image is that of the FDI-created sweatshop in developing countries; a foreign-
owned factory paying low wages and violating local safety laws. Pessimists
argue that MNCs make employees in developing countries poor by paying
them low wages. An argument with more support is that MNCs pay low wages
because of existing poverty and low wages. Studies show that, on average, FDI
firms pay 10 per cent more than the going wage, and affiliates of US MNCs
sometimes pay a premium that ranges from 40 to 100 per cent (Bhagwati,
2007:216). MNCs also tend to invest more in developing countries with better
working conditions. An analysis of outward investment by US corporations
showed a greater share of US investment in countries that ratified more
International Labour Organization (ILO) workers’ rights (Bhagwati
2007:220).
A related debate concerns the ‘race to the bottom’, wherein developing
countries compete to host FDI by offering greater tax/environment/labour
concessions than rival hosts. Much of the benefit of the investment is thus
transferred back to the MNC. The success of countries such as Ireland and
Singapore in attracting FDI has masked the lack of benefits to the hosts. Ever-
extending tax concessions for FDI in Singapore meant that,by the 1990s, no
tax was paid on the profits from almost two-thirds of Singapore’s manufac-
tured output, and three-quarters of direct exports. Foreign investors received
cheap access to land purchased by the government under compulsory powers.
For example, the Jurong Town Corporation, owned by the Singapore govern-
ment, leased land at very low cost to incoming industrialists for 30 years,
frequently with an option to renew for a further 30 years. If firms wished the
government could provide purpose-built factories. The government also
provided modern infrastructure including a port, airport, telecommunications,
roads and a mass rapid transit system. From the early 1980s the government
began to spend heavily on education and training geared to the labour/skills
needs of FDI firms (Ermisch and Huff, 1999; Huff, 1999). Many argue that this
problem intensified during the 1990s,as the Singapore strategy of zero tax and
infrastructure subsidies was copied elsewhere, such as in the Republic of
Ireland, in Subic Bay in the Philippines and in Malaysia. MNCs have also been
adept at exploiting unintended loopholes in tax laws to avoid paying taxes even
in developed countries. In 2012/13 Amazon UK had sales of £4.2 billion on
which they paid taxes of only £3.2 million. Amazon.co.uk has classified itself
as a service provider to its Luxembourg business Amazon EU to which it pays
large fees, so reducing its UK profitability and tax liabilities. The large profits
earned by the Luxembourg business are subject to much lower rates of taxation
than those prevailing in the UK.
FDI that leads to the development of linkages in the host economy is more
likely to promote growth than FDI that is highly dependent on imported inputs,
and exports most of its output. This latter type of FDI creates what is known as
an enclave,in which the FDI may have no linkages with the domestic econ-
omy. Chinese investment in Africa has in recent years raised concerns about
enclave effects. Chinese firms offer good quality infrastructure projects with a
76 Sources of Growth in the Modern World Economy since 1950