Nita Rudra, University of PittsburghSiddharth Joshi, Indian Institute of Management, Bangalore

Good for the Goose, Bad for the Flock? FDI in Developing Countries (with special focus on India)

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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

3

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

4

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 help…but 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 tariffs=> 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 India’s 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).

3. Theoretical Predictions : Impact of FDI on Poor

* Demand for Water * Water pollution

Divided societies ?

Limited water reforms

Water reforms

Water access

Water access

FDI

Yes

No

· Flows to poor countries with high emission and consumption permits

· Greater local competition

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4. Impact of FDI on Water Consumption and Water Pollution

Models

Industrial water withdrawal (% total water withdrawal)

Organic water pollutant (BOD) emissions

(kg per day)(1) (2) (3)

FDI inflow0.209*(0.119)

1.500**(0.593)

0.0465***(0.0123)

Population3.836***(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 capita8.015**(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 119R-squared 0.236 0.154 0.680

4. FDI and potable water access in developing countries

ModelsAccess to water (% change)

(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 diversity0.0999

(0.0591)Estimated Household Income Inequality (EHII)

0.00587(0.00543)

Gini index0.0102***(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 growth0.00405(0.0147)

0.00381(0.00872)

0.00907(0.0131)

-0.0175**(0.00708)

Climate change0.0230

(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)

Population0.477

(0.375)0.533

(0.361)0.516*(0.268)

0.0201***(0.00239)

Polity0.00592

(0.00468)0.00594

(0.00412)0.00110

(0.00490)0.00474***(0.00145)

Fixed Effects No No No No YesYear Effects Yes Yes Yes Yes NoRegion Effects No No No No YesN 77 39 50 40 108R-squared 0.252 0.598 0.473 0.703 0.98

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4. India : Impact of FDI on Water Supplies

ModelsADD Cases Access to water (%age change)

(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 growth1.354

(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 cap0.517

(0.815)-0.00847(0.0247)

Water exp per cap-0.161(0.202)

-0.000406(0.00586)

Health exp per cap0.656

(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 224R-squared 0.966 0.974 0.973 0.065 0.310 0.308

4. Impact of FDI on HHLD Access to Piped Water in India

Models

Access to water (% change)

MV: Socioeconomic inequalityMV: Weaker

section populationMV:

Conviction rate(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 YesYear fixed effects Yesa Yesa Yes YesN 243 224 224 165R-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)

Manufact FDI

Services FDI

Manufacturing Subsector FDITextile

FDIChemicals FDI Food and

Beverages FDIElectrical

Machinery FDITransport

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