Foreign Direct Investment

1
Foreign Direct Investment

• The Developmental Prayer

2
How is development achieved?

• The key to economic growth is
• Investment!
• Where does it come from?
• Savings
• Retained earnings
• Gifts
• Investments

3
Who is interested in anLDCs 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

4
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, etc.

5
What are the potential costs of foreign
investments?

• Dependence on external powers?
• Sweatshops and (child?) labor exploitation.
  Working conditions and wages.

6
What are the potential costs of foreign
investments?

• Environmental degradation

7
Can the costs be avoided?
What do the LDCs want?

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

8
Capital Inflow Types

• Bond finance.
• Countries sell bonds to private citizens
  (1918-1939, some popularity after 1990)
• Bank finance.
• (1970s and 80s) LDCs borrowed extensively from
  commercial banks.
• Official Lending
• Loans from the World Bank or Inter-American
  Development Bank

Federal Reserve Bank
New York Stock Exchange
9
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.

10
FDI or Portfolio Investments. Which way is the
better?

• FDI is done by the multinational firms to
  maintain control, to keep costs down.
• Why do we have firms?

Hong Kong
11
FDI or Portfolio Investments. Which way is the
better?

• Administrative costs (Here, were speaking of
  the firms costs of contracting, coordination,
  motivation, information provision, etc.)
• If high, go to the market.
• (The old question make or buy?)

12
FDI or Portfolio Investments. Which way is the
better?

• Transactions costs
• If the firm doesnt make it, it must find it,
  negotiate about a price, contract, motivate the
  contract, enforce the contract, etc.)
• If these costs are high, go to production by
  the firm.

13
FDI or Portfolio Investments. 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

14
FDI or Portfolio Investments. Which way is the
better?

• Portfolio capital comes without the multis
  demanding control.
• But it comes without technology and the
• transfusion of skills.
• And it can disappear quickly!

15
FDI or Portfolio Investments. Which way is the
better?

• The problem of financial crises, such as the
  Asian Crisis beginning in 1997.
• Insufficient returns on investments
  flight,

Singapore
16
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

17
So the disadvantage of FDI is managing multis

• Is this possible for LDCs?
• If not, does it matter?
• Why?
• There are still international agencies and
• International public opinion
• Times are changing.
• If not fast enough, will the LDCs try going it
  alone?
• Certainly not! FDI benefitscosts.