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International Trade and Finance

Notes (ii) Which of the following are viable methods by which industrially advanced countries (IACs)
can help less-developed countries (LDCs) that are stuck in poverty?
I. Provide foreign economic aid through the Agency for International Development (AID)
II. Give loans through the International Monetary Fund (IMF) and other private banks
III. Take control of policymaking for the LDC's government
IV. Transfer workers from LDCs to IACs
(a) I and IV (b) I, II, and III
(c) IV only (d) I and II
(e) II and III
(iii) In addition to income per capita, what other measures are indicators of a country's standard
of living?
(a) Infant mortality rate (b) All of these
(c) Illiteracy rate (d) Per capita energy consumption
27.3 Summary

• A host country’s decision on which type of investment to pursue is made within a wide range
of interests and a variety of complex objectives. Such decisions are necessarily characterised by
considerable uncertainty and risk as each type of FDI comes with its own benefits and drawbacks
although the net result appears to be that FDI does have a positive effect on an economy’s
growth and development.
• Five different types of FDI were discussed, namely : export oriented, market development,
government initiated, greenfield, and mergers and acquisitions. Distinguishing government-
initiated investment projects from other types of investment projects is difficult and necessarily
imprecise because virtually all foreign investment projects in less-developed countries (LDCs),
including export-oriented and market-development projects, receive government encouragement
through subsidies in one form or another. However, the distinction becomes difficult to draw
when other forms of FDI are supplemented with other government investment incentives. The
distinction between export-oriented investments and those oriented to local sales (i.e. market
development) is more firmly based than that between market-development and government-
initiated investment. Thus the distinction between these types of investments is more hazy and
difficult to interpret. The differences in the origin and determinants of these two types of
investment suggest that the distinction is of some value even though the statistical differences
between these two categories are open to greater question and must be interpreted with
considerably more caution than the difference between export- and locally oriented projects.
• The UNCTAD report concludes that it is difficult to distinguish between the impact of greenfield
and acquisition types of FDI on a host country. UNCTAD also observes that there are broader
policy concerns regarding the weakening of the national enterprise sector, loss of control over
the direction of economic development, and the pursuit of social, cultural and political goals
resulting from the activities of MNEs. The basic question here is what role foreign firms should
play in an economy, regardless of whether they enter through greenfield investment or cross-
border M&As. In light of potential host-country consideration of the need for a specific type of
FDI, Wei states that : Each country needs to make its own judgement in the light of its conditions
and needs and in the framework of its broader development objectives. It also needs to be
aware of - and to assess-the trade-offs involved, whether related to efficiency, output growth,
the distribution of income, access to markets or various non-economic objectives.
• With this in mind, the focus of the study in the next chapter will be on the effects of FDI on an
economy.

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