Lecture 15 - Spring 2010 - Lecture 15 International Factor...

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Lecture 15 1 of International Factor Movements: Role of Capital in Economic Growth Capital assets – the engine of growth Five types of capital: 1. Natural capital 2. Physical capital 3. Financial capital 4. Human capital 5. Social capital Financial capital markets serve to pool domestic savings, attract foreign capital, intermediate between lenders and borrowers, and provide financing to entrepreneurs, all in order to promote economic growth. Professor David Lee AEM-ECON 2300
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Lecture 15 2 of Professor David Lee AEM-ECON 2300 International capital flows International portfolio investment : investment to diversify investor‟s portfolio, not involving direct management control versus foreign direct investment (FDI): flow of funding (through lending and/or purchase) to establish or acquire and exert control of a foreign firm, or to expand or reinvest in said firm. Established international threshold: 10% ownership
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Lecture 15 3 of Professor David Lee AEM-ECON 2300 International capital flows Motivations for international capital flows: 1. Maximize expected rate of return on capital 2. Diversify risk within international portfolio (explains two-way investment flows) 3. Market expansion and diversification 4. Minimize costs of production (low wage countries) 5. Horizontal or vertical integration 6. Secure access to raw materials 7. Secure access to promising markets
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Lecture 15 4 of Professor David Lee AEM-ECON 2300 Data from World Investment Report , U.N. Conference on Trade and Development, 2009
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Lecture 15 5 of Professor David Lee AEM-ECON 2300 Foreign Direct Investment (FDI) part of a country’s Capital Account Capital account records financial transactions which affect balance of assets between countries: corporate stocks and bond, government securities, real estate, and commercial bank deposits. e.g., U.S. investments in foreign assets (capital outflow ); foreign investments in U.S. assets (capital inflow ) Includes both private sector and central bank transactions Other types of financial transactions include: debt forgiveness, transfers of migrants‟ financial assets, sales and purchases of rights to patents, copyrights, trademarks, franchises, leases.
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Lecture 15 6 of Professor David Lee AEM-ECON 2300 FDI fluctuates with world economic growth Industrialized economies are the destination for most FDI
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Lecture 15 7 of Professor David Lee AEM-ECON 2300
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Lecture 15 8 of Professor David Lee AEM-ECON 2300 30% drop betw. 2007 & 2008!
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Lecture 15 9 of Professor David Lee AEM-ECON 2300 1) No drop in FDI in dev.cos. 2) Dominance of Asia
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Lecture 15 10 of Professor David Lee AEM-ECON 2300
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Lecture 15 11 of Top 10 Countries in Terms of Country FDI Outflows , 2008 Rank/Country Value (billion $) 1 USA 312.0 2 France 222.0 3 Germany 156.0 4 Japan 128.0 5 U.K. 111.0 6 Switzerland 86.0 7 Canada 78.0 8 Spain 77.0 9 Belgium 68.0 10 Hong Kong, China 60.0 Professor David Lee AEM-ECON 2300 Source: UNCTAD, World Investment Report 2009
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Lecture 15 - Spring 2010 - Lecture 15 International Factor...

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