Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism

established a UK plant in 1981, it was forced to procure 60% of value added locally, with a time scale over which this would rise to 80%. It is reported that the British government also ‘put pressure on [Ford and GM] to achieve a better balance of trade.’[51]

Even cases like Singapore and Ireland, countries that have succeeded by extensively relying on FDI, are not proof that host country governments should let TNCs do whatever they want. While welcoming foreign companies, their governments used selective policies to attract foreign investment into areas that they considered strategic for the future development of their economies. Unlike Hong Kong, which did have a liberal FDI policy, Singapore has always had a very targeted approach. Ireland started genuinely prospering only when it shifted from an indiscriminate approach to FDI (‘the more, the merrier’) to a focused strategy that sought to attract foreign investment in sectors like electronics, pharmaceuticals, software quite and financial services. It also used performance requirements quite widely.[52]

To sum up, history is on the side of the regulators. Most of today’s rich countries regulated foreign investment when they were on the receiving end. Sometimes the regulation was draconian – Finland, Japan, Korea and the USA (in certain sectors) are the best examples. There were countries that succeeded by actively courting FDI, such as Singapore and Ireland, but even they did not adopt the laissez-faire approach towards TNCs that is recommended to the developing countries today by the Bad Samaritans.

Borderless world?

Economic theory, history and contemporary experiences all tell us that, in order truly to benefit from foreign direct investment, the government needs to regulate it well. Despite all this, the Bad Samaritans have been trying their best to outlaw practically all regulation of foreign direct investment over the last decade or so. Through the World Trade Organisation, they have introduced the TRIMS (Trade-related Investment Measures) Agreement, which bans things like local content requirements, export requirements or foreign exchange balancing requirements. They have been pushing for further liberalization through the current GATS (General Agreement on Trade in Services) negotiations and a proposed investment agreement at the World Trade Organisation. Bilateral and regional free trade agreements (FTAs) and bilateral investment treaties (BITs) between rich and poor countries also restrict the ability of developing countries to regulate FDI.[53]

Forget history, say the Bad Samaritans in defending such actions. Even if it did have some merits in the past, they argue, regulation of foreign investment has become unnecessary and futile, thanks to globalization, which has created a new ‘borderless world’. They argue that the ‘death of distance’ due to developments in communications and transportation technologies has made firms more and more mobile and thus stateless – they are not attached to their home countries any more. If firms do not have nationality any more, it is argued, there are no grounds for discriminating against foreign firms. Moreover, any attempt to regulate foreign firms is futile, as, being ‘footloose’, they would move to another country where there is no such regulation.

There is certainly an element of truth in this argument. But the case is vastly exaggerated. There are, today, firms like Nestle that produces less than 5% of its output at home (Switzerland), but they are very much the exceptions. Most large internationalized firms produce less than one-third of their output abroad, while the ratio in the case of Japanese companies is well below 10%.[54] There has been some relocation of ‘core’ activities (such as research & development) overseas, but it is usually to other developed countries, and with a heavy ‘regional’ bias (the regions here meaning North America, Europe and Japan, which is a region unto itself).[55]

In most companies, the top decision-makers are still mostly home country nationals. Once again, there are cases like Carlos Ghosn, the Lebanese-Brazilian who runs a French (Renault) and Japanese (Nissan) company. But he is also very much an exception. The most telling example is the merger of Daimler-Benz, the German car maker, and Chrysler, the US car maker, in 1998. This was really a takeover of Chrysler by Benz. But, at the time of the merger, it was depicted as a marriage of two equals. The new company, Daimler-Chrysler, even had equal numbers of Germans and Americans on the management board. But that was only for the first few years. Soon, the Germans vastly outnumbered the Americans – usually 10 or 12 to one or two, depending on the year. When they are taken over, even American firms end up run by foreigners (but then that is what take-over means).

Therefore, the nationality of the firm still matters very much.Who owns the firm determines how far its different subsidiaries will be allowed to move into higher-level activities. It would be very naive, especially on the part of developing countries, to design economic policies on the assumption that capital does not have national roots anymore.

But then how about the argument that, whether necessary or not, it is no longer possible in practice to regulate foreign investment? Now that TNCs have become more or less ‘footloose’, it is argued, they can punish countries that regulate foreign investment by ‘voting with their feet’.

One immediate question one can ask is: if firms have become so mobile as to make national regulation powerless, why are the Bad Samaritan rich countries so keen on making developing countries sign up to all those international agreements that restrict their ability to regulate foreign investment? Following the market logic so loved by the neo-liberal orthodoxy, why not just leave countries to choose whatever approach they want and then let foreign investors punish or reward them by choosing to invest only in those countries friendly towards foreign investors? The very fact that rich countries want to impose all these restrictions on developing countries by means of international agreements reveals that regulation of FDI is not yet futile after all, contrary to what the Bad Samaritans say.

In any case, not all TNCs are equally mobile. True, there are industries – such as garments, shoes and stuffed toys – for which there are numerous potential investment sites because production equipment is easy to move and, the skills required being low, workers can be easily trained. However, in many other industries, firms cannot move that easily for various reasons – the existence of immobile inputs (e.g., mineral resources, a local labour force with particular skills), the attractiveness of the domestic market (China is a good example), or the supplier network that they have built up over the years (e.g., subcontracting networks for Japanese car makers in Thailand or Malaysia).

Last but not least, it is simply wrong to think that TNCs will necessarily avoid countries that regulate FDI. Contrary to what the orthodoxy suggests, regulation is not very important in determining the level of inflow of foreign investment. If that were the case, countries like China would not be getting much foreign investment. But the country is getting around 10% of world FDI because it offers a large and fast-growing market, a good labour force and good infrastructure (roads, ports). The same argument can be applied to the 19th-century US.

Surveys reveal that corporations are most interested in the market potential of the host country (market size and growth), and then in things like the quality of the labour force and infrastructure, with regulation being only a matter of minor interest. Even the World Bank, a well-known supporter of FDI liberalization, once admitted that ‘[t]he specific incentives and regulations governing direct investment have less effect on how much investment a country receives than has its general economic and political climate, and its financial and exchange rate policies’.[56]

As in the case of their argument about the relationship between international trade and economic development, the Bad Samaritans have got the casuality all wrong. They think that, if you liberalize foreign investment regulation, more investment will flow in and help economic growth. But foreign investment follows, rather than causes, economic growth. The brutal truth is that, however liberal the regulatory regime, foreign firms won’t come into a country unless its economy offers an attractive market and high-quality productive resources (labour, infrastructure). This is why so many developing countries have failed to attract significant amounts of FDI, despite giving foreign firms maximum degrees of freedom. Countries have to get growth going before TNCs get interested in them. If you are organizing a party, it is not enough to tell people that they can come and do whatever they want. People go to parties where they know there are already interesting things happening. They don’t usually come and make things interesting for you, whatever freedom you give them.

‘The only thing worse than being exploited by capital …’

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