By Riccardo Crescenzi (LSE), Arnaud Dyevre (LSE) and Roberto Ganau (LSE, University of Padova)

 

Politicians around the world have devoted significant efforts and resources to attract foreign direct investment (FDI). The assumption is that multinationals bring in new skills and ideas, create jobs and spur on local companies. But is all this effort really worth it? Is the impact of foreign investment always what policy-makers assume it is going to be? At least four fundamental misconceptions have dominated the public debate in this area.

Policy-makers around the world have earmarked conspicuous resources to the attraction of Foreign Investments[1]. Conversely, groups questioning the economic benefits of FDI have frequently based their arguments on ideological views or on a case-by-case basis. A balanced evidence-based framework to unveil the full set of intended and unintended economic impacts of internationalisation on local communities has remained somewhat marginal in the mainstream policy debate and practice.

The research of the LSE GILD (Global Investment Local Development) presented in this video has attempted to go beyond anecdotal evidence by looking at the impact of tens of thousands of investments all over the world, finding that – under the right conditions – foreign investment generates positive economic impacts on receiving sub-national regions[2]. However, there are some very widely held-assumptions that turn out not to be right at all offering a much more nuanced picture to inform public policies and debates.

First, is the idea that some of the best investors that countries, regions and cities can attract are the big technological giants, such as Microsoft or Google. By many measures, these are the largest companies in the world economy. They are growing quickly and should help provide cities and regions with highly productive, 21st century technologies, know-how and skills that local areas do need to compete globally.

New research on the regional innovation impacts of FDI around the globe shows[3] that, while an area does become more innovative after multinationals move in, actually the Microsofts and Googles can end up being far from ideal as local partners. That is because these large Multinationals are more capable than other firms in keeping their knowledge and new ideas in-house. Moreover, tech giants are less likely to hire local workers or send former employees back into the rest of the job market. They collaborate less with local firms, and they are less likely to demonstrate their ideas & innovations and share them with the local economy.

In other words, the risk for the local economy is that a highly sought-after Google Campus – often supported by public resources and infrastructure – might become a Google Enclave. Instead, medium-sized innovative multinationals are most likely to boost regional innovation. These “second-tier” players might be the best partners to facilitate regional innovation and should be given more attention by policymakers even if they are less well-known (and therefore harder to identify).

A second misconception has also been unveiled by recent empirical research on the impact of FDI on European sub-national regions. This is the commonly-held notion that foreign investment is a great way to get out of recession – in other words, when domestic firms tend not to be investing, getting money in from abroad might seem an appealing answer to support regional recovery.

Looking at European regions coming out of the Great Recession, new research found that this is only partially true[4]. The areas which received the most FDI recovered the quickest, but this only holds when new investments are flowing into the industries that are already strong in the host economy, rather than encouraging a whole new industry to set up. Moreover, investments in services are especially important to facilitate regional recovery contrary to the current emphasis of EU policies on manufacturing.

The third misconception, is that it is always better for the region when multinationals come and invest in something new – for example, by setting up a brand new factory through Greenfield investments – than when the multinational buys a pre-existing factory or firm. Sometimes this is even seen as “stealing” an industry and siphoning the profits out of the country.

New research compared regions in Mexico, Brazil and Colombia, which are three massive hubs for exporting into the US and the rest of Latin America[5]. But only in two of these, Brazil and Mexico, the evidence suggests that the investment in brand new activities is actually helping local innovation. Instead in Colombia, where technological development and global integration of many areas are less advanced, multinationals buying up existing local firms are more effective at encouraging innovation in the local regions.

The fourth and final misconception is that a country benefits not just from inward FDI, but also keeping its own investments onshore[6]. In the US, city-regions with more firms which expand abroad actually become even more innovative. If East Coast companies can expand to India, the city-region where they are based gain more than if they had gone to Ohio instead. By travelling further abroad, instead of being trapped onshore, they can cast as wide a net as possible to find new ideas.

Unfortunately, these four misconceptions are only growing in credence in many parts of the world. National and sub-national governments are increasingly chasing after investment from the Tech Giants, expecting large returns in terms of local innovation and employment[7]. More recently, the widespread upsurge in economic nationalism has convinced some policy makers to put in place (or at least threaten to do so) restrictions or sanctions on domestic companies that off-shore[8].

For that reason, it is more important than ever that policymakers take an empirical, data-driven approach to these issues in order to successfully balance the opportunities offered by the evolving globalisation of innovation with inclusive growth and local wealth.

 


Notes

[1] See for example the recent debate on Opportunity Zones in the USA: https://www.ft.com/content/1c473618-e82b-11e8-8a85-04b8afea6ea3

[2] https://dv-lse.github.io/fdi-patent-innovate/

[3] Crescenzi R., Dyevre A., Neffke F. ‘Catalysts of Regional Innovation’. All papers mentioned in this post are available upon request (Geog.Gild@lse.ac.uk )

[4] Crescenzi R. and Ganau R. Inward FDI and Regional Performance in Europe after the Crisis

[5] Crescenzi and Jaax  ‘Multinational Enterprises and the Geography of Innovation in Latin America: Evidence from Brazil, Mexico, and Colombia’

[6] Crescenzi R. and Ganau R.  Keep America first: Regional innovation and the ‘magic’ of foreign investments

[7] See for example BBC – 14th September 2018 –  ‘Can the city of Pizza reinvent itself as a tech capital?’ https://www.bbc.co.uk/news/business-45486674 ;

[8] See the case of Italy http://www.ansa.it/english/news/politics/2018/07/02/offshoring-clampdown-in-dignity-decree-3_4d6ee979-2ec1-4809-b208-6dc6077166d4.html or the USA https://www.economist.com/finance-and-economics/2018/09/13/tariffs-may-well-bring-some-high-tech-manufacturing-back-to-america


About the Authors

Riccardo Crescenzi is a Professor of Economic Geography at the London School of Economics

Arnaud Dyevre is a PhD candidate in the Department of Economics at the London School of Economics.

Roberto Ganau is an Assistant Professor of Economics at the University of Padova, and Research Associate at the Department of Geography and Environment at the London School of Economics.

The authors are part of the ERC GILD (Global Investments and Local Development) Team at the LSE