March 15, 2006 | Volume 3, Issue 1
Foreign Investment, Development, and Globalization: Can Costa Rica Become Ireland?
Eva Paus, Palgrave Macmillan, 2005
Along with international trade and financial flows, an explosive growth of foreign direct investment (FDI) has characterized the process of globalization occurring since the late twentieth century. Although most of the FDI goes to the developed economies, many books have been written about the effects of FDI on developing countries. Findings have ranged from the favorable macroeconomic effects of FDI on the balance of payments, to FDI‘s crowding-out effects on domestic financial markets and its pernicious results in the development of local economies. Historical evidence has also shown that FDI does not often contribute to sustainable long-term economic development in the developing world. Eva Paus’ book, Foreign Direct Investment, Development, and Globalization: Can Costa Rica become Ireland?, adds to the discussion of the effects of FDI in developing countries by introducing an in-depth empirical and comparative economic analysis of Ireland and Costa Rica. Both Ireland and Costa Rica are “latecomers in the development process” and have received little attention in the academic development literature.
Specifically, Paus looks at the effects of high technology FDI flows and their impact on the domestic development of these two countries during the 1980s and 1990s. The focus on high technology FDI relies on the premise that this type of FDI has “the greatest potential for generating knowledge spillovers in the host country” that consequently can “raise domestic technological capabilities and increase the possibility of sustained industrial upgrading”. Paus’ empirical analysis focuses on three issues: first, “the reasons why high-technology [transnational corporations] invested in these two countries;” second, “the impact of high-tech FDI on the macroeconomy and structural change in the host economies;” and third, “the extent to which indigenous technological capabilities expanded through high-tech FDI.” Her comparative analysis looks at issues related to “the implications of industry specificity (with main focus on the electronic industry and medical instruments), the implications of dynamic changes over time (at the country, industry and the global level), and the role of government policies (in attracting FDI, fostering location-specific assets, and enhancing indigenous linkage capabilities).” For the comparative analysis, the author intelligently uses a diverse set of methods and sources, including quantitative information, qualitative evidence, primary and secondary data, prior literature, and author interviews. Paus makes a valuable contribution to the comparative analysis of both countries. The information was gathered through interviews with principal stakeholders of both Ireland and Costa Rica in charge of past and present domestic development policies, and with the leaders of both domestic and multinational businesses with FDI interests.
In Chapter 2 of the book, Paus builds an analytical framework for a high-tech-led FDI growth for “small latecomers” such as Ireland and Costa Rica. In her framework, she relates development with enhancing “knowledge-based assets” that moves countries through a staged process that begins with the production of primary goods and ends with the production of high-value products and services. Success of a high-tech-led FDI growth in “small latecomers” relies on contingencies that symbiotically connect the fast-changing strategic needs of transnational corporations and the location-specific assets of “small latecomers.” These contingencies include variables such as proximity to major markets, stable property and production relations, cost factors, and clustering, which determine the initial decision of FDI flows into the host country and, to an extent, their medium- and long-term continuity. Ultimately, high-tech FDI produces development when steering the host country to experience an industrial upgrade of its domestic economy. The author wisely points out that industrial growth does not occur automatically; instead, it happens when there is a convergence between the investment made by transnational corporations and the value chain structure and linkage capability of “small latecomer” countries.
Paus demonstrates that Ireland succeeded in transitioning from a “small latecomer” country to a high-income, developed country during a ten-year period because a specific conjuncture allowed the necessary contingencies to exist and, consequently, led the development of a country with relatively strong “knowledge-based assets.” The combination of skill-based education policies in the 1960s and 1970s, the financial and policy benefits of European Union membership during the 1980s, and well-coordinated, consistent and politically-leveraged application of public industrial policies proved fundamentally important to Ireland’s fast growth and industrialization during the 1990s. The specific conjuncture occurring in Ireland provides a key insight to understanding the complexity and challenges of achieving development. Despite the successful conjuncture, Paus shows that industrial growth and development have their limits because of country size and the difficulties of making technology transfers happen. Costa Rica cannot become Ireland because this conjuncture was and still is absent in Costa Rica.
Paus importantly and innovatively contributes to the ongoing discussion of FDI and development. Her book makes us very much aware of the complexity of designing and implementing successful industrial policies in a developing setting subject to the forces of globalization. A competent, proactive and politically leveraged government agency in charge of industrial policy proved successful for Ireland, and this strategy may be replicable in other developing countries. Paus’ macroeconomic analyses are weak because she does not fully look at changes in balance payments, government spending, inflation and general interest rate levels before and after high-tech FDI occurred. However, she compensates for this weakness by providing very thorough microeconomic analyses. Overall, Paus’ book reminds policy-makers and economists that, under the pressures and challenges of the current globalization process, the successful development effects of FDI in the developing world require a complex joint effort between stakeholders, including the active role of appropriate and timely public policies.