Maintenance services

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Good for the Goose, Bad for the Flock? FDI in
Developing Countries (with special focus on
India)
Nita Rudra, University of Pittsburgh Siddharth
Joshi, Indian Institute of Management, Bangalore
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Puzzle Limited research on how FDI affects the
poor?

• Political economy has yet to uncover the many
  complexities of FDI
• Existing literature FDI affects growth,
  inequality, labor rights, wages, and employment.
• But these can improve without impacting quality
  of life of majority of population in developing
  countries (Sen 1987, 2003)
• Point we have limited understanding of how FDI
  impacts the well-being of host populations

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Research focus The links between FDI, water,
and the poor

• Study of FDI impacts on poor should focus on
  water because
• It is the poor who lack access in developing
  countries
• It provides a more complete picture of well-being
  of the poor
• Existing research on water access has neglected
  the role of international economic factors
• It is a precise way to unravel (some of) the
  complexities of FDI and its effects on host
  populations

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Argument in Brief FDI contributes to water
crises

• FDI helps improve the well-being of the poor only
  under certain circumstances low socioeconomic
  diversity
• Much of the rapidly expanding sectors attracting
  FDI in developing countries are highly water
  intensive or water-polluting, or both
• FDI key mechanism for tech transfer and best
  practices
• BUT foreign investors have limited incentive to
  treat water as a valuable resource
• AND governments have limited incentives in
  diverse countries to regulate MNC activities or
  implement comprehensive water policies

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3. Theoretical foundation FDI as a factor in
water access

• OLI framework host countries must offer
  locational advantages to firms (Dunning 2001,
  1998, 1973)
• The Pollution Haven Hypothesis developing
  countries have a comparative advantage in dirty
  products
• Findings Free trade is good for the environment
  (Bhagwati 2004, Frankel 2003, de Soysa and
  Neumayer2005, Birdsall and Wheeler 1993, Grossman
  and Krueger 1994, Amtweiler , Copeland and Taylor
  2001)

Issues . . .

• Focus on atmospheric pollution
• Neglect extent of water consumption
• Most focus on trade effects

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3. FDI could helpbut limited incentives

• Much of the expanding sectors for FDI in
  developing countries are water-intensive and/or
  water-polluting (electric and electronic
  products, machinery, automotive products, metals,
  food and beverages)
• Spread of best practice is unlikely
• South-South FDI on the rise
• Most FDI in developing countries is
  market-oriented
• Lower consumer awareness in internationally and
  domestically

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3. Weak government regulations

• As multinational firms demand greater access to
  water and increase water pollution, potable water
  declines
• Weakly enforced water regulations (supply and
  usage)
• Low tariffsgt prevents cost recovery to provide
  access to gen pop
• Corruption
• Rent seeking occurs as governments underreport
  water use, accepting bribes to cover wastewater
  discharge and pollution ( Global Corruption
  Report 2004)
• H1 FDI will have an adverse impact on access to
  potable water

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3. But FDI does not hurt water access in all
countries

• Government preferences are related to level of
  inequality and ethnic diversity
• Richer groups in unequal countries prefer the
  status quo, and hold more political sway relative
  to larger group of disadvantaged poor(logic
  based on Alesina, Baqir, and Easterly 1999)
• Rich already have access to potable water in
  developing countries they benefit the most from
  water subsidies (Human Development Report 2006,
  World Bank 2005).
• Reforms would result in higher costs for
  themselves and multinationals
• This group of elites favor multinationals (Pandya
  2010)
• Ethnic diversity increases chasm between elites
  and masses
• In more equal countries, larger middle classes
  shares an economic interest in regulating MNCs
  and comprehensive water policies.

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3. FDI impacts will be conditioned by government
preferences

• High inequality is associated with weak conflict
  mediating institutions (World Development Report
  2005, Acemoglu, Johnson and Robinson 2001,
  Engerman et al 2002, Easterly, Rizen and Woolcock
  2006)
• Reasons historical
• inequality lends itself to a power structure that
  is crystallized in institutions
• Political elites systematically neglect
  subordinate groups in unequal societies
• H2 FDI will slow access to potable water in
  countries with high socioeconomic diversity

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3. Case study India

• Increases confidence that a link between FDI and
  Indias water crisis
• Additional causal mechanisms
• FDI does have environmentally friendly
  technologies, but insufficient
• FDI boosts productivity and output of local firms
  (Haskel, Pereira and Slaughter 2002).

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3. Theoretical Predictions Impact of FDI on
Poor
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4. Impact of FDI on Water Consumption and Water
Pollution
Models Industrial water withdrawal ( total water withdrawal) Industrial water withdrawal ( total water withdrawal) Organic water pollutant (BOD) emissions (kg per day)
Models (1) (2) (3)
FDI inflow 0.209 (0.119) 1.500 (0.593) 0.0465 (0.0123)
Population 3.836 (1.331) 0.337 (1.568) 1.082 (0.0598)
Urban population () 0.0239 (0.0112) -0.0973 (0.126) 0.00674 (0.00296)
GDP per capita 8.015 (3.364) 0.458 (0.0641)
GDP growth -1.138 (1.141) -0.666 (0.272)
Constant -59.93 (20.81) -50.57 (37.86) -10.96 (1.466)
N 187 89 119
R-squared 0.236 0.154 0.680
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4. FDI and potable water access in developing
countries
Models Access to water ( change) Access to water ( change) Access to water ( change) Access to water ( change)
Models (1) (2) (3) (4) (5)
FDI inflow(t-1) -0.0181 (0.00782) 0.0569 (0.0546) 0.118 (0.0654) 0.100 (0.0498) 0.0112 (0.00153)
Socio-economic diversity 0.0999 (0.0591)
Estimated Household Income Inequality (EHII) 0.00587 (0.00543)
Gini index 0.0102 (0.00279) 0.00544 (0.000609)
FDI flow(t-1) Socio-economic diversity -0.0443 (0.0235)
FDI flow(t-1) EHII -0.00323 (0.00168)
FDI flow(t-1) Gini index -0.00275 (0.000942) -0.000256 (5.51e-05)
Non-military gov spending(t-1) -5.39e-05 (4.00e-05) -3.59e-05 (2.25e-05) 3.45e-06 (5.31e-05) 0.00374 (0.000693)
Economic growth 0.00405 (0.0147) 0.00381 (0.00872) 0.00907 (0.0131) -0.0175 (0.00708)
Climate change 0.0230 (0.0213) -0.00102 (0.0140) 0.0165 (0.0171) 0.0126 (0.0188)
GDP per capita -0.0112 (0.0587) -0.0249 (0.0399) -0.0217 (0.0393) -0.0219 (0.00717)
Urban population -0.00211 (0.00139) -0.000844 (0.000914) -0.0217 (0.0393)
Population 0.477 (0.375) 0.533 (0.361) 0.516 (0.268) 0.0201 (0.00239)
Polity 0.00592 (0.00468) 0.00594 (0.00412) 0.00110 (0.00490) 0.00474 (0.00145)
Fixed Effects No No No No Yes
Year Effects Yes Yes Yes Yes No
Region Effects No No No No Yes
N 77 39 50 40 108
R-squared 0.252 0.598 0.473 0.703 0.98
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4. India Impact of FDI on Water Supplies
Models ADD Cases ADD Cases ADD Cases Access to water (age change) Access to water (age change) Access to water (age change)
Models (1) (2) (3) (4) (5)a (6)a
FDI inflow(t-2) 0.0967 (0.0502) 0.101 (0.0591) 0.111 (0.0595) -0.00345 (0.00122) -0.00283 (0.00118) -0.00270 (0.00120)
Population growth 1.354 (0.974) 1.079 (1.026) 2.96 (0.0319) 4.70 (0.0405)
Economic growth -0.131 (0.712) 0.0262 (1.209) 0.0548 (0.0321) 0.0778 (0.0393)
Urban pop -0.124 (0.354)
GSDP per cap 0.517 (0.815) -0.00847 (0.0247)
Water exp per cap -0.161 (0.202) -0.000406 (0.00586)
Health exp per cap 0.656 (0.489)
State fixed effects No Yes Yes No Yes Yes
Year fixed effects No Yes Yes No Yesa Yesa
N 247 231 217 262 243 224
R-squared 0.966 0.974 0.973 0.065 0.310 0.308
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4. Impact of FDI on HHLD Access to Piped Water
in India
Models Access to water ( change) Access to water ( change) Access to water ( change) Access to water ( change)
Models MV Socioeconomic inequality MV Socioeconomic inequality MV Weaker section population MV Conviction rate
Models (1) (2) (3) (4)
FDI inflow(t-2) -0.00282 (0.00118) 4.326 (1.129) 0.0112 (0.00691) -0.00537 (0.00334)
Socio-economic diversity -0.0145 (0.00822) 0.110 (0.0811)
SC/ST ( population) 0.00389 (0.00152)
Conviction rate -0.0153 (0.00857)
FDI flow(t-2) Socio-economic diversity -2.165 (0.564)
FDI flow (t-2) SC/ST -0.000660 (0.000341)
FDI flow (t-2)Conviction rate 0.0608 (0.0356)
Population growth 0.0332 (0.0327) 0.0404 (0.0331) -0.0522 (0.0511) -0.138 (0.0376)
State econ growth 0.0574 (0.0325) 0.0496 (0.0402) 0.0736 (0.0284) 0.0946 (0.0328)
Urban pop -0.0263 (0.103) 0.130 (0.376) 1.184 (0.740)
GSDP -0.0171 (0.0185) 0.0149 (0.0338) -0.129 (0.0546)
Water expenditure per capita -0.00153 (0.00334) -0.00288 (0.00546) 0.00267 (0.00732)
Access to water ( change) (t-1) 0.0621 (0.184) 0.457 (0.228) 0.390 (0.294)
State fixed effects Yes Yes Yes Yes
Year fixed effects Yesa Yesa Yes Yes
N 243 224 224 165
R-squared 0.310 0.842 0.644 0.668
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4. Impact of FDI on HHLD Access to Piped Water
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4. Impact of FDI on HHLD Access to Piped Water
  Dependent Variable Access to water (age change) Dependent Variable Access to water (age change) Dependent Variable Access to water (age change) Dependent Variable Access to water (age change) Dependent Variable Access to water (age change) Dependent Variable Access to water (age change) Dependent Variable Access to water (age change)
  Manufact FDI Services FDI Manufacturing Subsector FDI Manufacturing Subsector FDI Manufacturing Subsector FDI Manufacturing Subsector FDI Manufacturing Subsector FDI
  Manufact FDI Services FDI Textile FDI Chemicals FDI Food and Beverages FDI Electrical Machinery FDI Transport Equipment FDI
FDI (Disaggregated) -0.00347 (0.00170) 0.00747 (0.00480) -0.00938 (0.00456) -0.00195 (0.00452) 0.0262 (0.0578) -0.0467 (0.0634) 0.000133 (0.00252)
Population growth 0.0256 (0.0330) -0.0720 (0.206) -2.407 (0.835) 0.0556 (0.0487) -0.365 (0.342) -1.315 (0.925) -3.033 (1.545)
State Economic growth 0.0533 (0.0342) 0.100 (0.0504) 0.0655 (0.0389) 0.105 (0.0510) 0.0889 (0.0568) 0.161 (0.100) 0.129 (0.0513)
Year Fixed Effects Yes Yes Yes Yes Yes Yes Yes
State Fixed Effects Yes Yes Yes Yes Yes Yes Yes
N 222 171 45 155 147 77 99
R-squared 0.292 0.311 0.781 0.337 0.531 0.598 0.630
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5. Conclusions and Contributions

• FDI can adversely affect water access in
  countries with skewed distributions of income
• Potential contributions to debates in CPE, IPE
  and IE
• Do multinationals flock to developing countries
  because of weak regulations (PHH)?
• Likely
• Contribution Need to consider water pollution
  and water consumption
• Does global market integration undermine
  government control?
• FDI pressures can reinforce government inaction
• Contribution different mechanisms at play
• Does FDI help the poor?
• In homogenous developing countries some
  political responses to globalization can be
  predicted on the basis of inequality and ethnic
  heterogeneity
• Contribution impacts of openness may be
  conditioned by class cleavages