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 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

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, 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?)

12. 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.

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 benefits>costs.