Industrialization and the Role of Foreign Direct Investment

Industrialization is a process of social and economic change that transforms society from an agrarian economy to that based on the application of modern technology (Ocampo in: O’Connor and Kjollerstrom (eds) Industrial Development for the Twenty-First Century, Zed books, London, 2008; Tregenna in: Szirmai, Naude, and Alcorta (eds) In Pathways to Industrialization in the Twenty-First Century: New Challenges and Emerging Paradigms, Oxford University Press, London, 2013). Even though the industrial sector includes manufacturing, mining, and construction, it is largely associated with manufacturing. Since the industrial revolution, manufacturing has driven output and employment due to improvements in mechanization. Manufacturing is an important engine of economic growth and structural transformation. It enables a shift in resources from low-productivity activities such as rural agriculture and informal services to activities that increase productivity and output, largely due to improvements in the division of labor and changes in technology (Kaldor, Causes of the slow rate of economic growth of the United Kingdom: Aninaugural lecture, Cambridge UniversityPress, 1966; Ocampo, The quest for dynamicefficiency: Structural dynamics and economic growth in developing countries. InBeyond reforms: Structural dynamics andmacroeconomic vulnerability, StanfordUniversity Press, 2005). High-productivity jobs are often associated with higher wages (Weiss, Industrial policy inthe twenty-first century: Challenges for the future. In A. Szirmai, W. Naude,amp; L. Alcorta (Eds.), Pathways to industrialization in the twenty-first century: Newchallenges and emerging paradigms. Oxford University Press, 2013). Manufacturing also has positive ramifications on the rest of the economy by stimulating demand for primary goods and services (trade, finance, transportation). Moreover, it generates externalities in technology development, skill formation, and learning that enhance the economy’s overall competitiveness. Fragile states have weak productive capacities and tend to produce and export standard products with limited diversity and sophistication. For example, in livestock products, African countries export low-value-added products such as live animals, leather and hides (18 billion USD in 2012) while importing processed and high-value-added content such as dairy, prepared edible products (99 billion USD in 2012) (Yameogo et al., Food Policy, 49, 2014). Their chances of participating in global value chain activities are partly limited by a weak enabling environment, and a feeble private sector.