Economic growth and welfare: How Foreign Direct Investment contributes to improving social order in less developed countries

Abstract

Does Foreign Direct Investment (FDI) promote development? And does it change social order? The attempt to answer these questions will always be controversial, because, first, the effects differ from context to context, and second, it is highly difficult to measure the (positive) spillovers of know-how and technology etc., as well as of contributions to enhancing social responsibility and improving the standards of living in the host country. The outcome will very much depend on how state governments, international bodies, the business world and non-governmental organizations collaborate. Likewise, interdisciplinary collaboration is required to research the issue, between well-trained economists, investment theory specialists, sociologists and ethicists. For this, our article combines a large number of arguments on market and investment theory, business ethics, John H. Dunning’s eclectic paradigm, etc. It examines whether there is practical evidence to support the assumption that doing business through FDI improves social conditions in less developed countries, and whether the logic for this to happen is rooted in ethical theory. The article contributes to insights from the appropriate sub-stream of the development, FDI and poverty/bottom of the pyramid literature, and to highlighting which trends should be followed in academic research. However, there are limitations to the article, which lie with the limitations of ethics frameworks, as these are often only constructed based on certain moral appeal, and only very few of them examine the incentive compatibility of such constructs.