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Chapter 14 Foreign Capital and Aid. Foreign Direct Investment. Total resource flows consist of Portfolio investment Official flows Foreign Direct Investment by multinational corporations. Multinationals – Size and Patterns.
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Chapter 14 Foreign Capital and Aid
Foreign Direct Investment • Total resource flows consist of • Portfolio investment • Official flows • Foreign Direct Investment by multinational corporations
Multinationals – Size and Patterns • Multinational assets are in many cases higher than the GDP of many countries • Five of the top 10 MNCs have combined sales greater than GNI of India • Sales of any two of them are greater than GNI of Indonesia • South-South investment is increasing
Contribution of Foreign Direct Investment (MNCs) • According to two-gap model, foreign capital fills in ‘Saving-gap’ and ‘Foreign-exchange gap’ • Saving gap is the difference between domestic saving and domestic investment • F = I – S • Foreign-exchange gap is the difference between targeted foreign-exchange requirements and export earnings • (m1 – m2)I + m2Y – E ≤ F • m1 = marginal import share of investment • m2 = MP to import out of income • MNCs contribute to LDC’s development in terms of knowledge and technology and management
Disadvantages of Foreign Direct Investment (MNCs) • Discourage domestic saving and investment • MNCs import intermediate goods and capital goods and adversely affect balance of payments • Employment in low-skill areas do not create high level management jobs • MNC’s dominance discourages local entrepreneurship and small businesses • They bring inappropriate technologies
Disadvantages of Foreign Direct Investment (MNCs) • Demand for consumer goods is created while LDC’s need critical inputs (fertilizers, machines etc.) for industrialization • Compete for scarce resources – Coca Cola using up clean water • Political influence on government and elections • Contribute to inequalities by locating in and developing urban areas (Table 4.1)
Foreign Aid • Tied aid is conditional • Non-tied aid is a general purpose grant • Foreign aid also fills two gaps discussed earlier • Foreign aid can successfully generate growth if • Complementary resources are available • Country has absorptive capacity • Taiwan and South Korea used foreign aid successfully