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that international capital flows negate gains for all from trade. He reasons that since

wages are low in LDCs, profits will be high. If profits are re-invested, there will be rapid

development and a narrowing of the gap between the rich and the poor. Hence, trade

would be mutually gainful. However, with capital flows and foreign investment, this is

not the case. Since foreigners face low profits in their home countries, they are willing to

accept much lower rates of profit than local investors are. Hence, they invade local

markets, drive down prices and siphon profits back to their countries. In the advanced

countries, therefore, foreign investment leads to higher profits, higher prices and growth

while in the LDCs it creates economic imperialism and stagnation. Hence, Arghiri posits

that capital flows from the developed to the underdeveloped capitalist countries primarily

to take advantage of the enormous difference in the cost of labour power. According to

this view, unequal exchange is predicated on the basis of the dominant position enjoyed

by the advanced industrial countries and the resultant dependence of the poor countries

on the rich.

Other critics argue that FDI is often associated with enclave investment,

sweatshop employment, income inequality and high external dependency (see Durham,

2000). All these arguments regarding the potential negative impact of FDI on growth

point to the importance of certain enabling conditions to ensure that the negative effects

do not outweigh the positive impacts.

At present the consensus seems to be that there is a positive association between

FDI inflow and economic growth, provided the enabling environment is created. Given

the fact that economic growth is strongly associated with increased productivity, FDI

inflow

is

particularly

well

suited

to

affect

economic

growth

positively.

The

main

8

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