Foreign direct investment

Examples of Foreign direct investment in the following topics:

• The Financial Account

  • The financial account has four components: foreign direct investment, portfolio investment, other investment, and reserve account flows.
  • Foreign direct investment (FDI) refers to long term capital investment such as the purchase or construction of machinery, buildings, or even whole manufacturing plants.
  • If a nation's citizens are investing in foreign countries, there is an outbound flow that will count as a deficit.
  • After the initial investment, any yearly profits not re-invested will flow in the opposite direction, but will be recorded in the current account rather than the financial account .
  • Austria has experienced a surplus of foreign direct investment: more foreign investors invest in Austria than Austrian investors do in the rest of the world.

• The Balance of Payments

  • Sources of funds include exports, the receipt of loans or investment, and income from foreign assets.
  • Whenever a country has an outflow of funds, such as when the country imports goods and services or when it invests in foreign assets, it is recorded as a debit on the balance of payments.
  • For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves, or by receiving loans from other countries .
  • It includes the balance of trade (net earnings on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors), and cash transfers.
  • It is composed of foreign direct investment, portfolio investment, other investment, and reserve account flows.

• The Multiplier Effect

  • National income can change as a direct result in a change in spending whether it is private investment spending, consumer spending, government spending, or foreign export spending.
  • The government invests money in order to create more jobs, which in turn will generate more spending to stimulate the economy.
  • The goal is that the net increase in disposable income will be greater than the original investment.
  • This suggests that types of government spending can crowd out private investment or consumer spending that would have taken place without the government spending.

• The Importance of Aggregate Decisions about Consumption versus Saving and Investment

  • Money can either be consumed, invested, or saved (deferred consumption or investment).
  • Savings is essentially deferred consumption or investment; it is intended for use in the future.
  • The interest rate effect has to do with access to inexpensive funding, which provides an incentive to increase current period expenditures; while the exchange-rate effect has to do with expenditure decisions related to imports or foreign related expenditures, as the exchange rate is perceived to be favorable to the domestic currency, expenditures on foreign items or imports will increase.
  • Aggregate demand met by the market is spending, be it on consumption, investment, or other categories.
  • Through investment spending, savings influences aggregate demand.

• The Global Economy

  • As international financial markets grew more robust and interconnected, some countries ran into severe problems paying their foreign debts, not because of general economic mismanagement but because of abrupt changes in flows of private investment dollars.
  • Foreign investors noticed, and soon flooded the Asian economies with funds.
  • In response, the IMF began requiring governments to stop directing lending to politically favored projects that were unlikely to survive on their own.
  • And in many instances, it pressed countries to liberalize their trade policies -- in particular, to allow greater access by foreign banks and other financial institutions.

• The Current Account

  • The current account represents the sum of the balance of trade (net earnings on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors), and cash transfers.
  • Income refers not only to the money received from investments made abroad (note: the investments themselves are recorded in the capital account but income from investments is recorded in the current account) but also to the money sent by individuals working abroad, known as remittances, to their families back home.
  • When a tourist from a local country visits a foreign country, the local country is consuming the foreign services and this is counted as an import.
  • This would typically take place when a domestic investor receives dividends from an investment made in a foreign country, or when a worker abroad sends remittances back to the local country.
  • Likewise, a debit in the income account takes place when a foreign entity receives money from an investment in the local economy.

• Arguments For and Against Fighting Recession with Expansionary Fiscal Policy

  • When the government runs a budget deficit, funds will need to come from public or foreign borrowing.
  • Fiscal stimulus is implemented with the view that tax relief through a reduction in tax rate and or direct government spending through investment (infrastructure, repair, construction) will provide stimulus to increase economic growth by directly influencing consumption or the government expenditure component of GDP .

• The Balance of Trade

  • The availability of adequate foreign exchange with which to pay for imports
  • Y represents national income or GDP, C is consumption, I is investment, G is government spending, and NX stands for net exports (exports minus imports).
  • Assuming that the economy is at potential output (meaning Y is fixed), if the budget deficit increases and savings and investment remain the same, then net exports must fall, causing a trade deficit.
  • This is because the nation is financing its spending by selling assets to foreigners.
  • In the U.S., net borrowing has tended to have a direct relationship with net imports.

• Long-Run Implications of Fiscal Policy

  • Expansionary fiscal policy can lead to decreased private investment, decreased net imports, and increased inflation.
  • When government borrowing increases interest rates it attracts foreign capital from foreign investors.
  • To purchase bonds originating from a certain country, foreign investors must obtain that country's currency.
  • Once the currency appreciates, goods originating from that country now cost more to foreigners than they did before and foreign goods now cost less than they did before.
  • Similarly, if stimulus capital is invested in creating jobs, the overall spending in a given economy will increase (that is, if jobs are actually created).

• Reason for a Zero Balance

  • The country's currency is supplied when it is used to purchase foreign currencies.
  • Exports + (foreign purchases of domestic assets) = imports + (domestic purchases of foreign assets)
  • Exports - imports = (domestic purchases of foreign assets) - (foreign purchases of domestic assets)
  • The right-hand term is the difference between the foreign assets that people within the country purchase and the domestic assets that are purchased by foreigners.
  • These assets include the reserve account (the foreign exchange market operations of a nation's central bank), along with loans and investments between the country and the rest of world (but not the future regular repayments/dividends that the loans and investments yield; those are earnings and will be recorded in the current account).