Foreign Direct Investment and Extractive Institutions

Lessons from Latin America

Abstract

There is a significant debate underway regarding the risks and rewards of foreign direct investment (FDI) for countries in the Global South. These discussions are particularly relevant to the people of Latin America, where the use of inward FDI as a mechanism to support economic development has had dramatic results, both positive and negative. One of the key works in the study of FDI is Robert I. Rotberg’s argument that FDI is critical to support the development of weak states; however, the applicability of this theory faces difficulty in the context of Latin America, where middle-income countries have extractive institutions (Rotberg, 2002). I use the cases of Mexico and Peru to demonstrate that for middle-income countries, extractive institutions can hamper the rewards of FDI and even exacerbate development problems or create new ones. In this regard, the sector of FDI will determine the nature of the impact. In states with extractive institutions, FDI in the natural resource sector is prone to stimulating social conflict. In states with extractive institutions, FDI in the manufacturing sector begets a situation of stagnated development, as the jobs that are introduced are of poor quality and low wages.