RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTI/W/72
13 April 1999
(99-1465)
Working Group on the Relationship
betwen Trade and InvestmentOriginal:  English
COMMUNICATION FROM INDIA
The following communication, dated 22 March 1999, has been received from the Permanent
Mission of India with the request that it be circulated to Members.
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Relationship between Trade, Investment and Development
I. INTRODUCTION
1. Foreign direct investment (FDI) and trade have become more closely interconnected in the
framework of efficiency oriented, integrated international production strategies pursued bytransnational corporations (TNCs).  No doubt, FD I and trade support one another in this context.
Also, there is no denying the need for national po licy coordination between FDI and trade policies.
But to arrive at an understanding on the extent and the depth of mutual supportiveness of trade and
investment, one crucial question still needs to be answered - where do firms locate their value added
activities and why?  Factors that make particular locations attractive for particular activities become
important. UNCTAD studies have listed various determ inants of FDI flows, both economic as well as
policy factors.  Primary amongst them are economic growth, market size, profitability, cheap labourand developed infrastructure amongst economic factors; and private sector development, macro
economic reforms and liberalization amongst policy factors. These conclusions still beg the crucial
question - is development a prerequisite to encourage investment or does development follow
investment?  Three introductory sets of questions here may help further the educative process
underway in the Working Group.
2. The first set involves the basic question of investment regulation for development.  It is  said
that FDI follows a country’s success, it rarely leads it. India is encouraging investment inflows for its
development, and development needs policy direc tion.  Hence, should investment flows also be
directed?  Infrastructure spending priorities of the Government would be a factor for attracting
investment. Having limited resources, should investment inflows, therefore, be directed more towardsinfrastructure sectors to reach a level of development necessary to make FDI, trade and development
conducive to economic growth?  These questions are generic in nature and may apply to most of the
developing countries, although stages of developm ent, market size, geographical and regional factors
would be relevant for individual countries.
3. Secondly, while trade concerns itself with delivery of economic goods, investment involves
their production.  Along with money, material and machinery, labour as a factor of production would
need to be equally considered.  If other factors of global production are liberalized, can restrictions on
mobility of labour be conducive to mutual supportiveness of trade and investment, or to economic
growth and development?  The extensive debate on free mobility of capital may have to beWT/WGTI/W/72
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supplemented by an equally extensive study on free mobility of labour. If cheap labour is an important
determinant of investment decisions, and results in higher profitability for investors which can be
ploughed back into the home country economy, it may be, at the least, equitable to augment host
country economies by returns from a mobile labour working in the investors’ home country.
4. Thirdly, ‘more’ is not necessarily ‘better’ in the case of multinational corporate activities in
developing countries.  Studies have shown that between 25 and 45 per cent of FDI has a demonstrably
negative impact on host societies.  That is, the costs in terms of using scarce domestic resources
inefficiently substantially outweigh the benefits of national income.  Obviously, it introduces the need
for competition and, thereby, efficiency.  To ensure the greatest contribution to their own
development, host governments may in fact have to refuse to grant the kind of treatment that many
international companies want most. In fact, screening mechanisms can help developing countries sortout beneficial from detrimental foreign investment projects.  This gives rise to the related question of
investor’s obligations.  Such obligations may be important for various economic, social and cultural
necessities.  Any study of trade and investment interface thus inevitably introduces concepts of TNC
obligations, which are not new to the discussants here.  We need to avoid tragedies of the type we had
in Bhopal, India, a decade ago.  We may also need  to study obligations for protection of environment
and sustainable development. Should TNCs, for example, not be asked to maintain the same
environmental standards in host countries as they have in home countries, even though host country
domestic investors have certain lower standards on account of lack of capital, technology or skills
required, or on account of better assimilative capacities in their regions?  These are issues that need
further study.
5. With this background, and with a view to coming  back to these and other issues involving the
development and economic growth dimension of the trade-investment relationship, let us further the
educative process in certain critical areas, inter alia:
The relationship between investment and trade liberalization and stages of development, in particular,
the experiences of countries, including the present industrial countries, in this connection
6. Broadly speaking, stages of development as well as timing of investment in terms of stage of
industrialization and globalization , affect the development and economic growth dimension in the
trade-investment interface.  As per Kiyoshi Kojima (1991), the micro-economic interests of MNCsdominate America’s FDI and as a result macro-ec onomic impacts, such as the impact of FDI on
patterns of comparative advantage, are largely ignored.  On the other hand, the pattern of JapaneseFDI has been characterized as the ‘trade-oriented type’ in which macro-economic impacts have been
considered either explicitly or implicitly.  He adds that Japanese FDI has contributed to the
development of host countries with more efficiency than American FDI has in most cases.  An
industrial country example of managed economic growth through FDI in vertically integrated
industries is cited in WIR 96 (page-119) viz. Japan’s early industrial strategy selectively promotedFDI in resource extraction, matching it with liberal import regulations for raw materials, protective
policies against competitive FDI or manufactured good imports and export-promotion programmes to
assist final product sales.
7. Going to the next rung of development, two newly industrialized countries have been studied
quite extensively.  While FDI contributed significantly to the net private capital inflows in one of
them, it was only marginal  in the former.  But both countries have shown equally gallant strides in
economic growth as well as development.
8. At the third rung, governments of low-income  (as well as other) developing countries are
increasingly aware of the potential value of foreign investment.  There is, however, a danger of
exaggerated expectations of what foreign investment can achieve, particularly of its rôle in resolving a
severe foreign-exchange position through net infl ows.  The limited natural resource endowments andWT/WGTI/W/72
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home markets of many low-income countries tend to make these countries particularly unattractive to
foreign investors.  Thus, without strong ‘fundamentals’ for economic growth and development,
investment liberalization may mean little to them.
9. Given this wide array of experiences, there is surely a need for a more coherent analysis of
implications of investment and trade liberalization on economic growth of countries at various stages
of development.  The recent South-East Asian crisis adds to the need for further analysis before
drawing any firm conclusions on the issue.
The rôle of  FDI in transferring intangible assets, notably in the fields of technology and human
resource development, the implications of this for development and the relation to the protection of
intellectual property rights
10. The implications in this case are even more nebulous.  While traditional theory advocates the
assumption that FDI promotes technology tran sfer, various studies, beginning with WIR 1991,
pointed out that countries at low levels of development are likely to be able to induce FDI only into
low-technology activities.  The chicken-and-egg dilemma confronts us again here - should
development and economic growth precede FDI to engender technology transfers?  Certainly, as
indicated by Lan and Young (Transnational Corpor ations, Vol.5 No.1, April 1996) a study of the
problems of technology transfer into low-income c ountries is necessary.  No doubt, national policy on
the issue is of increasing concern for TNCs.  To meet this demand, the international community has
successfully concluded many conventions on the issue of property rights, most important being the
TRIPs Agreement.  But the connected issues of the international market for technology and, moregenerally, the advantages to host countries from th e transfer of technology have not met with similar
success. This crying need to study this issue in the context of development and economic growth
needs to be addressed before FDI’s conclusive positive rôle is presumed.
11. Another aspect of this issue is the positive national policy intervention required in order to
facilitate transfer of technology through FDI.  Joseph M. Grieco (1984) had taken the example of the
computer industry and India and suggested that despite initial ‘turbulence’, ‘assertive’ countries can
develop closer ties with international firms in high-technology to the domestic industry - a
circumstance more conducive to a new and perhaps higher level of international order.  It can be said,
then, that national policy intervention may be a necessary prerequisite for developing a positive rôle
of FDI in transferring intangible assets while ensuring protection of intellectual property rights at the
same time.
The relationship between different types of FDI and the development process; experience with
sectoral targeting and the rôle of industrial policy
12. The FDI-trade linkage needs to be studied from the point of view of relationship of
development and economic growth with sectoral thrusts in national policies.   Grieco’s study (above)
shows a symbiotic relationship between sector specific national policy intervention and development.
There are numerous such examples that may be collected, collated and studied for their implications.
Of particular interest would be to study sectors where comparative advantage lies with the developing
countries - such an analysis would help the process of development and economic growth that wewish to achieve through this educative process.
13. Two sectors of importance to developing countries are agriculture and textiles. In view of the
continuing impediments to developing country access to industrialized countries’ market in
agriculture and textiles, despite (or because of) the Uruguay Round agreements on those aspects,investment policy aspects may be studied in these two sectors specifically.  For example, it is reported
that some obsolete textile machinery is finding its way from industrialized to developing countries
through various forms of investments or outright sales, thus blocking precious funds in technologies
that may deny comparative advantage to host countries even after the Multi-Fibre Arrangement ends.WT/WGTI/W/72
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Secondly, in agriculture, new forms of investment s and innovations too often have been seen as a
panacea by developing countries whereas there is ample evidence that in some cases the new forms
shift risk to host-country producers.
14. While such sectoral studies in areas relevant for comparative advantage would be helpful, it is
equally essential to study the need for investments in certain sectors for development and economic
growth.  Core sectors, infrastructure, value added food products, textiles and other sectors have been
requiring positive policy intervention.  The rôle of industrial policy to encourage investment in such
sectors is not denied.  How this interfaces with the different types of FDI, and what is the right mix, is
not clear though.  A study of these issues is more likely to result in a recommendation for sector
specific national efforts to facilitate development.
The determinants of the locational decisions of multinational enterprises
15. These determinants, as identified by UNCTAD and elsewhere, have already been referred to
in the introduction.  The most important factors influencing the location decisions are concerned with
the structural features of the host economy.  Important positive determinants could be the level ofprosperity, market size, growth rates, extent of industrialization and quality of infrastructure, and
negative determinants could be high rates of inflation, current account deficits and political instability.
Degree of openness of the economy, investment incentives and liberalization are not significant
determinants. In fact, many investors prefer a protective régime so that they can bar the entry of
potential competitors once they have jumped the ta riff wall. Requirements of investment protection
and dispute settlement are already being taken care of through bilateral agreements.  Rather, as was
evident in the recent UNCTAD expert meeting, even bilateral investment agreements have little effect
on FDI flows.  Given such conclusive evidence, de terminants of locational decisions of TNCs have
little implication for the trade-investment inte rface, and for this reason, there appears no reason to
study their impact on development and economic growth.  What is perhaps required is policy stability,which depends on domestic factors like political stability and economic fundamentals.
II. CONCLUSION
16. The term FDI is being currently used, in a gene ric sense, to refer to the increase in the book
value of the net worth of investments in one country, held by investors in another country, where the
investments are under the management control of investors.  It should be recognised at the outset that
the term investment here is a misnomer because all the reported values of FDI flows do not implyaddition to the stock of capital i.e., capital formation in the host economy.  For example, take-overs do
not add to capital.  Hence, empirical data needs to be collected at the outset on the volume of take-
over form of FDI flows and other forms to analyse the relative importance of those FDI flows, which
lead to development and economic growth.
17. The recent South-East Asian case demonstrates the unsustainability of large trade and current
account deficits and profligacy induced by distorted trade and investment patterns.  It shows how it
has affected the value and level of domestic savings, fiscal position and balance of payments of these
countries.  Although more study and analysis may be required by taking stock of recent developments
in that region, it can prima facie  be concluded that FDI when channelled in the right way and in
desirable sectors can positively contribute to economic growth and development. This may call for
progressive and prudent liberalization and management of their trade regimes by developing countries
so as to calibrate their impact on macro-economic stability.
18. The Trade and Development Report (1997) indi cates that trade, investment- and technology-
led globalization has posed a major challenge to employment generation, income and wealth
distribution within and among countries. That shows the importance of making international trade and
investment policies more conducive to employment, income and wealth generation in developingWT/WGTI/W/72
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countries commensurate with their natural, human, entrepreneurial and other resources. There should
be both value creation and value realisation of their resources by developing countries in the context
of international trade and investment flows.
19. Competitiveness, transfer of technology and managerial skills are important benefits of trade
and investment for development and economic gr owth. However, much would depend on how the
investing firm actually transfers relevant and state of the art technology, shares managerial skills and
competitive advantages such as global marketing and distribution networks and brand image.  It is not
sufficient for liberal trade and investment policies to be in place to ensure maximum positive impact
on development and economic growth of developing countries in all their dimensions.  Unless some
responsibilities are also taken by investing firms, the positive nexus between trade and investment on
the one hand, and development and economic growth on the other, may not materialize.  Hence, theneed for any international debate on the FDI issue to insist that these parameters be consciously
provided for in terms of governmental policy as well as the investors responsibility and behaviour.
20. Domestic markets of developing countries are generally moving towards larger indigenous
enterprises, alone or in collaboration with foreig n enterprises capturing market shares in a large
spectrum of goods and services.   SMEs are facing a crisis of competition and survival. This issue of a
level playing field for domestic enterprises of developing countries in the context of their
globalization is an issue that must be addressed in this Working Group, as well as that on trade and
competition policy.
21. Finally, mobility of all factors of production needs to be studied for a comprehensive
educative process on this issue.  Thus, mobility of labour should be inextricably linked with the
discussions on trade-investment linkage if the WTO is to go beyond looking at delivery systems to
look at production systems.
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