106 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 107 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 108 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).