The failed promise of foreign direct investment: some remarks on ‘malign’ investment and political instability in former Soviet states

Abstract

The policy of key international organisation continues to be informed by the assumption that Foreign Direct Investment (FDI) has an unambiguously positive effect on recipient nations. However, there is increasing evidence that, on a global scale, increased trade and investment flows from rich to poorer nations have not contributed to a convergence of levels of income and well-being. This is particularly apparent in the context of former Soviet states, many of which continue to experience a decline, in both relative and absolute terms, in per capita GDP alongside a diminution in the life expectancy of their populations. Examining data on FDI received by former Soviet States from 1997 to 2005, this paper notes, firstly, that these investments have been concentrated on a few, typical natural-resource-rich states. Secondly, it observes that even these resource-rich countries experienced massive fluctuations in terms of the amounts of FDI they received over this time period. Lastly, the paper examines the impact of FDI on a number of country risk indicators via a pooled regression model which includes data for twelve former Soviet countries, namely the Central and Eastern European States of Belarus, Moldova, Russia, and Ukraine, and the Central Asian Republics of Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. This analysis indicates that FDI has either a marginally negative effect on individual country risk measures such as in the case of ‘Overall Country Risk’, or significantly negative effects as in the case of ‘Economic Risk’ and ‘Legal Risk’. The paper concludes that there is strong case for questioning the existing orthodoxy which argues that problems of transition can be overcome via increased FDI and which continues to advise former Soviet states to pursue foreign capital at all cost