Friday, October 26, 2012

The role of academic research in investment for development

Foreign direct investment (FDI), like investment in general, may be profitable and productive. But does it generate what economists call "spillovers" or "beneficial externalities"? For example, if a company builds a large factory, how likely is it that locals will become better technically qualified or start new businesses as a result? This is important if you are, as you should be, trying to maximize the development impact of a project.

You might expect the answer to be a clear "yes". Any new enterprise is likely to generate new demand for inputs and will need to train workers in skills that they may later use when working for other employers or for themselves.

But these new needs may be met in other ways. An investing company may bring in all its machinery, raw materials, semi-finished goods and skilled labor. Locals may be employed for unskilled tasks, giving them no new skills, and no local businesses need be set up to provide inputs.

FDI has been around for a long time, so surely the academics have studied this question and provided a clear answer? Unfortunately not. The research on this, taken as a whole, has so far proved inconclusive.

Some investments have provided clear spillover effects in a particular industry in a particular place at a particular time, but others have not. So it isn't possible to state that such effects always occur everywhere. The general conclusion is that such external benefits are more likely to occur if deliberate policies are adopted to ensure that they do.

The approach of Growing Capacity is different. We focus on finding practical solutions to real problems, not the need to publish research to obtain a higher degree or tenure at a university.

Academic research does have an important role, provided it is relevant. Rather than looking at the problem in an abstract way, research should be designed to develop solutions. The researcher, in co-operation with the investor and the host community, can start with a project, examine the possibilities of generating specific beneficial externalities, then set up a simple, sustainable, transparent and independently verifiable mechanism for testing success.

The results can be assembled by academic researchers, who are welcome to use them for the advancement of their university careers but should focus on producing usable descriptions of successful approaches that are sufficiently clear and complete for investors and communities to be able to take and adapt them to their own objectives.

For example, an investor initiating an impact investment project may include an externalities assessment component in addition to routine accounting for tax and corporate reporting. This could be part of a social compliance assessment or a stand-alone item. Raw results could be used by a team of graduate students together with similar reports from other investment projects. The results could then be compiled into summary form, evaluated and tentative conclusions drawn.

No comments:

Post a Comment