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3. The Current FDI-Led Development Regime
The failure of previous development regimes led the Hungarian and Irish states to
forge a new regime with foreign capital in the form of FDI as the main developmental agent. Economic growth was to be based on the generation of exports and the
development of indigenous capabilities to be attained via the internalisation of direct
and indirect spillovers. This new development regime evolved in Ireland throughout
the crisis years in the late 1950s (O’Malley 1989: 86; O’Hearn 2001: 122). In Hungary, the new development regime was forged during the country’s transition to a
democracy and a market economy after 1990 (Berend 2000: 48; Sass 2004: 72).
Although the basic parameters of the development regime were left untouched, individual aspects were readjusted due to the malfunctioning of the development strategy. Nevertheless, the prime developmental actors remained attracted TNCs.
Consequently, the impetus for economic growth in the current development regime stems from foreign actors outside of the respective national economy. The
development regime had implications for the role of the state in the development
process. On the one hand, increased external dependence on foreign demand and on
FDI infringed upon external autonomy. Likewise, the spending constraints of the
model required adherence to low state intervention, reducing the capacity of the
state. On the other hand, both states enjoyed a considerable scope of internal autonomy, allowing them to set the development agenda with a minimum of interference
by non-state interests. However, the low capacity of the state left it ill-prepared to
counteract the negative external influences of the global economy; this led to a malfunctioning of the development strategy. As a result, rising popular dissent prompted
the readjustment of the development regime.
Beginning with a theoretical overview on the envisaged benefits of the FDI-led
export-oriented development strategy, it will be shown that the integration of TNCs
aims to unleash macroeconomic and microeconomic gains supporting the attainment
of macroeconomic stability and increased competitiveness of the productive structure. Beginning with Hungary, the formation of the FDI-led development regime
will be portrayed for both countries. In both cases, the foundation of the development regime was the result of a culmination of internal and external factors. Finally,
the evolution of the Hungarian and Irish development regimes and their crisisrelated realignment are analysed by using the previously defined variables of internal and external autonomy, capacity and consent/dissent.
3.1 Envisaged Effects of FDI-led Development
The 2002 Monterrey United Nations International Conference on Financing for
Development emphasised the key role of FDI in supporting long term economic
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growth. FDI is seen to be “especially important for its potential to transfer knowledge and technology, create jobs, boost overall productivity, enhance competitiveness and entrepreneurship, and ultimately eradicate poverty through economic
growth and development.” (UN 2002: 5). FDI is seen to resemble a package consisting of “tangible and intangible assets” (UNCTAD 1999: 149), which are of importance for a host economy’s development strategy.
The positive impact of export-oriented FDI on the host economy is distinguished
by direct and indirect, pecuniary and non-pecuniary positive effects. The positive
impact of FDI can be divided into macroeconomic and microeconomic factors affecting the product and factor markets of the host economy (Barba
Navaretti/Venebles 2004: 152-153). The first effect relates to the pecuniary effects
of export-oriented TNC investment, which can enable macroeconomic stabilisation.
The microeconomic effects characterise the envisaged impact of FDI on the production structure of the economy. Within this context, FDI is seen as an instrument with
which peripheral indigenous industries can surmount their barriers to entry to attain
international economic competitiveness. Hence, FDI inflows resemble an important
measure for countries suffering from economic backwardness to overcome underdevelopment.
3.1.1 Macroeconomic Effects
Starting with macroeconomic effects, essentially, Hungary and Ireland opted for a
capital-import strategy of economic development. Besides obviously contributing to
economic growth and, therefore, supporting the general rise in incomes levels (Klein
et al. 2001: 5), FDI is seen to affect three macroeconomic areas: monetary, employment and fiscal policy. Export-oriented FDI can, therefore, support the attainment of
macroeconomic stabilisation.
In regards to monetary effects, the strategy relies on the attraction of debt neutral
capital inflows in the form of FDI and the generation of export surpluses through
export-oriented TNCs. Export-oriented FDI can provide access to export markets
and hence increase a host economy’s export share (UNCTAD 1999: 317).
Following Stephan (1999: 214), trade surpluses together with FDI inflows have
two positive consequences. First, they contribute to reducing the country’s indebtedness. FDI inflows contribute to non-debt financed real investment. Likewise trade
surpluses as well as FDI represent foreign exchange earnings, which positively affect the current account and the balance of payments, thereby reducing the level of
financing requirements. The foreign exchange earnings can be used to service and
repay foreign debts, improving the monetary credibility of a country (UNECE 2001:
198).
Secondly, trade surpluses additionally support monetary stabilisation. The reconversion of export profits can lead to an appreciation of the domestic currency,
stabilising the domestic currency’s exchange rate vis-à-vis the currencies of its main
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trade partners. An appreciated currency can reduce the debt servicing requirements
of loans in foreign currencies (Stephan 1999: 214).
Depending on demand elasticities, currency appreciation can reduce inflationary
pressure by lowering the price of imports. This mechanism can not only offset the
negative effects of appreciation-related export price increases by lowering production costs, but it can also contribute to reducing general inflation. This in turn leads
to a reduction in interest rates, prompting increased investment, as the interest rate
falls below the rate of return on investment allowing capital accumulation (Stephan
1999: ibid; Murphy 1998: 7).
Interest rates are also further reduced by TNCs contributing to state revenues, as
the increased tax intake can contribute to lowering budgetary finance requirements.
Likewise positive fiscal effects can also arise through the direct employment effects
of foreign investments, amounting to increases in income taxes as well as to rising
contributions to pension, social welfare and health funds. Similarly, demand effects
on the host economy stemming from goods and services sourced by TNCs can produce indirect positive results. TNC internal demand can stimulate investment, production and employment by indigenous firms and additionally create positive fiscal
results (Murphy 1998: 7).
3.1.2 Microeconomic Effects
Microeconomic effects characterise the envisaged impact of FDI on the production
structure of the economy. TNCs are regarded to be sources for modern technologies
and management techniques. They can be transferred to the economy via backward
and forward linkages between foreign and indigenous firms. The diffusion of these
assets into the rest of the host economy can raise the international competitiveness
of indigenous firms. Hence, they can enable indigenous industry to overcome its
barriers to entry to international economic participation (UNCTAD 1999: 317). The
transmission of technology via FDI allows the creation of hitherto non-existent hightech industries in a country. This poses the possibility for indigenous firms in a peripheral country to “leapfrog” development stages, enabling the country to catch-up
with technologically advanced countries (Klein et al. 2001: 5).
FDI-related gains to the production structure of the host economy can again be of
direct and indirect nature and result from the entry of TNCs into the factor and
product markets of the host economy. Enderwick (2005: 103-105) mentions a total
of 4 direct effects resulting from links between TNCs and the host economy. The
first set of envisaged gains pertains to the industrial structure. FDI can induce the
development of entirely new industries previously not present in the host economy.
Furthermore, TNC engagement can lead to higher value-added production and support industrial diversification. This can enable a backward country to overcome
previous barriers to entry and participate on the world market by producing high
technology products (Enderwick 2005: 103).
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References
Zusammenfassung
Irland und Ungarn verfolgen eine Entwicklungsstrategie, die in bewusster Abhängigkeit von Globalisierungsprozessen in Form von ausländischen Direktinvestitionen steht und sich als Paradigma in der Peripherie durchgesetzt hat. Doch dieser Entwicklungspfad hat zu einer ungleichen und abhängigen Entwicklung geführt. Dies ist laut dem Autor das Resultat des mangelnden Gestaltungswillens beider Staaten, für einen gleichgewichtigen Wachstumsprozess zu sorgen. Die historische Analyse zeigt, dass eine auf ausländische Firmen fußende Entwicklungsstrategie nicht ausreicht, um traditionelle Peripheralität zu überwinden. Der Autor fordert eine Reform des Entwicklungsparadigmas, um eine gleichgewichtige Entwicklung zu ermöglichen.