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‘right’ combination of ‘market forces’ and ‘context’ based coordination would
stimulate those FDI that seek local market penetration. In order to keep growth at
pace, a delicate fine-tuning of policies is necessary, to help balance the’ market’
with the ‘context’. But the relative importance of the two cannot be discussed in
principle, as it will depend on the socio-economic and political conditions of that
particular country, on the quality and the aims of its bureaucracy, and eventually on
the degree of influence that all constituencies, both domestic and foreign, can
exercise on the State.
4.4 Policies
Given such a narrow space of action, let us now briefly consider the mix of
fundamentals and selective policies that are more suitable for the task, provided a
good institutional set up is there to deliver. A vast array of policies, and policy
mixes, can be arranged, once all previous measures are accounted for. It is beyond
the scope of this paper to supply all the possible combination of macro and microeconomic
policies along the process of capital liberalization. But limiting our final
remarks to the core of our arguments, i.e. the mix between monetary policy and
selective industry policies, a few considerations may be suggested to conclude. A
tight monetary policy could be considered, for example, a way to off-set a more
equitable income policy. In setting higher interest rates, this policy would attract
more foreign capital, but mostly in the form of finance, and possibly equity,
provided the process of institutional building has gone beyond its initial phases. In
principle, the more advanced the local institutions, the higher the probability that
capital would flow in, provided a flexible exchange rate regime would take care of
excessive imports. But to the extent that foreign direct investments also outsource
some capital locally, higher interest rates would also slow down, ceteris paribus,
the inflow of new technologies.
To help increase the inflow of less liquid capital, which would lower the risks
associated with capital reversal and prompt a faster real growth, the process of
institutional building – in this case higher competition and a system of
contestability of local markets – should be geared to reconcile the access to
‘foreign knowledge’ by local firms (and competitors in general) with the MNE’s
target of profit maximization. A series of industry policies, fiscal policies, and
relative price-setting could be imagined, at this point, to create synergies among
resource accumulation, productivity gains and allocation efficiency. Eventually, if
FDI won’t be discouraged by a tighter monetary policy, selective incentives may
not be needed, and thus no market disruption should take place. By setting a
leveled playing field among national and international competitors alike, a policy
maker could thus choose the mix and the sequencing of industry policies, valid for
all firm, no matter their nationality, according to socio-economic conditions and
political cycles. He could also choose between faster growth (by giving preference
to factor accumulation and productivity gains) and a less equal allocation of
resources (by letting profit grow according to the local scarcity of capital). But in
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