Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 14 Foreign Finance, Investment, and Aid: Controversies and Opportunities.

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Chapter 14

Foreign Finance, Investment, and Aid: Controversies and Opportunities

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 14-2

The International Flow of Financial Resources

• Three sources:– Private direct and portfolio investment

– Remittances of earnings by international migrants

– Public and private development assistance


Private Foreign Direct Investment and the Multinational Corporation

• Definition of MNC– Recent growth of foreign direct investment (FDI)


Figure 14.1 FDI Inflows, 1980–2005


Figure 14.2 FDI Inflows to Developing Countries in Relation to Domestic Investment,1990–2003


Figure 14.3 Total Net Resource Flows to Developing Countries, 1990–2005


Private Foreign Direct Investment and the Multinational Corporation

• Multinational corporations: size, patterns, and trends

• Private foreign investment: pros and cons for development


Private Foreign Investment: Pros and Cons for Development

• Traditional arguments in support of private investment: Filling savings, foreign exchange, revenue, and management gaps– Four main arguments


Private Foreign Investment: Pros and Cons for Development

• Traditional arguments against private foreign investment: Widening gaps– Two main perspectives of the arguments:

Economic and ideological

– transfer pricing

• Reconciling pros and cons


Table 14.1 Seven Key Disputed Issues about the Role and Impact of Multinational Corporations in Developing Countries


Table 14.1 Seven Key Disputed Issues about the Role and Impact of Multinational Corporations in Developing Countries (continued)


Private Portfolio Investment: Boon or bane for LDCs?

• What is portfolio investment?

• Emerging-country stock markets


The role and Growth of Remittances

• Wage differences

• “Brain Drain”

• Uneven flow of remittances


Figure 14.4 Resource Flows to Developing Countries, 1990–2005


Figure 14.5 Top 20 Remittance Recipient Countries, 2004


Foreign Aid: The Development Assistance Debate

• Conceptual and measurement problems

• Amounts and allocations: public aid– Official development assistance (ODA)


Table 14.2 Official Development Assistance Disbursements from Major Donor Countries, 1985, 2002, and 2005


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



• Why donors give aid– political motivations

– economic motivations:• Foreign exchange constraints (two gap model)

• Growth and savings

• Technical assistance

• Absorptive capacity

• Self interest



The two-gap model:savings constraint

sYFI Where

I is domestic investmentF is the amount of capital inflowss is the savings rateY is national income

(15.1)



The two-gap model:foreign-exchange constraint

WhereI is domestic investmentF is the amount of capital inflowsE is the level of exportsY is national incomem1 is the marginal import sharem2 is the marginal propensity to

import

FEYmImm 221)( (15.2)



• Why LDC recipients accept aid

• The role of nongovernmental organizations (NGOs)

• The effects of aid


Conclusions: Toward a New View of Foreign Aid

• Dissatisfaction among donors and recipients may create the possibility for new aid arrangements

• Future aid is likely to be linked to market reforms and institutional capacity-building


Case Study: Botswana


Concepts for Review

• Absorptive capacity

• Aid weariness

• Concessional terms

• Economic transition

• Emerging-country stock markets

• Foreign aid

• Foreign direct investment (FDI)

• Foreign-exchange gap

• Global factories

• Multinational corporation (MNC)

• Nongovernmental organizations (NGOs)

• Official development assistance (ODA)


Concepts for Review (cont’d)

• Portfolio investment

• Productive resources

• Savings gap

• Technical assistance

• Tied aid

• Transfer pricing

• Two-gap model

Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 14 Foreign Finance, Investment, and Aid: Controversies and Opportunities.

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