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Friday, 8 August 2008

FDI and domestic spillovers...

A new paper investigates the effect of foreign presence on the productive of manufacturing industries in Ghana :

.."We find that the presence of foreign firms in a sector has a negative effect on the productivity of domestically owned firms, but a positive effect on most foreign owned firms, regardless of the productivity measure. Interestingly, the effect of foreign ownership per se is ambiguous and depends on the model specification. Unlike in recent work on China, it does not appear that the negative level effect from foreign ownership is compensated for by a positive growth effect, at least not in any reasonable time period. We also find that, after controlling for labor quality and unobserved heterogeneity, foreign firms do not pay higher wages in Ghana. However, they also do not appear to have a negative effect on wages paid by domestic firms."
In truth none of this surprising, since much of the literature does acknowledge that spillovers from new FDI to domestic firms are not inevitable. The right conditions need to exist for them to occur. A reason why I remain unconvinced by the new Zambian Shenzhen . The key questions relates to the nature of these conditions are, and whether countries like Ghana or Zambia possess those conditions. Two of these conditions come to mind :

First, for positive spillovers to occur there has to be a smaller technological gap between domestic and FDI firms. It therefore follows that FDI will not generate the spillovers unless it is placed within a broader economic policy context. Investment in basic infrastructure, education and training, and encouragement of Zambian firms to invest in technological development becomes crucial. These policies will do a great deal in increasing Zambian firms technological capability, and hence make it easier for the nation to benefit from spillovers.

Secondly, there needs to an institutional framework that prevents state capture from domestic firms. As this
recent paper from CDG notes, inflence-peddling in Zambia has affected industrial competition and ultimately productivity. If domestic firms (e.g. ZAMTEL , ZESCO) can be prevented from influence-peddling and be subjected to more competition, they may be more willing to go into partnership with foreign firms. Part of that influence peddling is to eliminate the practice of "parastatal madness" for government owned firms, although the problem is not restricted to parastatals.

I am sure there are other conditions, and would be interested to hear what others think!

7 comments:

  1. .."We find that the presence of foreign firms in a sector has a negative effect on the productivity of domestically owned firms, but a positive effect on most foreign owned firms, regardless of the productivity measure.

    So giving massive advantages to foreign corporations means it is easier for foreign firms to do business than it is for domestic firms?

    Maybe it is time to extend the same benefits to domestic companies - free trade zones, low or no taxes, loans, that sort of thing.

    I was just reading Ha-Joon Chang's book, and it turns out that you don't need low inflation to create economic growth, but low interest rates - that overall, business cannot be profitable of the cost of capital (interest rates) are higher than the return on capital (profit rate). Which makes some sense - if you pay 20% interest rates on your capital, you are going to have a hard time if you don't make more than 20% return on your business. That limits the number and type of business models that can be profitable to high risk/high return businesses, and that rules out (for instance) grocery chains. Unless they charge very high prices for their goods.

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  2. I was just reading Ha-Joon Chang's book, and it turns out that you don't need low inflation to create economic growth, but low interest rates - that overall, business cannot be profitable of the cost of capital (interest rates) are higher than the return on capital (profit rate).

    Errr..
    If your inflation is superior to your interest rates or your profit rate, you don't find anyone willing to lend their money or to start a business.
    To have positive real interest rate, your nominal interest rates has to be superior to your inflation rate.

    So if you have high inflation, you cannot have low interest rates.

    It's really not "interest rates" or "inflation", you reduce both (and yes, that does involve raising interest rates temporarly to limit inflation).


    (That said, I haven't read the paper. So I'll have more comments later)

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  3. MrK,

    ”So giving massive advantages to foreign corporations means it is easier for foreign firms to do business than it is for domestic firms?”

    The ease of doing business is not the same as being productive. Productivity is about efficiency of production.

    As I note in the post, many domestic firms like ZAMTEL and ZESCO are clearly unproductive because they have no incentive to perform and become technically efficient.

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  4. I thought we were talking about the burdon that the state puts on domestic firms, versus all the benefits it gives to FDI - no taxes, development agreements, loans, free trade zones.

    And I do think it is possible to run parastatals in an efficient manner. All you have to do is take the corruption out of hiring and procurement, and pay people to be more frugal with their budgets.

    It is all about priorities. It is all about how serious the government is about enforcing efficiency in these companies.

    For instance, there could be a ban on hiring anyone who has a relative in government. Or, you could compensate managers this way: If they achieve a project within specifications, you pay them 25% of the difference between what is spent now, and how far they manage to reduce expenditures.

    There are ways to incentivize people in parastatals as well as privately owned companies. What I think part of the problem is, is a government that believes in business and free markets and does not believe in government.

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  5. Secondly, there needs to an institutional framework that prevents state capture from domestic firms.

    I think political influence is inevitable. However, openenness

    From Parastatal Madness:

    The government knows the right approach is to fully commercialise the firms and ultimate privatisation (with adequate regulation where necessary), but they fear that doing so would make them pay the debts back!

    Well there is a way around debt, as the government can only pay the interest on their debt, and work off the rest by temporarily setting the parastatal tax rate to zero.

    Meanwhile the government should run it's own operational budget on a PAYGO basis, which would both reduce government spending and make the government prioritize what it really needs.

    But above all, there has to be complete transparancy about how debt and finances in general are dealt with - who is paid what, procurement, hiring, etc.

    Openness in government should be highest on the agenda. There is no more war to justify secrecy.

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  6. I am with you on transparency. But transparency is complicated.

    First government can reveal everything but in the wrong MEDIUM!

    So lots of reports and records available at ZRA except you need to be a Lusaka resident and able to deal with large reports!

    Secondly, even when information is available the citizens may not be interested.

    Thirdly, even when information is available the citizens may not understand it.

    Because of this, the best way is to limit what government gets involved in so that people have fewer things to hold it to account.

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  7. Cho,

    So lots of reports and records available at ZRA except you need to be a Lusaka resident and able to deal with large reports!

    So put them online and give lots of people public internet access. Libraries, council buildings - it could be part of the government's TIC policy as you mentioned.

    Because of this, the best way is to limit what government gets involved in so that people have fewer things to hold it to account.

    But then there is a need to police what private companies are doing. And only government has the resources and powers to hold them to account.

    Look at the ENRON saga, and what is happening with Blackwater and Iraq.

    We have seen what complete deregulation looks like, and it seems like a scene from the 16th century, complete with pirates. It is anarchy.

    ReplyDelete

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