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26 August 2021 Written by  TESFAYE ABATE

THE MIDDLE PATH THEORY ON FOREIGN INVESTMENT

 

When communism proved to be unsuccessful, a free-market economy was accepted as a means to marshal economic development. Then, the private economy was considered essential for the development of an economy. As a result, privatization of state companies took place in developed and developing countries. Accordingly, the ideological predisposition to foreign investment has shifted the view that. A multinational corporation is a threat to the sovereignty of developing states has changed. Developing states have built up confidence in dealing with these multinational corporations. Multinational corporations, on their part, usually ceased to be instruments of the foreign policy of their home states. It was also observed that such corporations formed alliances with developing states. For example, foreign corporations in the petroleum sector formed alliances with oil-exporting states to the determinant of oil-importing developed states.

 

In addition, research conducted by the United Nations Commission of Translational corporations contributed a lot to reduce the hostility towards multinational corporations. The study did not deny the harmful results of foreign investments in certain circumstances. It also showed that multinational corporations could be engines that fuel the growth of developing states. This was supported by an influential group of European and American scholars. The study initiated a debate on multinational corporations in the 1980s. The debate has had an influence on the laws used to control foreign investment. In addition, it has an impact upon the forms through which developing countries preferred to receive investment. Do you agree that multinational corporations could be engines that increase the development of states?

 

The study identified the advantages and disadvantages of foreign investment. The beneficial effects identified were similar to those identified by supporters of the classical theory of foreign investment. Can you list the advantages?

 

It was identified that foreign investment made by multinational corporations benefits the economy of the host country through:

the flow of capital

the transfer of technology

creating new employment

creating new opportunities for export income.

 

The study also identified the negative effect of multinational corporations. This enabled the host states to take regulatory measures to curb harmful practices. It was possible to design codes of conduct for multinational corporations. The gist of the codes of conduct is that multinational corporations shall avoid things that are identified as harmful to the economic development of developing states.

 

What were the harmful acts identified by the study?

  1. Defeating the Tax law of the host states was the first harmful conduct of multinational corporations. Multinational corporations find an artificially high price for an item permitted to be imported. This transfers pricing which is harmful to the host economy.

  2. Hazardous and disused technology: The study showed that the technology that was exported was often hazardous and disused. It was identified that the hazardous and disused technology was causing potential harm to both life and the environment. For example, the Bhopal disaster which was caused by gas leakage in a plant set up by a multi-national corporation caused damage to life and property. This shows that multinational corporations export hazardous and outdated technology that was prohibited in their home countries. Therefore, it is necessary to control foreign investment and thereby ensure that the technology is suitable to the host state and up to date.

  3. Lack of profits: Multinational corporations adopt restrictive business practices on a global scale that prevents the host state from maximum export scope potential for goods that are produced within its territory. Do you think that such a problem could be resolved by host states only? Host states themselves cannot address the problem; it needs more effort. Therefore, efforts have been made to design codes on restrictive business practices. What should be done? Is it wise to prohibit foreign investment totally?

 

Here, a theory is required that corrects the drawback of both the multinational corporations and the host state. Host states have taken measures to correct the defects of foreign investment. They have enacted laws and set up screening bodies that permit entry to or give incentives to approved investments. At the international level, the theory was used to control business on which codes of conduct of multinational corporations are sought to be crafted.

 

The theory has disproved that foreign investment was not fully beneficial to the host state because it accepted the drawbacks of foreign investment. According to the new theory, foreign investment is entitled to protection only on a selective basis. Thus, protection may be accorded to a foreign investment depending on the extent of the benefit it brings the host state and the extent to which it has behaved as a good citizen in promoting the economic objectives of the host state.

 

The success of Hong Kong, Singapore, Taiwan, and South Korea proved that state regulation and intervention is necessary. Nevertheless, this should not disregard the role of the free-market economy for development. Therefore, the middle path theory propagates that mixing regulation and openness to foreign investment should be the rule. Thus, this seems to be the basis for most developing countries that moved from hostility to transition.

Ethiopia adopted a liberal (mixed) economic policy after socialism. In the beginning, there was a heavy regulatory regime. However, as time goes on, flexible and programmatic approaches were used with the intention to speed up foreign investment inflow.

 

The international law on foreign investment is based on the principle of the economic sovereignty of states. In the past, the control on investment was made externally. Nevertheless, it has become possible to control foreign investment by national law through means of administrative controls and supervision on the basis of a valid theory of international law with regard to economic sovereignty.

 

In general, both capital sending and host countries could benefit from foreign direct investment. The capital sending countries benefit from FDI because outward FDI increases the competitiveness and performance of the enterprises involved. It also contributes to industrial transformation and upgrading of value-added activities, improved export performance, higher national income, and better employment opportunities. The outflow of FDI may result in reducing domestic investment and lowering the capital stock of the home state.

 

QUESTIONS

 

  • Analyze the gist of the middle path theory on foreign investment.

  • Analyze the demerits of multinational corporations identified by the research conducted by the United Nations Commission of Transnational Corporations with regard to foreign investment.

  • Discuss the advantages of multinational corporations from the host country's point of view.

  • How do you evaluate the Ethiopian economy in light of the middle path economic theory?