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Ecomomics evelopment 10th by p todaro and smith chapter 14

Chapter 14
Foreign Finance,
Investment, and
Aid: Controversies
and Opportunities

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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

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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

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FDI Inflows, 1980–2005

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FDI Inflows to LDCs in Relation to
Domestic Investment,1990–2003


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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

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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

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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”
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Seven Key Disputed Issues about the Role
and Impact of MNCs in LDCs

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Seven Key Disputed Issues about the Role
and Impact of MNCs in LDCs

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FDI Debate: Pros & Cons
Yes, MNCs


Create jobs and income



Transfer managerial skills and technology

But, MNCs


Invest in most profitable business venture



Transfer their profits out

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Private Portfolio Investment


Foreign investment in the LDCs’ financial markets: i.e., stocks, bonds, certificates
of deposit, commercial papers



Investment in bonds and CDs increased from $4 billion in 1989 to $54 billion in
1997



Investment is stocks rose from $2.2 billion in 1989 to $33 billion in 1997

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Private Portfolio Investment
The “emerging-country” financial markets of the NICs offered



High rates of return (e.g., 39% in Latin American stock markets in 1988-93)



High risks due to frequent volatility

• Mexican currency crisis in 1994-95
• Asian financial crisis: a net outflow of $12 billion
in 1997 in contrast to a net capital inflow of $93
billion in 1996

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The Role and Growth of Remittances


Wages and salaries made in a host country, but sent back to the home country



Wage differences



“Brain Drain”



Uneven flow of remittances

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Resource Flows to Developing
Countries, 1990–2005

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Top 20 Remittance Recipient Countries,
2004

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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

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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

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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
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Addison0.23 in©2002,
but rose
to 0.33 in 2005
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Table 14.2 Official Development Assistance
Disbursements from Major Donor Countries,
1985, 2002, and 2005

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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

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Table 14.3 Official Development
Assistance (ODA) by Region,
2005

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