Download Foreign Direct Investment

Foreign Direct Investment
A Prerequisite to Economic
Growth (GDP)?
GDP Equation
• GDP = consumption +
investment + government
spending + (exports - imports)
Consumption

Total personal consumption
expenditure, i.e., the purchase of
currently produced goods and
services out of income, out of
savings (net worth), or from
borrowed funds.
So…to Increase GDP…
• GDP = consumption + investment
+ government spending + (exports
- imports)
• Maybe…Increase consumption.
GDP Equation
• GDP = consumption +
investment + government
spending + (exports - imports)
Lithuania
Lithuania

GDP - real growth rate:

7.5% (2005 est.)
Lithuania

Growing domestic consumption (but also
a lot of increased investment) have furthered
recovery. Trade has been increasingly
oriented toward the West. Lithuania
has gained membership in the WTO
and joined the EU in May 2004.
Privatization of the large, stateowned utilities, particularly in the
energy sector, is nearing completion.
Consumption

Note: if consumption is of imported
items, then these figures would
cancel in the equation…
• Also could mean spending
savings….another problem…

consumption + investment + government spending + (exports imports)
(GDP =
So…that leaves us with…
• GDP = consumption + investment
+ government spending +
(exports - imports)
Bhutan
Bhutan




The economy, one of the world's smallest and
least developed, is based on agriculture and
forestry, which provide the main livelihood for
more than 90% of the population.
Rugged mountains dominate the terrain and
make the building of roads and other
infrastructure difficult and expensive.
The economy is closely aligned with India's
through strong trade and monetary links and
dependence on India's financial assistance.
Bhutan's hydropower potential and its attraction
for tourists are key resources.
Preserving Cultural Values

Each economic program takes into
account the government's desire to
protect the country's environment
and cultural traditions. For example,
the government, in its cautious
expansion of the tourist sector,
encourages visits by upscale,
environmentally conscientious
tourists.
Bhutan

Detailed controls and uncertain
policies in areas like industrial
licensing, trade, labor, and finance
continue to hamper foreign
investment.
But…


GDP - real growth rate:5.9%
(2005 est.)
(ranks 199 in GDP per capita, but 71
in GDP growth rate)
WHY???

VERY LITTLE FDI…

But…
• Cultural reasons…

Non-materialistic
• Few imports
Exports of lumber to India = $
 This $ goes towards Government Spending
on Infrastructure

So…how can others replicate this?

Don’t import goods and especially
not services!

Become non-materialistic
• Establish a trade partner that wants
your renewable natural resources.
• Spend only on infrastructure.
Back to the Real World…
The Direction of FDI

Historically, most FDI has been directed at the developed
nations of the world as firms based in advanced countries
invested in other markets
• The US has been the favorite target for FDI inflows

While developed nations still account for the largest share
of FDI inflows, FDI into developing nations has increased
• Most recent inflows into developing nations have been targeted at
the emerging economies of South, East, and Southeast Asia
FDI Flow by Region
What Encouragers FDI?

PREDICTABILITY!
• Stable countries draw FDI.


Even Burma Had FDI amidst corruption (until sanctions)
Some market reform…
• Communist states can draw FDI

Vietnam.
• Legal institutions do play a crucial role
in the process of market-oriented
development
 by protecting private rights, especially
the property and contract rights of
foreign investors
 By creating the legal foundations for
market-oriented reform
Conclusions

Investor experience suggests that:

Foreign direct Investment is NOT a
prerequisite for growth of GDP.
• Except in the real world.
 Most of the time.

A conventional program of market-oriented
legal reform is NOT a prerequisite for
foreign investment