USD ECON 337 - Chapter 14 Foreign Capital and Aid

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Slide 1Slide 2Multinationals – Size and PatternsContribution of Foreign Direct Investment (MNCs)Disadvantages of Foreign Direct Investment (MNCs)Slide 6Foreign AidChapter 14Foreign Capital and AidForeign Direct InvestmentTotal resource flows consist ofa) Portfolio investmentb) Official flowsc) Foreign Direct Investment by multinational corporationsMultinationals – Size and Patterns•Multinational assets are in many cases higher than the GDP of many countries•Five of the top 10 MNCs have combined sales greater than GNI of India•Sales of any two of them are greater than GNI of Indonesia•South-South investment is increasingContribution of Foreign Direct Investment (MNCs)•According to two-gap model, foreign capital fills in ‘Saving-gap’ and ‘Foreign-exchange gap’•Saving gap is the difference between domestic saving and domestic investmentF = I – S •Foreign-exchange gap is the difference between targeted foreign-exchange requirements and export earnings(m1 – m2)I + m2Y – E ≤ Fm1 = marginal import share of investmentm2 = MP to import out of income• MNCs contribute to LDC’s development in terms of knowledge and technology and managementDisadvantages of Foreign Direct Investment (MNCs)•Discourage domestic saving and investment•MNCs import intermediate goods and capital goods and adversely affect balance of payments•Employment in low-skill areas do not create high level management jobs•MNC’s dominance discourages local entrepreneurship and small businesses•They bring inappropriate technologiesDisadvantages of Foreign Direct Investment (MNCs)•Demand for consumer goods is created while LDC’s need critical inputs (fertilizers, machines etc.) for industrialization•Compete for scarce resources – Coca Cola using up clean water•Political influence on government and elections•Contribute to inequalities by locating in and developing urban areas (Table 4.1)Foreign Aid•Tied aid is conditional•Non-tied aid is a general purpose grant•Foreign aid also fills two gaps discussed earlier•Foreign aid can successfully generate growth ifoComplementary resources are availableoCountry has absorptive capacityoTaiwan and South Korea used foreign aid


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USD ECON 337 - Chapter 14 Foreign Capital and Aid

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