Foreign Finance,

Investment, and
Aid: Controversies and
Opportunities
 Quantitative change or expansion in a country's economy.
Economic growth is conventionally measured as the
percentage increase in gross domestic product (GDP) or
gross national product (GNP) during one year. Economic
growth comes in two forms: an economy can either grow
"extensively" by using more resources (such as physical,
human, or natural capital) or "intensively" by using the same
amount of resources more efficiently (productively). When
economic growth is achieved by using more labor, it does not
result in per capita income growth . But when economic
growth is achieved through more productive use of all
resources, including labor, it results in higher per capita
income and improvement in people's average standard of
living. Intensive economic growth requires economic
development.
 Three sources:
◦ Private direct and portfolio investment
◦ Remittances of earnings by international migrants
◦ Public and private development assistance

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 Foreign Direct Investment – when a firm
invests directly in production or other
facilities, over which it has effective control,
in a foreign country.
 International Monetary Fund (IMF)

guidelines consider an investment to be a

foreign direct investment if it accounts for
at least 10 percent of the foreign firm's
voting stock of shares..
 Foreign subsidiaries – overseas units or
entities.
 Host country – the country in which a foreign
subsidiary operates.
 Flow of FDI – the amount of FDI undertaken
over a given time.
 Stock of FDI – total accumulated value of
foreign-owned assets.
 Outflows/Inflows of FDI – the flow of FDI out
of or into a country.
 Horizontal FDI – the MNE enters a foreign
country to produce the same products
product at home.
 Conglomerate FDI – the MNE produces
products not manufactured at home.
 Vertical FDI – the MNE produces
intermediate goods either forward or
backward in the supply stream.
 Liability of foreignness – the costs of doing
business abroad resulting in a competitive
disadvantage.
 Flow and stock increased in the last 20 years
 In spite of decline of trade barriers, FDI has
grown more rapidly than world trade
because

◦ FDI is seen a a way of circumventing trade

barriers
◦ Dramatic political and economic changes in many
parts of the world
◦ Globalization of the world economy has raised
the vision of firms who now see the entire world
as their market
Copyright © 2009 Pearson Addison- 14-
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 Traditional arguments in support of private
investment:
 Filling savings,
 foreign exchange,
 revenue,
 management gaps

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 Traditional arguments against private foreign
investment: Widening gaps
 Lower Domestic saving
 Reduce Foreign exchange earnings
 Lesser contribution to taxes
 Lesser development of Management skills
 Wage Differentials
 Influence govt. policies

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 60
Inward
Foreign 50
FDI 2002 52.7
Direct
Investment
40
$Billions 30
20 16.6
13.6
10 8.1
3.6 4.1
0
India Poland Czech Mexico Brazil China
Republic
Country
 What is portfolio investment?

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 Conceptual problems
 Amounts and allocations: public aid
◦ Official development assistance (ODA)
◦ Foreign Aid
 Grants, which do not have to be repaid.
 Concessional loans, which have to be repaid but at
lower interest rates and over longer periods than
commercial bank loans.
 Contributions to multilateral institutions promoting
development, such as the United Nations,
International Monetary Fund, World Bank, and
regional development banks.
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Public services (Education, Health, Population, Water&
Sanitation, Government, Environmental)
Production (Transport & Storage, Energy, Agriculture,
Forestry, Fisheries, Industry, Mining)
Business services (Communications, Banking,
Financial, Business, Trade, Tourism)
Macroeconomic adjustment (Structural adjustment,
Debt relief)
Commodities (Food aid, other commodities)
Relief (relief food, Emergency Distress Relief)
Other multisectoral and unallocated
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 Why donors give aid
◦ political motivations
◦ economic motivations:
 Foreign exchange constraints
 Growth and savings
 Technical assistance
 Absorptive capacity

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 Why LDC recipients accept aid
 The role of nongovernmental organizations

(NGOs)
 The effects of aid

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