Issues related to developing nations

Custom Student Mr. Teacher ENG 1001-04 19 December 2016

Issues related to developing nations

News reports suggest that economic giants from third world Asia namely China and India are expected to grow at the rate of 9. 7 and 6. 5 percent respectively. The GDP growth rate of these nations is much higher than that of any developed nation and hence are the two fastest growing economy of the world. China has now become the factory of the world with large multinational companies infusing lots of money in establishing manufacturing units and India is now one of the major destinations for back office jobs and is the leading service sector economy.

As a complete entity, the globalization started showing results right from the early eighties in South East Asia. The process which has got its roots right from the beginning of 20th century with the beginning of economic cooperation between Europe and the United States later became synonymous with the word development in Far East Asian Countries including the ASEAN (The World Bank Group, 2000). But still this globalization has yet to make this world a better place to live. The concern related to the globalization process is the growth which is visible is actually more of mathematical in nature than the real cumulative growth.

It might be taking place at the cost those who are less privileged (Kumar, 2007). The purpose of this paper is to analyze the effects on developing nations especially ASEAN which are said to the most benefited one when one of the components of globalization, i. e. , foreign direct investment (FDI). The paper gives brief explanation of globalization and its different phases and theoretical aspects of some of its components. While presenting theoretical arguments, the main focus of the paper is an exploration of different aspects of FDI while keeping in view of its impact on the growth of economy in terms of growth in GDP.

The paper looks in detail towards the contribution of FDI in the growth of developing nations and the role played by multinational firms in the fire-sale purchases. It has examined World Bank Development Indicators Website and this statistical investigation has been made to look into the above mentioned impact of FDI on GDP. The countries which have been chosen for this statistical analysis are ASEAN and various other South East Asian economies (The World Bank Group, 2000).

The outcome of the paper has concentrated around the conclusion that the component of globalization which promotes ‘Direct investment’ as is termed as Foreign Direct Investment has actually brought changes in most of the developing nations but at the same time have induced many negatives like the fire-sale incidents (Loungani & Razin, 2001) and excessive leverage can led to financial transactions causing reversal of FDI with money being transferred back to the foreign company (Gallaghar & Zarsky, 2006).

In addition to the above mentioned conclusions, the benefits of the FDI have appeared to decline with more integration of market. Thus while studying the impact of FDI on countries, the other factors like domestic regulatory and market structures and the extent up to which the market has been liberalized are equally responsible and require to be considered and are equally necessary for the success and benefits of the FDI (Gallaghar & Zarsky, 2006). 2. Advantage: Developing nations

Globalization and its spread across the world is very much a successful understanding of theory of competitive advantage there by making the theory of comparative advantage as the most important concepts in international trade and a major reasons behind the existence of WTO and its world wide success. The theory in the context of international trade explains the benefits of trade between two countries without any barrier even if one is more efficient at producing goods or services needed and produced by the other. (Bromley, Mackintosh, Brown and Wuyts, 2004, p. 47).

On close analysis this globalization can be understood as a combination of four major trends. The four trends in a globalize world are the expansion of international trade, financial flows where FDI is a major entity, global communications which includes transportation and finally the immigration i. e. , transnational movements of people. The point of discussion and research has now moved from the causes and determinants of the globalization to its various components and interaction between them. These four trends have worked quite differently while implementing the globalization process among different nations.

If we talk about FDI only, then it has been observed that the same FDI has given different result sin different nations. The South East nations gained status of being an economic powerhouse with greater export especially of electronic items and before 1990s these nations depended on foreign money inform of investment in securities with government of these nations investing a bulk of that in exportable products like automobile and electronic items (Panelver, 2002). 3. Trade Flows and Foreign Direct Investment The developing countries have shown substantial progress if the economy is looked upon with trade perspective.

The last decade of 20th century shown great results with share of trade rising i. e. , the sum of import and export as percentage of GDP rising from 34. 6 percent in 1990 to 51. 6 percent in 2000. If compared with the results of developed countries where the share of trade in GDP showed marginal improvement from 32 percent to 37. 1 percent in the same period, the level of trade as well as its growth in developing nations has shown better results. The most remarkable aspect of this trade is that even the least developed countries have seen very high growth rate in the total percentage of GDP, this trade flow occupies.

The percentage of trade in GDP has increased from 26. 7 percent to 41. 3 percent in the above considered period of ten years (Loungani & Razin, 2001). The Foreign Direct Investment in these developing countries in the period of above mentioned ten years has also seen upward trend with this FDI occupying 3. 5 percent of total GDP in 2000 but here this is much lesser if the same is compared to that of developed nations. In developed countries the FDI was found to be around ten percent of GDP in the year 2000. The FDI normally come under two categories.

(Panelver, 2002). 4. Foreign Direct Investment and development The foreign direct investment (FDI) has been reason behind which the developing nations started making rounds of economic reforms to attract foreign investment with a sole purpose of giving the economy a much needed boost for sustainable economic growth. The FDI inflows in many countries surged to higher levels with large multinationals called as multinational corporations (MNCs) bringing capital in form of superior technology oiled with ultimate management skill.

The transfer of cleaner technology would also bring better environmental performance. With MNCs’ better management of inventory and technology, the developing nations would get infused with standards normally prevailed in western world (Blomstrom and Kokko, 1996). The investment had been expected to bring more employment and higher per capita income and will make ways for cleaner consumer goods. The countries observed two basic practices. First to attract more FDI and for that the policy to get more was made central character in every national development strategies.

The second one is to have investment agreements which can have global, regional or bilateral scope (Malampally & Karl, 1999). The reforms of 1990s caused massive inflow of FDI in developing nations and in the last decade of the century was around 4 percent of global GDP. This miniscule amount of money formed a major portion of the GDP of some of the developing nations; 26 percent of GDP in Thailand and as a whole, the share of FDI in the total GDP got raised to 3. 5 percent by the end of 2000 (Gallaghar & Zarsky, 2006). These developing nations saw a chain of privatizations.

Many government companies in those nations were acquired by MNCs despite wide spread criticism and resistance especially when companies being privatized were meant providing basic utilities like water. FDI based privatization also changed the way it has been utilized. Service sector got a big boost with the money coming into the nations in form of FDI and this sector accounted for almost 200 percent growth in the total FDI inflows in the period ranging from 1988 to 1999 (Gallaghar & Zarsky, 2006). 5. FDI and the crisis Multi National Companies or the MNCs are often regarded as smart investors and great profiteers.

These companies are expected to have a great feel of opportunities and upcoming market possibilities. Now the same companies put their money in FDI channel and invest in developing countries with a word of bringing technological and managerial efficiency. They often buy controlling stakes in domestic firms and then reenergize the whole structure of the firm to make it more profitable and competitive. But still even a layman would believe in putting money in those areas or economy where the market if not growing at some astronomical rate but at least have a sluggish but positive growth (Krugman, 1998).

The crisis of late 1990s in East Asia showed a very different business approach of MNCs. The companies were found to be putting great amount of money through FDI channel in Korea and other South East Asian countries. But this time the company went into large scale buying of local firms. These local firms were found to be facing financial crisis causing great fall in the total value of the firm with equities available at throw away prices. The Foreign Institutional Investors and investors in government’s securities taking their money out of the country but the same financial crisis created an investment opportunity for MNCs.

A number of companies changed hands with a number of MNCs from US and Europe buying controlling stakes in different South Asian firms. This sort of FDI investment pattern is more of crisis driven rather than opportunity driven. Even the governments were found to shell out its stake in PSUs to foreign investors to get over the ongoing financial crisis. The fall in the value of currency and big debts diminishes the market cap of the domestic firms and then they are for sale on a platter at a throw away price to foreign players.

The sudden fall in the value of the assets attracts the investors to buy those sick firms with a belief that once the crisis gets over these firms under the new management will turn out to be a golden goose (Aguiar & Gopinath, 2004). 6. Conclusion If we look into what every major financial organization like the IMF; the World Bank; and any of the OECD states, the most common thing is that all of them have suggested that this FDI is very much similar to a doctor’s prescription which is for the improvement of ailing industrial sectors.

The transfer of cleaner technology and better management as well as socially responsible corporate policies helps in improving environmental and social conditions by enormous amount (Gallaghar & Zarsky, 2006). The presence of foreign firms have given positive results in the productivity of domestic firms has been true up to some extent but that’s the case of developed nation only (Lim,2001). Though the technology transfer can be made possible through foreign players but it’s the domestic operators who are better in controlling and firm operation.

The MNCs have often been found to put money in form of FDI in the state of financial crisis. The domestic firms in a state of cash crisis are made available for purchase at a price which has been much lesser than the asset of the firm. The final conclusion out of these investments by MNCs give a clear indication that its not the efficiency that gives them the edge it’s the better cash position which drives the flow of FDI. Through the simulation of domestic investment and improved technology, the over all productivity and efficiency of the industry gets a boost. So the FDI cause “crowding in” effect on investment.

Even the simple assembling firm can make a very profitable growth with rising consumer demand. The higher consumer demand can make the industry with more players can make good returns through better technology and efficient managing (Gallaghar & Zarsky, 2006). But the negatives associated with the globalization are also there. MNCs have been found as causing more distortion to the local traditional business structure rather than the maintaining its sanctity. Even applying the management policy of a different nation model to the workers of the new region is not going to help and will cause more harm to efficiency rather then improving it.

Business and work ethics are very much dependent on local culture and traditions. Anything that will undermine the importance of these issues harms the work culture of the nation (Gallaghar & Zarsky, 2006). 7.

Bibliography Aguiar, M. & Gopinath, G. 2004, ‘Fire-Sale FDI and Liquidity Crisis’, The Review of Economics & Statistics, Vol. 87, No. 3, Pages 439-452 Bromley, S, Mackintosh, M. , Brown, W. & Wuyts, M. (2004). Making the International: Economic Interdependence and political Order. Pluto Press Gallagher, K. V. , Zarsky, L.

2006, ‘Rethinking Foreign Investment for Development’, Boston University and Businesses for Social Responsibility, USA Krugman, P 1998, ‘Firesale FDI’, Working Paper, Massachusetts Institute of Technology. Kokko, Ari 1994, ‘Technology, Market Characteristics, and Spillovers’, Journal of Development Economics, Vol. 43, pp. 279-293. Kokko, A. and M. Blomstrom 1995,. ’Policies to Encourage Inflows of Technology Through Foreign Multinationals’, World Development, Vol. 23, No. 3, pp. 459- 68. Kumar, A. 2007, ‘Does Foreign Direct Investment Help Emerging Economies? ’

Insights from the Federal Reserve Bank of Dallas, vol. 2, no. 1 Lim, Ewe-Ghee 2001, ‘Determinants of and the Relation between Foreign Direct Investment and Growth: A Summary of the Recent Literature’, Working Paper 01/75, IMF. Loungani, P & Razin, A. 2001, ‘How beneficial is foreign direct investment for developing countries? ’ Finance & development Malampally, P. & Karl, P. S. 1999,. ’Foreign Direct Investment in Developing Countries’, Finance and Development 36 (1) OECD 2002. ‘Foreign Direct Investment for Development, Maximizing Benefits, Minimizing Costs’, Paris: OECD


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