The Missing Links between Foreign Investment and Development: Lessons from Costa Rica and Mexico

Eva A. Paus and Kevin Gallagher

No 06-01, GDAE Working Papers from GDAE, Tufts University

Abstract: A developing country will derive long-lasting development benefits from FDI only, if there is the right coincidence between its location-specific assets and TNCs’ global interests, and the right match between the country’s national linkage capability and TNCs’ strategic interest in domestic sourcing. We argue that Costa Rica and Mexico have been very successful in attracting high-tech FDI due to the cumulative results of past development policies, proximity to the U.S., and trade arrangements. However, a combination of pervasive market failures, government inaction, and changes in TNC strategies explains why the two countries have not been able to reap lasting benefits from high-tech FDI. We conclude that pro-active government policies have to be an integral part of any FDI-linked development strategy. Pro-action is needed to attract FDI, to promote indigenous linkage capability, and to enhance key location-specific assets on an on-going basis in the context of a coordinated policy framework.

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