Compensation or Opportunity? The Effects of International Recessions upon Direct Foreign Investment and Growth in Third World States, 1970-1978

This research investigates the effects of international recessions upon the role of direct foreign investment in underdeveloped countries. Arguments for two schools of thought are examined: (1) the opportunity school, which regards recessions as presenting poor countries with a chance to reduce the role of foreign investment in their societies; and (2) the compensation school, which sees economic disturbances as leading multinational corporations to use underdeveloped states to offset the problems posed by the recession. The results from the analysis indicate that recessions only are used as a moment of opportunity under the very limited circumstances found when the under-developed host state has a high total stock of investments in mining that are predominantly from a home state perceived as domineering in its relations with the host state. Attempts at compensation were found to center around the protection of valuable Third World markets and sources of raw materials. No evidence was found indicating that foreign investors increase their repatriation of profits, nor was there any effect by foreign investment on growth during a recession.