A few days ago, shopkeepers in India were protesting the visit of executives from Wal-Mart, the US mega store, as the company's representatives came to explore the setting up of operations in that country. This is after the mega store chain has been spreading its wings in China anticipating a consumer boom, the early signs of which are already evident.

Dennis Morrison

In that same part of the world, the interim military government in Thailand is being viewed as biased against foreign investors, although the soldier-turned-prime minister who leads the government asserts that he is merely seeking to create a level playing field.

The irony of this situation is that even in the USA, which is the leading recipient of foreign direct investment, there is a developing backlash against such investment, and legislation to subject potential foreign takeovers to more rigorous scrutiny is being considered in the House of Representatives and in the Senate.

After all, the liberalisation and privatisation theology was led by the US Government and the institutions forming the so-called Washington Consensus. Now, there seems to be a wind of resistance to foreign investment, where it is perceived to be going after national champions regarded as important to national security, cultural identity or economic development.

The economic liberalisation, which facilitated the boom in foreign direct investment for the two decades leading up to the end of the 1990s, is not just facing protectionist reactions in Europe and the USA. In developing countries such as India and Thailand, there are signs that populism and nationalism are on the rise. In Latin America, contracts with foreign firms, particularly in the petroleum industry, are being cancelled and in other cases nationalisation of the operations of multinational corporations is again in vogue.

Jamaica is, in its own way, reflecting some of the impulses against foreign direct investment. Among private sector groups, there is the fear of being overrun by new foreign players who are better capitalised and, by virtue of size and connections, more competitive in the marketplace. The view is that we ought to find ways of excluding such players from entering the Jamaican tourist industry in particular, or at least placing restrictions on them. For instance, one suggestion was that they should be quarantined in the less attractive beach properties in Hellshire and so on.

Another view opposes strongly the foreign takeover of our financial system that has occurred through FINSAC. The argument with which I agree to some extent is that the financial system, considering its central role in the allocation of capital, ought not to be dominated by foreigners.
This is a position which is held by policymakers in the USA, which still enforces a restrictive regime where foreign ownership is concerned in that sector. Similarly, the US authorities have maintained controls on foreign ownership in the country's airline industry and in the petroleum sector. Apart from economic considerations, national security concerns also play a significant role in the US position.

In China, which ranks in the top three of recipients of foreign direct investment, there is also growing unease because of a feeling that the country has become excessively dependent on foreign capital. In some of its industries, there is a saturation of investment, which, with intense price competition and rising raw material prices, is reducing profitability. From a policy position, the proposed alignment of corporate tax rates for domestic and foreign firms, which is expected to come into force in 2008, is likely to have a slowing effect on foreign investment. Foreign companies now pay tax rates that go down to 15 per cent, whereas Chinese firms pay 33 per cent.

It is still not clear whether these factors will erode China's attractiveness and cause investment to move to cheaper locations, such as India. The fact is that China's competitive position in manufacturing is strong and is bolstered by its rapidly improving infrastructure. India, on the other hand, has problems with its infrastructure and inflexible labour laws in a politically open system that puts it at a disadvantage. The overall sense, however, is that both countries will remain attractive and will continue to pull in increasing levels of foreign investment, especially in sectors in which they have achieved global competitiveness.

Globally, the picture for foreign investment appears positive, as the key factors driving such investment look promising. These include intensified competition that is spurring companies to seek the best production conditions, technological change, and improved conditions for doing business in an increasing number of countries. In the previous two decades, liberalisation and privatisation were the main drivers. While some countries are still in the early stages of the liberalisation process, this process is very advanced in the developed countries which are responsible for two-thirds of foreign direct investment.

The privatisation push was a major factor in the investment flows to developing countries. In many countries such as Jamaica, that trend has gone further than many nationals would sanction. In any case, less areas are now available for privatisation, and investment will therefore not generate the flows that have been seen in the 1990s and in the first half of this decade. Indeed, as was indicated earlier, there may even be a reversal of flows in some countries as a result of nationalisation of strategic industries.

Outsourcing, which has become a bad word in the lexicon of powerful interest groups in the USA in particular, has been another driver of foreign direct investment flows to developing countries. Labour-intensive manufacturing industries were the base of this movement, which subsequently spread to higher technology-driven activities.
The automobile industry has felt the effects of this very dramatically in the USA, where foreign firms producing both in that country and abroad, have drastically reduced the market share of General Motors, Ford and Chrysler.

This process is now becoming more widespread in the aviation industry and workers in the European countries that are partners in Airbus Industrie are now feeling the pressure as that company prepares to do further outsourcing of the production of components. Boeing, the US company is already using China, which is a major purchaser of its aircraft, as a base for the manufacturing of components. Still, experts are anticipating that the outsourcing process will slow down and some degree of "outsourcing fatigue" is already appearing among some western companies.

The long view of global foreign direct investment flows, taking all these factors into account, is for continuing growth, and the expectation is that the period up to 2010 should see foreign direct investment growing by somewhere in the region of eight per cent per year.

Even at this rate, such flows will only reach the 2000 peak of US$1.4 trillion by 2010. Were there to be a backlash, as discussed above, the growth would be significantly reduced. Jamaica as a high-performing recipient of foreign direct investment should be watching developments closely as a downturn would affect our economic prospects.

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