Deck 14: Foreign Finance, Investment, Aid, and Conflict: Controversies and Opportunities

Question 1

The emergence of giant multinational corporations is said to have altered the very nature of international economic activity. In what ways do these MNCs affect the structure and pattern of trading relationships between the developed world and the developing world?

Answer 1

It has stated that emergence of giant Multinational Corporations is said to have altered the very nature of international economic activity.
Multinational Corporations referred to the enterprises that have their production activities own and operated in more than one country. Most of the MNCs are based in United States and Europe while recently many MNCs have also originated from South Korea, Taiwan, and China as well.
MNCs has significant amount of resources at their disposal which acts as both an incentive as well as threat for many developing countries in which they operate.
MNCs have now emerged as the new lynchpin in trading relationship between developed and developing countries. Most of the financial flows going into the developing countries from developed countries is now routing through the MNCs. However, emergence of MNCs has created inequality in terms of capital flowing into the developing regions.
MNCs are not in development business and also are unconcerned about poverty, inequality, employment conditions, and environmental problems in host nations and are generally concerned about maximizing their return on capital and generally move their capital to only those regions in developing world that provide highest financial returns and greatest perceived safety.
Due to their sheer size and operation scale, combined with limited competition these MNCs have greater bargaining power and thus intimidate many developing countries into entering in agreements that are favorable for the MNCs rather than host countries.
Also, many developing countries feel overwhelmed in their attempt to bargain with such powerful entities and thus could not be able to negotiate favorable deals for themselves with regards to technology transfer and taxation with the MNCs.
Even though MNCs are now establishing large scale production operations in developing countries but most of these productive activities have touch of the period of colonialism and imperialism in the sense that most production being done by the MNCs n developing world is for the export to MNC's home country and other developed countries rather than for consumption in host developing country.
This kind of behavior brings back the memories from the era of imperialism.

Question 2

Summarize the arguments for and against the role and impact of private foreign investment in less developed countries. What strategies might developing countries adopt to make private foreign investment fit their development aspirations better without destroying all incentives for foreign investors?

Answer 2

Arguments for the role and impact of private foreign investment in less developed countries is as follows -
1. Due to low level of domestic savings, resources available to developing countries always fall short of the needed quantity. Private foreign investment by bringing in additional capital resources can help in fulfilling this gap.
2. It has been argued that private foreign capital inflows can help in eliminating part or the entire deficit on the balance of payments current account. Thus, foreign private investment helps a country if bridging the gap between the needed foreign exchange and the foreign exchange that is earned through the exports.
3. Developing Country governments' by taxing the local operations of foreign enterprises or by participating financially in the operations of these enterprises can generate revenue that could easily fill the gap between the targeted governmental revenues and locally raised taxes thus enabling the developing countries to raise the enough resources to undertake required development projects.
4. MNCs not only bring financial resources only. Apart from financial resources, they also bring managerial experience, entrepreneurial abilities, and technological skills. Since developing countries generally lack these skills, establishment of local operations by MNCs will bring all these to developing countries as well.
5. Establishment of local operations by MNCs in developing countries involves transfer of technological knowledge about production processes as well. This transfer of knowledge is considered as both desirable and productive for the recipient nations.
Arguments against the role and impact of private foreign investment in less developed countries is as follows -
1. It has been argued that MNCs lower the rate of domestic savings and investment in developing countries. This happens because due to their greater bargaining power they enter into such production agreements with local governments that not only they stifle the local competition but also insert such clauses that free them from reinvesting much of their profits. Apart from this, many MNCs use the developing countries capital market to raise capital resources and thus crowd out investment for local firms as well.
2. it has been also argued that in long run MNCs bring a net increase in foreign exchange earnings of the host nation by importing intermediate goods in substantial quantity and repatriating major portion of profit and funds in other manner as well such as management fees, royalties etc. to their home countries.
3. A stated above due to their greater bargaining power MNCs enter into favorable agreements with the developing countries. These favorable agreements provide them with many concessions such as liberal tax concessions, disguised public subsidies, and tariff protection which generally reduce their contribution through corporate tax to such an extent that it does not have any favorable impact for resource mobilization as done by the host country.
4. It has been experienced that the management skills, ideas, technology as brought by the MNCs generally does not have any major impact on the local economy of host nations. In fact, this transfer sometimes inhibits the growth of local resources by preventing the growth local enterprises since MNCs dominate the host country market.
The developing countries should adopt following strategies -
1. Developing countries should enact stringent conditions with regards to flow of foreign investment so that favorable and beneficial investment flow into the country.
2. Developing countries should bargain in tough manner with MNCs and compel them to undertake steps with regards to technology transfers, reinvestment of profit, employment generation that are favorable for the developing countries itself.
3. Developing countries should enact laws that promote greater ownership and control over the operation of MNCs in their respective territories so that profit and revenue generated by MNCs could be utilized for the benefit of the host country.
4. While laying down terms and conditions for foreign investment, developing countries should coordinate these terms and conditions with their development strategies so that foreign investment benefits the country itself rather country being used for the benefit of foreign investors.

Question 3

What are private portfolio flows? What factors do you believe are most important in determining the amount and direction of such flows?

Answer 3

PRIVATE PORTFOLIO FLOWS
Private portfolio flows refers to the purchase of stocks, bonds, certificate of deposit, and commercial paper in a country by a foreign investor.
Factors that are most important in determining the amount and direction of such flows -
1. How much liberalized and open to foreign investors is the domestic financial market? If market is more liberalized and open it will attract large quantity of private capital flow and vice versa.
2. Is the stock and bond market n the respective country developed and well-functioning?
Developed and well-functioning stock and bond markets attract larger private capital flows and vice versa.
3. Magnitude of interest rate in the respective country. Prevalence of higher interest rate will attract more capital flows than prevalence of lower interest rate.
4. Political and economic stability prevailing in the country. Politically stable and macro economically sound countries attract more private capital flows than economically and politically unstable countries.
5. Growth prospects of the respective country. If a country is expected to clock rapid growth rate in current and future time period, it will attract more capital flows than a country which is expected to clock lower growth rate.

Question 4

To what extent do private portfolio investments in developing countries benefit the recipient countries? What are the potential costs and risks to both investors and recipients? Explain your answer.

Question 5

How important is foreign aid for low- and middleincome developing economies in relation to their other sources of foreign-exchange receipts? Explain the various forms that official development assistance can take, and distinguish between bilateral and multilateral assistance. Which do you think is more desirable, and why?

Question 6

What is meant by tied aid? Most nations have increasingly shifted from grants to loans and from untied to tied loans and grants. What are the major disadvantages of tied aid, especially when this aid comes in the form of interest-bearing loans?

Question 7

Under what conditions and terms do you think developing countries should seek and accept foreign aid in the future? If aid cannot be obtained on such terms, do you think developing countries should accept whatever they can get? Explain your answer.

Question 8

What are the differences between official development assistance (public foreign aid) and private development assistance from nongovernmental organizations (NGOs)? Which type of aid is more desirable from the perspective of recipient countries? Explain your answer.

Question 9

How do you think the current orientation of military and diplomatic policy in potential donor nations toward combating international terrorism is likely to affect the pattern of development assistance?

Question 10

What do you think would persuade the public to get over its "donor fatigue" and support more aid for the least developed countries?

Question 11

Why do you think conflicts within developing countries increased so much from the 1950s to the 1990s? Why do you think they then began to decrease?

Question 12

What can be learned from the historical experiences of Costa Rica and Guatemala about internal conflicts, and about both positive and negative foreign influences