Chapter 14 Foreign Finance, Investment, and Aid: Controversies and Opportunities Copyright © 2009 Pearson Addison-Wesley All rights reserved Multinational Corporations (MNCs) • Corporations that conduct and control productive activities in more than one country • Large firms mostly from the U.S., Europe, and Japan • 350 MNCs control 40% of international trade in primary and secondary products Copyright © 2009 Pearson AddisonWesley All rights reserved 14-2 Copyright © 2009 Pearson AddisonWesley All rights reserved 14-3 Foreign Direct Investment (FDI) • FDI is investment by MNCs • FDI in LDCs rose from an annual rate of $11 billion in 1980 to $1,100 billion in 2000, but fell to $600 in 2005 • Major recipients of FDI are China, Brazil, Argentina, and Mexico Copyright © 2009 Pearson AddisonWesley All rights reserved 14-4 FDI Inflows, 1980–2005 Copyright © 2009 Pearson AddisonWesley All rights reserved 14-5 FDI Inflows to LDCs in Relation to Domestic Investment,1990–2003 Copyright © 2009 Pearson AddisonWesley All rights reserved 14-6 Copyright © 2009 Pearson AddisonWesley All rights reserved 14-7 FDI Debate: Pros FDI fills the • Saving gap: causing economic growth • Foreign-exchange gap: improving the BOP • Tax revenue gap: raising funds for public spending • Management gap: improving entrepreneurship • Technology gap: facilitating industrialization Copyright © 2009 Pearson AddisonWesley All rights reserved 14-8 FDI Debate: Cons MNCs • Don’t reinvest their profit • Return profits to their headquarters through transfer pricing • Create income for semi-skilled labor with low saving propensities • Deteriorate current account through importation of capital goods and intermediate products Copyright © 2009 Pearson AddisonWesley All rights reserved 14-9 FDI Debate: Cons MNCs • Deteriorate capital account through outflow of profits • Receive investment tax credits and are exempt from tariffs • Hinder development of domestic managerial skills • Gain monopoly power • Reinforce dualism, increase income inequality, and induce R-U migration • Influence local politics and support “friendly” Copyright © 2009 Pearson Addisongovernments Wesley All rights reserved 14-10 Foreign Aid All governmental resource transfers from one country to another • Expressed in real terms • Exclude military aid • Exclude transfers from private foreign investors • Must be allocated to economic development projects and programs Copyright © 2009 Pearson AddisonWesley All rights reserved 14-20 Kinds of Foreign Aid • Official Development Assistance: grants and loans • Tide aid: the donor requires the recipient to use the funds to import products from companies in the donor country • Untied aid: the donor provides assistance for developmental projects and plans Copyright © 2009 Pearson AddisonWesley All rights reserved 14-21 Donation of Foreign Aid • In monetary value, the U.S and Japan are the largest donor • In percentage of GDP, Sweden and Netherlands are the largest donor • In monetary value, FA increased from 1985 to 2005 • In percentage of GDP, FA fell from 0.35 in 1985 to Copyright 2009 Pearson Addison0.23 in©2002, but rose to 0.33 in 2005 Wesley All rights reserved 14-22 Table 14.2 Official Development Assistance Disbursements from Major Donor Countries, 1985, 2002, and 2005 Copyright © 2009 Pearson AddisonWesley All rights reserved 14-23 Allocation of Foreign Aid • In U.S $ per capita, the largest recipients are countries in the Middle East & North Africa and Sub-Saharan Africa • In percentage of GNI, the largest recipients are countries in Sub-Saharan Africa and the Middle East & North Africa and Copyright © 2009 Pearson AddisonWesley All rights reserved 14-24 Table 14.3 Official Development Assistance (ODA) by Region, 2005 Copyright © 2009 Pearson AddisonWesley All rights reserved 14-25 Allocation of Foreign Aid • In monetary value some of the largest recipient are China, Israel, Egypt, India, Bangladesh, and Indonesia • In percentage of GNI, some of the largest recipient are Mozambique, Nicaragua, Uganda, Ethiopia, and Bolivia Copyright © 2009 Pearson AddisonWesley All rights reserved 14-26 Reasons for FA Donation Economic • Assist with economic development and technology transfer • Help in case of emergency (e.g., natural disasters) • Assist with economic transition (e.g., former Soviet republics) Copyright © 2009 Pearson AddisonWesley All rights reserved 14-27 Reasons for FA Donation • Economics: FA fills the • Saving gap: causing economic growth • Foreign-exchange gap: improving the BOP • Technology gap: facilitating industrialization given absorptive capacity limitation Copyright © 2009 Pearson AddisonWesley All rights reserved 14-28 Reasons for FA Donation Political • Assist “friendly” government to succeed • Promote “national security” by shifting FA from one country or region to another Copyright © 2009 Pearson AddisonWesley All rights reserved 14-29 Criticism of the Donor Countries • FA won’t necessarily assist the poor people of the LDCs • FA assists non-democratic and corrupt LDC governments • FA is just a small percentage of GDP of donor countries Copyright © 2009 Pearson AddisonWesley All rights reserved 14-30 Criticism of the Donor Countries • FA is mostly in the form of loans rather than grants; FA is mostly tied • FA discourages production, competition, and self-reliance of the recipient nations • FA is abused as an election propaganda in both donor and recipient countries Copyright © 2009 Pearson AddisonWesley All rights reserved 14-31 Nongovernmental Organizations • Voluntary organizations that work with and on behalf of mostly grassroots and religious groups • Provide emergency relief, food, and medical supplies for humanitarian reasons • Work directly with people, not governments • Save the Children, CARE, World Vision, etc Copyright © 2009 Pearson AddisonWesley All rights reserved 14-32 New View of FA • Make aid need-based to reduce poverty and overpopulation • Provide more grants and less loans and more untied aid • Promote self-reliant development Copyright © 2009 Pearson AddisonWesley All rights reserved 14-33 New View of FA • Provide economic rather than political aid • Help expand and strengthen the NGOs • Understand that in the long-term, there can’t be a dual future for the mankind, one for the very rich and one for the very poor, without the proliferation of global or regional conflict Copyright © 2009 Pearson AddisonWesley All rights reserved 14-34 ... Foreign-exchange gap: improving the BOP • Tax revenue gap: raising funds for public spending • Management gap: improving entrepreneurship • Technology gap: facilitating industrialization Copyright © 2009 Pearson... the recipient to use the funds to import products from companies in the donor country • Untied aid: the donor provides assistance for developmental projects and plans Copyright © 2009 Pearson... allocated to economic development projects and programs Copyright © 2009 Pearson AddisonWesley All rights reserved 14- 20 Kinds of Foreign Aid • Official Development Assistance: grants and loans • Tide