Putting it to Work in Developing Countries - Nathan Associates

lower-tech manufacturing they will move up to
more sophisticated, knowledge- and capitalbased
activities, leaving the former to other FDI
destinations that are still cost-effective. Lowertech
manufacturing opportunities will dwindle
as high-tech opportunities increase, giving countries
an incentive to climb the ladder and attract
technology-based manufacturing FDI. Second,
as always, host countries along the ladder will
need to develop packages of skills, costs, institutions,
and policies to compete for manufacturing
FDI.
FUTURE FDI DIRECTIONS—
OTHER DRIVERS
The forces at work in services and manufacturing
are broad, long-term determinants of the
physical and sector destinations of FDI in the
developing world. But four narrowly focused
factors will also drive patterns in FDI over the
next decade or so: the phase-out of global textile
quotas, the enduring appeal of China as a destination,
private investment in infrastructure, and
South–South flows of investment.
THE END OF GLOBAL TEXTILE QUOTAS
Apparel is a special case in the future of manufacturing
FDI. For nearly half a century, developed
countries regulated access to their textile
and apparel markets with import quotas, tariffs,
and systems of preferential access. The
Multifibre Arrangement (MFA) was the principal
mechanism of control. While the agreement
restrained imports from many low-cost producers
such as China and India, it encouraged
investment in countries that had not filled their
quotas and which, in effect, enjoyed guaranteed
access to U.S. and European markets. Quota
access reinforced by low wages became a powerful
lure for FDI in the apparel sector, which can
establish, uproot, and reposition facilities quickly
and cheaply. Many U.S., European, and Asian
textile and clothing manufacturers set up operations
in Mauritius, Lesotho, the Caribbean,
Cambodia, Mongolia and other locations that
had no textile or apparel industry.
But the system has changed radically. The WTO
Agreement on Textiles and Clothing, in operation
since 1995, ended the MFA and eliminated
quotas on January 1, 2005. Many developing
countries that had benefited from quota
restraints on their toughest rivals are now competing
for markets in the United States and the
European Union on the basis of price, quality,
and responsiveness to market demand.
How will the elimination of quotas affect FDI
inflows As quota access becomes irrelevant to
plant location, many developing countries risk
significant loss of domestic as well as foreign
investment in textile and apparel manufacturing.
Countries such as Lesotho (textiles and apparel
account for 87 percent of export value),
Cambodia (84 percent), Mauritius (57 percent),
and the Dominican Republic (51 percent),
whose industries have been fueled by FDI and
have depended largely on quota restrictions on
low-cost Asian producers, could face rapid disinvestment.
8 The full consequences of the end of
the MFA are still uncertain, but the major beneficiary
will be China. Though not the lowestcost
producer, China is extremely efficient
because of massive economies of scale and will
be able to dominate the industry thanks to its
production volume, reliability, and full-package
responsiveness. 9 China could garner a steadily
increasing share of textile and apparel industry
FDI that would have gone to other locations
under the MFA regime.
The industry, however, will seek some diversification
of supply beyond China, especially
among producers who modernize, ensure quality,
and provide special advantages. FDI might
still flow to countries like the Dominican
Republic, which offers just-in-time inventory
advantages for the U.S. market, or to Croatia,
which produces high-end specialty apparel for
the EU market. 10 Bulgaria has reportedly been
able to retain FDI in textiles and apparel by
upgrading from simple assembly to higher valueadded
activities. 11 Free trade agreements, such as
CAFTA between the United States and the
Dominican Republic and Central American
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