Foreign Investment: Correlation & Causation

I agree with Paul Staines of the Globalization Institute that foreign direct investment generally has positive effects. A good case can be made that foreign investors aid the growth of developing economies by introducing new competition, technologies, business practices, tacit knowledge, etc. However, the data cited by Staines in his latest post are insufficient to draw that conclusion.

The “rough correlation between the preponderance of multinationals operating in a given country and lower poverty indicators” does not imply causation. Lower poverty indicators likely correlate to greater foreign investment because many things that reduce poverty (credible governmental policymaking, an educated and healthy populace, transparent property rights, etc) also increase returns to investments. Does Staines want us to conclude that the United States was poor until a plethora of multinationals invested here?

My affinity to positive conclusions about the desirability of foreign investment in developing countries can’t override my instinct to point out that correlation doesn’t necessarily imply causation.