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Foreign investment: democracies preferred?
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Research news
Foreign investment: democracies preferred?
A working group set up by the UN Sub-Commission on the Promotion and Protection of Human Rights, a subsidiary body of the UN Commission on Human Rights, is currently discussing a code of conduct for transnational corporations – a code which could be adopted at the Sub-Commission’s next meeting in August. If that happens, a success will have been scored where the “New International Economic Order” debate of the 1970s failed. However, if one accepts the findings of a new study by the Hamburg Institute of International Economics (HWWA), a code of conduct taking account of human rights records would have been a great deal more important in the seventies than it is now – because according to the study’s author, HWWA economist Matthias Busse, it made little difference to transnational corporations in those days whether the countries in which they invested were democracies or dictatorships. In the 1980s, and especially in the 1990s, however, foreign investment poured more readily into developing countries where democracy and human rights were respected. As Busse puts it: “The often-cited hypothesis by non-governmental organisations that lower democratic rights boost foreign investment does not hold”.
Busse reaches his conclusion after comparing foreign investment and the state of democracy and human rights in 69 developing countries since 1972. His indicators of human rights observance in a country are political rights (e.g. the right to vote and eligibility for political office) and civil liberties (e.g. freedom of speech, assembly and association).To enable him to assess the significance of the relationship between these two variables and the level of foreign investment in a country, he also considers four control variables, including per-capita income, growth rate and the openness of the economy (ratio of imports and exports to gross domestic product). Busse’s conclusion: In the period 1990 to 1999 there was a distinct positive relationship between human rights observance and the level of foreign investment in a country. “In other words, countries with a higher level of political rights and civil liberties received more FDI per capita than would have been forecasted on the basis of the other country characteristics”. In the 1970s, Busse found no such correlation.
The study’s author offers two explanations for this change in the pattern of investment. First, the proportion of investment in manufacturing and services has increased steadily since the 1970s, whereas the relative significance of raw material production, e.g. mineral mining, is diminishing. Consequently, transnational corporations are not tied as strongly as they used to be to certain investment locations and can thus be more selective. Secondly, Busse reckons the change is partly due to the pressure exerted by civil society organisations all over the world. International NGO campaigns for more respect for human rights – also on the part of private enterprise – are more effective today than they were twenty or thirty years ago.
In other words, the UN code of conduct for transnational corporations may have made it onto the agenda too late – because the bulk of investment today is in democratic countries anyway. That does not mean, however, that civil society watchdogs no longer need to be vigilant – because without their efforts, the present situation might never have been reached.
Matthias Busse: Democracy and FDI. HWWA Discussion Paper 220
Internet: www.hwwa.de/Publikationen/Discussion_Paper/2003/220.pdf
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