09-01 "Resources, Rules and International Political Economy: The Politics of Development in the WTO"



GDAE Working Paper No. 09-01 Resources, Rules and International Political Economy

Senegalese firms are subject to other countries’ regulations.29 Furthermore, developed
and developing countries’ interests as capital importers are not the same either, because
of the different roles that DFI tends to play in the local economy. Foreign investors tend
to be concentrated in different sectors, use different modes of entry, and account for
different shares of investment, production, exports, and so on.

Thus, similar to what we see in the case of IP, structural characteristics lead to
differing perspectives on investment and, subsequently, persistent conflict in the area of
IIR. Developed countries seek limited regulations on investors, while developing
countries have historically sought the right to use policy instruments designed to harness
the benefits of DFI. These instruments include, for example, local content requirements,
screening entry of foreign investors, equity limitations (i.e. making joint ventures
compulsory), controls on repatriation of profits and export of capital, and requirements
regarding technology transfer and the training of human resources.

Although there is little new about the basic observation that states seek to regulate
inward investment and the claim that conflicts over IIR are rooted in structural
differences between countries, a set of changes that have occurred since the 1980s have
brought increased prominence to the issue-area. From the perspective of developing
countries (i.e. capital importers), we see a new orientation in the wake of debt and
protracted economic crises in the 1980s and 1990s and, subsequently, widespread trade
liberalization and privatization. Attracting DFI has become, in most if not all developing
countries, one of the primary objectives of economic policy. Countries seek investors as
exporters (and, hopefully, purveyors of skills and technologies); countries seek foreign
investors as purchasers of privatized state enterprises and suppliers of public services
(particularly when, as is often the case in poorer countries, local private actors lack the
capital to take over the state’s role). Most generally, whereas in the past many
governments were wary of DFI and preferred the autonomy that came from borrowing
from international banks,30 in the current environment foreign investors have come to be
regarded - and desired - as more stable and less mobile forms of capital inflow. Thus, as
countries become more desiring of and dependent on DFI, they are more wary of
frightening away potential investors with “over-regulation,” and this changes their
approach to the area of IIR.

We also see a change from the perspective of developed countries (i.e. capital
exporters), in that the nature of DFI in developing countries has undergone a shift since
the 1980s. Whereas DFI had historically been in extractive industries or tariff-hopping
manufacturing sectors, the contemporary environment is marked by the proliferation of
“efficiency-seeking” foreign investors seeking to use developing countries as export
platforms, and by “market-seeking” foreign investors taking over formerly state-reserved
roles of public service and infrastructure provision. Linked to this change, especially the
growth of DFI in public services, are new concerns on the part of investors as they move
into sectors that are, by their very nature, more heavily regulated and more vulnerable to
expropriation. Also worth noting here is that as
international operations represent
increased shares of some global firms’ revenues, the subject of how subsidiaries are
regulated becomes more important.

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