Chapter 14

Foreign Finance, Investment, and Aid: Controversies and Opportunities Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

The International Flow of Financial Resources

• Three sources: – Private direct and portfolio investment – Remittances of earnings by international migrants – Public and private development assistance Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Private Foreign Direct Investment and the Multinational Corporation • Definition of MNC – Recent growth of foreign direct investment (FDI) Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Figure 14.1 FDI Inflows, 1980 – 2005 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Figure 14.2 FDI Inflows to Developing Countries in Relation to Domestic Investment,1990 –2003 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Figure 14.3 Total Net Resource Flows to Developing Countries, 1990 –2005 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Private Foreign Direct Investment and the Multinational Corporation • Multinational corporations: size, patterns, and trends • Private foreign investment: pros and cons for development Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Private Foreign Investment: Pros and Cons for Development • Traditional arguments in support of private investment: Filling savings, foreign exchange, revenue, and management gaps – Four main arguments Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Private Foreign Investment: Pros and Cons for Development • Traditional arguments against private foreign investment: Widening gaps – Two main perspectives of the arguments: Economic and ideological – transfer pricing • Reconciling pros and cons Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Table 14.1 Seven Key Disputed Issues about the Role and Impact of Multinational Corporations in Developing Countries Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Table 14.1 Seven Key Disputed Issues about the Role and Impact of Multinational Corporations in Developing Countries (continued) Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Private Portfolio Investment: Boon or bane for LDCs?

• • What is portfolio investment?

Emerging-country stock markets Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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The role and Growth of Remittances

• • • Wage differences “Brain Drain” Uneven flow of remittances Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Figure 14.4 Resource Flows to Developing Countries, 1990 –2005 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Figure 14.5 Top 20 Remittance Recipient Countries, 2004 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Foreign Aid: The Development Assistance Debate

• • Conceptual and measurement problems Amounts and allocations: public aid – Official development assistance (ODA) Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Table 14.2 Official Development Assistance Disbursements from Major Donor Countries, 1985, 2002, and 2005 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Table 14.3 Official Development Assistance (ODA) by Region, 2005 Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Foreign Aid: The Development Assistance Debate

• Why donors give aid – political motivations – economic motivations: • Foreign exchange constraints (two gap model) • Growth and savings • Technical assistance • Absorptive capacity • Self interest Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Foreign Aid: The Development Assistance Debate

The two-gap model:

savings constraint I



F



sY

(15.1) Where

I

is domestic investment

F

is the amount of capital inflows

s

is the savings rate

Y

is national income Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Foreign Aid: The Development Assistance Debate

The two-gap model:

foreign-exchange constraint

(

m

1 

m

2 )

I



m

2

Y



E



F

Where

I

is domestic investment

F

is the amount of capital inflows

E

is the level of exports

Y

is national income

m 1 m 2

is the marginal import share is the marginal propensity to import Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

(15.2)

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Foreign Aid: The Development Assistance Debate

• • Why LDC recipients accept aid The role of nongovernmental organizations (NGOs) • The effects of aid

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Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Conclusions: Toward a New View of Foreign Aid

• Dissatisfaction among donors and recipients may create the possibility for new aid arrangements • Future aid is likely to be linked to market reforms and institutional capacity-building

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Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Case Study: Botswana

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

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Concepts for Review

• • • • • Absorptive capacity Aid weariness Concessional terms Economic transition Emerging-country stock markets • • Foreign aid Foreign direct investment (FDI) Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

• • • Foreign-exchange gap Global factories • Multinational corporation (MNC) • Nongovernmental organizations (NGOs) Official development assistance (ODA)

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Concepts for Review (cont’d)

• • • Portfolio investment Productive resources Savings gap • • • • Technical assistance Tied aid Transfer pricing Two-gap model

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