International Finance and Globalization

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Executive Summary

This paper discusses the statement of M. Escaleras and C. Register in terms of of Foreign Direct Investments and then demonstrates the  understanding of FDI and its impact on the economy, along with evaluation crigeria. The theme of discussion will cover both the increase in Foreign Direct Investment and Natural Disasters. 

Introduction

In this assignment, the authorwill critically evaluate the statement of M. Escaleras and C. Register as presented above. The criteria of evaluation covers Foreign Direct Investments and then expands to demonstrate its impact on the economy. Later, the author will explain how (and in which form) FDI is associated with ecological issues. In second part, the paper will aim to discuss the second aspect of the sentence, natural disasters.

Foreign Direct Investment

Roles of Foreign Investment

Foreign Direct Investment (FDI) is one form of investment that aims to create a lasting interest for the country’s economy or long-term business development and is carried out by a foreign investor in the host country. The literature and empirical evidence identifies FDI as an important catalyst for development, as it has the potential to generate employment, increase savings and foreign exchange earnings, stimulate competition, encourage the transfer of new technologies and boost exports; positively affecting all productive and competitive environment of a country (Joseph 2002; Edward 2008; Anon, 2009).

The foreign direct investment plays the roles,as follows;

  • An excellent source of additional funds for the expansion and renovation of fixed capital investment programs and projects that provide aid and serve towards economic recovery, as well as the saturation of the domestic market with competitive services and products.
  • Can introduce advanced technologies and modern methods of marketing and management, as well as know-how.
  • FDI is usually directed at specific goals and objects and it is accompanied by an increase of staff, which effectively uses a variety of new technologies, international contracts, market mechanisms, and the like.
  • Allows to consolidate and develop experience of the companies that are operating in a market economy, by the other "rules", which serves to increase the flow of foreign direct investment and gives foreign investors more confidence in terms of refund of money deposited with a good profit. It also allows accelerating the formation of the national economy of a favorable investment climate that is favorable for both domestic and foreign investors.
  • Make fast integration into the world economy, develop effective processes of integration, fosters various advantages of international cooperation and the division of labor.
  • Avoid the additional burden of the external debt, as opposed to various loans and credit, and also contributes to the new cash flows to repay debt.

Empirical Relationship

The theoretical relationship between Foreign Direct Investment and Economic Growth differs according to the framework of analysis. Neoclassical growth models imply that FDI does not affect economic growth in the long run as a result of assuming perfectly competitive markets, diminishing marginal productivity and constant returns to scale(Anon 2009, pp. 26-49). From these assumptions, exogenous increases in foreign direct investment can only positively affect capital per person temporarily, given the diminishing returns. Thus, the only way to affect economic growth in the long term can be achived by modifying two exogenous factors: technology and labour (Gupta 2002).

In contrast, endogenous growth models generally indicate that foreign direct investment has a positive effect on economic growth indirectly through both capital formation and the development of human resources (Slaughter 2004).

Overall, the literature indicates that the effects of foreign direct investment occur through the externalities they produce, such as technology transfer and spillages. Romer (1993) states that foreign direct investment can facilitate the transfer of technology and know-how from developed countries to less developed; thus, increasing the productivity of all firms.

Borensztein et al. (1995) indicate that foreign direct investment is a vehicle for technology transfer and contribution towards further growth in domestic investment. However, these results are conditional on the existence of certain factors in the destination country, such as a minimum level in human capital and others (World Bank, 2008).

Alfaro et al. (2004) agree on the conditioning of the effects of foreign direct investment, this time pointing to the development of financial markets as the key factor. Hermes and Lensink (2000) indicate that both the degree of development of financial markets and the existing human capital level condition produce the positive impact. Balasubramanyam et al. (1996) focuses his opinion on the opening degree of the economy. Blomström et al. (1994) point to the level of income and claim that the developing countries with higher income levels will reap the greatest benefits (Zaring 1998, pp. 281–330).

In contrast, studies such as those of Boyd and Smith (1992) claim that, in the event of the existence of financial and trade distortions; foreign direct investment has negative effects on economic growth. In the middle between these disparate results, there are jobs like De Mello (1999), Lipsey (2000), Carkovic and Levine (2005), among others, which do not establish a significant positive relationship between Foreign Direct Investment and Economic Growth.

The following analysis also considered the process of real convergence between countries. In this sense, literature largely constructed from Barro and Sala-i-Martin (1990) notes, the conditional convergence of economies and capital tends to move from countries with low marginal returns ( i.e., developed countries) to countries with higher rates (i.e., less developed countries (World Bank 2008)

Escot and Galindo (2004) show that the less developed countries grow faster than those developed, provided liquidity levels and risk of the analyzed countries are similar. Blomström et al. (1994) confirm the existence of conditional convergence of education levels, changes in the rate of labour force participation, foreign investment, pricing structures and rate of fixed investment.

  • FDI attraction policies are related to macroeconomic stability, political and social stability, reduction in country risk, investment in productive infrastructure, the promotion of a market economy, including unconditional attachment to democracy and rule of law (Slaughter 2004).
  • The positive effects that FDI can have on the economy include economic growth, technology transfer, job creation and increased business competitiveness.
  • When the attraction policies and development policies of the country are integrated, this results in a creation of the conditions that make the country attractive to investors and serve to maximize the potential benefits of IE.
  • In the event that the country began to develop a fledgling industry in the outsourcing sector, the wages in the field exceed the average of local businesses ( Jegadish, 2004).
  • Signifant importance is paid to the business opportunities in the western region of Masaya in the field of some light industrial enterprises and production of auto parts.

Some well-documented work has sought to establish the evolution of FDI. In recent years, there has been significant growth in the amount of international funds, who have been seeking to acquire a certain participation in the management, ownership or control of companies that are located in places outside their home country (Gupta 2002). This flow of resources, known as FDI, globally tripled between 1990 and 1998, from around 200 billion dollars (MDD) to over $ 600 billion (Joseph 2002).

FDI has grown into all sorts of countries and from all regions of the world dramatically. The countries that have benefited from this growth were at the range of low and middle income economies (Elisa, 2007). Overall, FDI of these countries increased by a factor of seven between 1990 and 1998. For poor countries, the main recipient wasChina (Dale 2002, pp. 10–36), the recipient of about 80% of FDI received by low-income countries.

Moreover, among the countries of middle and low income, the main destinations of FDI are, in descending order, Latin America and the Caribbean (69 billion dollars), Southeast Asia and the countries of the Pacific region (64 000 billion dollars) andEurope and Eastern Asia Central (24 billion dollars).FDI to other middle-income regions has grown recently, as well; howver, their levels remain relatively low (Carnoy 2002, pp. 1–9).

In terms of FDI growth, the area has shown greater dynamics in the recent years is Eastern Europe. In fact, FDI to the region has grown at an average annual rate of about 50%, which has increased more than 23 times over a period of just eight years.It should be noted, however, that this region had very low levels of FDI; therefore, despite having had a remarkable growth in this period, its share in global FDI remains relatively low (3.9%). Moreover, middle-income regions that combine dynamics and relatively high levels of FDI are East Asia and Latin America, as well as the Caribbean (Anon 2009, pp. 26-49). This trend  in the context of an increasing flow of FDI is significant and indicates that countries in these regions have become extremely attractive receptors for international investment flows (Paez 2011).

The data shown on FDI behaviour indicate that it has tended to grow significantly in recent years. However, this behaviour alone does not indicate whether the importance of FDI in the world economy has also grown or not. In order to be able to make any statement in this regard, it is necessary to have a variable that allows to control the size of the recipient economies. There are two immediate alternatives: the gross domestic product (GDP) or gross domestic investment (GDI) (Zaring 1998, pp. 281–330).

For an example, the share of FDI in GDP worldwide increased from 0.7 to 2.2 percent, between 1980 and 1998, while FDI as a percentage of gross domestic investment worldwide has increased from 2.7%, in 1980, to 7.1%, in 1998 (Jegadish 2004).

In short, the preliminary conclusions regarding recent developments of FDI in the world are as the following:

  • Global FDI has grown not only in nominal terms but also in importance with respect to size and the level of gross domestic investment in the economies.
  • This increased importance of FDI is not only explained by increases in international liquidity, but also by controls of the international interest rate (proxied by the interest rate of the United States). This trend in FDI (as a proportion of both GDP and gross domestic investment) remains positive and significant (Gupta 2002).
  • The regions that have been most favoured by the increase in global FDI are Latin America and the Caribbean, East Asia and the Pacific Region, Eastern Europe and East Asia.The regions that have been less favoured are the Middle East and high-income countries that do not belong to the OECD (Elisa 2007; Edward, 2008).

Foreign Direct Investments in Globalization Process

One of the notable landmarks of modern system of international economic relations is the growing role of interstate investment cooperation, which is caused by the objective need to strengthen globalization at all levels. Conditions prevailing in the world market and national economies adequately reflect the great interest of the developing countries and countries with transition economies to increase the volume of foreign investments.

In today's world, almost all countries are involved in international investment cooperation. Even countries such as Cuba and North Korea, in recent years, have found the ways of attracting foreign direct investment in their economies. Foreign direct investments stimulate in some countries the ability to use the absolute benefits of infrastructure, as well as low labor costs, low environmental standards, including the benefits of skilled labor or cost of investment tax. An example is the increased direct investment of U.S. and European companies in South Korea.

In the process of globalization of the world economy, the international flows of investment capital are more important in comparison with the international trade of goods and services. It is not self-evident that sustainable economic development is not possible without the effective participation in global economic processes, including non-active use of the benefits of foreign direct investment (Adams 2002). The international movement of capital feature the developments in the late twentieth century. Widespread uniform rules influence state regulation of investment processes. States act in accordance with international bilateral and multilateral treaties, and abide by the auspices of international economic organizations such as the World Trade Organization (WTO).

For various reasons (including the above mentioned), direct investments have a significant impact on the world economy and international business. From an economic point of view, in terms of firms, the foreign direct investments play different roles.

  • Ensure a stable market for themselves, either directly or as a springboard to enter the markets of "third countries".
  • Serve towards education of its "internal market", certain sectors which are located in different countries.
  • Foster the inclusion of their interest in inter-state relations at the regional and international levels.

Natural Disasters

The planet Earth has undergone different types of natural disasters during its history, among them big waves (called tsunamis) and hurricanes  (which are winds blowing in opposite directions), floods and earthquakes (i.e., internal vibrations of the Earth.

All disasters mentioned above are called natural because no man is directly involved since the nature provokes these events, for example, the movement of the tectonic plates of the Earth.

However, our goal is to demonstrate that the overall actions of the men are also involved in creating these calamities, in addition to informing the reader about the losses entailed by natural disasters.The second chapter will mention the two main consequences of these disasters: human, as well as economic and material losses around the world. Throughout history, thousands of human lives have been lost due hurricanes and earthquakes, among other reasons. Moreover, the disasters have a terrible misfortunes upon nations economically.

The figures of losses of resources and economic nature are alarming worldwide. The present work assumes that the reader knows that there are natural disasters and is informed about the consequences of these calamities. To highlight this point, we have relied on sources from literature, magazines and newspapers, as well as the Internet.

Natural disaster is an issue that is becoming increasingly common now, and even though the world has lived though disasters at various times, humans still fail to confront these disasters or avoid losses of lives or alleviate economic consequences.

Empirical Evidences

This paper is also intended to educate the reade rabout this situation. Last year alone, the Earth was hit by as many as 427 disasters, as revealed by the World Disasters Report 2007 Red Cross. The catastrophes that occurred in 2006 took the lives of 23,833 people. This figure represents a sharp decline of 75% over 2005.

For victims, the document reveals that, in 2006, there were a total of 142 million people affected by these events.

The deadliest disaster was the earthquake, which stoke on May 27 at Yogyakarta (Indonesia) and ended the life of 5,778 people, according to the Centre for Research on Epidemiology of Disasters (CRED).

In economic terms, it is estimated that disasters have totalled 23,500 million Euros in costs, in 2006. It is the second lowest rate of the decade 1997-2006, and less than half of the annual average that was recorded in this period, which totalled 53,600 million (Edward 2008).

The set of data for 2006, which have been lower than in previous years, does not change the upward trend in natural disasters that have occurred in the decade 1997-2006. These cases have reached the number of 6806, which is a 60% increase as compared to the previous decade: 1987-1996 (with 4241 cases) (Edward 2008).

Climate change, massive unplanned urbanisation, rapid population growth and environmental degradation are some of the main factors that have caused this significant increase in disasters levels.

Another point of interest that is reflected in the document is that groups are often discriminated in the course of such natural events. These include people with disabilities, the elderly and women (Carnoy 2002, pp. 1–9).

Hurricane Katrina is the paradigmatic example of discrimination after a natural disaster. A survey in 2006 of the International Medical Corps (IMC) claimed, more than 3.2 million people were forced to flee their homes. Once initiated movements daily violations were 5.9 per 100,000 women. This figure is equivalent to 527 violations between females out of 32,841 displaced in refugee areas. The same survey reveals that occurred CMI high rates of domestic violence. In the 274 days following the hurricane, the rate of women who were beaten by their spouse amounted to 3.2% (Anon 2009, pp. 26-49).

During the disaster, in the Japan, lots of different methods were set up to help the victims of this country. The most impressive was the development of the game about purchasing certain virtual goods. The software company Zynga made possible to donate money through the purchasing of artifacts in the game (Parr 2011). These entire donations from the CityVille, FarmVille and FrontierVille went to the “Save the Children” fund. With the help of this campaign, more than $2 million were collected. In order to give the support to the Japanese, the designated page was created at the Facebook, and there were more than 190 thousands of subscribers that provided the new information about the disaster and tried to help the victims.

Critical Analysis

Foreign direct investments have large contribution towards the country development, and its role on the world economic area is significant. Different forms of investments were invented due to the different wants of investors: whether they want to take part in the company’s governance or are just concentrated on receiving dividends. In contrast to the indirect investments, foreign direct ones are effective for those who want to receive return from their investments without the need to deepen into the company’s affaires. While such investor is not involved in company’s management, there is a significant risk of money loss that the investor cannot avoid. Foreign direct investments are a rather sound tool to stimulate the economy of other country while still being present in their performance.

Conclusion and Recommendation

The first measure, FDI as a percentage of GDP, as discussed in this paper, says about the importance of foreign investment upon the flow of national economy's annual output. Since GDP is a variable that usually tends to grow, the share of FDI in GDP is likely to grow only when FDI grow at rates that are faster than that of production (World Bank 2008). The second measure, FDI as a percentage of gross domestic investment, provides information about the relevance of international financial flows in financing the acquisition of new capital in an economy (Slaughter 2004).

To solve the problem of discrimination in the course of natural disasters, the report notes the needs for marginalized and vulnerable groups to participate in the design and implementation of programs, which are aimed to provide relief and prepare information on the impact of population immigration and define the concepts of marginalisation and vulnerability avoidance (Paez 2011).

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