1. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Chapter 15 Foreign Finance, Investment, and Aid: Controversies and Opportunities

2. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-2 The International Flow of Financial Resources n Two sources: –Private direct and portfolio investment –Public and private development assistance n How can these flows help development? n Can these flows harm development?

3. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-3 Private Foreign Direct Investment and the Multinational Corporation n Definition of MNC n Recent growth of foreign direct investment (FDI) n Private foreign investment: pros and cons

4. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-4 Figure 15.1

5. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-5 Figure 15.2

6. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-6 Table 15.1

7. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-7 Multinational Corporations: Size, Patterns, and Trends n MNCs are typically very large and are the major force in the rapid globalization of world trade.

8. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-8 Multinational Corporations: Size, Patterns, and Trends n MNCs are typically very large n Private foreign investment: some pros and cons for development (see table 15.1 from 9e) n Traditional arguments in favor of n Traditional arguments against n Reconciling pros and cons

9. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-9 Private Portfolio Investment n What is portfolio investment? n Private portfolio investment: boon or bane for LDCs?

10. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-10 Foreign Aid: The Development Assistance Debate n Conceptual and measurement problems n Amounts and allocations: public aid

11. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-11 Table 15.2

12. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-12 Table 15.3

13. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-13 Table 15.4

14. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-14 Table 15.4 (cont’d)

15. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-15 Foreign Aid: The Development Assistance Debate n Conceptual and measurement problems n Amounts and allocations: public aid n Why donors give aid- political and economic motivations.

16. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-16 Foreign Aid: The Development Assistance Debate The two-gap model: savings constraint Where I is domestic investment F is the amount of capital inflows s is the savings rate Y is national income (15.1)

17. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-17 Foreign Aid: The Development Assistance Debate The two-gap model: foreign-exchange constraint Where I is domestic investment F is the amount of capital inflows E is the level of exports Y is national income m 1 is the marginal import share m 2 is the marginal propensity to import (15.2)

18. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-18 Foreign Aid: The Development Assistance Debate n Conceptual and measurement problems n Amounts and allocations: public aid n Why donors give aid n Why LDC recipients accept aid n The growing role of nongovernmental organizations (NGOs) n The effects of aid

19. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-19 Conclusions: Toward a New View of Foreign Aid n Dissatisfaction among donors and recipients may create the possibility for new aid arrangements n Future aid is likely to be linked to market reforms and institutional capacity-building

20. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-20 Concepts for Review n Absorptive capacity n Aid weariness n Concessional terms n Economic transition n Emerging-country stock markets n Foreign aid n Foreign direct investment (FDI) n Foreign-exchange gap n Global factories n Multinational corporation (MNC) n Nongovernmental organizations (NGOs) n Official development assistance (ODA)

21. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 15-21 Concepts for Review (cont’d) n Portfolio investment n Productive resources n Savings gap n Technical assistance n Tied aid n Transfer pricing n Two-gap model