1. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 14 Foreign Finance, Investment, and Aid: Controversies and Opportunities

2. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-2 The International Flow of Financial Resources Three sources: – Private direct and portfolio investment – Remittances of earnings by international migrants – Public and private development assistance

3. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-3 Private Foreign Direct Investment and the Multinational Corporation Definition of MNC – Recent growth of foreign direct investment (FDI)

4. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-4 Figure 14.1 FDI Inflows, 1980– 2005

5. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-5 Figure 14.2 FDI Inflows to Developing Countries in Relation to Domestic Investment,1990–2003

6. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-6 Figure 14.3 Total Net Resource Flows to Developing Countries, 1990–2005

7. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-7 Private Foreign Direct Investment and the Multinational Corporation Multinational corporations: size, patterns, and trends Private foreign investment: pros and cons for development

8. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-8 Private Foreign Investment: Pros and Cons for Development Traditional arguments in support of private investment: Filling savings, foreign exchange, revenue, and management gaps – Four main arguments

9. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-9 Private Foreign Investment: Pros and Cons for Development Traditional arguments against private foreign investment: Widening gaps – Two main perspectives of the arguments: Economic and ideological – transfer pricing Reconciling pros and cons

10. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-10 Table 14.1 Seven Key Disputed Issues about the Role and Impact of Multinational Corporations in Developing Countries

11. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-11 Table 14.1 Seven Key Disputed Issues about the Role and Impact of Multinational Corporations in Developing Countries (continued)

12. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-12 Private Portfolio Investment: Boon or bane for LDCs? What is portfolio investment? Emerging-country stock markets

13. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-13 The role and Growth of Remittances Wage differences “Brain Drain” Uneven flow of remittances

14. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-14 Figure 14.4 Resource Flows to Developing Countries, 1990–2005

15. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-15 Figure 14.5 Top 20 Remittance Recipient Countries, 2004

16. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-16 Foreign Aid: The Development Assistance Debate Conceptual and measurement problems Amounts and allocations: public aid – Official development assistance (ODA)

17. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-17 Table 14.2 Official Development Assistance Disbursements from Major Donor Countries, 1985, 2002, and 2005

18. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-18 Table 14.3 Official Development Assistance (ODA) by Region, 2005

19. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-19 Foreign Aid: The Development Assistance Debate Why donors give aid – political motivations – economic motivations: Foreign exchange constraints (two gap model) Growth and savings Technical assistance Absorptive capacity Self interest

20. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-20 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)

21. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-21 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)

22. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-22 Foreign Aid: The Development Assistance Debate Why LDC recipients accept aid The role of nongovernmental organizations (NGOs) The effects of aid

23. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-23 Conclusions: Toward a New View of Foreign Aid Dissatisfaction among donors and recipients may create the possibility for new aid arrangements Future aid is likely to be linked to market reforms and institutional capacity-building

24. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-24 Case Study: Botswana

25. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-25 Concepts for Review Absorptive capacity Aid weariness Concessional terms Economic transition Emerging-country stock markets Foreign aid Foreign direct investment (FDI) Foreign-exchange gap Global factories Multinational corporation (MNC) Nongovernmental organizations (NGOs) Official development assistance (ODA)

26. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-26 Concepts for Review (cont’d) Portfolio investment Productive resources Savings gap Technical assistance Tied aid Transfer pricing Two-gap model