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Foreign Direct Investment and Corporate Codes of Conduct in National Development Strategies: Costs, Benefits and Policy Options

In an era of stagnant or declining aid budgets, foreign direct investment offers significant scope for channelling much-needed resources to developing countries. However, a number of caveats must be borne in mind. FDI does not always lead to economic growth, and whether it does so depends critically on the local economic environment. FDI is also very geographically concentrated, meaning that most developing countries still require greatly increased aid flows to alleviate poverty, to build infrastructure and to develop sound institutions. Moreover, the FDI that is available has costs as well as benefits. Some studies have shown that up to a third of projects can be a net cost to the host country. Major FDI proposals should therefore be evaluated carefully in a comprehensive cost-benefit framework. This is a much-neglected, but essential skill and most developing countries require increased technical assistance and resources to build their capacities to undertake it. Neglecting sound cost-benefit analysis of FDI is a dangerous false economy. Corporate codes of conduct should be discussed in this context. Their utility is highly dependent on what they include, what they leave out and what procedures are in place for monitoring and enforcing them. Many fail on all counts. The better ones can be useful as an adjunct to a sound legal environment, or as a restraint in more chaotic circumstances, but they must not ‘crowd out’ the development of sound, well-enforced social, environmental, tax, anti-corruption and labour laws. Moreover, a company’s adherence to an outstanding code of conduct does not automatically mean that its FDI will be beneficial to the host country. FDI by the perfect company in the wrong sector or in the wrong economic circumstances can still result in a net cost to the host country. Thorough cost-benefit analyses of proposed FDI projects remain essential.