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

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

HOW HAS THE DE REGULATION OF GLOBAL FINANCIAL MARKETS ACTED AS A FACTOR OF THE INCREASE OF GLOBALISATION?

Yes, But I would suggest it is quite a limited factor.

Deregulation of financial markets has made it easier to transfer money to investment projects. Therefore, it has helped increase inward investment, which encourages global MNCs to enter developing countries.
Deregulated financial markets make it easier for workers and firms to move from one country to another.

However,

Restrictions of global finance still remain. Especially in countries like China. China has restrictions on residents buying foreign currency. But, China typifies the success of globalisation

Globalisation is due to many other factors
See: What explains the rise of globalisation?

• Globalisation

Labels: globalisation

What are the Advantages of Globalisation for Developing Countries?

1. Inward Investment from foreign Mulitnationals MNCs. This inward investment creates job opportunities and helps to boost economic growth. Critics of MNCs paying low wage ignore the fact other wages in developing countries are generally lower.

2. Greater free Trade Increased free trade creates more export Markets.
For example, improvements in transport have enabled primary products to be sold around the globe. This increases the opportunity to make foreign currency earnings.

3. Improved Technology and information. Globalisation has enabled technology and information to be shared more easily this has helped countries in their development.

4. Positive Impact upon Agriculture

Globalisation has increased the scope for earnings from agriculture



What are Disadvantages of Globalisation for Developing Countries.?

1. Infant Industry Argument.

If developing countries wish to diversify and start new industries, they may find it very difficult to compete against developed countries. This is because they don't have economies of scale or experience.

2. Globalisation can reinforce a state of development.

A developing country may have a comparative advantage in the production of pineapples, globalisation will encourage them to specialise in their production. However, this has drawbacks.

• Limits potential growth (low income elasticity of demand for pineapples.
• Economy unbalanced. - fall in price of pineapples could cause serious problems for economy.

3. Free Movement of Labour

Free movement of labour may cause the highest skilled workers to leave the economy and get better jobs in developed countries.

4. Environmental costs.

Often globalistion has led to the exploitation of natural resources, such as cutting down the Amazon rain forest to increase grazing land.

Related:

• Essay: Effects of Globalisation on developed and developing countries
• Definition of Globalistation
• Effects of Globalisation on UK Economy
  

Labels: globalisation

Globalisation involves the increased integration of national economies. It means a reduction in barriers of trade and investment between different economies.

The benefits of globalisation are related to the benefits of free trade.

1. Consumers will have a wider choice of goods, and prices are likely to be lower. Globalisation has been an important factor in the falling price of manufactured goods.

2.Globalisation gives an opportunity for domestic firms to export a wider market. Export led growth has been an important factor in increasing economic welfare in Asian countries.

3. Globalisation enables increased specialisation of production. This specialisation enables firms to benefit from economies of scale. This leads to lower average costs and increased efficiency.

4. Globalisation causes increased competition between different firms and countries. This puts pressure on firms to be increasingly efficient and offer better products for consumers.

5. Increased Inward Investment. The process of globalisation has encouraged firms to invest in other countries. For example, many firms are relocating call centres to countries like India, where wage costs are lower. This inward investment benefits developing countries because it creates employment, growth and foreign exchange. Some foreign companies are criticised for exploiting cheap labour. But often the wages are higher than otherwise.

Problems of Globalisation

1. Developing Countries May Struggle to compete.

If a developing country wishes to develop a new manufacturing industry, it may face higher costs than advanced industries in the west, who will benefit from years of experience and economies of scale. To develop an industry it may be necessary to have protection from cheap imports; this gives the firm chance to develop and gain economies of scale.

2. Globalisation keeps Developing countries producing primary products. Developing countries may have a comparative advantage in primary products, however, this offers little scope for economic growth. Primary products have a low income elasticity of demand. Therefore, with economic growth demand for products increases only slowly. Primary products often have volatile prices, this can cause the economy to be subject to fluctuations in income

3. Multi national Companies may be able to force out local retailers, leading to less choice for consumers and less cultural diversity.

4. Movement of Labour. globalisation enables workers to move easily around. however, this may cause the highest skilled workers of developing countries to leave for better paid jobs in developed countries.

Labels: globalisation