investment and conflict.

7 The results were basically the same when parallel analysis was conducted employing 1960 as the birth date for new states.

8 The capital hypothesis projects scarcity as leading to conflict. Since this interaction term represents an abundance, a negative relationship would support the hypothesis. Additional analysis employing the upper quartile to create dummy variables produced the same basic results.

9 No problems of bias were found when scatterplots of the relationships between error terms and independent variables and between predicted values and error terms were examined.

10 Only the results for the interaction terms are reported to conserve space. Other results are available upon request.

11 A survey of the OECD governments that provided data for 1967 did not yield usable data. Correlations over time for total investments, however, are stable, indicating that the absence of sectoral data after 1967 probably does not distort results.

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JOHN M. ROTHGEB, JR.

Miami University

JOHN M. ROTHGEB, JR. is Paul Rejai Professor of Political Science at Miami University. He is the author of U.S. Trade Policy (Washington, DC: CQ Press, 2001), Foreign Investment and Political Conflict in Developing Countries (Westport, CT: Praeger Publishers, 1996), Defining Power (New York: St. Martin's Press, 1993), and The Myths and Realities of Foreign Investment in Poor Countries (New York: Praeger Publishers, 1989).

Copyright Dr. George Kourvetaris Summer 2002
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