University of Papua New Guinea

International Economics

Lecture 17: Foreign Investment

The University of Papua New GuineaSlide 2

Lecture 17: Foreign Investment Michael Cornish

Overview

• Introduction

• Multinational corporations

• Foreign direct investment

– Case study: Ramu Nickel Mine

• Foreign portfolio investment

• Remittances

The University of Papua New GuineaSlide 3

Lecture 17: Foreign Investment Michael Cornish

Introduction

• Positives on the capital account:

– FDI

– Foreign portfolio investment

– Remittances

– Foreign aid

The University of Papua New GuineaSlide 4

Lecture 17: Foreign Investment Michael Cornish

FDI inflows: 1980 - 2005

The University of Papua New GuineaSlide 5

Lecture 17: Foreign Investment Michael Cornish

Total Net Resource Flows to Developing Countries: 1990 - 2005

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Lecture 17: Foreign Investment Michael Cornish

Developing Country FDI v Domestic Investment:1990 - 2003

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Lecture 17: Foreign Investment Michael CornishC

ountries & C

orporations in order of P

PP

GD

P: 2000 (U

SD

bn)1 USA 9882,82 Japan 4677,13 Germany 1870,14 UK 1413,45 France 1286,36 China 1076,97 Italy 1068,58 Canada 689,59 Brazil 595,5 10 Mexico 574,5 11 Spain 555,012 India 474,313 S. Korea 457,2 14 Australia 394,015 Netherlands 364,9 16 Argentina 285,017 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

26 Indonesia 153,327 Norway 149,3 28 Saudi Arabia 139,4 29 South Africa 125,9 30 Thailand 121,931 Venezuela 120,532 Finland 119,8 33 Greece 112,034 Israel 110,3 35 Portugal 103,936 Iran 99,037 Egypt 98,738 Ireland 94,439 Singapore 92,340 Malaysia 89,7 41 Colombia 81,342 Philippines 74,743 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 50,850 New Zealand 50,0 51 Bangladesh 47,1

52 UAE 46,553 General Motors 46,254 Hungary 45,655 Ford Motor 45,156 Mitsubishi 44,357 Mitsui 41,358 Nigeria 41,159 Citigroup 39,160 Itochu 38,461 DaimlerChrysler 37,562 Royal Dutch/Shell 37,363 BP 37,064 Romania 36,765 Nippon T&T 36,166 Ukraine 35,367 Morocco 33,568 AXA 32,569 General Electric 32,570 Sumitomo 31,971 Vietnam 31,372 Toyota Motor 30,473 Belarus 29,974 Marubeni 29,975 Kuwait 29,776 Total Fina Elf 26,577 Enron 25,2

78 ING Group 24,979 Allianz Holding 24,980 E.ON 24,381 Nippon life insurance 23,882 Deutsche Bank 23,583 AT&T 23,184 Verizon Comm. 22,685 US Postal Service 22,686 Croatia 22,487 IBM 22,188 CGNU 21,589 JP Morgan Chase 21,090 Carrefour 21,091 Crédit Suisse 20,892 Nissho Iwai 20,593 Bank of America Corp 20,294 BNP Paribas 20,295 Volkswagen 19,796 Dominican Republic 19,797 Uruguay 19,798 Tunisia 19,599 Slovak Republic 19,1100 Hitachi 19,0

Source: De Grauwe & Camerman, How Big are the Big Multinational Companies?, 2000

The University of Papua New GuineaSlide 8

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?

The University of Papua New GuineaSlide 9

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

The University of Papua New GuineaSlide 10

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

The University of Papua New GuineaSlide 11

Lecture 17: Foreign Investment Michael Cornish

Foreign direct investment

• Arguments against FDI:

– Environmental damage

– Exploitation

– Uneven benefits

– Capital-intensive

– Political influence

The University of Papua New GuineaSlide 12

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

The University of Papua New GuineaSlide 13

Lecture 17: Foreign Investment Michael Cornish

The University of Papua New GuineaSlide 14

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

The University of Papua New GuineaSlide 15

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

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Lecture 17: Foreign Investment Michael Cornish

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Lecture 17: Foreign Investment Michael Cornish

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Lecture 17: Foreign Investment Michael Cornish

Case Study: Ramu Nickel Mine

• Conclusion?

– Depends: whether FDI is good or not is

highly contextual!

The University of Papua New GuineaSlide 19

Lecture 17: Foreign Investment Michael Cornish

Foreign portfolio investment

• Investment without full ownership or control

• Sometimes small volumes

• Riskier…

– Speculation can fuel volatility

The University of Papua New GuineaSlide 20

Lecture 17: Foreign Investment Michael Cornish

Flows to Developing Countries:1990 - 2005

The University of Papua New GuineaSlide 21

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

The University of Papua New GuineaSlide 22

Lecture 17: Foreign Investment Michael Cornish

Top 20 Remittance Recipient Countries (2004)