Globalization and the Regulation of FDI: New Proposals from the European Community and Japan

Abstract

The key analytical and policy question examined in this paper is whether multinational companies and their overseas investment need to be regulated at the national and/or at the international level, in order to address market failures, and to enhance their potential contribution to world welfare. The paper examines, from a developing country perspective, two kinds of regulatory regimes: first, the current regime and second, a new regime proposed by the European community and Japan at the WTO (ECJ) to institute fresh global rules of the game which will effectively allow multinationals unfettered freedom to invest where they like, whenever they like, how much and in what products. The central conclusions of the paper are, first, that ECJ, despite its important concession of confining itself to only one source of external finance namely FDI, is a flawed proposal from the perspective of both developing and developed countries. Its shortcomings are particularly serious with respect to developing countries as it essentially ignores the developmental dimension altogether. Secondly, it is emphasised that although the current post-Uruguay Round FDI regime is to be preferred in relation to the ECJ, the former has, nevertheless, severe deficits from a developmental perspective. Thirdly, the paper suggests that instead of laissez faire, globalisation and integration of the world economy is more likely to be promoted on a sustainable basis by suitable national and international regulation of MNC activities and the incentive structure facing their executives.