Developing Countries and International Investments

Developing Countries and International investments

How can developing countries rise up economically trough international investments

Abstract 

In this paper we’ll try to figure out if actually exists a way for developing countries to attract economic investments without making pay the price of deregulation to the population ^[a]or without putting into practice thoughtless public policies attract investment as: incentives to investments, removal of restrictions, deregulation in general.

Introduction

The word globalization became popular in the mid-80s especially after the growing of the number of multinational corporations (MNC’s), and foreign direct investments (FDI’s).

Globalization can manifest itself in various ways, for the purpose if ^[b]this paper we’ll cite only^[c] the increasing role of multinational corporations in the international markets, the augmented interdependence between national markets and international trade and the increasing importance of finance and international monetary policies. Globalization is a phenomenon followed by a number of different processes like the decrees of the commercial trade barriers. (Gilpin)

Different authors found different answers to the question of what affects and boosts FDI’s^[d], we’ll have just a small overview of some of the literature about the subject. The motivation that a can push a ^[e]investor to Invest in a country or in another are different depending on the sector in which they have interest and the different benefits that one country can offer.

Some scholars believe that a major incentive to international investments is the wage rate in the host country. In fact, low wages can attract investments especially from the sectors that are labor intensive. Other authors, o the other hand, note that companies need increasingly skilled workers because the market is shifting towards skill-intensive manufacturing and service. Because of that countries with high wages can still be attractive for international investments (Noorbakhsh,1999).

Some scholars, on the other hand^[f], tend to focus on tax rates in fact large multinationals, such as Apple, Google and Microsoft tend to invest in countries with lower corporation tax rates. Studies examining cross-border flows suggest that on average, FDI decreases by 3.7% following a 1 percentage point increase in the tax rate on FDI (OECD, 2008). However, despite ^[g]this trend no consensus exists on how tax affects FDI.

To explain what attracts investments some authors ^[h]focus on the size and the potential growth of the economy of the country, others focus on the clustering effect to benefit ^[i]from external economies of scale.

Decide to displace the production in a foreign market is not a Trivial question ^[j]because enterprises incur in big risks. According to Dunning’s (1977) ^[k]eclectic paradigm, the benefits associated with investment are related to ownership, location, and internalization (OLI).

Due the final aim of this paper well’ focus on Political s^[l]tability and on the access to free trade areas.

A major disincentive to investments is political and economic uncertainty, for this reasons European Union is very attractive to FDI’s because is considered very stable^[m]. Political^[n] stability means, among other things, low levels of corruption and trust in institutions. Corruption and governance concerns have a significant bearing on investment prospects. The investment regime and the environment for business - including the business licensing system, the tax regime, and quality of the bureaucracy - are vital^[o].

Possible alteration of the policy environment by governments is the biggest fear of MNCs. Although, nowadays, the possibility and the number of expropriations became^[p] less because of the change of the type of investments, there are still a large number of subtle actions that can be made by governments that concerns enterprises. ^[q]

That’s^[r] why it’s important to understand if a stronger legal framework and rule of law may boost investment and if this is achievable trough trade agreements^[s].

1. MNC and developing countries ^[t]

As we seen to local stability, limited government intervention, such as trade and financial openness, can be attractive to FDI.

But is a unilateral commitment to maintain the status quo made by only one state really credible^[u]? 

It’s not hard to understand that there is, in case of unilateral commitment, nothing that impose to the government to not change its rules, ^[v]and if the expense if these changes ^[w]will be played by foreign firms it may sound even better to governments.

There are different kind of FDI’s but the main one is when a firm control and manages production directly in two or more states. This means that the company have to create tangible assets which are characterized by the fact that they can be moved easily in the short run. This fact leads to the so called “bargain obsolescing” (Vernon 1971) which means that ^[x]the bargaining power of a MNC shifts to the host state after undertaking the investment.

Since in the short run those investments are not perfectly mobile, governments of the host countries may implement policies as changes in the regulation, taxation etc. that may cause an economic damage to MNC’s. For this reason, some MNC’s may prefer countries where liberal economic policies exist and can be expected to prevail, that is, where government intervention in the market is limited^[y]. ^[z]

2. Developing countries and FDI

The discussion about if developing countries should or should not try to attract foreign investments is very ample^[aa], some claim that it would be just an exploitation relationship, other sustain that the positive effect can be produced only if there is an absorptive capacity of the developing country. One of the main probes is the fact that there are big cross-country differences so there is no clear-cut answer to this question. ^[ab]