Foreign Direct Investment

Foreign Direct Investment A Prerequisite to Economic Growth (GDP)?

GDP Equation • GDP = consumption + investment+ government spending + (exports - imports)

Consumption • Total personal consumption expenditure, i.e., the purchase of currently produced goods and services out of income, out of savings (net worth), or from borrowed funds.

So…to Increase GDP… • GDP = consumption + investment + government spending + (exports - imports) • Maybe…Increase consumption.

GDP Equation • GDP = consumption + investment + government spending + (exports - imports)

Lithuania

Lithuania • GDP - real growth rate: • 7.5% (2005 est.)

Lithuania • Growing domestic consumption (but also a lot of increased investment) have furthered recovery. Trade has been increasingly oriented toward the West. Lithuania has gained membership in the WTO and joined the EU in May 2004. Privatization of the large, state-owned utilities, particularly in the energy sector, is nearing completion.

Consumption • Note: if consumption is of imported items, then these figures would cancel in the equation… • Also could mean spending savings….another problem… • (GDP =consumption+ investment + government spending + (exports- imports)

So…that leaves us with… • GDP = consumption + investment+ government spending + (exports - imports)

Bhutan

Bhutan • The economy, one of the world's smallest and least developed, is based on agriculture and forestry, which provide the main livelihood for more than 90% of the population. • Rugged mountains dominate the terrain and make the building of roads and other infrastructure difficult and expensive. • The economy is closely aligned with India's through strong trade and monetary links and dependence on India's financial assistance. • Bhutan's hydropower potential and its attraction for tourists are key resources.

Preserving Cultural Values • Each economic program takes into account the government's desire to protect the country's environment and cultural traditions. For example, the government, in its cautious expansion of the tourist sector, encourages visits by upscale, environmentally conscientious tourists.

Bhutan • Detailed controls and uncertain policies in areas like industrial licensing, trade, labor, and finance continue to hamper foreign investment.

But… • GDP - real growth rate:5.9% (2005 est.) • (ranks 199 in GDP per capita, but 71 in GDP growth rate)

WHY??? • VERY LITTLE FDI… • But… • Cultural reasons… • Non-materialistic • Few imports • Exports of lumber to India = $ • This $ goes towards Government Spending on Infrastructure

So…how can others replicate this? • Don’t import goods and especially not services! • Become non-materialistic • Establish a trade partner that wants your renewable natural resources. • Spend only on infrastructure.

Back to the Real World…

The Direction of FDI • Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in other markets • The US has been the favorite target for FDI inflows • While developed nations still account for the largest share of FDI inflows, FDI into developing nations has increased • Most recent inflows into developing nations have been targeted at the emerging economies of South, East, and Southeast Asia

FDI Flow by Region

What Encouragers FDI? • PREDICTABILITY! • Stable countries draw FDI. • Even Burma Had FDI amidst corruption (until sanctions) • Some market reform… • Communist states can draw FDI • Vietnam.

Legal institutions do play a crucial role in the process of market-oriented development • by protecting private rights, especially the property and contract rights of foreign investors • By creating the legal foundations for market-oriented reform

Conclusions • Investor experience suggests that: • Foreign direct Investment is NOT a prerequisite for growth of GDP. • Except in the real world. • Most of the time. • A conventional program of market-oriented legal reform is NOT a prerequisite for foreign investment

Foreign Direct Investment