Economic Development
Lecture 17: Foreign Investment
Life Impact | The University of Adelaide
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Overview
• Introduction
• Multinational corporations
• Foreign direct investment
– Case study: Ramu Nickel Mine
• Foreign portfolio investment
• Remittances
PLUS: we’ll
talk about the
exam format…!
Slide 1
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Introduction
• Positives on the capital account:
– FDI
– Foreign portfolio investment
– Remittances
– Foreign aid
Slide 2
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
FDI inflows: 1980 - 2005
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University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Total Net Resource Flows to
Developing Countries: 1990 - 2005
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University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Developing Country FDI v Domestic
Investment:1990 - 2003
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University of Papua New Guinea
Lecture 17: Foreign Investment
Slide 6
26 Indonesia 153,3
27 Norway 149,3
28 Saudi Arabia 139,4
29 South Africa 125,9
30 Thailand 121,9
31 Venezuela 120,5
32 Finland 119,8
33 Greece 112,0
34 Israel 110,3
35 Portugal 103,9
36 Iran 99,0
37 Egypt 98,7
38 Ireland 94,4
39 Singapore 92,3
40 Malaysia 89,7
41 Colombia 81,3
42 Philippines 74,7
43 Chile 70,5
44 Wal-Mart Stores 67,7
45 Pakistan 61,6
46 Peru 53,5
47 Algeria 53,3
48 Exxon 52,6
49 Czech Republic 50,8
50 New Zealand 50,0
51 Bangladesh 47,1
78 ING Group 24,9
52 UAE 46,5
53 General Motors 46,2 79 Allianz Holding 24,9
80 E.ON 24,3
54 Hungary 45,6
81 Nippon life insurance 23,8
55 Ford Motor 45,1
82 Deutsche Bank 23,5
56 Mitsubishi 44,3
83 AT&T 23,1
57 Mitsui 41,3
84 Verizon Comm. 22,6
58 Nigeria 41,1
85 US Postal Service 22,6
59 Citigroup 39,1
86 Croatia 22,4
60 Itochu 38,4
61 DaimlerChrysler 37,5 87 IBM 22,1
62 Royal Dutch/Shell 37,3 88 CGNU 21,5
89 JP Morgan Chase 21,0
63 BP 37,0
90 Carrefour 21,0
64 Romania 36,7
91 Crédit Suisse 20,8
65 Nippon T&T 36,1
92 Nissho Iwai 20,5
66 Ukraine 35,3
93 Bank of America Corp 20,2
67 Morocco 33,5
94 BNP Paribas 20,2
68 AXA 32,5
69 General Electric 32,5 95 Volkswagen 19,7
96 Dominican Republic 19,7
70 Sumitomo 31,9
97 Uruguay 19,7
71 Vietnam 31,3
98 Tunisia 19,5
72 Toyota Motor 30,4
99 Slovak Republic 19,1
73 Belarus 29,9
100 Hitachi 19,0
74 Marubeni 29,9
Source: De Grauwe & Camerman,
75 Kuwait 29,7
How Big are the Big Multinational
76 Total Fina Elf 26,5
Companies?, 2000
77 Enron 25,2
Countries & Corporations in order
of PPP GDP: 2000 (USD bn)
1 USA 9882,8
2 Japan 4677,1
3 Germany 1870,1
4 UK 1413,4
5 France 1286,3
6 China 1076,9
7 Italy 1068,5
8 Canada 689,5
9 Brazil 595,5
10 Mexico 574,5
11 Spain 555,0
12 India 474,3
13 S. Korea 457,2
14 Australia 394,0
15 Netherlands 364,9
16 Argentina 285,0
17 Russia 251,1
18 Switzerland 240,3
19 Belgium 231,0
20 Sweden 227,4
21 Turkey 199,9
22 Austria 191,0
23 Hong Kong 163,3
24 Poland 162,2
25 Denmark 160,8
Michael Cornish
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Multinational corporations
• ‘MNC’ Features:
– Can be exceedingly large
– Large role in FDI
– Often possess strong market power
– Profit motivation
– Rising in new industries
– Developing country MNCs
• Centralised political control good when dealing
with MNCs?
Slide 7
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Foreign direct investment
• Arguments for FDI:
– Plugging the savings gap
– Balance of payments
– Government revenue
– Technology transfer
– Plugging the entrepreneurial /
managerial gap
Slide 8
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Foreign direct investment
• Arguments against FDI:
– Crowding out domestic investment
– Balance of payments (again!)
– Concessional tax treatment
– Transfer pricing
– Technology immobility
Slide 9
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Foreign direct investment
• Arguments against FDI:
– Environmental damage
– Exploitation
– Uneven benefits
– Capital-intensive
– Political influence
Slide 10
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Case Study: Ramu Nickel Mine
• Located in Papua New Guinea near Madang
• Majority owned by Chinese government corporation
• Australian corporation as junior partner
• No initial landowner consultation
• Construction started in 2008
• Will produce $1.37 billion, 31,000 tonnes of nickel,
and 3,300 tonnes of cobalt, each year for 20 years
• $731,000 in infrastructure to be provided to local
groups
Slide 11
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Case Study: Ramu Nickel Mine
• Issues:
– Environmental
• Deep sea tailings disposal
• Biodiversity hotspot
– Employment
• Chinese workers
• Illegal immigration
• Disparate working conditions
Slide 12
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Case Study: Ramu Nickel Mine
• Issues:
– Government revenue
• Hard to get figures but…
• Mine will comprise 8% to 10% of total GDP
• 10 yr income tax exemption for Chinese workers
• No fuel excise
– Social unrest
• Anti-Chinese riots
• ‘New’ v ‘old’ Chinese
Slide 13
University of Papua New Guinea
Lecture 17: Foreign Investment
Slide 14
Michael Cornish
University of Papua New Guinea
Lecture 17: Foreign Investment
Slide 15
Michael Cornish
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Case Study: Ramu Nickel Mine
• Conclusion?
– Depends: whether FDI is good or not is
highly contextual!
Slide 16
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Foreign portfolio investment
• Investment without full ownership or control
• Sometimes small volumes
• Riskier…
– Speculation can fuel volatility
Slide 17
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Flows to Developing
Countries:1990 - 2005
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University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Remittances
• Wages for similar jobs are, on average, 5 times
higher in developed world
• Estimated 200m migrants from developing
countries in 2007: half migrating to developing
countries
• Policy options?
– Decrease cost of remitting funds
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University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Top 20 Remittance Recipient Countries (2004)
Slide 20
University of Papua New Guinea
Lecture 17: Foreign Investment
Michael Cornish
Exam format
At this stage (subject to change):
• Part A: SIX short answer questions
– [5 marks each, total of 30 marks]
• Part B: ONE essay out of a choice of 5
– [30 marks]
• Part C: Article with questions about the article
– [40 marks]
Slide 21
University of Papua New Guinea