Modernization vs. Dependency Revisited: Effects of Foreign ... · Modernization vs. Dependency Revisited: ... effects of PFDI and signiﬁcant positive effects of manufacturing FDI

Modernization vs. Dependency Revisited:Effects of Foreign Direct Investment on

Food Security in Less Developed Countries1

Andreea Mihalache-O’keef

Roanoke College

and

Quan Li

Texas A&M University

Food security is of great urgency in the developing world. Many countrieshave sought to attract foreign capital to promote development andreduce hunger. But how do foreign direct investment (FDI) inflows affectfood security? Extant research based on dependency and modernizationarguments or the globalization debate offers contradictory theoreticalpredictions and produces conflicting evidence. We resolve the puzzle bydisaggregating FDI. Foreign investments in distinct economic sectors havedisparate attributes, producing different welfare consequences for foodsecurity. We test our arguments using the food security indicators recom-mended by the Food and Agriculture Organization (FAO) and new dataon sector-specific FDI inflows to 56 developing and transition economiesbetween 1981 and 2001. We find highly robust evidence that manufactur-ing FDI improves food security. We also find that primary-sector FDIreduces food security and that service-sector FDI has an ambiguous butsometimes negative effect. These results are largely robust under differentstatistical methods, additional control variables, and alternative measuresof food security. Our research offers policy lessons for how to improvefood security and demonstrates how to resolve theoretically the long-standing dependency-modernization controversy that has informed thecontemporary debate between the pro- and anti-globalization camps.

A grim reality confronts humankind today. Despite increases in the global foodsupply, 842 million people were undernourished and suffering chronic foodinsecurity in 1999–2001; of them, 10 million lived in the industrialized countries,34 million in transition economies, and 798 million in developing countries(Food and Agriculture Organization [FAO] 2003:6). Relative to the World FoodSummit’s previous estimate in early 1990s, the undernourished population inthe developing world decreased by only 19 million, a mere 2.3% improvement innearly one decade. At this pace, the first of the eight Millennium DevelopmentGoals the United Nations set in 2000—to reduce by 2015 the proportion of

1 We thank Michael Bernhard, Sybille Kranz, David Mason, Bill Thompson, and the anonymous reviewers forcomments and suggestions. Blake Garcia provided helpful assistance. Replication data sets and do file, as well as aWeb appendix with additional tables and graphs are available at http://www.personal.psu.edu/asm218/modVSdep.htm.

doi: 10.1111/j.1468-2478.2010.00636.x� 2011 International Studies Association

International Studies Quarterly (2011) 55, 71–93

people who suffer from hunger by half2—is unlikely to materialize. Morerecently, a policy brief, published by the EC-FAO Food Security Information forAction Programme, notes that ‘‘of particular concern are hunger hotspots,marked by the widespread persistence and prevalence of food insecurity, espe-cially in protracted crises. As of May 2006, 39 countries in the world were experi-encing acute food security crises, requiring external assistance: 25 in Africa, 11in Asia and the Near East, 2 in Latin America and 1 in Europe’’ (FAO 2006:2).Food security is both a long-term issue and one of immediate urgency.

Many agree that food security is not only a basic human need and fundamen-tal human right, but also plays a critical role for economic development andworld peace (FAO 1996; Leathers and Foster 2004; Bryant and Kappaz 2005;Kent 2005; World Bank 2006; Jenkins, Scanlan, and Peterson 2007). However,only a few academic studies investigate the economic and political determinantsof food availability and access.3 Even fewer works study the role of FDI4 (forexample, Wimberley 1991; Wimberley and Bello 1992; Firebaugh and Beck 1994;Jenkins and Scanlan 2001). The scant research on the impact of FDI on foodsecurity stands in sharp contrast to the growing scholarly interest in the causes ofFDI flows (for example, Jensen 2003; Li and Resnick 2003) and their effects oneconomic development, growth, and income inequality (for example, de Soysaand Oneal 1999; Reuveny and Li 2003; Kosack and Tobin 2006). Over the pasttwo decades, the importance of FDI to the global economy has increased dramat-ically. For example, according to the World Investment Report (UNCTAD 2006),FDI inflows to developed countries in 2005 increased by 37% (or $542 billion)relative to the 2004 level, while developing countries received $334 billion—thehighest level of FDI ever recorded. FDI flows into developing countries as ashare of their gross domestic product (GDP) rose from only 10% in 1980 toapproximately one-third in 2005.

The urgency of food security in the developing world and the significance ofFDI justify a closer examination of their relationship, to improve our knowledgeof how globalization affects a basic human need. The few existing studies of theeffects of FDI on food security build on arguments from two divergent theoreti-cal perspectives: the dependency theory and the modernization thesis. Theseperspectives have informed the contemporary debates about globalization (Lake2007:761), but produce contradictory predictions regarding the effects of FDI onfood security. While both camps imply that a country’s position in the globaleconomic order affects its level of food security and other indicators of well-being, they disagree over the nature of the effect. According to the modernizationarguments, the inflows of foreign capital, technology, and know-how generategrowth, increase absolute incomes of all economic groups (Deardorff and Stern1994), and as a result, alleviate hunger (Hein 1992; Firebaugh and Beck 1994;Tsai 1995). However, based on the dependency theory and its offspring, a coun-try’s reliance on foreign capital and foreign processed goods, even if inducinggrowth, widens the income gap between the rich and the poor (Rubinson 1976;Bornschier and Chase-Dunn 1985; Tsai 1995; Feenstra and Hanson 1997; Mah2002; Zhang and Zhang 2003; Taylor and Driffield 2005; Stiglitz 2006; Basu andGuariglia 2007). FDI inflows thus reduce food security by generating relativelosses for the poor (Escudero 1991; Wimberley 1991; Wimberley and Bello1992). Extant evidence is limited and mixed. Some scholars (Wimberley 1991;Wimberley and Bello 1992) find that FDI reduces food security, whereas others

2 For all eight UN millennium goals, see http://www.un.org/millenniumgoals/.3 For exceptions, see Nicholson and Esseks 1978; Puchala and Hopkins 1978; Scanlan 2001, 2004; Scanlan and

Jenkins 2001; Leathers and Foster 2004; Brady, Kaya, and Beckfield 2007; Jenkins et al. 2007.4 The International Monetary Fund (IMF 1993) defines FDI as investment made to acquire lasting interest in

enterprises operating outside of the economy of the investors. It suggests a threshold of 10% of equity ownershipfor FDI (UNCTAD 2007).

72 Modernization vs. Dependency Revisited

(Firebaugh and Beck 1994; Jenkins and Scanlan 2001) show that internationalinvestment improves food security and social welfare.

In this study, we tackle this timely and controversial question: how do FDIinflows affect food security in the developing countries? Intuitively, FDI indi-rectly influences food security via its effects on growth and development.However, we theorize that FDI also affects food security through wages andlabor market dynamics, environmental effects, demographic and migrationforces, and distributional implications. We resolve the theoretical and empiri-cal inconsistencies over the effects of FDI by recognizing that investments indifferent economic sectors have disparate attributes and, therefore, varyingimplications for food security. By lumping together international investmentsin different sectors, previous studies conflate their differential effects into asingle estimate.5 We, however, expect that primary-sector FDI (PFDI) reducesfood security, manufacturing FDI (SFDI) improves it, and service-sector ortertiary-sector FDI (TFDI) has ambiguous effects. To test our arguments, wecollect a new data set of annual sector-specific FDI inflows to 56 developingcountries between 1981 and 2001. We study two commonly used measures offood security: daily per capita calorie and protein intakes. The statistical find-ings largely confirm our theoretical expectations, revealing significant negativeeffects of PFDI and significant positive effects of manufacturing FDI on foodsecurity.

Our research makes several innovations. First, by distinguishing differenttypes of foreign production capital and their consequences, we reconcile thetheorized competing effects of FDI in the food security literature. Second, ourargument that the effects of different types of FDI should be analyzed sepa-rately can be applied to resolve broader globalization-related debates on otherissues such as basic needs satisfaction, human development, and incomeinequality. To our knowledge, only three analyses investigate empirically thedifferential effects of sectoral FDI on economic growth (Alfaro 2003; Aykut andSayek 2007; Chakraborty and Nunnenkamp 2008), and no one has studied theeffects of sectoral FDI on other aspects of development. Third, we introduce anew data set on sectoral FDI, also helpful for testing other theories on the causesand effects of FDI. Finally, our findings have policy implications for governmentsthat seek to attract FDI but are wary of the potential negative effects of foreign capi-tal penetration. Not all foreign production capital is detrimental, and not all is ben-eficial.

The rest of the article proceeds as follows. Section 2 briefly reviews the debateon the socioeconomic effects of globalization, applied to the problem of hunger.Section 3 introduces our argument on the effects of sector-specific foreign invest-ment and lays out testable propositions. Section 4 discusses the research design.Section 5 presents the statistical results, Section 6 discusses additional robustnesstests, and Section 7 concludes the study.

Food Security, Dependency, and Modernization

The study of human welfare has drawn growing attention over time. Most of thestudies dating from the 1970s and 1980s (for example, Elsenhans 1975; Bornschi-er, Chase-Dunn, and Rubinson 1978; Dolan and Tomlin 1980; Evans and Tim-berlake 1980) evaluate human welfare at the macroeconomic level, focusing oneconomic growth, income per capita, and inequality. More recent studies focuson microlevel indicators of welfare that better reflect true development than the

5 Raul Prebisch noted the benefit of diversification for reducing Third-World poverty. Our argument is differ-ent, highlighting the benefit of FDI in some sectors and its negative impact in others, and we test our argument sta-tistically in a large-N sample.

73Andreea Mihalache-O’keef and Quan Li

macrolevel measures.6 These indicators include infant mortality (Firebaugh andBeck 1994; Shen and Williamson 1997; Frey and Field 2000), life expectancy(Wimberley 1990; Firebaugh and Beck 1994), child labor (Samatar 1993; Newma-yer and de Soysa 2005), the status of women (Shen and Williamson 1997; Gray,Caul Kittilson, and Sandholtz 2006; Richards and Gelleny 2007; Villarreal and Yu2007; Ross 2008), and food security (Wimberley and Bello 1992; Firebaugh andBeck 1994; Jenkins and Scanlan 2001).

Historically, two contending sets of arguments—dependency and moderniza-tion—provided the conceptual basis for explaining patterns of change in humanwelfare, and they continue to inform the contemporary debate about the socio-economic impact of globalization. In a recent survey of the field of InternationalPolitical Economy, David Lake (2007:761) notes that while the dependency the-ory died out in the 1980s, it ‘‘taps into issues of international inequality, unevengrowth, and national control over international economic forces that remaincentral to contemporary debates about globalization.’’ In the contemporarydebate, the pro- and anti-globalization camps often revive, restore, and revisethe dependency and modernization arguments. Both theoretical perspectivesemphasize the central role of a country’s external interactions through tradeand investment, but predict diametrically opposed consequences of economicinterconnectedness.

The modernization thesis, rooted in economic liberalism, argues that developingeconomies tend to benefit from economic linkages with advanced economies.Through trade, foreign investment, and international aid, developing countriesgain access to export markets, capital, and technology that are essential for devel-opment.7 Developed economies also benefit from such interdependence, as theyacquire cheap raw materials, opportunities for investment, and markets for theirproducts. Liberals believe that global economic openness redirects factors of pro-duction to their most efficient use; consequently, growth-generating capital flowsnot only compensate for the savings deficit of developing countries but also cre-ate productivity gains and positive spillover effects inside developing host econo-mies (Gilpin 1987:266). In the long run, this process has the potential toequalize development levels, real wages, and input prices around the world(Rostow 1980:360). Confirming the modernization arguments directly or indirectly,recent studies demonstrate that FDI promotes economic growth independently(Firebaugh 1996; de Soysa and Oneal 1999), or conditionally, depending on thequality of local financial markets (Alfaro, Chanda, Kalemli-Ozcan, and Sayek2004), the level of human capital in the host country (Borenzstein, de Gregorio,and Lee 1998), or the economic sector receiving the investment (Alfaro 2003).

Applied to the question of food security, the modernization ideas informsome interesting arguments. Firebaugh and Beck (1994) suggest that FDI leadsto higher productivity. As firms compete for labor, increased productivity ulti-mately leads to higher wages. Thus, FDI entry raises wages and purchasingpower and, as a result, foreign capital penetration leads to higher caloric con-sumption. For Jenkins and Scanlan (2001:721), international trade and invest-ment stimulate economic development and spread technological andoperational innovations across national borders, ultimately increasing social wel-fare. They argue that, while FDI has a ‘‘relatively less beneficial’’ effect on foodsupply than domestic investment (Jenkins and Scanlan 2001:739), both types of

6 Another motivation for this change in research focus is that unlike benefits from macroeconomic growth,individual welfare such as food security, health, education, and life expectancy tend not to concentrate in the handsof a few, but distribute across different groups in a society (Firebaugh and Beck 1994; Brady et al. 2007).

7 It is worth mentioning that liberals also emphasize the crucial role of domestic social and political factors fordevelopment. In the presence of social rigidities, political corruption, parasitic bureaucracies, and underinvestmentin human capital, developing countries cannot reap the full benefits of their relationship with developed countries.For detailed discussion, see Gilpin (1987), especially chapter 7.


investment contribute to industrialization and growth, which in turn improvefood consumption.

The dependency arguments emphasize the mechanisms through which the inter-national capitalist order distorts the economies of developing countries (Gilpin1987:273). Advanced economies in the core dominate the system, transferringeconomic surplus out of developing countries in the periphery through interna-tional trade and investment. Unequal exchange through trade, an expressioncoined by Emmanuel (1972), perpetuates underdevelopment because it biasesthe terms of trade against the less developed. Reliance on foreign capital frommultinational corporations (MNCs) also perpetuates the low status of developingcountries (Bornschier and Chase-Dunn 1985). As viewed by dependence theo-rists, FDI inflows to the periphery destruct local entrepreneurship, stifle techno-logical innovation, crowd out domestic firms, increase unemployment, andstrengthen the hosts’ authoritarian regimes (Wallerstein 1974; Lindblom 1977;Held 1991; Dixon and Boswell 1996; Moran 1996; Feenstra and Hanson 1997;Rodrik 1997).8 Empirical studies find export dependence and FDI contribute tolower economic growth and worse quality of life, including lower food supply,higher infant mortality, higher inequality, higher pollution, and reduced accessto clean water, doctors, and education (for example, Adams and Behrman 1982;Ragin and Bradshaw 1992; Bradshaw, Rita, Gash, and Buchmann Sershen 1993;Kentor 2001; Kentor and Boswell 2003; Jorgenson, Dick, and Mahutga 2007; Lee,Nielsen, and Alderson 2007).

Applying the dependency arguments to food security, Wimberley (1991) andWimberley and Bello (1992) claim investment dependence has a strong harmfuleffect on food consumption, even more detrimental than that of primary exportdependence. MNC penetration reduces food security in the periphery countriesfor several reasons (Wimberley and Bello 1992:899). FDI promotes luxury goodsmarkets that decrease consumer demand. In addition, because of their use ofcapital-intensive production in labor-surplus environments, multinationals causeunemployment and underemployment. Finally, foreign investors cause immisera-tion by reproducing the core–periphery hierarchy, which is sustained throughintrafirm transactions and the promotion of ‘‘semiproletarization.’’

Statistical evidence on the effect of foreign capital on food security is limitedand mixed. Wimberley (1991) estimates that in a sample of 60 countries between1967 and 1985, countries with minimum MNC penetration gained approximately700 more calories and 20 more grams of protein consumption per person perday than those with maximum FDI penetration. Furthermore, the detrimentaleffect of FDI penetration grows with the length of the lag between penetrationand the dependent variables. Wimberley and Bello (1992) find that FDI penetra-tion, measured in 1967, reduces food security, measured by daily per capita con-sumptions of calories and protein averaged over 1984–1986, in a sample of 59developing countries. In contrast, Firebaugh and Beck (1994) show a positiverelationship between foreign investment and caloric consumption, based on vari-ables differenced over the 23-year period between 1965 and 1988, in a sample of62 nations. Jenkins and Scanlan (2001) find that FDI during 1970–1975 does notreduce calories and grams of protein per capita in the early 1990s in a sample of78 developing countries.

Overall, the small body of literature on the impact of FDI on food securityoffers contradictory theoretical predictions and mixed evidence. In our view, thekey to this puzzle is the overlooked fact that foreign investments in different eco-nomic sectors have disparate attributes and consequences.

8 For extensive discussions of dependency arguments, see Gilpin 1987, 273–90.


Sector-Specific FDI and Food Security: A New Argument

Like the early proponents of dependency and modernization arguments, andthe scholars engaged in the current globalization debate, we agree that FDIinfluences host economic performance and individual welfare. However, weargue that foreign investments in different sectors produce differential effects.Some types of FDI reduce well-being in the host country, consistent with thedependency arguments, whereas other types of FDI are welfare enhancing, sup-porting the modernization ideas.

Effects of PFDI

Most investments in natural resources are vertically integrated, producing forexports to developed economies and thus reinforcing the dependency ⁄ coloniallinks between countries in the periphery and the core. This type of investmentshas insignificant spillover benefits for other economic sectors and is likely to hurtdownstream industries by diverting domestic resources to foreign markets. Alongthese lines, Hirschman (1958:110) writes, ‘‘[t]he grudge against what has becomeknown as the ‘enclave’ type of development is because of this ability of primaryproducts from mines, wells, and plantations to slip out of a country without leav-ing much of a trace in the rest of the economy.’’ Almost half a century later, therelationship described by Hirschman remains largely unchanged. According tothe 2001 World Investment Report, ‘‘in the primary sector, the scope for linkagesbetween foreign affiliates and local suppliers is often limited’’ (UNCTAD2001:138). Large projects in the primary sector use few intermediate inputs andexport most of their output (Aykut and Sayek 2007:37). Furthermore, FDI flowsin agriculture and extraction tend to be highly volatile (World Bank 2005).

Primary-sector FDI arguably contributes little to a country’s capital accumula-tion. For example, in Somalia, nearly 75% of the earnings from banana exportsleave the country (Samatar 1993:25). In Nigeria, an increase in oil revenues from$33 per capita in 1965 to $325 per capita in 2000 had no effect on per capita GDP,which amounted to $325 in 2000, unchanged from its 1965 level (Sala-i-Martinand Subramanian 2003:4). The benefits from PFDI also tend to be concentratedand easily captured coercively by the elite at the national and regional levels. Highresource flows in the primary sector often increase rent seeking and weaken insti-tutions (Sachs and Warner 2001; Isham, Woolcock, Pritchett, and Busby 2003;Sala-i-Martin and Subramanian 2003), also reducing competitiveness in other eco-nomic sectors (Aykut and Sayek 2007). As a result, the benefits of PFDI rarelytrickle down to the masses or are reinvested toward sustainable development. Notsurprisingly, Alfaro (2003) and Aykut and Sayek (2007) show in cross-nationalempirical analyses that PFDI hurts economic growth in developing countries.

Primary-sector FDI also produces negative environmental externalities, harmingthe livelihood of indigenous people. Business operations funded by PFDI oftenpollute water sources, poison farmland, and compel migration, frequently forcingclosures of subsistence farms. Extractive activities, particularly in countries withlax environmental regulation, often cause severe damages to the environment.In areas where people subsist based on the land, through agriculture orfishing, these damages pose significant threats to food security and public health.9

9 The case of Shell Oil in Nigeria is infamous. A 2009 Amnesty International report estimates at least 9 millionbarrels of oil were spilled in the Niger Delta over the past 50 years. Shell recognized its activities contaminated theenvironment, but attributed 85% of the pollution to attacks and sabotage by criminal bands (Tattersall 2009).Another example concerns the ongoing lawsuit against Chevron because of environmental damages caused byTexaco’s petroleum extraction activities in Ecuador. An important part of the alleged damages was because of thepollution of the local waters and the destruction and contamination of fish, an important food source for the locals(Romero and Krauss 2009; Ramirez 2010).


In agriculture, the technology and know-how transfers that accompany foreigncapital can be beneficial to farmers (Dries and Swinnen 2004), but the presenceof foreign investors can also hinder the development of sustainable agriculturalpractices. Governments in developing countries often pursue agricultural policiesfocused on chemical-dependent technologies because of multinational involve-ments in agricultural projects (for example, Clapp 1998, 2003). As farming sys-tems are integrated into the global agribusiness supply chain, crop rotation andrecycling of organic matter are often replaced by the intensive use of pesticidesand synthetic fertilizers (for example, Altieri 2000; Jorgenson 2007), includingsubstances banned in developed countries with high environmental standards(Frey 1995; Magdoff, Foster, and Buttel 2000; Shiva and Bedi 2002). These prac-tices are highly polluting and reduce food security in the long run becauseapproximately 90% of all pesticides applied trickles into local ecosystems tocontaminate water and soil (Pimental and Levitan 1988; Frey 1995).

Primary-sector FDI also produces negative demographic externalities. By hiringunskilled laborers and contributing little to their training, PFDI hinders thedevelopment of human capital. For instance, approximately one-third of theoperations on banana plantations in Somalia are performed by very young work-ers, mostly girls aged 8–15; these children are very unlikely to obtain an educa-tion (Samatar 1993:37). Also, because PFDI often draws on labor that isoversupplied and poorly organized, MNCs have more bargaining power over theterms of employment (Echanove and Steffen 2005). The laborers therefore arenot necessarily highly paid.10

Finally, PFDI in agriculture hinders the type of rural development the FAOand UNCTAD recommend for alleviating hunger. Ideally, the improvement ofrural infrastructure, accompanied by government subsidies to subsistence farms,would encourage the development of local markets for the products of smallfarmers. Agricultural PFDI clearly undermines these mechanisms. Foreign inves-tors in agriculture often expand by buying land from small farmers, preventingthem from subsistence activities and forcing them to rely solely on wages too lowfor good nutrition. In his study of FDI in Somalia’s banana industry, Samatar(1993:25, 37) finds that while ‘‘foreign investment modernized banana produc-tion and increased exports, [it] did not improve the starvation wages of planta-tion workers,’’ which ranged in 1991 from $0.10 to $0.50 a day. Children usuallyreceive even lower wage rates, insufficient for buying ‘‘more than a loaf of bread,or five cups of tea, or a kilogram of rice’’ (Samatar 1993:38). In some cases,foreign rural enterprises that acquire subsistence farms often absorb only littlelabor, lowering the incomes of many villagers. For instance, large cattle ranchesset up in the early 70s in the states of Para and Mato Grosso in Brazil employedfew people and drove away many peasant farmers (Davis 1978). In addition,PFDI inflows to large farms may redirect government subsidies away from smallfarmers and change the focus of domestic investment in agriculture.

Effects of SFDI

Foreign direct investment in the manufacturing sector differs from PFDI in sig-nificant ways. We argue that the developmental effects of secondary-sector FDI(SFDI) mirror those proposed by the modernization theorists. Unlike PFDI,manufacturing FDI in developing countries can be both vertically and horizon-tally integrated. A large part of the SFDI output often remains in the developinghost country, increasing market competition, and benefiting consumers (Aykut

10 Consistent with this logic, Galtung (1971) finds reliance on exports of primary products is associated withhigher sectoral income inequality.


and Sayek 2007). In addition, SFDI typically involves sustained investment ofmedium intensity, and earnings from SFDI are more likely reinvested.

Manufacturing FDI may produce technology and knowledge spillovers thatincrease the overall potential of the host economy. According to Alfaro (2003:9),‘‘the argument that FDI generates externalities in the form of technologytransfers, managerial know-how, and access to markets tends to be more relevantto investment in manufacturing than [to investment] in the agriculture or min-ing sectors.’’ Consistent with the modernization thesis, such technology transfershave the potential to narrow the gap between developing and developed econo-mies. Through spillovers in technology and managerial know-how, domesticfirms may learn from MNC affiliates and optimize their own production pro-cesses, resulting in lower consumer prices (Chakraborty and Nunnenkamp2008). The productivity growth allows the employers to pay higher wages withoutsacrificing profits (Firebaugh and Beck 1994:634–635). In addition, manufactur-ing foreign affiliates typically pay higher wage rates to workers than their rivalhost firms (Lipsey 2002; Lipsey and Sjoholm 2004; Sjoholm and Lipsey 2006).All else equal, as workers earn higher wages, they can spend more on food.

Manufacturing FDI also increases demand for the products of upstream indus-tries and produces higher-quality, lower-priced supplies for downstream hostindustries (Jordaan 2008). Rodrıguez-Clare (1996) shows that multinationals useintermediate goods intensively, enhancing production efficiency and outputdiversity in host economies. Markusen and Venables (1999) find that throughcompetition with domestic firms, MNCs increase demand for domestically pro-duced intermediate goods. As more domestic firms enter intermediate goodsindustries, the prices of inputs and final goods decline. Lower prices for interme-diate goods benefit other domestic firms, while lower prices for finished prod-ucts benefit consumers.

Finally, SFDI contributes directly to human capital formation in the hostbecause manufacturing MNCs provide training for both skilled and unskilledworkers hired (Aykut and Sayek 2007). Better human capital induces develop-ment, improving basic needs satisfaction and food security. As noted earlier,empirical evidence indicates SFDI increases economic growth, which by implica-tion should increase food security in the developing host countries.

These benefits of SFDI are dispersed and difficult to capture coercively by theelite. As they trickle down, spread, and improve the overall efficiency of theeconomy, SFDI benefits the host population as a whole. Even when SFDI is notdirectly linked to food supply, it brings about higher wages, lower consumergoods prices, and better overall productivity in the host. All these benefits helpimprove the food security of the population.

We do not completely discount the relevance of the dependency-type claimsfor SFDI. In some cases, employees in manufacturing subsidiaries in developingcountries might not receive training or learn new skills. Workers often are price-takers in the labor markets. Governments may sometimes side with MNCs ratherthan domestic laborers, adopting policies that hurt the latter. These effects ofSFDI might reduce food security, and they coexist with its positive consequences.On average, however, we expect SFDI to improve food security.

Effects of Service-Sector FDI or Tertiary-Sector FDI

The dependency and modernization arguments do not easily apply to the impactof the service-sector FDI on food security. Neither dependency nor moderniza-tion speaks extensively of tertiary-sector FDI (TFDI) because developing countriesstarted to receive significant service-sector FDI only recently. In 2004, the WorldBank noted that ‘‘FDI [to developing countries] had evolved from focusing pri-marily on natural resources, infrastructure, and manufacturing (export-driven or


‘‘tariff jumping’’ investment) to also covering banking, retail, construction, tour-ism, and offshore services’’ (Palmade and Anayiotos 2005:3). Furthermore,because the output of tertiary enterprises is typically nontradable and both argu-ments were motivated by the integration of developing countries in the globaltrade system, neither perspective addresses TFDI in detail.

More importantly, relative to the primary and manufacturing sectors, the ter-tiary sector includes highly heterogeneous industries in terms of skill and capitalintensity. It contains such diverse industries as public utilities, construction,trade, transportation and communication, hotel and restaurant, healthcare andsocial services, finance, and education. Its employees range from the most highlypaid lawyers and doctors to the most poorly paid domestic servants and streetvendors (Evans and Timberlake 1980:534). Hence, to explain how TFDI affectsfood security, one needs to consider separately the unskilled and the skilledlabor in the sector.

For the unskilled labor, TFDI has the potential to reduce food security.According to Todaro (1969) and Evans and Timberlake (1980), the developmentof the tertiary triggers the migration to city slums of rural laborers who expecthigher incomes, inducing a process of ‘‘semiproletarization.’’11 However, ter-tiary-sector jobs in the city do not necessarily guarantee higher incomes. Theindustries that typically employ unskilled workers continue to pay low wagesbecause of excess labor supply. Furthermore, access to food for rural immigrantshired for service jobs may decrease because they pay higher prices in urban mar-kets and can no longer supplement their food supply through subsistence farm-ing. Therefore, the increased demand for unskilled tertiary labor because ofhigher TFDI has little or even a negative effect on their food security.

The effect is different for the skilled labor in high-skill tertiary industries(finance, business, education, healthcare). Foreign investments in these indus-tries often increase income if we (reasonably) assume the pool of skilled workersis limited. As these industries grow, the competition for skilled labor intensifies,inducing higher wage rates (Firebaugh and Beck 1994:634–635). Does thisincrease in income improve their food security levels? It may depend on the typeof nutritional intake in question. Assuming that skilled workers generally earnsufficiently to meet basic nutritional needs, rises in income because of TFDIlikely change the quality of diets, but not the amount of calories consumed.

In addition to these direct effects, TFDI and tertiary-sector growth could havelarge, visible, indirect effects via development in the long run. As the sectorexpands, the variety, quality, and accessibility of services improve. For instance,transportation becomes more accessible, financial transactions more secure, thecredit system more dependable, and education and healthcare more reliable.Such changes in the tertiary likely improve the overall economic performance(Chakraborty and Nunnenkamp 2008). TFDI also generates know-how transfers,particularly in terms of managerial and organizational strategies, encouragingthe host’s development. Furthermore, foreign firms in the tertiary may createupstream linkages. In Brazil, Poland, and Thailand, for instance, retail invest-ment drives productivity growth, lowers prices, and increases consumption.Foreign retailers also encourage improvements in host-country wholesalers andfood processors and are ‘‘now becoming important sources of exports: Tesco inThailand and Wal-Mart in Brazil are increasingly turning to local productsto feed their global supply chains’’ (Palmade and Anayiotos 2005:3). These

11 According to Wimberley and Bello (1992:899), ‘‘semiproletarization’’ is a consequence of the growth of theservice sector. ‘‘Many service workers receive very low wages, and their presence in urban labor markets keeps someindustrial wages low as well (Evans and Timberlake 1980). These low-wage workers are semiproletarian, i.e., theirwages require them to rely on subsistence activity and petty commodity production to survive. It is the semi-proletarians who have experienced absolute immiseration in the modern world system’’ (Wallerstein 1978; Wallerstein,Martin, and Dickinson 1982; Wimberley 1991).


macrolevel effects may ultimately promote development and better satisfactionof human basic needs.

Hence, TFDI could influence food security through several mechanisms thatgenerate conflicting effects. While the direction of each effect is predictable, themagnitudes of these effects are not. Until we separate them empirically, which iscurrently unfeasible and beyond the scope of this study, we cannot predict theoverall net impact of TFDI on food security.

Overall, different types of FDI may affect food security through a variety ofmechanisms. Figure 1 summarizes which mechanisms link FDI and food securitydirectly and which ones connect them via growth and development. We expectthat ceteris paribus, primary-sector FDI reduces food security, manufacturing FDIincreases it, and the net effect of service-sector FDI is ambiguous.

Research Design

We test our argument in a sample of 56 developing and transition economiesbetween 1981 and 2001, determined by data availability. The unit of analysis iscountry year. We choose not to pool less developed countries (LDCs) and devel-oped countries (DCs) because of their systematic developmental, socioeconomic,and political differences (for example, Morisset and Lumenga Neso 2002:5–7)and because the dependency-modernization controversy is most pertinent toLDCs. The countries in sample, sector classifications, summary statistics, and vari-able correlations are available in our Web appendix.

PFDI

DEVELOPMENT ANDGROWTH CHANNEL

FOOD ACCESS ANDAVAILABILITY CHANNEL

Little spillover benefits for other sectors, and fewer resources fordownstream industriesRents easily captured by elites, rarely reinvested in public goods ortowards sustainable developmentReduced human capital

Negative environmental and demographic externalitiesNegative effect on wages and labor lawsShifts use of land from subsistence agriculture to commercial farmsHinders rural development beneficial for alleviating hunger

FOODSECURITY

-

-

SFDI



Increased market competitionTechnology and knowledge spilloversImproving human capitalPositive externalities for upstream and downstream industries

Higher employment and wages

Improved skills that put workers in a better bargaining positionPositive externalities more evenly distributed, thus reaching the poor

FOODSECURITY

+

+



Diversified, better and more accessible servicesPositive externalities for upstream and downstream industriesTechnology and know-how spillovers

FOODSECURITY

+

-/+/0

UNSKILLED LABOR INTENSIVE INDUSTRIESMigration to city slums, therefore forgoing subsistence agricultureand paying higher prices for food in urban marketsLower wages

SKILLED LABOR INTENSIVE INDUSTRIESHigher wagesExtra training increases workers’ bargaining power

-

+

TFDI

••••

•

•

•

•Lower prices of intermediate and final products•

••

••••

••

•

•

•••

FIG 1. Channels of Sectoral Foreign Direct Investment Impact on Food Security


Dependent Variable

‘‘Food security exists when all people, at all times, have physical and economicaccess to sufficient, safe, and nutritious food that meets their dietary needs andfood preferences for an active and healthy life’’ (FAO 1996)12. To measure thisconcept, the FAO Statistics Division employs two indicators: (i) daily per capitaenergy consumption, in kilocalories13; and (ii) daily per capita protein consump-tion, in grams. They represent the two aspects of food security: hunger andnutrition. FAO estimates caloric and protein content ‘‘by applying the appropri-ate food composition factors’’ to the food supply available for domestic utiliza-tion, calculated as the sum of food production, food imports, and changes infood stocks, less food exports. Per person consumption is then estimated bydividing the total nutrient amount by the number of individuals partaking of thefood supply during the reference period.

These two FAO indicators, i.e., daily per capita energy consumption and dailyper capita protein consumption, are our main dependent variables. Relative toFAO’s recommended 3,000 calories per Adult Equivalent Unit, caloric intakein the estimation sample ranges from 1,639 (Mozambique in 1992) to 3,487(Hungary in 2000), with an average of 2,558 (for example, Colombia in 1999,Paraguay in 1992, and Costa Rica in 1984) and a standard deviation of 379. Pro-tein consumption ranges from 31.1 g (Mozambique in 1994) to 107.4 g (Sloveniain 1999), with an average of 67 (Fiji in 1992 and Indonesia in 1995) and astandard deviation of 15.5.

Previous studies (for example, Wimberley and Bello 1992; Jenkins and Scanlan2001; Reenock, Bernhard, and Sobek 2007) also used these two indicators offood security for several reasons. First, they exhibit short-term variations inresponse to factors other than major catastrophes. Second, the data are compara-ble across countries and years and available for wide temporal-spatial coverage.Third, they reflect not only food supply, as one would expect, but also accessover time. Regarding access, it is worth noting that changes in per capita-nutrient-consumption averages tend to reflect closely changes in the consump-tion of lower income groups, under the reasonable assumption that the highincome group typically gets the nutrition it needs (Reenock, Bernhard, andSobek 2007). If the food consumption of higher income groups is relatively con-stant over time, the change in either intake measure reflects mostly the con-sumption variations of lower income groups. Thus, the overall food consumptionincrease tends to imply the poor have improved access to food. Patterns in ourdata confirm that the per capita nutritional intake proxies both the availabilityof and access to food. For example, our measures are highly correlated at )0.8with food Gini, a measure of food inequality from the FAO Statistics Division.14

In addition, calories per capita correlate with undernourishment in the popula-tion, child stunting and underweight, and child wasting at )0.9, )0.6, and )0.4,respectively, whereas proteins per capita correlate with the three measuresat )0.8, )0.6, and )0.3, respectively. Higher per capita nutritional intakes

12 The conceptualization of food security has evolved over the past three decades, reflecting the shifts in policyinterests (Clay 2002; Heidhues, Atsain, Nyangito, Padilla, Ghersi, and Le Vallee 2004). The concept was introducedin the mid-1970s, when the World Food Conference (1974) defined food security in terms of food supply, specifi-cally the availability of food at the international and national levels (World Food Conference 1974, cited by FAO2006:1). Throughout the 1980s, the focus of food-related policies of both national governments and internationalorganizations shifted from supply to access and from the regional and national level to the individual (FAO 1983).At the end of the 1980s and in the early 1990s, the conceptualization of food security was further revised to incor-porate temporal dynamics.

13 Throughout, we refer to kilocalories as calories following the convention of FAO and WHO.14 The food Gini unfortunately has extremely limited data coverage. For details, see http://www.fao.org/

fileadmin/templates/ess/documents/food_security_statistics/AccessToFoodGini_en.xls.


correspond to lower food inequality and less undernourishment.15 Finally, theFAO indicators of food security are positively but far from perfectly correlatedwith development or growth. As illustrated in the Web appendix scatterplot,countries at similar development levels can vary widely in terms of caloric andprotein intakes. For instance, within three narrow income intervals ($900–$950,$4000–$4050, and $8700–$8750), both caloric and protein intakes show largevariations (2104–2641, 2205–3439, and 2789–3354; 38.7–57.3, 50.5–105, and79.1–104.7).

Main Explanatory Variables

To test the three hypotheses, we construct three FDI variables: PFDI, SFDI, andTFDI. Each variable measures the respective type of annual FDI inflows as ashare of a country’s GDP. Data are collected from the UNCTAD’s World Invest-ment Directory. The share over GDP measures the relative size of FDI in the econ-omy, consistent with our question of how the relative importance of FDI in eachsector affects food security in the host.

We build on previous empirical studies and control for various other determi-nants of food security, including economic development, economic growth,international trade, level of democracy, political instability, and government con-sumption. We measure economic development with GDP per capita in constant1995 US dollars, logged because of its skewed distribution. We measure econom-ic growth with the annual percentage-change in economic growth. These vari-ables help us control for the indirect impact of FDI on food security viadevelopment and growth. Data come from the World Development Indicators(World Bank 2009).

Trade and FDI correlate and sometimes even overlap, but they also differ andcapture different aspects of a country’s integration into the global economy.Trade concerns the flow of goods and services, whereas FDI involves the flow ofproduction capital, technology transfer, managerial know-how, and productivityspillovers. We follow previous research (for example, Jenkins and Scanlan 2001)and include two trade variables to ensure our FDI findings are not spurious.Primary-sector exports and manufacturing exports represent the shares ofprimary and manufacturing commodities over merchandise exports, respectively(World Bank 2009). Primary-sector exports may reduce food security, based onthe dependency arguments, whereas manufacturing exports may increase foodsecurity, based on modernization arguments.

Democracy level, based on the polity2 variable in the Polity IV data set, rangesfrom )10 to +10, with higher values indicating greater democracy (Marshall andJaggers 2002). It controls for the possibility that democracies better respond tofood security concerns of the population through redistributive policies andsocial welfare programs. We measure political instability (for example, strikes,riots, or assassinations) based on investor responses to the International CountryRisk Guide surveys, directly capturing business perceptions of the politicalaspects of the investment climate. It ranges from 0 to 49, with higher valuesreflecting greater instability. Government consumption is general governmentfinal consumption expenditure as a share of GDP (World Bank 2009). It cap-tures state capacity and resources a government may directly use to address foodsecurity concerns.

15 Some (for example, Jenkins et al. 2007) argue the per capita nutritional intake does not tell the whole storyabout food security because it might be a poor indicator of child access to food. While we acknowledge it may bean imperfect measure, the nutritional intake, as shown, captures to a large degree both the availability of and accessto food.


Methods

Many other unobserved forces may also influence food security. As additionalcontrols, we include country dummies for country-specific unobserved charac-teristics16 and year dummies to account for temporal trends and year-specificunobserved effects. While they make it harder to find statistically significanteffects, they ensure our FDI findings are not spurious due to unobservables.

The time-series cross-sectional structure of the data allows for temporal and spa-tial comparisons, but presents statistical challenges such as autocorrelation andheteroskedasticity. To circumvent these problems, we employ the two-way (countryand year) fixed effects least square estimator with Huber–White robust standarderror, clustered over countries. These estimated standard errors are robust to bothheteroskedasticity and to a general type of correlation within the cross-sectionalunit (Rogers 1993; Williams 2000). We lag the independent variables by 1 year tomodel the fact that current-period caloric and protein intakes are a function ofpast stimuli and to control for possible reverse impact of the dependent variable.We evaluate the directional hypotheses on PFDI and SFDI using the one-tailed testand the nondirectional hypothesis on TFDI using the two-tailed test.

Findings

Table 1 presents the results from four two-way fixed effects models. For eachfood security indicator, we estimate two models: one with the FDI variables, plus

TABLE 1. Effects of Foreign Direct Investment on Food Security in LCDs, 1981–2001

Dependent variable: calorieintake per capita

Dependent variable: proteinintake per capita

Primary-sector FDI )4.60*3.07

)13.42**7.19

)0.26**0.13

)0.63***0.23

Secondary-sector FDI 6.67**3.25

7.67**4.17

0.32**0.15

0.26*0.16

Tertiary-sector FDI )1.881.18

)7.95*4.10

)0.060.04

)0.110.18

Democracy level )2.313.51

0.020.11

Instability )22.62**9.83

)0.85**0.38

Government consumption 10.06**4.60

0.47**0.19

Income per capita 220.35***65.05

7.78**3.79

Economic growth 2.022.67

0.070.07

Primary-sector exports )0.461.18

0.0040.04

Manufacturing exports )1.521.41

)0.020.05

Constant 2423.63***43.05

803.10*606.76

60.64***1.16

)7.7232.72

Adjusted R-squared 0.92 0.93 0.96 0.96Observations 551 439 560 440

(Notes. Results for country and year dummies not reported.Robust standard errors, clustered over countries, below coefficients.*p<.10, **p<.05, ***p<.01.)

16 As an additional benefit, the country dummies also help control for regional effects.


country and year dummies, and the other adding other political and economiccontrols. Overall, the models demonstrate excellent explanatory power, account-ing for 92–96% of the variations in caloric and protein intakes.

Among all four models, PFDI has statistically significant negative effects on cal-orie and protein intakes, supporting the PFDI hypothesis. PFDI reduces foodsecurity. Manufacturing FDI has statistically significant positive effects on calorieand protein intakes, consistent with the SFDI hypothesis. Manufacturing FDIincreases food security. Finally, the effects of TFDI are consistently negativeacross the models, but significant only in the full model of caloric intake. Thenet effect of service-sector FDI on food security appears ambiguous. Overall,these results support our arguments on the differential effects of various types ofFDI on food security.17

The largely insignificant effect of service-sector FDI is not surprising based onour argument. As noted, TFDI could have conflicting effects on food security.The empirical results indicate that on average, the negative and positive conse-quences of TFDI may cancel each other out. Alternatively, the statistical insignifi-cance may be because the surge of TFDI in LDCs is a recent phenomenon. Formost country-years in our sample, the variations in TFDI are small such that theestimated average effect tends to be insignificant.

Substantively speaking, how large are the direct effects of PFDI and SFDI onfood security? According to the estimates in the full models, a 1% rise in theshare of PFDI in the host reduces caloric and protein intakes per person per dayby 13.4 calories and 0.6 g, respectively. If PFDI increases by 4.3% (one standarddeviation) or 72.5% (mean to maximum), energy intake will decrease by 57.2 or973.6 calories, and protein intake by 2.7 or 45.7 g, per person per day. Theannual effects of such PFDI increases (1%, 4.3%, and 72.5%) on an average indi-vidual accumulate to respective caloric losses of 4,898 calories, 20,866 caloriesand 355,371 calories, and respective protein losses of 230, 980, and 16,683 g.

Manufacturing FDI, on the other hand, contributes to increases in individualcaloric and protein intakes. A 1% increase in the share of manufacturing FDI inthe host raises energy and protein intakes per person per day by 7.7 calories and0.3 g. A 2.6% rise (a standard deviation) in manufacturing FDI increases energyand protein intakes per person per day by 20.2 calories and 0.7 g, and a 20.2%increase (mean to maximum) raises energy and protein intakes by 155 caloriesand 5.2 g. With these increases in manufacturing FDI (1%, 2.6%, and 20.2%),the annual individual energy intake will rise by 2,800, 7,391, and 56,551 calories,respectively, and the annual individual protein intake will increase by 95, 251,and 1,917 g, respectively.

How do we interpret these effects in public health terms? According to physio-logic studies, for an individual in energy balance, who is neither a growing childnor elderly (a relatively conservative scenario), the intake of 3,500 calories causesa weight gain of one pound of body fat. For such a person, the effects of 1–20.2% increases in manufacturing FDI could lead to increases in body weightranging from 0.8 to 16 pounds in 1 year, and the effects of 1–72.5% rises inPFDI could cause the body weight to decline by 1.4–102 pounds in a year.

In terms of protein consumption, the recommended protein intake in theUnited States for a 5-ft, five-in tall male who weighs 136 pounds is at least 27.8 gper day. Relative to this recommendation, the substantive effects of primary andmanufacturing FDI on protein intake do not appear large ()0.6 g and +0.3 g,respectively, for 1% rise in investment; )2.7 g and 0.7 g for a standard deviationchange in investment; and )45.7 g and 5.3 g for the mean-to-maximum increase

17 We computed variance inflation factors (VIF) to gauge the impact of multicollinearity. Except for incomeper capita and government consumption, all variables have individual VIFs below 6.06, smaller than the conven-tional threshold of 10. Hence, multicollinearity is not a cause of concern for the FDI results.


in investment). However, it is worth noting that protein is crucial for growth andhealing. Thus, children and sick individuals have greater protein needs, in excessof the usual protein needs estimates. Considering that several of the countries inour sample feature large percentages of underweight children, as high as 40%in Laos, 24% in Mozambique, and 48% in Nepal18, any variation in protein con-sumption, however small, could have a large public health impact. Furthermore,to the extent that primary and manufacturing FDI often affect those employedwithin the particular sectors more than those outside, their effects on the pro-tein intake for the respective subpopulations will be larger than those for therest of the population.

Among the control variables, as expected, per capita real income has a signif-icant positive effect on both indicators of food security. A 1% rise in per capitaincome increases daily individual food intakes by 350 calories and 12 g of pro-tein. Government consumption also improves food security. A 1% rise in gov-ernment consumption increases daily nutritional intakes by 10 calories and0.5 g of proteins. Political instability, in contrast, significantly reduces foodsecurity, with a one-standard-deviation rise of instability decreasing average dailyintakes by approximately 113 calories and 4 g of protein. The estimated effectsof other control variables (e.g., democracy, growth, primary and manufacturingexports) do not attain statistical significance. This is not surprising given theconservative nature of the two-way fixed effects estimator. Interestingly, theeffects of primary and manufacturing exports on food security are much weakerthan those of the FDI variables. Thus, the evidence in previous research thatprimary commodity exports hurt food security is likely attributable to the associ-ated PFDI.

Are the results in Table 1 robust to additional control variables, alternative sta-tistical methods, and other measures of food security? We conduct extensive sen-sitivity analyses, but only report the FDI results in Table 2 below to save space.Details are available in our Web appendix.19

In Table 2, panels A and B report the FDI results when additional control vari-ables, including age dependency20, inflation, total aid per capita, food aid percapita,21 civil conflict (Gleditsch, Wallensteen, Eriksson, Sollenberg, and Strand2002), and economic crisis,22 are each added into the full models of calorie andprotein intakes in Table 1. These additional control variables do not change ourfindings regarding primary-sector and manufacturing FDI, except for PFDI incalorie model with food aid. Service-sector FDI appears to significantly reducecalorie intake, but remains insignificant for protein intake.23

Panel C in Table 2 reports the FDI results under three alternative estimationtechniques: first differencing, 5-year average, and three-stage least squares

18 These are percentages of children 0–59 months old who are moderately underweight (i.e., falling below )2standard deviations from the median weight-for-age of the reference population, according to the WHO). For coun-try-level data on child malnutrition, see UNICEF Statistics Web site http://www.childinfo.org/areas/malnutrition/underweight.php.

19 In one additional sensitivity analysis, only reported in our Web appendix, we estimated the separate effectsof agricultural and extractive FDI, together with manufacturing and service-sector FDI, on calorie and proteinintakes. The effects of SFDI remain positive and significant, whereas the effects of TFDI are negative and signifi-cant. The results also indicate that the negative effects of PFDI on food security are driven by FDI in agriculture.One important caveat is the drastic reduction in sample size because of limited industry-level FDI data.

20 Age dependency is the ratio of dependents (i.e., people younger than 15 or older than 64) to the working-age population, controlling for the effect of the population structure. Data are from the World Bank (2009).

21 Both total aid and food & development aid are measured as a share of the recipient’s GDP. Data are fromthe OECD Development Assistance Committee.

22 Coded 1 for years with negative economic growth and 0 otherwise, based on growth data from the WorldBank (2009).

23 These findings are also robust when we control for the countries’ core or periphery positions in the globaleconomy (measured as Burkhart and Lewis-Beck 1994) and for openness (trade over GDP). Results are notreported because of space.


(3SLS). The first differencing model employs first-differenced variables on bothsides of the equation, removing all country-specific heterogeneity and reflectingclosely the short-run dynamics of how changes in FDI affect changes in foodsecurity indicators. In contrast, in the 5-year average model, all variables are aver-aged over 5 years, a technique widely used in the economic growth literature toaverage out the idiosyncratic temporal noises and capture long-run patterns.Finally, the 3SLS model addresses the concern that PFDI, SFDI, and TFDI maybe endogenous to food security and lagging them may be insufficient for the

TABLE 2. Robustness Tests

Panel A Dependent variable: calorie intake per capita

Additional control Age-depend Inflation Total aid Food aid Civil conflict Econ-crisis

Primary-sector ForeignDirect Investment (PFDI)

)13.47** )13.16** )12.87** )8.72 )13.52** )13.21**7.38 6.98 6.95 10.07 7.26 7.04

Secondary-sector FDI (SFDI) 7.69** 8.25** 9.57*** 12.52** 6.93* 7.48**4.26 4.30 3.96 5.92 4.31 4.09

Tertiary-sector FDI (TFDI) )7.98* )7.89* )8.15* )12.13** )7.39* )7.62*4.02 4.03 4.26 4.68 4.25 4.09

Observations 439 436 400 309 439 439

Panel B Dependent variable: protein intake per capita

Additional control Age-depend Inflation Total aid Food aid Civil conflict Econ-crisis

PFDI )0.60*** )0.62*** )0.62*** )0.60** )0.63*** )0.62***0.25 0.22 0.22 0.31 0.23 0.22

SFDI 0.25* 0.27* 0.31** 0.35* 0.23* 0.25*0.17 0.17 0.17 0.25 0.17 0.16

TFDI )0.09 )0.12 )0.07 )0.11 )0.09 )0.100.18 0.17 0.19 0.21 0.18 0.18

Observations 440 437 401 310 440 440

Panel C Calories Proteins Calories Proteins Calories Proteins

Alternative estimators First differences Five-year averages 3SLS

PFDI )2.63 )0.07 44.81 1.52 )10.30* )1.52***3.45 0.15 35.08 1.99 7.16 0.32

SFDI 8.06** 0.19* 83.10*** 1.16 47.57*** 0.48*3.55 0.14 22.41 1.59 8.08 0.36

TFDI )3.36 )0.07 )66.24* )0.36 )31.06*** )0.432.33 0.10 33.51 2.32 7.98 0.36

Observations 375 375 69 70 357 358

Panel D % Undernourished % Underweight % Stunting % Wasting

PFDI )0.15 )0.21 )0.78*** 0.32***0.13 0.20 0.23 0.08

SFDI )2.31*** )0.35 )1.31** )0.40**0.47 0.83 0.76 0.21

TFDI 0.59*** 0.53*** 0.47*** 0.31***0.13 0.17 0.15 0.07

Observations 69 39 38 37

(Notes. Results for country dummies, year dummies, and control variables not reported.Below coefficients are robust standard errors, clustered over countries for all except 5-year average models.*p<.10, **p<.05, ***p<.01.)


problem. We thus estimate two four-equation systems using 3SLS, includingthree FDI equations plus a calorie or protein equation.24 Across the three estima-tors, the most robust finding is the statistically significant positive effects of man-ufacturing FDI on food security except in the 5-year average model of protein.The negative effects of PFDI are less robust, now significant only in the 3SLSmodels. The effects of TFDI are generally negative, but significant only in twomodels of calorie consumption.

Panel D presents the FDI results based on four other measures of food security:percent undernourished in the population; percent underweight in children, per-cent stunting in children, and percent wasting in children, measuring undernour-ishment in total population and in children younger than five.25 Because of theextremely small sample sizes of the four measures, we can only control for incomeper capita and whether a country is in the periphery of the global system (Burk-hart and Lewis-Beck 1994), using ordinary least squares (OLS) with robust stan-dard errors. Thus, one should interpret these results with caution and as largelyheuristic. Still, manufacturing FDI reduces undernourishment, with significanteffects for three of the four measures. PFDI significantly increases child wasting,yet significantly reduces child stunting, and has no statistical effect on childunderweight or undernourishment in the population. TFDI significantly increasesundernourishment for all four measures.

Conclusion

In 2006, the World Bank identified hunger as ‘‘the world’s most serious healthproblem and a key indicator of social development’’ because of its effects onhealth, educational achievement, gender inequality, and poverty’’ (Jenkins et al.2007:826). Food insecurity often results from inequitable access to resourcesand accounts for delays in development and the speed of economic conver-gence (Gollin, Parente, and Rogerson 2007). Food insecurity even transcendsthe domestic sphere, producing repercussions on international relations (Bryantand Kappaz 2005; Jenkins et al. 2007). Hunger crises may spill over into neigh-boring countries through refugees and force national governments and interna-tional organizations to intervene (Jenkins et al. 2007). Hunger can lead topolitical instability and manipulation, ranging from buying votes to joining rebelgroups and organized crime. Food security is clearly important, but relativelyunderstudied.

Building on the modernization and dependency arguments, limited previousresearch produced contradictory theoretical predictions and conflicting evidence.We offer a new argument that resolves the debate. We argue FDI in different sec-tors (primary, manufacturing, and services) influence food security differently.Through resource exploitation and misallocation, insignificant spillovers, negativelabor market effects, and environmental and demographic externalities, primaryFDI reduces food security in developing hosts. In contrast, manufacturing FDIincreases food security by stimulating upstream and downstream industries, facili-tating technology spillovers and human capital formation, raising employmentand wages, lowering prices of intermediate and final products, and increasingcompetition and dispersed benefits. The service-sector FDI can both benefit and

24 For each sectoral FDI, we use the sector-specific value-added over GDP as an instrument; sectoral FDI equa-tions also include democracy, instability, government consumption, income per capita, and trade. We also employed2SLS with robust standard errors and the results are similar. In addition to the four-equation system, we also esti-mated a five-equation system treating GDP per capita as endogenous as well, producing similar results.

25 Data are from FAOstat. The measure of underweight children (or stunting, or wasting) represents the per-centage of under-fives whose weight (or height or weight) is more than two standard deviations below the medianof weight-for-age (or height-for-age, or weight-for-height) of the reference population of WHO.


harm food security through competing mechanisms so that its net effect is theo-retically ambiguous.

We test these arguments using a new data set of annual sector-specific FDIinflows to 56 developing countries between 1981 and 2001. We focus on twoempirical indicators of food security: per capita caloric and protein intakes, usingthe country- and year-fixed effects least squares with robust standard errors.Overall, we find strong robust evidence that manufacturing FDI improves foodsecurity. We also find that primary-sector FDI reduces food security and service-sector FDI has an ambiguous but sometimes negative effect.

Our findings have important theoretical and policy implications. At least somemultinationals make good companions on the path to meeting the MillenniumDevelopment Goals. But this path can be treacherous because progress throughmanufacturing FDI could be undone by the primary-sector and service-sectorFDI. Developing countries ought to be selective in courting foreign investors andconsider not only the short-term benefits of foreign capital injections, but alsotheir medium- and long-run socioeconomic consequences. To improve individualwelfare, the resource-dependent countries should particularly seek to diversifytheir economies, increasing the share of manufacturing FDI while reducing theirdependence on FDI in natural resources and agriculture. Our findings also sug-gest that the effects of primary and manufacturing FDI are stronger than thoseof trade on food security. Hence, the blanket approach that all types of FDI andtrade are beneficial for alleviating food insecurity should be reconsidered.

Theoretically, our research offers a solution to a long-standing controversybetween the dependency and modernization arguments that have informed thecontemporary debate between the pro- and anti-globalization camps. Proponentsof modernization and globalization claim that FDI inflows benefit developingeconomies, whereas adherents of dependency and anti-globalization activistsassert that FDI generates negative consequences. Our theory reconciles these twocontradictory theoretical positions, specifying the conditions under which eachside’s argument can work. We believe that this approach can be fruitfullyextended to the debates on other salient and controversial issues such as incomeinequality, economic development, public health, and environmental degrada-tion. Empirically, the new data set we compile on sectoral FDI makes thesefuture extensions possible.

Going beyond sectoral differences, one may consider using industry-level datato parse out the effects of the service-sector FDI or study the different effects ofenclave-type investments vs. projects with strong upstream-downstream linkages.One could also study whether the skill intensities of FDI, which vary widelywithin the manufacturing and service sectors, have different effects on welfare.Furthermore, the rise of agribusiness over the past two decades suggests theneed to examine closely its effects, for the issue ties closely into food depen-dency and sovereignty. This exploration should go beyond FDI because, sincethe 1980s, contracting has become an equally important supply mechanism inthe oligopolistic global market for fresh fruit and vegetables (for example, Baas,van Potten, and Zwanenberg 1998; Dolan and Humphreys 2000). These develop-ments in agriculture largely stem from globalization and clearly affect the liveli-hood of rural populations in developing countries.

Finally, one may explore the reconceptualization of food security to accountfor all forms of malnourishment, including obesity. Child obesity is a growingconcern in developing countries and can have grave consequences for publichealth (for example, Monteiro, Moura, Conde, and Popkin 2004; Caballero2005; Prentice 2006). Because of the proletarization of the rural population andthe liberalization-induced replacement of traditional subsistence crops with highvalue-added crops for specialized markets (Ufkes 1993), local demand for food isincreasingly met through food imports. These carry not only higher prices but


also different nutritional profiles. In this context, a broadening of the food secu-rity concept to account for nutritional quality in addition to supply and access,as well as the continued study of this aspect of human welfare in conjunctionwith globalization, will be beneficial.

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