Foreign Investment and Aid

Negative effects of MNC on consumption

Importing intermediate goods Repatriation of profits

What are the main risks with private portfolio investment in developing countries?

In 1998, LDC stock market collapsed and foreign investors ran-->big losses to LDC firms. Highly volatile Respond to the global interest-rate differentials. They follow growth rather than lead it.

Positive effects of MNC on technology and knowledge transfer

More capital-intensive technology from investment Knowledge transfers from developed country to developing country

What is the existing evidence on the relationship between foreign aid and economic growth?

Burnside and Dollar (2000) Estimate the positive effect of aid on growth in developing countries with good policies. Good policies is an index that includes budget surplus, inflation rate, and trade openness (dummy variable)

What is the main finding of the 2003 study by Easterly "Can Foreign Aid Buy Growth"?

Effect varies on the definition of growth, aid, and policy. Highlight the issues with aid selectivity, conditionality, and evaluation. Critical of "aid can buy growth" Need to be realistic about what the small amount of foreign aid can achieve

Positive effects of MNC on consumption

FDI reduces current account deficit (balance of trade [E-I] + increase balance of factor income[FDI earnings] + cash transfers)

Explain the motives of developed countries in providing foreign aid

Foreign aid can give firms positive trade relations, political alliances, location advantages, and transfer price advantages

Positive effects of MNC on wages and inequality

Higher wages from technological/high skilled jobs More jobs available to reduce inequality

How did recent global financial crisis affect the developing countries?

Hit even harder than developed countries. Inflating rate rose 12% compared to 4% of developed countries. Industrial production and exports plummeted. However--quicker recovery than developed countries due to lessons learned (lowering debt burden and increase current account surplus)

Potential advantages of FDI for developing countries

Increased capital and knowledge Increased jobs (productivity)-->more income-->more aggregate demand Demand for other industries (spillovers) Lowers current account deficit Tax revenues

Explain how tied foreign aid leads to inefficiencies in recipient country's economy

Increased reliance on FDI as investment, which could stop funding anytime as in recessionary periods. More inequality can occur from the focused investment in certain areas of the country and the markets then become very segmented.

Positive effects of MNC on savings and investment

Investment leads to growth (Harrod-Domar model) More jobs allows for more income and savings or investment

Positive effects of MNC on domestic employment

Jobs are widely available as firms have the capital to pay for employees. Capital-intensive technologies also allow for more high-skilled jobs, giving employees greater income

Negative effects of MNC on domestic employment

Jobs can lead to a crowding out effect of domestic employees and not give an advantage of domestic employment expansion Worsens the urban-rural balance

Discuss the evolution of the various forms across the last decade

Look at graph from power point

Evaluate "If no other assistance is available, tied aid should be accepted anyway, on the grounds that developing countries should accept any help they can get"

Not true as aid can cause negative spillovers to the recipient country as well. Developing countries should use all of their resources to build up their economies, but sometimes foreign aid can be see as false indicators of economic improvement. Also, developing countries do not have the funds to help support areas that don't receive the high levels of investment (rural)

Why are developing countries more prone to financial crisis?

Often cannot use the same tools of dealing with financial crisis as developed countries do (i.e. monetary/fiscal policy) Limited borrowing and revenue collection to finance govt spending during recession. In the past, fiscal policy has tended to be pro-cyclical-->expanding booms, contracting recessions.

Potential negative effects of foreign direct investment for a developing country

Political dependence Increased inequality--clustered investment Increased opportunity cost of education if FDI increases demand for low-skilled jobs Lower income mobility/segmentation Crowding out--moving domestic firms Increased bribery Tax revenues may not increase (tax concessions and transfer prices)

What are the main forms through which foreign capital flows into LDCs?

Private foreign direct investment Private foreign portfolio (stocks/bonds) investment Public and Private development assistance (foreign aid) Remittances from migrants

Negative effects of MNC on technology and knowledge transfer

Segmented markets Worsen unemployment Increased inequality

Negative effects of MNC on savings and investment

Substitution for private savings Low reinvestment

Negative effects of MNC on tax collection

Tax concessions, rebates, public subsidies by host govt Transfer pricing: pricing of goods and services within MNC to minimize tax revenues

Positive effects of MNC on tax collection

Taxing profits More jobs gives more income to directly and indirectly tax

Negatives effects of MNC on wages and inequality

Those in more rural areas do not receive the investment benefits and become relatively more unequal to the urban citizen

What are the main causes of the 1997 Asian financial crisis?

Watch videos: Thailand, Indonesia, S Korea http://www.pbs.org/wgbh/commandingheights/lo/countries/index.html Thailand's economy was booming and people thought it would never end. Too much $$ invested in the dollar (fixed exchange rate to the dollar) --> economy did not keep up and the Thai currency (bot) was depreciated