Foreign Direct InvestmentForeign Direct Investment

A Prerequisite to Economic A Prerequisite to Economic Growth (GDP)?Growth (GDP)?

GDP EquationGDP Equation

• GDP = consumption + GDP = consumption +

investmentinvestment + government + government spending + (exports - imports)spending + (exports - imports)

ConsumptionConsumption

Total personal consumption Total personal consumption expenditure, i.e., the purchase of expenditure, i.e., the purchase of currently produced goods and currently produced goods and services out of income, out of services out of income, out of savings (net worth), or from savings (net worth), or from borrowed funds. borrowed funds.

So…to Increase GDP…So…to Increase GDP…

• GDP = consumption + investment GDP = consumption + investment + government spending + (exports + government spending + (exports - imports)- imports)

• Maybe…Increase consumption.Maybe…Increase consumption.

GDP EquationGDP Equation

• GDP = GDP = consumptionconsumption + + investment + government investment + government spending + (exports - imports)spending + (exports - imports)

LithuaniaLithuania

LithuaniaLithuania

GDP - real growth rate:GDP - real growth rate: 7.5% (2005 est.)7.5% (2005 est.)

LithuaniaLithuania

Growing domestic consumption Growing domestic consumption (but also (but also

a lot of increased investment)a lot of increased investment) have furthered have furthered recovery. Trade has been recovery. Trade has been increasingly oriented toward the increasingly oriented toward the West. Lithuania has gained West. Lithuania has gained membership in the WTO and joined membership in the WTO and joined the EU in May 2004. Privatization of the EU in May 2004. Privatization of the large, state-owned utilities, the large, state-owned utilities, particularly in the energy sector, is particularly in the energy sector, is nearing completion. nearing completion.

ConsumptionConsumption

Note: if consumption is of imported Note: if consumption is of imported items, then these figures would items, then these figures would cancel in the equation…cancel in the equation…• Also could mean spending Also could mean spending

savings….another problem…savings….another problem…

((GDP =GDP = consumptionconsumption + investment + government spending + (exports+ investment + government spending + (exports - - importsimports))

So…that leaves us with…So…that leaves us with…

• GDP = consumption + investmentGDP = consumption + investment + + government spendinggovernment spending + +

((exportsexports - imports) - imports)

BhutanBhutan

BhutanBhutan

The economy, one of the world's smallest and The economy, one of the world's smallest and least developed, is based on agriculture and least developed, is based on agriculture and forestry, which provide the main livelihood for forestry, which provide the main livelihood for more than 90% of the population. more than 90% of the population.

Rugged mountains dominate the terrain and Rugged mountains dominate the terrain and make the building of roads and other make the building of roads and other infrastructure difficult and expensive. infrastructure difficult and expensive.

The economy is closely aligned with India's The economy is closely aligned with India's through strong trade and monetary links and through strong trade and monetary links and dependence on India's financial assistance. dependence on India's financial assistance.

Bhutan's hydropower potential and its attraction Bhutan's hydropower potential and its attraction for tourists are key resources. for tourists are key resources.

Preserving Cultural ValuesPreserving Cultural Values

Each economic program takes into Each economic program takes into account the government's desire to account the government's desire to protect the country's environment protect the country's environment and cultural traditions. For example, and cultural traditions. For example, the government, in its cautious the government, in its cautious expansion of the tourist sector, expansion of the tourist sector, encourages visits by upscale, encourages visits by upscale, environmentally conscientious environmentally conscientious tourists.tourists.

BhutanBhutan

Detailed controls and uncertain Detailed controls and uncertain policies in areas like industrial policies in areas like industrial licensing, trade, labor, and finance licensing, trade, labor, and finance continue to hamper foreign continue to hamper foreign investment.investment.

But…But…

GDP - real growth rate:GDP - real growth rate:5.9% (2005 5.9% (2005 est.)est.)

(ranks 199 in GDP per capita, but 71 (ranks 199 in GDP per capita, but 71 in GDP growth rate)in GDP growth rate)

WHY???WHY???

VERY LITTLE FDI…VERY LITTLE FDI…

But…But…• Cultural reasons…Cultural reasons…

Non-materialisticNon-materialistic• Few importsFew imports

Exports of lumber to India = $Exports of lumber to India = $ This $ goes towards Government Spending This $ goes towards Government Spending

on Infrastructureon Infrastructure

So…how can others replicate this?So…how can others replicate this?

Don’t import goods and especially Don’t import goods and especially not services!not services!

Become non-materialisticBecome non-materialistic

• Establish a trade partner that wants Establish a trade partner that wants your renewable natural resources.your renewable natural resources.

• Spend only on infrastructure.Spend only on infrastructure.

Back to the Real World…Back to the Real World…

The Direction of FDIThe Direction of FDI Historically, most FDI has been directed at the developed Historically, most FDI has been directed at the developed

nations of the world as firms based in advanced countries nations of the world as firms based in advanced countries invested in other marketsinvested in other markets

• The US has been the favorite target for FDI inflowsThe US has been the favorite target for FDI inflows

While developed nations still account for the largest share While developed nations still account for the largest share of FDI inflows, FDI into developing nations has increasedof FDI inflows, FDI into developing nations has increased

• Most recent inflows into developing nations have been targeted Most recent inflows into developing nations have been targeted at the emerging economies of South, East, and Southeast Asiaat the emerging economies of South, East, and Southeast Asia

FDI Flow by RegionFDI Flow by Region

What Encouragers FDI?What Encouragers FDI?

PREDICTABILITY!PREDICTABILITY!• Stable countries draw FDI.Stable countries draw FDI.

Even Burma Had FDI amidst corruption (until sanctions)Even Burma Had FDI amidst corruption (until sanctions)

Some market reform…Some market reform…• Communist states can draw FDICommunist states can draw FDI

Vietnam.Vietnam.

• Legal institutions do play a crucial role Legal institutions do play a crucial role in the process of market-oriented in the process of market-oriented developmentdevelopmentby protecting private rights, especially by protecting private rights, especially

the property and contract rights of the property and contract rights of foreign investorsforeign investors

By creating the legal foundations for By creating the legal foundations for market-oriented reformmarket-oriented reform

ConclusionsConclusions Investor experience suggests that:Investor experience suggests that:

Foreign direct Investment is NOT a Foreign direct Investment is NOT a prerequisite for growth of GDP.prerequisite for growth of GDP.

• Except in the real world. Except in the real world. Most of the time.Most of the time.

A conventional program of market-oriented A conventional program of market-oriented legal reform is NOT a prerequisite for foreign legal reform is NOT a prerequisite for foreign investmentinvestment