A report by World Bank in the year 2000News reports suggest that economic giants from third world Asia namely China and India are expected to grow at the rate of 9.7 and 6.5 percent respectively. The GDP growth rate of these nations is much higher than that of any developed nation. It’s not just the growth rate but also the sheer size of the economies of these nations that have made them an indispensable part of the world economy. John Ravenhill through his book “Global Political Economy”, has tried to analyze various aspects of globalization. The paper gives a brief explanation of globalization and its different phases and theoretical aspects of some of its components. The book looks into the detail towards the contribution of FDI in the growth of developing nations. The outcome of the book has concentrated around the conclusion that the component of globalization which promotes ‘Direct investment’ as is termed as Foreign Direct Investment has brought no change in most of the developing nations and some cases it has even brought negative changes In addition to this, Ravenhill emphasized on the declination with more integration of market. Thus while studying the impact of Globalization on countries, the other factors like domestic regulatory and market structures and the extent up to which the market has been liberalized are equally responsible and require to be considered and are equally necessary for the success and benefits of the FDI.
John Ravenhill’s view about globalization begins with a simple definition as a trade agreement and associations and later transformed it into collaborations between firms of different nations not only for trade but for technological development also. Beginning with Asia, globalization began with the countries of Southeast Asia who were termed Asian tigers. South Korea along with Taiwan was leading the pack and was only behind Japan. With a strategy of export-oriented economic integration, the degree of integration was not uniform rather varied in different spheres and changed over a phase of time. For almost 30 years these countries maintained import control to provide the cushion of the domestic market and hence competitive edge in international pricing. Though in the 1990s some countries of South East Asia faced economic crisis they continued to grow with a crisis not extending to a very long period. Some of the major currencies of the region saw unprecedented fall due to the withdrawal of money by western investors who lost their interest in the securities of East Asian nations. But it was the support from IMF and World Bank which helped these nations in getting over the problem and again the region is showing high economic growth.
Ravenhill continues with globalization through its sharp depiction in form of the foreign direct investment (FDI). The developing nations started making rounds of economic reforms to attract foreign investment with the sole purpose of giving the economy a much-needed boost for sustainable economic growth. The FDI inflows in many countries surged to higher levels with large multinationals called multinational corporations (MNCs) bringing capital not only in form of finance but also in form of superior technology oiled with ultimate management skill. All this came forward with the highest level of optimism with each of the developing nations who were integrating into the global market beginning to expect sudden stimulation in growth with a new jump in domestic investment and increasing efficiency. The transfer of cleaner technology would also bring better environmental performance. With MNCs’ better management of inventory and technology, the developing nations would get infused with standards that normally prevailed in the western world. The investment had been expected to bring more employment and higher per capita income and will make ways for cleaner consumer goods.
The countries observed two basic practices. First to attract more FDI and for that, the policy to get more was made a central character in every national development strategy. The focus of the governments has to be on environmental creation. To get maximum possible benefits, the countries created a congenial legal environment with proper transparency to ensure protection and financial stability to investors. The second one is to have investment agreements that can have global, regional, or bilateral scope. The agreements are meant for making the world a secure place to invest. But at the same time, the rights of the investors have to be protected by making the national development policies more flexible. These policies about FDI led to the creation of companies that have interests and assets all around the world. The inventory or the production units have got their way to developing countries like China and the manufactured items are exported to those countries where the parent companies have business interests in form of retail sales.
Again the same company’s branch in another country will import that product and the product will then be sold. Sometimes the companies used to import different parts of a single entity from its different inventories located at multiple locations in the world and those parts are assembled in the country where it has to be sold. So the FDI brought a new order to world business with inventories being established based on different suitability factors like cheap but efficient labor and vast presence of raw material etc. And what followed FDI was the phenomenon which all of us call “Privatization” or in some cases “Merger and Acquisitions (M&A)”. The FDI created some sort of wave in both developed as well as developing nations. The developing companies saw a chain of privatizations. Many government companies in those nations were acquired by MNCs despite widespread criticism and resistance especially when companies being privatized were meant providing basic utilities like water. The noise against privatizing these government units got louder when these firms under the new management made the steep hike in price at which they were providing services.
The later part of Ravenhill’s book looks into what every major financial organization like the IMF; the World Bank; and any of the OECD states, the most common thing is that all of them have suggested that this FDI is very much similar to a doctor’s prescription which is for the improvement of ailing industrial sectors. The FDI has been termed as a vital fuel that can take the engine of growth of a nation to a super fast zone. With this theme, every global organization has stated that the degree to which a developing country can get benefited from FDI is a very lucidly documented fact. This miracle drug not only powers the growth of the nation but simultaneously improves the environmental and social condition in the receiver country. The transfer of cleaner technology and better management as well as socially responsible corporate policies helps in improving environmental and social conditions by an enormous amount.
But the things, in reality, are very much far from what has been documented by different sources mentioned above. Even a paper by one of the writers of OECD has mentioned that the so-called social and environmental benefits that are expected to come through FDI may have differing results. It’s not that the result is always going to be positive; it might cause no or in the worst case negative effect. But the apprehensions related to development issues are equally worrying; whatever has been documented by great economists and many others might not give the result as suggested.
The theory which suggests that the presence of foreign firms has given positive results in the productivity of domestic firms has been true up to some extent but that’s the case of the developed nation only. The magnitude of reverse investment has been very small. The conditions in developing countries have been different. There have been many cases when FDI has caused negative impacts. The FDI is attracted through lots of incentives in form of taxes and many other ways. These government-sponsored discounts to foreign players prove too costly for local manufacturers. Though the technology transfer can be made possible through foreign players it’s the domestic operators who are better at controlling and firm operation. The MNCs have often been found to put money in form of FDI in a state of the financial crisis. The crisis which hit East Asia in the late 1990s led to the occurrences of a large number of cases involving fire-sale. The domestic firms in a state of cash crisis are made available for purchase at a price that has been much lesser than the asset of the firm. The conclusion out of these investments by MNCs gives a clear indication that it’s not the efficiency that gives them the edge it’s the better cash position that drives the flow of FDI. Another advantage that foreign firms possess is their superior information management.
These firms often create high market expectations through the widespread transfer of information which are emphasizing issues like their superior technology and news of efficiency. In this way, the MNCs manage to raise the confidence of domestic investors and often sell their equity stakes at a highly inflated cost. So the highly inflated market cap of MNC’s local subsidiary is more due to tactical business rather than superior technology usage and genuine investment policy. The rise in investment through FDI has caused rapid industrialization in most of the developing nations. The surge of regional and bilateral investments agreement caused economic liberalizations with countries unlocking their economy to foreign companies. Foreign Companies too saw these untapped markets as new zones of future development. Even with little investment but superior technology, the liberal economy of developing nations started showing higher growth rates. The success of the initial phase of FDI based business regime led to a further inflow of FDI and the next and next rounds of rapid industrializations.
Now the most important thing which might have got stretched due to these industrializations has been the environment. None of the agreements have taken into account the environmental factor. So this liberalization would cause a massive fall in the environmental health of the nation. The environmental performance of an MNC is getting into effect by two important decisions which are meant for maintaining the strategic and market position. The first of the two is to invest in the latest clean technology as well as dumping of older and obsolete technologies. Since several technologies are available; efficiency, environment, and energy friendly clauses should be the decision-making factors while making a selection of the technology. These factors have also been effective in some industries which are more technologically dynamic than others. The second decision is concerned with the management policy that too for an effective environmental management system. The firms are expected to voluntary compliance with the basic feature to have the clean environmental condition.
The book Global Political Economy as edited by John Ravenhill is a compilation of works of several experts of Globalization with Ravenhill himself contributing with two articles. The whole book has been divided into four sections namely: Theoretical Approaches to Global Political Economy, Global Trade, Global Finance, Globalization, and its Consequences, and finally Social Consequences of Globalization. Part 1 comes up with the theories related to the integrated approach towards the globalized world economy and how the same has its impact on both national and international politics.
The introductory part begins with the article by Ravenhill in which he has put forwarded the thoughts of many economists and continued with the proclamation that global capitalism is the phenomenon that will stay for further integration of the world economy. He clarified with the details that suggested that it’s the markets that drive the world, and the adjustments made by various countries have been towards cumulative integration of economy and market, irrespective of the pain and distractions caused to achieve this. Writers have continued with the considerations of the political circumstances behind these emboldened global markets to function. The end of communism and rapid technological changes under the wraps of globalization provides writers with enough thoughts and issues to cover their article. The fragility of this global economy in the current scenario has actually been a very deciding factor for further integration of the world economy thereby carving out a completely new entity called the global political economy.
While Ravenhill, in his first article has talked about theories behind global economy, he in his second article on historical issues and the rise of regionalism in global trade issues. His enhanced views on Asia Pacific regions gets depicted when he talks about the leadership of United States in global trade and dynamics associated with China, now termed as the factory of world inventory. Ravenhill has explored deep into various areas of trade liberalization, multinational companies, and fragility in world finances. The struggle of less developed and developing nations has been given adequate coverage with the spread of economic regionalism in three prominent global trade zones, namely Europe, North America, and Asia Pacific. The author has clearly mentioned about the necessity to provide political coverage and stability to global economy and the role of United States in making way for the same.
The later part of this book offers a very broadly explained interpretation with compelling analysis of the proliferation of regionalism and its creation through various trade agreements named as RTAs by the end of last century. The writers have called for more regional agreements and considered it as an extension of various economic integration issues related to free trade. The regional trade agreements made its way not only for trade purposes but also integrating social structure and culture of the nations. The ASEAN and SAARC are some of the many regional trade agreements with some getting significant success and at the same time some achieved negligible or limited success. But all these regionalism was meant on the basis of similar border as well as cultural ethos.
With a very wide range of data and proofs, the authors have clarified that the pursuit of free trade has its impact spread from the domain of economy and trade to very social process that endeavor the uniqueness of every regional treaty. The book has been very bold and is laced with an unprecedented comparative analysis of differences camouflaging the legal architectures bound to provide support to already erect standards of world economy and views of the ingredients namely market participants and key societal organizations like similar interest groups, businesses, and national administrations-and on a broad scale the broader and complete marketplace.
The articles have given a very special attention to three most important areas entertaining both economy and society. The three key areas of economic life have been “women in the workplace”, “the dairy industry”, and “labor rights” and the development concerning these rural and sub-urban sectors getting bold and original approach and depiction with some of the most impressive range of data, the book has used.
The most striking dispute in the world has been on the issue of Globalization and environment. The division among the supporters of these two domains has been the most striking one with both advocates and critics discussing and arguing with new doses of data and consequences. The article in the book has pointed out the mix of hype and results on this very issue. On analysis the article has focused on the very lack of literature related to this topic and the domination of hype over results. This book might be one of the first to investigate the subject as per some systemic standard using the parameters that relied on both economic theory and empirical analysis. Peter Dauvergne has tried to establish a strong theoretical framework for the analysis and examination of the impact of globalization induced international trade on local pollution levels. The framework has been reused it to provide a very unique and thoroughly integrated treatment of the links concerning economic growth, liberal trade, and conducive environment. The results and the theory as given by the author has been successful in setting a number of theories related to international trade to its successful environmental outcomes while developing the empirical implications, and examining their validity with the use of data on measured gaseous concentrations from all prominent industrialized cities all across the world.
The evidences and a number of cases after getting studied have clearly led to the conclusion that FDI has nothing like any miraculous property. The real wheel for the growth is often the policies and will power of the political establishment of the country involved. It’s not the FDI but the way the countries handle it while maintaining the interest of domestic industry which makes an impact on the economic health of the nation. The poorest and least developed nations have the scarcity of everything a civilized society possesses. The economy requires proper infrastructure for road transport and electricity to have a sustainable economic growth. The poor countries severely lack in these sectors and these are the most primary sector over there to invest. So the FDI should be done in this field rather than manufacturing and other sectors because the local market is very weak because very less purchasing power of the people. So for a poor nation, FDI should begin from infrastructural sector and then stretch to other sectors.
Any other type of FDI might be profitable for the firm but for the country it’s not going to make any sustainable growth. So it is clear FDI is not a solution to the woes of poor nations. The underdeveloped countries extra care for improvement in infrastructure, education and health care. The MNCs profit making business will cause more harm than any possible improvement. The philosophy that a person’s life can change only through its own efforts; no external help can cause any desirable change, suits these poor nations the most. Their condition can see improvement only through better domestic policies by involving people from all levels to cooperate for all future developments. The condition in developing countries is bit better and they can achieve higher growths through the inputs in form of FDI. But the unregulated inflow and outflow of capital with MNCs attacking local firms rather than making phenomenal changes in managerial policies and superior technology usage, has resulted into instances of fire-sale FDI and falling results.