Presented by:Ferdinand C. Importado

December 16, 2012

Business EconomicsDr. Carlos L. Manapat

FOREIGN LOANS AND FOREIGN INVESTMENTS

International flow of financial resources Private foreign direct and portfolio

investment Foreign direct investments Foreign portfolio investment

Public and private development assistance Individual national governments Private NGOs

Remittances of earnings by international migrants

Foreign direct investmentForeign direct investment (FDI) is a category of investment that reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investorOECD Benchmark Definition of Foreign Direct

4th edition

Foreign direct investmentRefers to investments made to acquire a lasting interest by a resident entity in one economy in an enterprise resident in another economy. The purpose of the investor is to have a significant influence, an effective voice in the management of the enterprise

Balance of Payments (BOP) Manual

Foreign direct investment flows

New or additional investments paid by a foreign entity to a resident enterprise in another country during the period

Capital or equity contributions or remittances from abroad,

Reinvested earnings, Technical fees and royalties converted to

equity, Bonds and other debts converted to

equity and imports converted to equity 

Approved foreign direct investment The amount of proposed contribution or

share of foreigners to various projects in the country as approved and registered by the BOI, the PEZA, the SBMA and the CDC

Do not represent actual investments generated but rather foreign investment commitments which may come in the near future

Registered foreign direct investment Represent foreign equity investments or

paid up capital and excludes intercompany loans

Not all approved FDIs are translated into registered FDIs

Capital inflows from approved FDIs are spread or expected to be fully implemented after five years or more

Foreign direct investment inflows

Net FDI inflows in selected Asian countries

FDI trends in the Philippines

FDI by inward source Philippines

Top investors 2Q 2012

Top investors 1SEM 2012

FDI spillovers

Skills via labor mobility Exports and infrastructure improvement Imitation Competition Vertical linkages

Horizontal, backward and forward linkages

Source: Lesher, M. and S. Miroudot. October 2008.

“FDI Spillovers and Their Interrelationships with Trade”

OECD Trade Policy Working Paper No. 80

Benefits of foreign direct investments Provides management resources where

that could be scarce Investments can provide a critical

component of technology and innovation

Brings in additional capacity to employ the country’s labor and other economic resources

Arguments against foreign direct investments

Exploitation of economic resources by foreigners

Foreign direct investment competes with Filipino enterprise

Foreign direct investments promote control of the nation’s politics by foreigners

Foreign investment is inimical to society and its progress

Private portfolio investment This consists of foreign purchases of the

stocks (equity), bonds, certificates of deposits and commercial papers of less developing countries

Benefits: Investor – increase returns on investment

while diversifying risks Recipient LDC – raising capital for

domestic firms

Foreign aid

Refers to any flow of capital to less developed countries that meets the following criteria:

Its objective should be non-commercial from the point of view of the donor

It should be characterized by concessional terms○ Concessional terms mean that the interest

rate and repayment period for borrowed capital should be less stringent than commercial terms

Foreign aid

It encompasses all official grants and concessional loans, in currency or in kind, that are broadly aimed at transferring resources from developed to less developed nations on development, poverty or income distribution grounds

Problems in measuring foreign aid Dollar values of grants and loans cannot be

simply added Different significance to donor and

recipient Foreign aid is tied as

By source By project

Distinguish between Real Nominal

Official Development Assistance

Flows of official financing administered with the promotion of the economic development and welfare of developing countries as the main objective, and which are concessional in character with a grant element of at least 25 percent

Organization of Economic Cooperation and Development (OECD)

Official Development Assistance

Promoting sustainable social and economic development and welfare;

Contracted with governments of foreign countries with whom the Philippines has diplomatic, trade relations or bilateral agreements or which are members of the United Nations;

No available comparable financial institutions;

Grant element of at least 25%

Grant element Reduction enjoyed by the borrower whenever

the debt service payments, which shall include both principal and interest and expressed at their present values discounted at ten percent (10%), are less than the face value of the loan or loan and grant

The grant element of a loan or loan and grant is computed as the ratio of (i) the difference between the face value of the loan or loan and grant and the debt service payments to (ii) the face value of the loan or loan and grant.”

Global trends Net ODA disbursements consistently rose in

real terms since the late 1990s and reached $105 billion (at constant 2004 prices) in 2005, up from about $58 billion in 1997

In 2005, the G8 pledged to increase global ODA to $154 billion in 2010

Aid flows reached $120 billion in 2009, there’s still a $30 billion shortfall in the annual ODA level agreed upon by G8 in 2005

ODA portfolio

ODA portfolio

ODA portfolio

ODA loans by funding source

Global initiatives toward aid effectiveness

Ownership

Alignment

Harmonization

Managing for results

Mutual accountability

Why donors give aid

Political motivations Marshall Plan Alliance for Progress

Economic motivations Foreign exchange constraints

○ Savings constraint or gap○ Foreign exchange constraint or gap

Growth and savings Technical assistance Absorptive capacity

Why LDC recipients accept aid

Economic reasons Role of aid over its amounts and conditions

Unproductive projects Plundered by corrupt public officials

Greater political leverage to suppress opposition and maintain power Increased interference with internal

government affairs Rich nations have an obligation to support

LDC economic and social development

Effects of foreign aid

Aid has promoted growth and structural transformation in LDC

Retard economic growth rather than supplement domestic savings and investment

Aid weariness