Assess the impact of inward investment by Multi national companies on developing countries. (20)

Inward investment involves increasing the capital stock and increasing the productive capacity. Therefore AS can increase, enabling higher rates of growth in the long term. The investment is important in economic models such as Harod Domar, which stress the levels of savings and investment. It is investment like this which enables economic development.

However, inward investment may not benefit developing countries as much as expected. The MNC may employ foreign staff and send profit back to a developed country.

Creates Employment. Even if the work is low paid, it is probably better than working in agriculture. This can reduce help reduce poverty and promote development. However, there may be environmental costs of the investment. Inward investment is often focused on exploiting natural resources like mining and forestry. Therefore, in the long run there can be an adverse impact on the environment of the developing country. E.g. Cattle ranches in the amazon rainforest.


Inward investment can increase AD, and increase economic growth. This can lead to a multiplier effect of rising wages and improved standards of living for other.

Inward investment may help to improve the quality of technology and managerial experience. This can be passed onto other industries, so the whole economy benefits.

Labels: development economics, globalisation

Discuss 3 Policies to increase FDI in developing countries.

1. Improve quality of infrastructure.
This leads to lower costs for firms and therefore, encourages investment.
However, it will take a long time to have an effect. It will also cost alot of money.

2. Lower taxes for foreign firms.

This will lead to more firms wishing to invest; however, it will affect the government finances, they may have to increase other taxes. It depends on how beneficial FDI actually is, there maybe a high opportunity cost. There could be better things to subsidise. (foreign firms may repatriate the profit, so the developing country benefits little.

3. Subsidise firms to invest.

This provides a financial incentive to increase investment. However, it will be quite expensive. Also, it may attract the wrong kind of firm. The subsidy may encourage inefficiency.

Labels: development economics

problems of outward looking policies (export led growth)

Outward looking policies to increase trade include:

• free trade
• devalutaion
• absence of susbsidies.

1. Developing countries may not be able to compete, especially with new developing industries. infant Industry argument difficult to promote growth.

2. Devaluation can lead to inflation.

3. May require investment in transport and infrastructure. Success of outward looking policies depends on whether there is a framework for trade or not.

4. export industries may require foreign investment and import of foreign workers.


benefits of outward looking policies.

• specialisation
• economies of scale
• world growth
• increased competition, incentives to cut costs

Labels: development economics

What causes external financial difficulties for developing countries?

• Difficulty of attracting foreign capital flows, will lead to current account deficit.

1. Overvalued exchange rate, makes exports more expensive and makes it less attractive to invest in the country.

2. corruption and poor credit history

There is No guarantee money will be well used. People feel investment is risky, because of track record. Firms require a higher return on investment to make the risk worthwhile.

3. Poor infrastructure.

Makes investment less successful


However, developing countries have certain advantages:

• low wage costs
• scope for growth
• natural resources
• examples of India and China in attracting external finance
  

Labels: development economics

Discuss Factors that caused a decline in economic and social development in some countries in 1990s, during a period of worldwide economic growth.


Why are many countries unable benefit from global economic growth. For example, growth rates in many sub Saharan African countries have lagged miserably behind growth rates in more developed countries. However, the experience of China, and to a lesser extent India, show that developing countries are not doomed to negative or low growth rates.

Factors that Can Prevent Developing countries experiencing Economic Growth

• Specialisation in one Commodity

Developing countries may focus on production of one primary product. e.g. Cuba depends on Sugar.

Economic growth doesn't mean demand for all commodities increases. Sugar has a low income elasticity of demand, rising incomes means a smaller % increase in demand. Therefore, economic growth does not translate into higher demand for these goods.

Furthermore, the prices of commodities can easily fall due to excess global supply. Therefore, countries who rely on this product see a fall in revenue.

This is important because demand is very inelastic for these goods. Increase in supply causes big fall in price and incomes. It is important because a high % of revenue can come from one good. In recent years, coffee has been a good example of a commodity with a falling price.


Structural weakness

Many developing economies doesn't have sufficient transport and infrastructure to make the most from trade. Low levels of human capital mean the economy struggles to grow and diversify into manufacturing industries. However, the cheap labour costs may encourage inward investment in labour intensive industries. This has been one of the main reasons for China's success.

Agricultural based economy.

Countries who rely on agricultural output may suffer from adverse weather conditions. E.g. a prolonged drought in sub Saharan Africa can lead to loss of farming income and therefore lower growth.

Internal Conflict

Internal conflict or mismanagement can lead to declining living standards for many. E.g. war brings about lower life expectancy and deters foreign investment.

Corruption and Mismanagement

Government in many of the poorest developing countries misuse Aid and the proceeds of growth.

Labels: development economics

Does AID increase economic and social development for developing countries?

Advantages of aid.

1. Provides foreign capital which can be used for investment and increasing productive capacity of the economy.

• However, a large % of aid is tied aid. This means it is fixed for certain investment projects which benefits the donor countries. In a sense this is not really aid, but it is classed as Aid. (e.g. building of dams in Argentina)

2. Can be important for solving economic, environmental and food crises. Without aid the developing country would struggle to rebuild. e.g. after tsunami disaster.

• However, there is concern aid can lead to dependency. Developing countries come to rely on aid and lose incentives to improve productivity. This depends on the type of aid given. E.g. some aid can be just to improve infrastructure, this is more beneficial than handouts.

3. Food aid can harm local farmers. An increase in supply from the west can drive down market prices. Because demand is inelastic for food, lower prices can lead to lower revenues. This was a real problem when the EU "dumped" its surplus on world Markets.

• However, if food aid is temporary, e.g. in a famine low prices are not concern. Food aid needs to be short term and specifically targeted to avoid this potential problem.

4. Foreign aid has its limitations in increasing productive capacity. Arguably long term growth requires building up trade and new industries.

• However, aid could play a role in improving trade performance. For example, aid could be used for education and training to increase labour productivity. This enables the country to become more competitive in the long run.

5. Aid can be used to prevent environmental damage. E.g. securing the purchase of rainforest and prevent exploitation of natural resources.
6. Aid and Corruption
A real problem with Aid is making sure it gets to the targeted people. This can actually be quite difficult in countries with more infrastructure. The problem is exacerbated when countries experience civil war. Unfortunately, aid often does not reach the intended recipients.


There is no guarantee that Aid will improve economic and social development; however, there is no reason why it cannot increase economic and social development, if this it is targeted in the right way.

See also:

• Why have IMF and World Bank not reduced relative poverty in developing countries?
• Problems of Aid: Case study in Africa at World Bank
  
• Problems of Aid
• Aid: can it work? Review of books on Aid including
  

  The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good

  by William Easterly

  Penguin, 436 pp., $27.95

• 
  

Labels: development economics, globalisation

Free essay: Problems of Free Trade for Developing Countries

1. Infant Industry Argument.

If developing countries wish to develop new manufacturing industries they may struggle to compete on an international scale. Therefore, in the short run at least, they may need tariff protection to enable their industries to develop. After a few years they may be able to reduce these tariffs. Many developed countries used tariff protection in the past, especially the Asian "Tiger Economies"
In this regard, it is said free trade usually benefits developed countries more than developing countries.

2. May Prevent Diversification

The lewis model of development suggests that development needs economies to switch from agricultural sector to industrial sector. This is because the marginal cost of production in agriculture is nearly zero. Therefore, moving to industrial production will be relatively costless. However, to diversify an economy protection may be needed. Otherwise developing economies will be stuck with the production of primary products. This makes the economy vulnerable to fluctuations in prices; there is also a low income elasticity of demand for products

3. Environmental Damage.

Free trade and the force of globalisation may lead to exploitation of natural resources.

see also: arguments against free trade

Labels: development economics

Assess Three Constraints To Economic Growth in Developing Countries (Edexcel Unit 5b)

Lack of Savings. The Harod Domar model suggests the levels of savings are important for determining levels of investment and hence the rate of economic growth. If there is a lack of savings, it limits investment and therefore, there is little prospect of economic development. However, sometimes the level of savings is misused on unproductive investment projects. The important thing is not level of savings but the economic management of investment resources. Also, low savings may be countered by foreign investment

Corruption. This can cause foreign aid to be siphoned off into the bank accounts of politicians. It means that resources for development will not be used in their entirety for economic development. In some cases the % of corruption can be very high. However, this has not stopped some countries from developing e.g. China. Corruption is endemic in the world. It is a major problem in China, but hasn't stopped growth. Also, corruption may just take a % of investment, therefore there are still funds being used for investment.

Human Capital Lack of human capital is a constraint on growth. To diversify the economy and move towards industrialisation it is necessary to have skilled labour. The world bank say human capital accounts for about 65% of economic development. Therefore, it can be a very significant constraint to growth. In many cases attempts to industrialise the economy suffered from lack of human capital. However, in many industries competitiveness can be achieved through low wage costs, as in China. Therefore, for labour intensive industries low wage costs can be more important than labour productivity.

Labels: development economics

Evaluate Impact of Foreign Direct Investment on Developing Countries.

• Foreign Direct investment will help to increase AD, and therefore, can increase the rate of economic growth. However, FDI is often a relatively small component of AD. Multinationals don't like to risk too much in developing countries.
• Foreign Direct investment can also help to increase productive capacity. This will shift AS to the right and enable higher rates of growth. Investment from abroad may also help improve the skills and technology of the local workforce; Foreign multinationals may help implement better work practices.
• However, FDI may require skilled labour which has to be brought in from abroad. Therefore, developing countries don't benefit that much.
• FDI may have strings attached; e.g. reciprocol spending.
• FDI may involve exploitation of natural environment. Foreign multinationals may not care about environment.
• Harod Domar model suggest savings and investment are important for determining the rate of economic growth.

Labels: development economics