Foreign Direct Investment

The Developmental Prayer

How is development achieved?• The key to economic

growth is…Investment!

• Where does it come from?SavingsRetained earningsGiftsInvestments

Who is interested in anLDC’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

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.

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

Can the costs be avoided? • 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 degradationThe LDCs are less concerned about this than we are. Why?How can the appropriate outcomes be achieved?

What do the LDCs want?

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 LendingLoans from the World Bank or Inter-American Development Bank

Federal Reserve Bank

New York Stock Exchange

Capital Inflow Types

• Direct Foreign InvestmentA firm mostly owned by foreign residents founds a subsidiary firm domestically.

• Portfolio investment in ownership of firmsPurchasing shares of stock in LDCs (often privatized) firms.

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

FDI or Portfolio Investments. Which way is the better?

Administrative costs (Here, we’re speaking of the firm’s costs of contracting, coordination, motivation, information provision, etc.)

If high, go to the market.(The old question: make or

buy?)

FDI or Portfolio Investments. Which way is the better?

Transactions costs If the firm doesn’t 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.

FDI or Portfolio Investments. Which way is the better?

Benefits. These can be shared with the LDC

Ban them?Regulate them?Domestically and throughinternational agencies?

Promoting competition may be best

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!

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

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

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 benefits>costs.