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FDI- Foreign or Faux Direct Investment: Domestic Business Interests, Foreign Investors and post- Communist Economic Development

Nikola Milicic
University of Toronto
Nikola Milicic
University of Toronto
Open Panel

Abstract

While opposing entry of particular and individual foreign investors into the post-communist economies, domestic business interests, ranging from oligarchs to cross- sectorial business associations, did not exercise their considerable influence on domestic policies (for example, taxation, employment and industrial policies) to attract foreign investors. This paper argues that domestic business groups saw neo- liberal policies aimed at attracting FDI as an opportunity to gain for themselves subsidies and other forms of preferential treatment that would not otherwise be politically viable. The first part of the paper examines statistical evidence from Eastern Europe and the Former Soviet Union and argues that domestic business interests masking themselves as foreign investors were not a minor, but a significant and prevailing trend. The second part of the paper demonstrates that domestic business supported FDI- driven development and the ways in which domestic business benefited from FDI policies by mimicking foreign investors through the case studies of Serbia, Ukraine, and Kazakhstan. The concluding section posits that states with greater autonomy and regulatory capacity had a better track record at attracting “genuine” Foreign Direct Investment as opposed to states with lower capacity which ended up with faux Direct Investment. Indeed, state regulatory capacity was more significant in attracting real FDI than actual incentives aimed at attracting FDI and investment climate. Overall, the paper argues against the assumption that FDI incentives alone can foster economic growth and development of newly emerging markets. At the same time, it also negates the notions of dependent development that views policies as a result of the process of coalition-building and collusion between foreign and domestic business elites. The paper concludes that in absence of state capacity FDI policies become yet another way for local business interests to capture rents in an opaque manner that is detrimental to the domestic economy.