copyright © 2009 pearson addison-wesley. all rights reserved. chapter 14 foreign finance,...

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Chapter 14

Foreign Finance, Investment, and Aid: Controversies and Opportunities

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-2

Multinational Corporations (MNCs)

• Corporations that conduct and control productive activities in more than one country

• Large firms mostly from the U.S., Europe, and Japan

• 350 MNCs control 40% of international trade in primary and secondary products


Foreign Direct Investment (FDI)

• FDI is investment by MNCs

• FDI in LDCs rose from an annual rate of $11 billion in 1980 to $1,100 billion in 2000, but fell to $600 in 2005

• Major recipients of FDI are China, Brazil, Argentina, and Mexico


FDI Inflows, 1980–2005


FDI Inflows to LDCs in Relation to Domestic Investment,1990–2003


FDI Debate: Pros

FDI fills the

• Saving gap: causing economic growth

• Foreign-exchange gap: improving the BOP

• Tax revenue gap: raising funds for public spending

• Management gap: improving entrepreneurship

• Technology gap: facilitating industrialization


FDI Debate: Cons

MNCs

• Don’t reinvest their profit

• Return profits to their headquarters through transfer pricing

• Create income for semi-skilled labor with low saving propensities

• Deteriorate current account through importation of capital goods and intermediate products


FDI Debate: Cons

MNCs

• Deteriorate capital account through outflow of profits

• Receive investment tax credits and are exempt from tariffs

• Hinder development of domestic managerial skills

• Gain monopoly power

• Reinforce dualism, increase income inequality, and induce R-U migration

• Influence local politics and support “friendly” governments


Seven Key Disputed Issues about the Role and Impact of MNCs in LDCs


FDI Debate: Pros & Cons

Yes, MNCs

– Create jobs and income

– Transfer managerial skills and technology

But, MNCs

– Invest in most profitable business venture

– Transfer their profits out


Private Portfolio Investment

• Foreign investment in the LDCs’ financial markets: i.e., stocks, bonds, certificates of deposit, commercial papers

• Investment in bonds and CDs increased from $4 billion in 1989 to $54 billion in 1997

• Investment is stocks rose from $2.2 billion in 1989 to $33 billion in 1997


Private Portfolio Investment

The “emerging-country” financial markets of the NICs offered

• High rates of return (e.g., 39% in Latin American stock markets in 1988-93)

• High risks due to frequent volatility• Mexican currency crisis in 1994-95

• Asian financial crisis: a net outflow of $12 billion in 1997 in contrast to a net capital inflow of $93 billion in 1996


The Role and Growth of Remittances

• Wages and salaries made in a host country, but sent back to the home country

• Wage differences

• “Brain Drain”

• Uneven flow of remittances


Resource Flows to Developing Countries, 1990–2005


Top 20 Remittance Recipient Countries, 2004


Foreign Aid

All governmental resource transfers from one

country to another

• Expressed in real terms

• Exclude military aid

• Exclude transfers from private foreign investors

• Must be allocated to economic development projects and programs


Kinds of Foreign Aid

• Official Development Assistance: grants and loans

• Tide aid: the donor requires the recipient to use the funds to import products from companies in the donor country

• Untied aid: the donor provides assistance for developmental projects and plans


Donation of Foreign Aid

• In monetary value, the U.S. and Japan are the largest donor

• In percentage of GDP, Sweden and Netherlands are the largest donor

• In monetary value, FA increased from 1985 to 2005

• In percentage of GDP, FA fell from 0.35 in 1985 to 0.23 in 2002, but rose to 0.33 in 2005


Table 14.2 Official Development Assistance Disbursements from Major Donor Countries, 1985, 2002, and 2005


Allocation of Foreign Aid

• In U.S. $ per capita, the largest recipients are countries in the Middle East & North Africa and Sub-Saharan Africa

• In percentage of GNI, the largest recipients are countries in Sub-Saharan Africa and the Middle East & North Africa and


Table 14.3 Official Development Assistance (ODA) by Region, 2005


Allocation of Foreign Aid

• In monetary value some of the largest recipient are China, Israel, Egypt, India, Bangladesh, and Indonesia

• In percentage of GNI, some of the largest recipient are Mozambique, Nicaragua, Uganda, Ethiopia, and Bolivia


Reasons for FA Donation

Economic

• Assist with economic development and technology transfer

• Help in case of emergency (e.g., natural disasters)

• Assist with economic transition (e.g., former Soviet republics)



• Economics: FA fills the

• Saving gap: causing economic growth

• Foreign-exchange gap: improving the BOP

• Technology gap: facilitating industrialization given absorptive capacity limitation



Political

• Assist “friendly” government to succeed

• Promote “national security” by shifting FA from one country or region to another


Criticism of the Donor Countries

• FA won’t necessarily assist the poor people of the LDCs

• FA assists non-democratic and corrupt LDC governments

• FA is just a small percentage of GDP of donor countries


Criticism of the Donor Countries

• FA is mostly in the form of loans rather than grants; FA is mostly tied

• FA discourages production, competition, and self-reliance of the recipient nations

• FA is abused as an election propaganda in both donor and recipient countries


Nongovernmental Organizations

• Voluntary organizations that work with and on behalf of mostly grassroots and religious groups

• Provide emergency relief, food, and medical supplies for humanitarian reasons

• Work directly with people, not governments

• Save the Children, CARE, World Vision, etc.


New View of FA

• Make aid need-based to reduce poverty and overpopulation

• Provide more grants and less loans and more untied aid

• Promote self-reliant development


New View of FA

• Provide economic rather than political aid

• Help expand and strengthen the NGOs

• Understand that in the long-term, there can’t be a dual future for the mankind, one for the very rich and one for the very poor, without the proliferation of global or regional conflict

copyright © 2009 pearson addison-wesley. all rights reserved. chapter 14 foreign finance,...

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