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 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-3

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved FDI Inflows, 1980–2005

Copyright © 2009 Pearson Addison-Wesley. All rights reserved FDI Inflows to LDCs in Relation to Domestic Investment,1990–2003

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-7

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Seven Key Disputed Issues about the Role and Impact of MNCs in LDCs

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Seven Key Disputed Issues about the Role and Impact of MNCs in LDCs

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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 ) High risks due to frequent volatility Mexican currency crisis in Asian financial crisis: a net outflow of $12 billion in 1997 in contrast to a net capital inflow of $93 billion in 1996

Copyright © 2009 Pearson Addison-Wesley. All rights reserved

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Resource Flows to Developing Countries, 1990–2005

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Top 20 Remittance Recipient Countries, 2004

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Table 14.2 Official Development Assistance Disbursements from Major Donor Countries, 1985, 2002, and 2005

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Table 14.3 Official Development Assistance (ODA) by Region, 2005

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Reasons for FA Donation Economics: FA fills the Saving gap: causing economic growth Foreign-exchange gap: improving the BOP Technology gap: facilitating industrialization given absorptive capacity limitation

Copyright © 2009 Pearson Addison-Wesley. All rights reserved Reasons for FA Donation Political Assist “friendly” government to succeed Promote “national security” by shifting FA from one country or region to another

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2009 Pearson Addison-Wesley. All rights reserved 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