AEM 2300 final lecture review - 12/05/201020:20:00

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12/05/2010 20:20:00 Lecture 15 Balance of Payments and Foreign Exchange Markets 5 types of capital o Natural o Physical o Human o Financial o Social International Portfolio Investment  = investment to diversity investors portfolio, not involving  direct management control Foreign Direct Investment  = Flow of funding to establish or acquire and exert control of a  foreign firm or to expand or reinvest in said firm; established international threshold:  10%  ownership Benefits of FDI for Host Country o Increased production, exports and employment o Generation of tax revenues o Economies of scale – prices decrease o Human capital development – augment skills o Technology transfer o Increase competition w/ domestic industry may lower market power and decrease  prices Problems of FDI for Host Country o Adverse impact on TOT (if investment is sizable, goes into export sector or country is  large)
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o Instability in the exchange rate and BOP o “Crowding out” of direct investment and shifting of funds away from alternative  investments o Loss of control over domestic policy Reasons for International Capital o Maximize expected rate of return on capital o Diversity risk w/in international portfolio o Market expansion and diversification o Minimize costs of production (low wage countries) o Horizontal or vertical integration o Secure access to raw material o Secure access to promising markets Capital Account =  records financial transactions which affect balance of assets b/w  countries:  corporate stocks and bond, gov’t securities, real estate and commercial bank  deposits; US investments in foreign assets (capital outflow); foreign investments in US assets  (Capital inflow); includes private and central bank transactions World Trends for FDI o Industrialized countries are destination spots for FDI o 30% decline in FDIs in developed countries, but no decrease in developing countries o Asia dominance in developing countries for FDIs Capital Controls =  gov’t imposed barriers on capital outflows and inflows domestically Why do gov’ts impose capital controls? o Regulate foreign exchange and influence its balance of payments position and  domestic currency value o Encourage or discourage specific transactions (using a parallel exchange rate  system – specific type of managed (“dirty”) float o Enable domestic monetary or fiscal policy to be more flexible and powerful by limiting  scope of exchange rate policy
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o Limit financial market instability by regulating inflows/outflows Multinational Corporations =  often oligopolies selling differentiated products produced  under economies of scale:  Motor vehicles, chemicals, etc. 
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This note was uploaded on 08/12/2010 for the course AEM 2300 taught by Professor Lee,d.r. during the Spring '06 term at Cornell University (Engineering School).

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AEM 2300 final lecture review - 12/05/201020:20:00

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