Globalization Lecture 3: International Financial Flows/Globalization and Poverty/Labor Markets and Migration

Question 1

What are two types of Foreign Investment?

Answer 1

1. Foreign Direct Investment

2. Portfolio Investment

Question 2

What’s a Foreign Direct Investment (FDI)

Answer 2

When a firm acquires a majority or a controlling interest in a foreign firm. A firm making a FDI is often called a MNC.

Question 3

What is a Portfolio Investment

Answer 3

Investment not involving a majority or controlling interest.

Question 4

Why should firms invest in Developing countries?

Answer 4

• To make profit.
• Investment happens when the real interest rate is positive.
• Ownership advantage – the firm owns a proprietary asset such as a superior product, production process, patent, trademark that gives it a comparative advantage
• Location advantage – prefer to produce abroad rather than export because of factors such as a large host country market, trade costs such as tariffs
• Internalization advantage - the firm needs to maintain tight control over knowledge-based capital or the value can be easily dissipated

Question 5

why is Foreign Investment Important?

Answer 5

• provide foreign exchange
• brings revenue by raising taxes for MNCs to operate
• MNCs provide expertise, and facilitates transfer of knowledge.

Question 6

What’s the impact of FDI on developing countries?

Answer 6

• On average higher pay and training opportunities, however, they do not enjoy universal protection over local entrepreneurs.
• Impact on overall rates of economic growth depends on other unrelated factors. Studies have found that in countries following export promotion policies, a rise in the ratio of foreign investment to GDP raised GDP growth more than in countries following import substitution policies. Others have found that responsiveness of GDP per capita to FDI depends on the level of the country’s financial development.

Question 7

Is Economic Aid efficient?

Answer 7

• Its not clear whether aid has an effect on econmic growth.
• Research shows that aid tends to more effective in well-governed countries with sound institutions and good macroeconomic management. This is specially the case when aid is channelled into investment in infrastructure; and when there is clear alignment of objectives between donors and recipients.
• Collier suggests that aid may have added around 1% to the annual growth rates of post-conflict countries. This aid may have helped such countries from falling apart giving them a chance to re-establish a measure of economic order.