Compass Money: Dr. Sonal Pandya Discusses the Impact of FDI on Race

Dr. Sonal Pandya discusses her research on the relationship between race and FDI (Screenshot from the event posted on Youtube).

The Mortara Center at Georgetown University hosted Dr. Sonal Pandya of the University of Virginia on February 18 as part of a series of talks for the Global Political Economy Project-Race (GPEP-R). Focusing on its relationship with race, Pandya described foreign direct investment (FDI) as a powerful conduit to positively shape egalitarian norms, but she also argued that it also magnifies racial inequality. 

FDI, according to Pandya, is global production within a single firm. Instead of relying on other suppliers, firms expand their production across countries to retain control over their advanced technology. 

Thus, Pandya explained that FDI can be a “catalyst” to introduce new technologies in host countries, increasing both demand and wages for skilled workers. But because skilled workers are disproportionately from the dominant group, Pandya argued that FDI magnifies existing racial inequalities in the workforce by placing a premium on skilled labor. 

To attract FDI, officials frequently use tax breaks at the expense of reducing public spending, becoming less inclined to enforce safety or environmental regulations. Pandya pointed to cases where governments let multinational corporations (MNCs) displace Indigenous populations so firms can extract resources or set up new production sites. “To the extent that certain groups are marginalized and have fewer rights, they're probably at a greater risk of having this happen to them,” remarked Pandya. 

Fortunately, FDI is not all doom and gloom. In countries with regressive social structures, Pandya argued FDI can be a powerful tool to positively reshape norms and practices. Because their home country often has stricter anti-discrimination laws, MNCs tend to have more equal hiring practices embedded in their culture. Moreover, local social categories may be less meaningful to them (e.g India’s caste system). As a result, MNCs are more likely than their local counterparts to hire minorities who have historically faced barriers to labor participation. Because FDI raises wages, Pandya explains that it “becomes more expensive for [local companies] to discriminate,” putting pressure on firms to pursue more equal hiring practices. 

Crucially, these norms can spill over into other parts of people’s lives. “There's a long history of research showing how labor force participation can facilitate political participation,” said Pandya. In developing countries, MNCs tend to have more decentralized and collaborative production practices, which can empower workers and give them a voice. “In fact, there's research that shows that exposure to those sorts of norms in the workplace translates into different dynamics within households,” remarked Pandya.

Even more intriguing is how MNCs can align government interests with social justice. Strategies to promote equality “rely really heavily on governments making a genuine commitment of resources and effort,” noted Pandya, “but it might be the case that people in government are disproportionately from the dominant group and have a vested interest in maintaining the status quo.” For example, she pointed out how politicians in India have had little incentive to address the country’s deep gender inequality. But because FDI is so lucrative, Pandya remarked that officials promote greater equality “almost in spite of themselves” by attracting MNCs. 

However, Pandya conveyed hesitance towards relying on MNCs as the sole “agent of social change” because their incentives are not firmly aligned with social justice, making them unreliable. Yet, Pandya expressed that “FDI is notable because it combines these norms with those income effects… if multinationals are more likely to hire people from marginalized groups.. and expose them to norms that empower them, we think that that's going to be a more robust source of empowerment.”