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Foreign Direct Investment

The Developmental Prayer

How is development achieved? • The key to economic growth is… Investment! • Where does it come from? Savings Retained earnings Gifts .

Who is interested in an LDC’s economic growth? • Who is interested enough to pay for such growth? • The “Multis” • What are the multis’ interests? • Low labor costs • Profits • Avoiding a bad reputation .

. etc.What are the potential benefits of foreign investments? • Growth of capital stock • Incorporated technologies • Possibilities to gain managerial and labor skills • Higher incomes and economic development. (Taxation for public sector) • Finance education • Finance health • Finance infrastructure development.

.What are the potential costs of foreign investments? • Dependence on external powers? • Sweatshops and (child?) labor exploitation. Working conditions and wages.

What are the potential costs of foreign investments? • Environmental degradation .

Why? • Environmental degradation The LDCs are less concerned about this than we are. Working conditions and wages. Why? How can the appropriate outcomes be achieved? .Can the costs be avoided? What do the LDCs want? • Dependence on external powers? “Dependence” may be better than continual. • Sweatshops and (child?) labor exploitation. grinding poverty. The LDCs want low costs. too.

• Bond finance. Countries sell bonds to private citizens (19181939. (1970s and 80s) LDCs borrowed extensively from commercial banks. some popularity after 1990) • Bank finance. • Official Lending Loans from the World Bank or InterCapital Inflow American Development Bank Types Federal Reserve Bank New York Stock Exchange .

Capital Inflow Types • Direct Foreign Investment A firm mostly owned by foreign residents founds a subsidiary firm domestically. . • Portfolio investment in ownership of firms Purchasing shares of stock in LDCs (often privatized) firms.

FDI or Portfolio Investments. to keep costs down. • Why do we have firms? Hong Kong . Which way is the better? • FDI is done by the multinational firms to maintain control.

we’re speaking of the firm’s costs of contracting. coordination. (The old question: make or buy?) . etc.) If high. Which way is the better? Administrative costs (Here. go to the market. information provision. motivation.FDI or Portfolio Investments.

) If these costs are high. contract.FDI or Portfolio Investments. negotiate about a price. . go to production by the firm. Which way is the better? Transactions costs If the firm doesn’t make it. it must find it. enforce the contract. motivate the contract. etc.

Which way is the better? Benefits. These can be shared with the LDC Ban them? Regulate them? Domestically and through international agencies? Promoting competition may be best .FDI or Portfolio Investments.

FDI or Portfolio Investments. But it comes without technology and the transfusion of skills. Which way is the better? Portfolio capital comes without the “multis” demanding control. And it can disappear quickly! .

Insufficient returns on investments flight. such as the Asian Crisis beginning in 1997. Singapore . Which way is the better? The problem of financial crises.FDI or Portfolio Investments.

FDI or Portfolio Investments. Which way is the better? • • • • • Stock prices collapse Withdrawals exchanged for $ Crash of local currency value Imports now very expensive Severe recession .

does it matter? Why? There are still international agencies and International public opinion Times are changing. will the LDCs try going it alone? Certainly not! FDI benefits>costs. If not fast enough. .So the disadvantage of FDI is managing “multis” • • • • • • • • Is this possible for LDCs? If not.