1 economic development 13.04.30 ed: trade and development some parts of this note are borrowed from...
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Economic Development <Lecture Note 4> 13.04.30
ED: Trade and Development
•Some parts of this note are borrowed from the references
for teaching purpose only.
Semester: Spring 2013
Time: Friday 9:00~12:00 am
Class Room: No. 322
Professor: Yoo Soo Hong
Office Hour: By appointment
Mobile: 010-4001-8060
E-mail: [email protected]
Home P.: //yoosoohong.weebly.com
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Trade Theory, Facts, Policies
Traditional Theory of Trade: Static Comparative Advantage
Trade Theory of Comparative Advantage (Ricardo)
- Trade is realized for mutual interests arising from exchange of products on the basis of productivity differences between countries.
- The traditional trade theory is initiated by the theory comparative cost or the theory of comparative advantage by D. Ricardo. Although himself is a classical economist, his theory has been developed as a neo-classical trade theory.
- Regardless od absolute advantages, each country should specialize in the industry where it has comparative advantage and trade the resulting output.
- That is, the welfare of trading economies will increase more than closed economies as total quantity of production increases, if countries trade goods that they can produce (specialize in) relatively cheaper than the other country.
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Trade Theory of Hecsher-Ohlin-Samuelson (HOS) and Others
- They inherited the theory of comparative advantage and further explained the determinant of competitiveness by the relative quantities of endowed resources. Namely, comparative advantage of an industry depends on the use of relatively more abundant resource than the counterpart country.
- The traditional theory assumed constant returns to scale, no migration of production inputs such as labor, capital, etc.
Leotief’s Paradox
- The HOS theory was not proved in the case of US.
- This case study triggered to find other factors to explain international trade better way.
- According to the traditional trade theory, an agriculture dominant economy should remain as an agricultural product exporter. If so, how can we explain the successful high-tech exports by newly industrializing economies?
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New Trade Theory and Dynamic Comparative Advantage
Main Points of the New Trade Theory (Krugman)
- Trade is motivated by ‘the economies of scale’ (cost reduction through expanded market).
- Emphasized incomplete competition or oligopolistic competition in the world market.
- Not the endowed resources but variable accumulation of capital and technological accumulation by the firm determine comparative advantages.
- As the result of technological innovation through technological learning and R&D investment, economies of scale are dynamic (following the learning curve). Accumulated past R&D and capital investments determine current productivity.
- Any country can build dynamic comparative advantages with proper policies and efforts.
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Trade Theory of Technology Gap
Trade Theory of Technology Gap / Product Cycle (Posner, Vernon)
- Technological innovation affects the pattern of trade and investment
as well.
- The world trade pattern: A new (innovative) product emerges in a ①
developed (advanced) economy, Exporting of the product to other ②
economies, A competitive economy (a medium level developing ③
economy or a developing economy) emerges through imitation, ④
The developed economy imports the product from these and
introduces another new product.
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- The catching up by late comers can be delayed to a certain extent
since imitation takes time and the front runner can have
advantages (=beginner’s advantage) due to learning effect and
dynamic economies of scale.
- This model can explain the emergence of NIEs.
- It emphasized the active role of firms.
- The theory has been proved well empirically. (e.g. PC)
- The Flying Geese Paradigm is an earlier version of this theory.
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Example of the Technology Gap / Product Cycle Trade Theory
t0
US Net export
US Net import
1st Stage 2nd Stage 3rd Stage 4th Stage 5th Stage
Production in US only
Europe starts to produce
Europe exports to US
Europe exports to developing countries
Develop-ing countries export to US
US exports to other countries
US exports to developing countries
Product in matured period
Emergence of a new
product
The Role of Trade in Development
-
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- Sources of growth from trade sector
- Static and dynamic efficiency gains
- Increased trade earnings
- Encouragement of investment
- Increase in employment
- Strengthening of scientific and technological base
- Product and market diversification
Trade and Development
Conceptual Framework of Trade, Growth and Poverty Linkage
- There are a number of direct channels through which trade affects development:
• Income and employment effects
• Effects on government revenue which affect resource allocation for public goods and anti-poverty program
• Growth of firms and competitiveness
- Indirect positive effects on economic growth—increased investment, technology acquisition and learning, dynamic efficiency gains coming from specialization and increased capacity utilization.
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Contributions of Trade to Development
□ Benefits
- Trade can lead to the full utilization of otherwise underemployed domestic resources.
- By expanding the size of the market, trade makes possible division of labor and economies of scale.
- International trade is the vehicle for the transmission of new ideas, new technology, know-how, and new managerial and other skills.
- Trade stimulates the international flow of capital from developed to developing countries. With FDI, foreign capital is likely to be accompanied by foreign
skilled personnel to operate it.
- International trade increases domestic and international competition and competitiveness.
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Lowering trade barriers will speed up the rate of economic growth and development in the long run by:
- Allowing developing countries to absorb the technology developed in advanced nations at a faster rate than with a lower degree of openness, increasing the benefits that flow from R&D.
- Promoting larger economies of scale in production.
- Reducing price distortions and leading to a more efficient use of domestic resources across sectors, encouraging greater specialization and more efficiency in the production of intermediate inputs, and leading to the more rapid introduction of new products and services.
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Sources of Growth and the Role of Trade
Growth results from three sources:
- Growth in inputs of production (factor accumulation)
- Improvements in the efficiency of allocation of inputs across economic activities
- Innovation that creates new use for existing products or brings about more efficient use of inputs (i.e. Productivity increase)
Trade contributes to each of the three sources through:
- Static efficiency gains associated with improved resource allocation for national economies as well as for the world economy due to increased specialization
- Dynamic efficiency gains from such factors as economies of scale, diffusion of information, technology transfer, knowledge spillover effects and consumption and investment smoothing
- Also reinforcing relationship: higher growth spurs large volume of trade flows.
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Export Growth GDP Growth
Source: World Trade Report
Exports: access to larger – and faster growing -- market•Economies of scale productivity•Economies of specialization
Imports:•Competition drives out less efficient firms -> productivity•Cheaper inputs • Products made with expensive inputs (R&D for poor countries; labor for rich countries) •Variety
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Trade and Growth Process
Trade is good for growth and growth is good for trade. But it can produce winners and losers and can widen inequality within and among countries because of:
- Change in relative product and factor prices
- Differential cross border factor mobility and associated change in global market and power structures
- The nature of technical progress and the technological diffusion process
- Differential impact on information flow
- Differential impact on volatility and vulnerability
- Difference in the role of institutions in mediating transmission mechanism
The challenge is to create more winners, i.e. making growth more inclusive.
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Making Trade work for Development
Strategic integration of trade policies into national development strategies
- Trade Policies
- Complementary Policies
- Trade Processes
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Trade Policy ProcessTrade Policy Process
Government ministries
National development strategy
Achievements of development objectives
Private sector
Civil society, Academia, research
Support from multilateral and bilateral donors
Source: UNCTAD 17
Comprehensive Trade Policies: Actions at national level
- Integration of trade policy into overall development goals and strategies
- A balanced growth strategy based on agriculture growth and export-led industrialization
- Promotion of employment-intensive economic activities and technology changes
- Market creation, market development, market acceleration and promotion of competition culture
- Creating synergies through the global value-chain
- Investing in productive capacity and trade logistics
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Comprehensive Trade Policies
- Market access: tariff, non-tariff measures
- Regional trading arrangement
- Not only international competition but also cooperation
- Addressing food security, livelihood, bio-diversity, climate change and environmental concerns
- Making foreign aid more inclusive and productive
- Meaningful participation in multilateral decision making process (e.g. WTO, DDA)
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Political Economy of Trade Policy
- Assessment of the extent of integration of trade policy into development strategies
- Assessment of backward linkages of export sector
- Assessment of liberalization on inclusive growth
- Assessment of the trade impact on food security, livelihood, biodiversity, climate change and environment concerns
- Strengthening trade policy institutions
- Exploration of the mechanism for engaging stakeholders in all policy making process
- Effective leadership and participation in multilateral forum
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Import Substitution Strategy
Three advantages of this strategy:
- Risks are reduced in setting up an industry to replace imports because the market for the product already exists, as evidenced by imports of the commodity
- It is easier for developing nations to protect their domestic market against foreign competition than to force developed nations to lower trade barriers against their manufactured exports.
- Foreign firms are induced to establish so-called tariff factories to overcome the tariff wall of developing nations.
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Disadvantages of import substitution policy:
-Domestic industries can grow accustomed to protection from foreign competition and have no incentive to become more efficient.
-Import substitution can lead to inefficient industries
-After the simpler manufactured imports are replaced by domestic production, import substitution becomes more and more difficult and costly (in terms of the higher protection and inefficiency) as more capital-intensive and technologically advanced imports have to be replaced by domestic production
Export Promotion Strategy
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Advantages of export-oriented industrialization:
- It overcomes the smallness of the domestic market and allows a developing nation to take advantage of economies of scale. This is particularly important for the many developing countries that are both very poor and small.
- Production of manufactured goods for export requires and stimulates efficiency throughout the economy. This is especially important when the output of an
industry is used as an input of another domestic industry
- The expansion of manufactured exports is not limited (as in import substitution) by the growth of the domestic market
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Disadvantages:
- It may be very difficult for developing nations to set up export industries because of the competition from the more established and efficient industries in developed nations.
- Developed nations often provide a high level of effective protection for their industries producing simple labor-intensive commodities in which developing nations already have or can soon acquire a comparative advantage.
- Import substitution may be of some benefit in the early stages of development
(especially for larger developing nations), while an export orientation becomes an absolute necessity only later in the development process
- Thus, rather than being alternatives, policies of import substitution and export
orientation could profitably be applied to some extent sequentially, especially in the larger developing nations.
Current Problems and Demands of Developing Countries
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Serious problems facing developing countries:
- The conditions of poverty prevailing in many countries
- The huge international debt of most developing nations
- The trade protectionism of developed countries against developing countries’ exports
Demands of developing nations:
- They demand a new international economic order based on the establishment of international commodity agreements, increased access of their exports to developed nations' market and increased flow of foreign aid.
Improvements in Infrastructure and Export growth…
Africa: Average increase in exports by improvements Africa: Average increase in exports by improvements
to half the level of the best performing countries to half the level of the best performing countries
Source: Calculated from Portugal and Wilson, 2010 (Borrowed)
Main questions:
•how to finance continued large investments
•how to design regulation that balances competitive pricing and universal access with profitability
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Trade Away From Advanced World
0
20
40
60
80
1001987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
%
-20
0
20
40
60
80
%
Industrial countries (left scale) Developing countries (left scale)Total trade, annual grow th rate
Source: IMF Direction of Trade Statistics
Developing countries, trade by partner region
Large Buffers of Rapidly Increasing International Reserves
0
200
400
600
800
1000
1200
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011f
US
D b
illio
n
0
750
1500
2250
3000
3750
4500
US
D b
illio
n
Central and Eastern Europe Commonw ealth of Independent StatesLatin America and the Caribbean Middle East and North AfricaSub-Saharan Africa Developing Asia - right scale
International Reserves, gross
Source: IMF WEO, October 2010
Trade and Development in the WTO
Historical Background
- Part IV of GATT, UNCTAD
- Disappointment with outcome of UR and failure in Seattle
- Adoption of the Doha Development Agenda
- Placing concerns of developing countries at centre of talks
- Core elements of development agenda
- Sectoral Concerns
- Special and Differential Treatment
- Technical Assistance29
Monetary Policy, Financial Services and Trade Competitiveness
Trade competitiveness is affected by inflation which is associated with the performance of monetary policy.
- Monetary policy that aims to restrain inflation and minimize output fluctuations is the most likely to permanently improve conditions for growth and poverty reduction.
- Monetary policy has more roles to play in order to promote trade competitiveness maintaining external sector stability; helping exchange rate to remain at optimal level.
Trade and Agriculture
- Trade liberalization is supposed to support commercialization of agriculture by expanding domestic and by creating export market for the products, smoothing the supply of inputs and transferring excess labor from agriculture to non-agricultural sector.
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Trade Liberalization and Manufacturing Sector
Trade liberalization can support manufacturing sector by
- Reducing the tariff applied on raw materials and machinery
- Encouraging foreign investment in manufacturing
- Facilitating technology transfer
- Creating a competitive environment by elimination of distorting measures like subsidies, transfers, and differential tax rates.
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Some Trade Policy Problems in Developing Countries
- Poor leadership
- Weak institutions: absence of effective trade data collection and analysis, weak information system, lack of technical knowledge and skills in trade policy analysis
- Lack of coordination
- Lack of consultation: private sector, civil society organizations, research institutions
- Weak participation in multilateral forum
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Fair Trade
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Dependency on Coffee
Gresser, Charis and Sophia Tickell. “Mugged: Poverty in Your Cup.” Oxfam International 2002:8 34
What is “Fair Trade”?
- Fair Trade is an organized social movement and market-based approach that aims to help producers in developing countries obtain better trading conditions and promote sustainability.
- “A trading partnership, based on dialogue, transparency and respect, that seeks greater equity in international trade”
- Fair trade certification guarantees that a living wage is paid to the producer. Currently coffee, tea, sugar, rice, vanilla, cocoa and fruits such as bananas, mangos, grapes and others are fair trade certified.
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Economics of Fair Trade-Coffee
- Coffee importers agree to purchase from the small farmers included in the International Fair Trade Coffee Registry.
- Fair trade coffee growers are guaranteed a minimum "fair trade price" of $1.55/pound for their coffee.
- Coffee importers provide a certain amount of credit to farmers against future sales, helping farmers stay out of debt.
- Coffee importers and roasters agree to develop direct, long-term trade relationships with fair trade coffee distributors, bringing greater commercial stability to an extremely unstable market.
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Major FT Development Concerns
- Low economic literacy
- Infrastructural bottlenecks
• Lack of training and skill generation, innovation and marketing strategies
• Lack of efficient information dissemination about structural changes
• Middlemen as exploiters
- Most stakeholders of the opinion that FTP aimed at large farmers/producers/exporters
- Tendency of FTP to focus on incentives for exporters, instead of producers as well
- Numerous producers cater to single trader/exporter resulting in exploitation
- Lack of coordination between various levels of the government
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The Way Forward
- Changes in policy formulation
- Regulatory changes
- Infrastructure
- Marketing facilities
- Bridging information gaps
- Development of human resources
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Increased trade, competitiveness
and growth
Aid for Trade
Trade reformEntrepreneurship
private
investment
Trade-related
capacity and
infrastructure
Catalyst
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FDI
Foreign Direct Investment
- FDI refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. The investor´s purpose is to gain an effective voice in the management of the enterprise. The foreign entity or group of associated entities that makes the investment is termed the ‘direct investor’.
Broad Characteristics of FDI
- A source of external financing is physical investment or real activity.
- As matter of convention FDI involves a 10 percent threshold value of ownership.
- FDI involves both the initial transaction that creates (or liquidates) investments as well as subsequent transactions between the direct investor and the direct investment enterprises aimed at maintaining, expanding or reducing investments.
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□ Why Companies Make FDI
- Resource seeking (physical and human)
- Market seeking
- Customer following
- Export platform
- Acquiring technological, managerial & organisational skills
- Efficiency seeking
- Strategic motivation
- Overcome trade barriers
- Risk diversification
- Short term profit maximisation
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- Economic:
Labour market
Infrastructure
Communication
Transport
Research and development facilities
Business services (including banking and support services)
Social capital, networking, clustering
- Fiscal incentives:
Taxation (Tax holidays)
Grant aid
- Legal
- Social/Cultural
- Language
43
Attraction Factors for FDI
Trends
- Developing countries continue to attract more direct investment from abroad but are increasingly also becoming significant investors abroad. Developing Asia, in the past three decades, has become the leader in FDI outward stock for developing countries. The location and types of their investments have varied.
- FDI outflows and inflows for most countries during the sub-periods 1990 to 1996 and 1997 to 2005 are positively correlated. This indicates periods of economic liberalization have been characterized by simultaneous rises in both FDI inflows as well as outflows.
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FDI Theories
• FDI Theories on Macro Level
• Development Theories of FDI
• FDI Theories on Micro Level
• Eclectic FDI Theory (OLI theory)
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Eclectic FDI theory (OLI theory) – John Dunning
O = Ownership Advantages
• Some firms have a firm specific capital known as knowledge capital: Human capital (managers), patents, technologies, brand, reputation…
• This capital can be replicated in different countries without losing its value, and easily transferred within the firm without high transaction costs
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L – Localization Advantages
• Producing close to final consumers or downstream customers
• Saving transport costs
• Obtaining cheap inputs
• Jumping trade barriers
• Provide services (for most services production and delivery have to be contemporaneous)
47
I – Internalization Advantages
- Why don't a firm just sign a contract with a subcontractor (external agent) in a
foreign country?
- Because contracting out is risky: it implies transferring the specific capital
outside the firm and revealing the proprietary information (e.g. how to use the
technology or the patent).
- Problem:If the agent interrupts the contract since it can use the technology to
compete with the mother companyIn the case of brands/reputation: if the agent damages the brand reputation
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OLI Approach
- The eclectic, or OLI paradigm, suggests that the greater the O and I advantages possessed by firms and the more the L advantages of creating, acquiring (or augmenting) and exploiting these advantages from a location outside its home country, the more FDI will be undertaken.
- Where firms possess substantial O and I advantages but the L advantages favor the home country, then domestic investment will be preferred to FDI and foreign markets will be supplies by exports.
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Strategic Asset/Capabilities Seeking FDI
□ MNCs pursue strategic operations through the purchase of existing firms and/or assets in order to protect O specific advantages in order to sustain or advance its global competitive position
– Acquisition of key established local firms
– Acquisition of local capabilities including R&D, knowledge and human capital
– Acquisition of market knowledge
– Pre empting market entrance by competitors
– Pre empting the acquisition by local firms by competitors
Four Types of FDI Derived from OLI Theory
□ The typology of FDI was developed by Jere Behrman to explain the
different objectives of FDI:
– Resource seeking FDI
– Market seeking FDI
– Efficiency seeking (global sourcing FDI)
– Strategic asset/capabilities seeking FDI
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Resource Seeking FDI
• To seek and secure natural resources e.g. minerals, raw materials, or lower labor costs for the investing company
• For example, a German company opening a plant in Slovakia to produce and re-export to Germany
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Market Seeking FDI
• To identify and exploit new markets for the firms` finished products
• Unique possibility for some type of services for which production and distribution have to be contemporaneous (telecom, water supply, energy supply)
• Ex: Automotive TNCs have invested heavily in China
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Efficiency Seeking FDI
• To restructure its existing investments so as to achieve an efficient allocation of international economic activity of the firms
– International specialization whereby firms seek to benefit from differences in product and factor prices and to diversify risk.
– Global sourcing – resource saving and improved efficiency by rationalizing the structure of their global activities. Undertaken primarily by network based MNCs with global sourcing operations.
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Eclectic Paradigm of FDI (Dunning*)
Ownership advantage: creates a monopolistic advantage which can be used to prevail in markets abroad
− Unique ownership advantage protected through ownership
− E.g., Brand, technology, economies of scale, management know-how
Location advantage: the FDI destination local market must offer factors (land, capital, know-how, cost/quality of labor, economies of scale) such that it is advantageous for the firm to locate its investment there (link to trade theory)
Internalization advantage: transaction costs of an arms-length relationship --licensing, exports-- higher than managing the activity within the MNE’s boundaries
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*Dunning, John H. (1980). “Towards an eclectic theory of international production: Some empirical tests.” Journal of International Business Studies 11(2): 9-31
Foreign direct investment (FDI) Hosting
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- Foreign direct investment (FDI) should be encouraged, not only for the extra capital it brings, but because it can lead to technology transfers, better human capital formation, deeper international trade integration and a more competitive business environment. Ideally, FDI projects should provide opportunities for competitive local firms to forge forward and backward linkages.
-There are four main determinants for attracting FDI: i) market size and growth prospects; ii) natural and human resource endowment;
-iii) physical, financial and technological infrastructure; and iv) openness to international trade and access to international markets.
- Some of these can be improved through investment-enhancing ODA. In the least-developed countries, which have still to benefit from sizable FDI inflows, particular efforts appear necessary to improve the functioning of financial markets, expand infrastructure, increase skill levels and connect up better with local enterprises.
World FDI Inflow 2000-2010
57Source: UNCTAD, Global Investment Trends Monitor, Jan.17,2011
58
FDI Inflows/Outflows by Region
59
FDI Inflows
60
FDI Outflows
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62
0
500
1000
1500
2000
2500
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006 April Nov
US
$ m
Electrical Equipment (including Software) Telecommunications Transportation
Chemicals (other than Fert.) Services Sector Fuels (Power & Oil Refinery)
Construction Activities
FDI Inflows by Sector
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Trends in Trade and FDI for Low-and Middle-Income Countries
0
200
400
600
800
1000
1200
1400
1600
1800
( Unit: Billions of US dollars)
1970 1974 1978 1982 1986 1990 1994 1998 2000
Note: LIC = low-income country; MIC= middle-income country.
Source : World Bank 2004
MIC export
LIC export MIC FDILIC FDI
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Asia’s Growing Share of FDI
- The role of Asian economies in global foreign direct investment (FDI)
is changing. Asia is attracting a larger share of global FDI and accounting for a larger share of FDI outflows to other countries.
More of Asia’s inward FDI is originating from the Asian region itself,
as are more of Asia’s imports.
- World FDI stock was estimated to be US$10,129 billion in 2005, of which South, East and Southeast Asia received 18%, with the East Asian sub-region accounting for three-quarters of that share.
An upsurge in FDI inflows into Asia was witnessed for the second
consecutive year in 2006, rising from US$158 billion in 2004 to
US$230 billion in 2006.
- A regional pattern of FDI flows has emerged, with investors’ attention shifting away from traditionally important locations in developed countries in favor of emerging markets, especially Asia.
Rising Tide of FDI in Asia
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- China and Hong Kong currently top the list of largest recipients,
absorbing approximately half of the total FDI inflow into Asia in recent
years.
- The Southeast Asian sub-region received approximately half of China and
Hong Kong’s FDI inflow level, with Singapore as the greatest beneficiary.
Investment into South Asia was much lower although it grew considerably
in several countries, especially India which recorded its highest level of
inward FDI ever at US$6.6 billion in 2005.
Global FDI Inflows by Major Host Region and Economy (2004–2006, $bil)
2004 2005 2006 *Growth
Rate
- South, East and Southeast Asia have increasingly attracted
manufacturing FDI and specific locations have evolved as countries
move up the value chain. For example, Thailand has been successful
in attracting FDI in automotive, IT and food manufacturing, while the
same is true for IT assembly in the Philippines, pharmaceutical and
chemical manufacturing in Singapore and general manufacturing
in China.
- China and India are predicted to be the top FDI destinations in the Asian
region in the longer term, while Thailand, the Republic of Korea,
Malaysia, Indonesia, Vietnam and Singapore are all expected to perform
well. The high ranking of these countries by both experts and MNCs
suggests a general consensus on individual country prospects.
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- Industry-wise, the automotive, electronics, steel and petrochemical
industries tend to draw the largest values of manufacturing FDI.
Vietnam has become a new choice location, attracting investment
from MNCs like Intel which is investing roughly US$1 billion in the
country’s first semiconductor assembly plant. China, too, is moving to
more advanced manufacturing technologies with businesses such as
Airbus planning to set up an assembly operation for its A320 aircraft.
- A shift toward services in Asia’s inward FDI is also visible, especially in
the banking, telecommunications and real estate sectors.
Singapore-based DBS bank, for example, has set its sights on
becoming the local bank of choice in Hong Kong as well as Singapore.
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The Strength of Intra-Asian FDI- A large share of the FDI inflows into Asia originated from other Asian
countries. Of the US$138 billion of FDI inflows into South, East and
Southeast Asia in 2004, 40% is estimated to have originated from other
Asian countries. China, Hong Kong, Indonesia, Philippines and Thailand
stand out as having inward FDI that is dominated by Asian investors.
Note: Figures may not sum to 100% as FDI inflows can be negative.
*2004 figures; **2003 figures.
Sources: Bank of Thailand, CEIC, Japan International Trade Organization, SCB Global research.
FDI Inflows by sources, 2005
Fluctuation of Overseas Investment Flows From Korea and Japan
69
Japanese FDI (annual)
70Source: BOJ
China: FDI Inflow and Export by Foreign-funded Enterprises
71Source: China Statistical Yearbook
BRICS and FDI
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- BRIC foreign direct investment holds the potential to boost productivity of LIC industries. Starting from a low base, BRIC FDI inflows to LICs have grown rapidly.
- Initialinvestment, mostly by state-owned companies, has often been destined for natural resource industries. Over time, however, investment appears to be spreading to agriculture, manufacturing, and service industries (e.g., telecommunications).
- Many non resource-rich countries have also attracted significant investment. Moreover, private companies, particularly small and medium-sized ones from BRICs, have become active investors, with the potential to form industrial clusters in some LICs as seen in East Asia.
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A key challenge for LIC policymakers is to ensure that BRIC FDI inflows, as well as FDI from other sources, continue to boost local firms’ links to the global economy and help enhance domestic resource mobilization.
- Continued improvement in the investment climate is important, as are policies to encourage joint ventures and local employment. Policymakers should be forward-looking to ensure adequate skill supply required by local and foreign-invested firms; local content and employment requirements can serve only as temporary measures.
The development of new activities financed by FDI, particularly new resource extraction, should contribute to enhancing domestic revenue mobilization and, by extension, financing of priority public spending. Thus, LIC governments need to carefully consider fiscal costs of any policy incentives for FDI, ensuring that public resources are devoted to the highest development priorities.
Outward FDI by BRICs
Outward FDI by BRICs has grown rapidly in recent years, particularly since the mid-2000s,(Figure7). The total value of BRIC FDI rose from less than US$147billion a year in the late 1990s to about US$100 billion in 2008 before declining to US$100 billion in 2008 before declining to US$100 billion in 2009. This growth is much faster than that of global FDI, which only doubled over the period 1998-2007. As a result, BRICs’ share in global outbound FDI increased from 1-2percent to 4-5 percent over the period.
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BRICs: Annual Outward Foreign Direct Investment Flows,1991-2009
75
Chinese FDI in Natural Resources in Africa, 2001–2007
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- Chinese firms became very active in investing directly in natural resources in SSA countries starting in 2003. During 2003–2007, Chinese firms were involved in 81 projects in at least 25 SSA countries, 40 percent of them in the oil sector, 55 percent in mining, and 5 percent in natural gas. In terms of value, more than 70 percent of the total commitment of about US$10 billion (cumulatively) was in the oil sector.
- In the oil sector, Chinese firms usually acquire exploration and drilling rights, or directly purchase oil blocks or production-sharing contracts. In most cases, the investment has been made in the exploration stage, but some investment was recently made in the refining stage. Between 2001 and 2007, Chinese firms were involved in oil investment projects in 18 SSA countries across the continent, most of them among the top recipients of Chinese economic cooperation.
- Most investments were initiated under bilateral agreements and run by one or more of three state-owned enterprises: China National Petroleum Corporation (CNPC), China Petroleum & Chemical Corporation (Sinopec), and China National Offshore Oil Corporation (CNOOC).
- In the mining sector, Chinese firms usually form a joint venture with local
firms or directly purchase equity of local entities. Chinese firms were involved in mining projects in 16 SSA countries, especially in the mining belt of central-southern Africa (especially Zambia and Tanzania).
- Unlike in the oil sector, both Chinese state-owned and private companies are active in mining projects.
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Chinese FDI in Selected Sub-Saharan African Economies
78
Source: Kaplinsky and Morris(2009), Ademola et al. (2008), and IMF stuff survey
*It is not possible to given an order of magnitude as this information is mostly from case studies
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Poverty and Inward FDI Stock in 60 Developing Countries
FDI stock as percentage of GDP, 1995 %
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◆◆
◆
◆◆
◆
Share of population living
below 1 USD per day %
Share of population living
below 1 USD per day %
Source: World Development Indications.
80
Openness to FDI and Trade
Source: OECD International Direct Investment Statistics and OECD Economic Outlook.
9 9
0
1
2
3
4
5
6
7
8
0 10 20 30 40 50 60 700
1
2
3
4
5
6
78
◆Netherlands
◆ Switzerland ◆ UK
◆ Canada
◆ Korea ◆ Italy
◆ Germany ◆ SpainFrance ◆
◆ AustraliaUS◆
◆ Japan
◆ Sweden ◆ BLEU
Average of export and import relative to GDP (1995-2000), %
Average of inward and outward FDI
relative to GDP (1995-2000), %
Average of inward and outward FDI
relative to GDP (1995-2000), %
81
Inward FDI Stock, 2000 (Share of GDP)
0 5 10 15 20 25 30 35
Western Europe
North America
Asia
Latin America
Africa
World
Developed countries
Developing countries
Source: UNCTAD
%
82
Trends in Trade and FDI Ratios
Trade/GDP(%) FDI/GDP(%)
Source: World Bank. World Development Indicators. 2003.
0
5
10
15
20
25
30
'70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '000
0.5
1
1.5
2
2.5
3
3.5
4
4.5Trade /GDPFDI/GDP
83
Ratio of FDI to Domestic Total Investment by Country, Recent Years
0
5
10
15
20
25
30
Sin
gapore
Mala
ysia
Mexi
co
Arg
entina
Chile
Philip
pin
es
Hongko
ng
Chin
a
Indonesi
a
Bra
zil
India
Thailand
Taiw
an
Kore
a
%
84
Contribution to Exports by MNCs in Same Countries, Recent years
0 10 20 30 40 50 60 70 80
China
Singapore
Korea
Malaysia
Thailand
%
85
0
50
100
150
200
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
ODA
Portfolio investment
Remittances
FDI
US
$ b
illio
ns
Sources: World Bank 2004
Trends in FDI, ODA and Remittances to DCs
Remittances by Receiving Region
Source: World Bank, Global Development FinanceDatabank
Remittances to Developing Countries
0
50
100
150
200
250
300
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
US
D b
illio
n
Europe & Central Asia East Asia & Pacif ic Latin America & Caribbean Middle East & North Africa Sub-Saharan Africa
Actually Increased ODA
0
10
20
30
40
50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
US
D b
illio
n
0
30
60
90
120
150
US
D b
illio
n
Europe AfricaAmerica AsiaOceania Developing Countries - unspecif iedTotal - right scale
Source: OECD, Development Database on Aid
Official Development Assistance to Developing Countries (all donors)
Less Dependendent on Foreign Savings
0
5
10
15
20
25
30
35
40
45
1990 – 1995 1996 – 2003 2004 – 2011
% G
DP
Central and Eastern Europe Commonw ealth of Independent States
Developing Asia Latin America and the CaribbeanMiddle East and North Africa Sub-Saharan Africa
Source: IMF WEO, October 2010
Gross national saving, as % of GDP period averages
Discussions
• Is heavy dependence on FDI a necessary condition for development, why or why not?
• Is ODI a substitute for exports or not?
• Is FDI helpful for local technology progress?
• Is competition for FDI a zero-sum game or not?
• Which country is No.1 in FDI and ODI as a recipient, respectively?
• Why developed countries as a whole receive more FDIs than developing countries as a whole?
89
Five Stage Theory - John Dunning
Stage 1
– Low incoming FDI, but foreign companies are beginning to discover the advantages of the country
– No outgoing FDI – no specific advantages owned by the domestic firmsStage 2
– Growing incoming FDI do the advantages of the country - especially the low labour costs
– The standards of living are rising which is drawing more foreign companies to the country
– Still low outgoing FDIStage 3
– Still strong incoming FDI, but their nature is changing due to the rising wages– The outgoing FDI are taking off as domestic companies are getting stronger and
develop their competitive advantagesStage 4
– Strong outgoing FDI seeking advantages abroad (low labour costs)Stage 5
– Investment decisions are based on the strategies of TNCs– The flows of outgoing and incoming FDI come into equilibrium
90
91
References
Dipeolu, A. n.a. “Trade and Development.”(PPT). African Trade Policy
Center, Economic Commission for Africa.
Melo, Jaime de et al. 2010. “Using Trade to Grow: Lessons from
International Experience for Rwanda.” (PPT) Richard Newfarmer
International Growth Center.
Pandey, P.R. n.a. “Trade and Inclusive Growth: Mechanism for More
Inclusive Policy Making.” (PPT) South Asia Watch on Trade
Economics. Google
Pangestu, Mari. n.a. “Trade as Engine for Development.” (PPT) Google.
References
Dunning, John H. 1993. Multinational Enterprises and the Global
Economy. Addison-Wesley.
Ing. Tomáš Dudáš, n.a. ”Main Theories of FDI” (Google)
Narula, Rajneesh. 2006. “FDI policy and industrial growth in a globalizing world”.
Spire Research and Consulting. 2007.“The Rising Tide of Asian
Investment in Asia”. (Google)
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