CH14 Foreign Finance, Investment and Aid - Ch14 Foreign...

Ch14. Foreign Finance, Investment and Aid: Controversies and
Opportunities
* Three main form of international flow of financial resources:
1. Private foreign direct and portfolio investment consisting of
a) Foreign direct investment by large multinational corporations
b) Foreign portfolio investment in LDC emerging credit and equity
markets by private institutions and individuals
2. Remittances of earning by international migrants (foreign aid, which used by many
developing countries)
3. Public and private development assistance from a) individual national governments
and multinational donor agencies and increasingly, b) private nongovernmental organization
working directly with development nations at the local level
* Private foreign direct investment and the multinational corporation
Multinational corporation (MNC) – defined as corporation or enterprise that conducts and
controls productive activities in more than one country; usually with large/ high income/GDP
corporation; present a unique opportunities but may pose serious problems for the many
developing counties in which they operate.
MNC are not in development business, their objective is to max return on capital; seek out
best profit opportunities and are largely unconcerned with issue such as poverty, inequality,
employment conditions and environmental problems
Foreign direct investment (FDI) –
recently
rapid growth in developing countries
- Majority of FDI flow from one country to another; and developing countries are heavily
concentrated on just a few destinations.
- Private capital gravitates toward countries and regions with the highest financial returns
and the greatest perceived safety
* MNC: size, patterns and trends
MNC Central characteristics: large size and worldwide operation and activities centrally
controlled by parents companies. They are the major forces in the rapid globalization of
world trade.
* Private foreign investment: Pros and cons for development
Pros:  private foreign investment is typically seen as a way of filling in gaps
- The saving investment gaps
- Foreign exchange/trade gaps (that is the gap between targeted foreign-exchange
requirement and those derived from net export earning +net public foreign aid)

- The revenue gap (that is the gap between targeted governmental tax revenue and
locally raised taxes
- The gap in management, entrepreneurship, technology, and skill presumed.
Cons:  Private foreign investments can also widening gaps
- MNC can raise a large fraction of their capital locally in the developing country itself,
and may lead to some crowding out of investment of local firms
- MNC initially improve foreign-exchange position, but in long-run impact may reduce
foreign-exchange earning on both current and capital accounts, wider gaps
between local and foreign companies