The impact of the national innovation systems on the flow and benefits of foreign direct investment to national economics.

Abstract

In the increasingly globalising economy, the flow of foreign direct investment(FDI) is seen as an important source for achieving greater and faster economic growth, particularly in the emerging market economies and other developing countries. Studies on FDI focus on different aspects such as impact of FDI on economic growth, its linkages to foreign trade, its contribution to technology diffusion and human capital formation in the local economy, its social and environmental impacts on host countries, the factors that determine different level of flow of FDI to different countries, the link between FDI and international production, trade and technology development. Such studies mainly highlighted that there are benefits as well as costs from FDI for the host countries (e.g. OECD, 2002; Wei, 2005; Chakraborty and Basu, 2002; Rajan, 2005). The benefits include technology spillovers, human capital formation, international trade integration, competitive environment, and enterprise development, and so on. The costs include balance of payment problems due to repatriation of profit, failure to link with local communities, negative impact on local environment, social destabilisation due to rapid commercialisation, impact on competition in national market, host country failing to benefit from technology and know how transfer, and loss of political sovereignty. Although it is found that the overall benefits are greater than costs, it is pointed out that benefits of FDI are not automatic, particularly for developing countries. It is suggested that these countries need to pursue appropriate policy regimes and should have “a basic level of development”. Various studies suggest that not only the volume and nature of FDI flow varies greatly across the emerging and less developed economies, but also their ability to absorb and benefit from them and how effectively they use FDI to enhance their national productive systems varies greatly. In this paper we would argue that this capacity is directly related to the degree of functioning of an economy’s national innovation system. If FDI is one key route for the introduction of knowledge, technology or innovation that is new to a national economy, it matters a lot how the network of institutions, ideas, policies, strategies, agents and incentives are organised, and work in tandem with logic and coherence and thus communicate and interact effectively to bring transformation. How well the latter are organised, interfacing the elements of the social-economic, productive and knowledge, intersectoralising the sectors and forging interdependent agents and structures is a question of the type of national innovation system (NIS) in place. FDI is not negative or positive a priori. Its role as positive or negative should emerge in relation to specific contexts and requires contextualising it within given national systems of innovation. And we propose that the weakness or strength of the system of innovation influences whether FDI’s contribution is negative or positive. A study of FDI in relation to how different national systems with varied capacities and characteristics or the strengths and weaknesses inherent in their NIS deal and cope with FDI can yield fresh policy insight on the type of changes that must take priority to benefit from flows of FDI. In this paper we analyse the nature of the flow of FDI in some selected emerging market economies such as China, India, South Africa and few smaller economies and its impact on these national economies. We analyse the volume, nature and characteristics of the FDI inflow in these countries and whether and how NIS has shaped the flow and the impact of FDI on these economies. We focus on the issue of managing and absorbing FDI to enhance national productive systems rather than whether FDI is positive or negative