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Ladder to development? Foreign direct investment, spillovers, and the governance in a global economy

Lyuba Zarsky, University of Massachusetts Amherst


This dissertation probes the interface between foreign direct investment (FDI) and sustainable industrial development in the context of the neo-liberal institutions governing the global economy. Comprised of three essays, it defines sustainable industrial development as simultaneous evolution across three axes: (1) economic, defined as increases in local capacities for production and innovation; (2) environmental, defined as a reduction in the environmental and health impacts of industry; and (3) social, defined as increases in the job-creating and equity-enhancing capacities of industry. The dissertation focuses on the economic and environmental dimensions. The dissertation is structured around three questions. First, is the neo-liberal claim about the positive contribution of FDI to development robust, that is, supported by empirical evidence? In particular, what is the evidence that FDI generates knowledge and environmental spillovers and "crowds in" domestic investment in developing countries? The central finding is that there is a substantial gap between theory and evidence. There is no statistical evidence that FDI generates positive and some evidence that it generates negative horizontal spillovers; and little evidence that it generates positive vertical spillovers. Case studies find evidence of both positive and negative horizontal and vertical spillovers. Second, what factors determine the environmental and economic impacts of FDI? The central findings are that host country regulation is pivotal and that neo-liberal global governance constrains nation-states in both direct and indirect ways. Global and regional trade and investment rules directly limit requirements host country governments can place on multinational corporations. In the absence of global environmental or corporate responsibility standards, competition between states for FDI puts a downward pressure on national environmental policy. While other social forces, including citizen demand, push environmental standards up, the counteracting pressure of competition for FDI keeps them "stuck in the mud," that is, it slows the rate of innovation in response to environmental threats. Third, how should FDI be governed, at the national and international levels, to more reliably promote sustainable industrial development? At the national level, it suggests that corporations work in a "development partnership" with host country governments and civil society. Such a partnership would define, pursue and evaluate progress towards specific development objectives. At the international level, investment rules should provide "policy space" for developing countries to pursue development objectives, and specify social responsibilities of foreign investors.

Subject Area

Business costs|Finance

Recommended Citation

Zarsky, Lyuba, "Ladder to development? Foreign direct investment, spillovers, and the governance in a global economy" (2006). Doctoral Dissertations Available from Proquest. AAI3242118.