Like Joan Robinson, a former Cambridge economics professor and arguably the most famous female economist in history, I believe that the only thing that is worse than being exploited by capital is not being exploited by capital. Foreign investment, especially foreign direct investment, can be a very useful tool for economic development. But how useful it is depends on the kinds of investment made and how the host country government regulates it.
Foreign financial investment brings more danger than benefits, as even the neo-liberals acknowledge these days. While foreign direct investment is no Mother Teresa, it often does bring benefits to the host country in the short run. But it is the long run that counts when it comes to economic development. Accepting FDI unconditionally may actually make economic development in the long run more difficult. Despite the hyperbole about a ‘borderless world’, TNCs remain national firms with international operations and, therefore, are unlikely to let their subsidiaries engage in higher-level activities; at the same time their presence can prevent the emergence of national firms that might start them in the long run. This situation is likely to damage the long-run development potential of the host country. Moreover, the long-run benefits of FDI depend partly on the magnitude and the quality of the spill-over effects that TNCs create, whose maximization requires appropriate policy intervention.Unfortunately, many key tools of such intervention have already been outlawed by the Bad Samaritans (e.g., local content requirements).
Therefore, foreign direct investment can be a Faustian bargain. In the short run, it may bring benefits, but, in the long run, it may actually be bad for economic development. Once this is understood, Finland’s success is unsurprising. The country’s strategy was based on the recognition that, if foreign investment is liberalized too early (Finland was one of the poorest European economies in the early-20th century), there will be no space for domestic firms to develop independent technological and managerial capabilities. It took Nokia 17 years to earn any profit from its electronics subsidiary, which is now the biggest mobile phone company in the world.[57] If Finland had liberalized foreign investment from early on, Nokia would not be what it is today. Most probably, foreign financial investors who bought into Nokia would have demanded the parent company stop cross-subsidizing the no-hope electronics subsidiary, thus killing off the business. At best, some TNC would have bought up the electronics division and made it into its own subsidiary doing second-division work.
The flip side of this argument is that regulation of foreign direct investment may paradoxically benefit foreign companies in the long run. If a country keeps foreign companies out or heavily regulates their activities, it will not be good for those companies in the short run. However, if a judicious regulation of foreign direct investment allows a country to accumulate productive capabilities more rapidly and at a higher level than possible without it, it will benefit foreign investors in the long run by offering them an investment location that is more prosperous and possesses better productive inputs (e.g., skilled workers, good infrastructure). Finland and Korea are the best examples of this. Partly thanks to their clever foreign investment regulation, these countries have become richer, better educated and technologically far more dynamic and thus have become more attractive investment sites than would have been possible without those regulations.
Foreign direct investment may help economic development, but only when introduced as part of a long-term-oriented development strategy. Policies should be designed so that foreign direct investment does not kill off domestic producers, which may hold out great potential in the long run, while also ensuring that the advanced technologies and managerial skills foreign corporations possess are transferred to domestic business to the maximum possible extent. Like Singapore and Ireland, some countries can succeed, and have succeeded, through actively courting foreign capital, especially FDI. But more countries will succeed, and have succeeded, when they more actively regulate foreign investment, including FDI. The attempt by the Bad Samaritans to make such regulation by developing countries impossible is likely to hinder, rather than help, their economic development.
CHAPTER 5
Man exploits man
John Kenneth Galbraith, one of the most profound economic thinkers of the 20th century, once famously said:‘Under capitalism, man exploits man; under communism, it is just the opposite.’He was not suggesting that there is no difference between capitalism and communism, he would have been the last person to do so; Galbraith was one of the leading non-leftist critics of modern capitalism.What he was expressing was the profound disappointment that many people felt about the failure of communism to build the egalitarian society it had promised.
Since its rise in the 19th century, the key goal of the communist movement had been the abolition of private ownership of the ‘means of production’ (factories and machines). It is easy to understand why the communists saw private ownership as the ultimate source of the distributive injustice of capitalism. But they also saw private ownership as a cause of economic inefficiency. They believed that it was the reason for the ‘wasteful’ anarchy of the market. Too many capitalists routinely invest in producing the same things, they argued, because they do not know the investment plans of their competitors. Eventually, there is over-production and some of the enterprises involved go bankrupt, condemning some machines to the scrap heap and laying perfectly employable workers idle. The waste caused by this process, it was argued, would disappear if the decisions of different capitalists could be co-ordinated in advance through rational, centralized planning – after all, capitalist firms are islands of planning in the surrounding anarchic sea of the market, as Karl Marx, the leading communist theorist, once put it. Therefore, if private property were abolished, communists believed, the economy could be run as if it were a single firm and thus managed more efficiently.
Unfortunately, the centrally planned economy based on state ownership of enterprises performed very poorly. Communists may have been right in saying that unfettered competition can lead to social waste, but suppressing all competition through total central planning and universal state ownership exacted enormous costs of its own by killing off economic dynamism. Lack of competition and excessive top-down regulation under communism also bred conformism, bureaucratic red tape and corruption.
Few would now dispute that communism failed as an economic system. But it is a huge leap of logic to go from that conclusion to the proposition that state-owned enterprises (SOEs), or public enterprises, do not work. This judgement became popular in the wake of Margaret Thatcher’s pioneering privatization programme in Britain in the early 1980s, and acquired the status of a pseudo-religious credo during the ‘transformation’ of the former communist economies in the 1990s. For a while, it was as if the whole ex-communist world was hypnotised by the mantra, ‘private good, public bad’, reminiscent of the anti-human slogan, ‘four legs good, two legs bad’, in George Orwell’s Animal Farm – that great satire of communism. Privatization of SOEs has also been a centrepiece of the neo-liberal agenda that the Bad Samaritans have imposed on most developing countries in the past quarter of a century.
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Nokia was founded as a logging company in 1865.The shape of the modern Nokia group started emerging when Finnish Rubber Works Ltd (founded in 1898) bought the majority shares in Nokia in 1918 and in Finnish Cable Works (founded in 1912) in 1922. Finally, in 1967, the three companies were merged to form Nokia Corporation. Some Finnish observers summarize the nature of the merger by saying that the name of the merged company (Oy Nokia Ab) came from wood processing, the management from the cable factory and the money from the rubber industry. Nokia’s electronic business, whose mobile phone business forms the core of the company’s business today, was set up in 1960. Even until 1967, when the merger between Nokia, FRW and FCW happened, electronics generated only 3% of Nokia group’s net sales. The electronics arm lost money for the first 17 years, making its first profit only in 1977.The world’s first international cellular mobile telephone network, NMT, was introduced in Scandinavia in 1981 and Nokia made the first car phones for it. Nokia produced the original hand-portable phone in 1987. Riding on this wave, Nokia rapidly expanded during the 1980s by acquiring a series of electronics and telecommunications companies in Finland, Germany, Sweden and France. Since the 1990s, Nokia’s leading business has been mobile phones. By the 1990s, Nokia became the leader in mobile telecommunications revolution. For further details, see H-J. Chang (2006),