Unit 3: Economic Interactions and Flows

Finance_flows

Foreign Direct Investment (FDI) 

What: investment in firms in other countries by firms/individuals to acquire at least 10% of the voting stock of a company.

Importance

Provides a significant flow of finance into countries.  This allows increased investment by firms.   Knock on effects such as increased employment, increased tax to the government and export earnings may follow.  The increased income for the government through corporate and income tax should enable increased investment in public services such as health, education and infrastructure. FDI from core regions to peripheral countries often brings new technologies and skills which benefit the local labour force.

With rapidly increasing populations in the emerging economies, many firms and investors have invested in these regions which has seen FDI increase rapidly in the last 20 years.  Large markets, cheap labour, available raw materials and less regulation in many cases is seen as attractive by investors.  The massive decreases in the cost of transport through containerisation have made investment in countries with cheaper labour much more attractive.

Concerns

Some FDI is seen as exploiting labour and the environment in LEDCs due to the lax regulation and poor enforcement of laws. In many cases, investors will see a return on their investment as profits flow back to MEDCs in the form of dividends.  Many countries often offer tax breaks, grants or subsidies as an incentive for large companies to invest in their country which can reduce the benefits that the FDI brings to the national economy.  The UK government offered grants and tax breaks to Nissan to entice it to build a new factory in Sunderland which had high structural unemployment but a labour force skilled in manufacturing.

Examples

Intel is an American company manufacturing microchips.  In 1997 it built a manufacturing and testing plant in Costa Rica. Over 1,900 employees work on designing, prototyping and testing of circuit and software solutions.  Intel’s investment in Costa Rica has been part of national strategy to develop high-tech industries and highly skilled jobs.  Intel also has factories in Barbados, China, Ireland, Israel, Malaysia, the Philippines, and soon also in Vietnam, however, the skilled-labor-intensive part of the production process (e.g. wafer production) is located in developed countries, the unskilled-labor intensive part (e.g. assembly and testing) is located in developing countries.

Toyota, a Japanese company has 2 factories in the UK.  In 2017 they committed to a further 240 million pound investment in the Burnaston plant which employs about 2,500 people and made about 180,000 vehicles in 2016, most of which are exported to Europe and other markets.  The investment will allow production of vehicles using its new global manufacturing system.

The government is providing £21.3m in funding for training, research and development, and improving the Burnaston plant’s environmental performance.

Remittance Payments

What: migrant labour sending money back to their country of origin.

Importance

The main flows of remittances are from the core regions to peripheral ones.  The core regions benefit from cheaper labour or highly skilled labour educated overseas which keeps firms costs low making them more competitive.  The peripheral regions benefit from foreign money entering the economy.  If migrants return home after a number of years they may bring new skills and knowledge with them whihc can benefit domestic industries.

Main recipients of remittance payments are African, South-east Asian and Central American countries.

This represents money going directly to households which can raise living standards and increase aggregate demand in the destination countries economy.  Remittances are a vital flow of money to developing countries as they go directly to the recipients, to be used as they see best (education, health, housing) rather than through agencies which can influence how the money is distributed and what it is used for.

Concerns

Migrants leaving to earn higher incomes in other countries are often of working age which reduces the country of origins labour force. The migrants that leave often have skills that would have benefitted their own economies.  In many cases, it represents families being separated as one parent migrates for work.

Examples

The United States is home to 19% of the world’s migrants. They sent $133.5 billion in remittances in 2015 and biggest recipients were: Mexico, $24.3 billion; China, $16.2 billion; and India, $10 billion.

International Agencies

World Bank: Formed in the 1940s by a collection of countries it provides loans for infrastructure and development projects.  The current focus is on achieving the Millennium Development Goals.

Criticisms: prioritises GDP increases too much as an indication of development, mainly run/controlled by MEDC countries.

International Monetary Fund (IMF):  Formed in the 1940s by a collection of countries.  It works to stabilise the world economy through increasing cooperation between countries.  Has played a leading role in the recent economic crisis assisting with emergency lending & recapitalisation plans.

Aid payments & Debt Repayment

Most AID payments flow from Western European & North American countries to LEDCs – particularly African countries with them receiving about a third of the total aid given in the world.

Many countries (MEDCS & LEDCs) have high levels of external debt.

In the case of LEDCs, it is often to the more developed countries or the World Bank as a result of loans for infrastructure development projects.

External debt in many LEDC countries is often considered a major problem due to its size in comparison with GDP levels.  In 2003 The D.R. of Congo & Mauritania were spending up to 30% of Government income on debt repayments & interest.  This severely restricts the money available for healthcare and education.  There have been pledges by G8 countries to write off the debt of several African countries in an effort to reduce poverty.

Most debt repayment flows from LEDCs (again particularly African countries) to European/ North American countries.

Labour Flows

Mexico

Significant levels of migration from Mexico to the USA.

Push factors

  • Low paid jobs in comparison.
  • Mechanisation of agriculture reducing jobs available.
  • Lower standards of living (housing, healthcare, education).
  • Densely populated urban areas.
  • Higher crime levels & drug related violence

Effect

  • loss of people of working age (economically active).
  • Benefit of remittance payments to families

USA

Pull factors

  • Higher wage levels
  • Relative ease of crossing the border
  • Higher living standards & higher average incomes.
  • High demand for seasonal labour in agriculture in the Southern States.
  • Spanish widely spoken in the U.S. so easier to integrate into the society.

Effect

  • the increase in labour supply reduces the costs of labour.
  • lots of illegal immigrants working with no rights & poor conditions
  • resentment by some Americans to Mexicans taking jobs.

Information Flows

The role of ICT in International Outsourcing

Definition: The concept of taking internal company functions and paying an outside firm to handle them. Outsourcing is done to save money, improve quality or free company resources for other activities.

Developments in ICT are enabling companies and individuals to use the speed and low cost of electronic communication methods to outsource many of their activities.  Companies can make use of cheaper labour in other countries to complete many of their tasks.

Many of the British Banks have outsourced their call centre operations to cities in India where the labour force speaks English, is ICT literate and costs a fraction per hour of a UK worker.  Other companies outsource software development or web design to companies in Indias high-tech city of Bangalore.  Investment in IT education has created a pool of highly skilled workers here and their work generates a lot of money for India.

On a more individual level, there are websites such as www.yourmaninindia.com that allow any individual to outsource work that they need doing to a company in India at low cost.  This may be research, admin tasks, data entry etc.

Freelancer.co.uk is a UK example of outsourcing whereby people post the work they need doing on the website & other people from around the world bid to do it for a fee.

E-mail, free video calling (Skype) and internet banking have enabled international outsourcing to boom, not only for large companies but also for enterprising individuals as well.