Selecting the Correct Hypothesis Test
Hypothesis testing is a very detailed subject. Understanding how to correctly conduct these tests is beyond the scope of this manual or the Six Sigma methodology itself. However, since the Six Sigma project team is expected to be applying these tests to uncover facts and these facts will then be used to base decisions on, […]
How the Philippines Beat India at its Own Game
The Philippines is a small country nestled amidst a scenic archipelago in South East Asia. There wasn’t too much to speak about the economy of the Philippines till the recent past. The country was mostly run by primitive businesses such as agriculture and mining. Filipinos who were highly educated would often leave the country. They […]
Effect of Domestic Politics on Business Process Outsourcing (BPO)
In previous articles, we talked about how the ongoing global economic crisis coupled with domestic pressures affect the outsourcing of back office operations. In this article, we look at a hot topic and a burning issue in the West i.e. the hue and cry over outsourcing and shipping jobs overseas especially at a time when […]
Introduction to Intellectual Property Rights
Intellectual Property Rights (IPR) safeguard the creations of the mind, offering legal protection to inventors, artists, and businesses for their innovations, designs, and works. When individuals and businesses know their work is protected, they are more likely to invest time, resources, and energy into research, development, and innovation. This cycle of protection and creation benefits […]
The PDSA (Plan-Do-Study-Act) Technique for Quality Improvement
What is the PDSA Technique ? The PDSA or the Plan-Do-Study-Act technique is a famous QI or Quality Improvement Tool or Initiative that helps organizations enhance the quality of their products and services. The PDSA technique hinges on the iterative process wherein each cycle begins with planning the quality improvement, actualizing the method or the […]
With the opening of the economies of the world, there has been a concomitant increase in the flow of investment from the west to the east.
As capital from the west started flowing into the developing countries in search of better yields, these countries are experiencing the effects of such investment.
While there are many benefits to the flow of foreign investment to the developing countries, there are downsides as well. Before delving into these effects, it would be useful to consider the categories of foreign investment that flow into the developing countries.
First, there is the FDI or the Foreign Direct Investment, which comprises the flow of capital into sectors that are opened up to foreign investment. This form of direct investment into these sectors usually is done through the setting up of plants, factories, and establishments either through joint ventures or through wholly owned subsidiaries.
The second form of foreign investment is the foreign institutional investors who invest in equity markets and bond markets of the developing countries as a policy of investment that is indirect. The crucial difference between these two types of foreign investment is that whereas FDI is longer term and less prone to capital flight in emergencies, the flow of foreign money into stock markets is what is known as “hot money” or money that can exit the country at short notice.
Hence, the fact that FDI is preferred more by developing countries become clear when one considers the deep and the longer-term nature of these flows. However, this does not mean that investments in equity and bond markets are not welcomed. This is because many developing countries run large current account deficits, which have to be financed with dollars.
In other words, current account deficits are the difference between the imports and the exports that a country does and since many developing countries import more than they export, there needs to be a mechanism through which the deficit is financed. This is made possible by the investment in bonds and equities.
On the other hand, FDI is suitable for generating jobs and creating conditions for future prosperity. Moreover, FDI comes with the added advantage of technology and knowledge transfer, which is beneficial to the developing countries. Therefore, as can be seen from this explanation, both FDI and hot money are attractive in terms of the usefulness they have to developing countries.
However, the downsides of these investments are that whenever there is a crisis like the recent economic crisis and the Asian financial crisis of 1997, there tends to be outward flows of foreign capital as panicky investors flee the developing countries markets lest they lose out in the process of the crisis eroding their investments. This is the key downside of foreign investment.
Further, even FDI or capital investment can flee the developing countries if they have full capital account convertibility or the provision for the foreign companies to quickly convert their holdings in domestic currencies back to their home currency, which in many cases is the United States Dollar.
Hence, the implications of FDI and Hot Money have to be clearly understood by policymakers before they commit themselves to opening up their economies.
Indeed, as the experiences of China and India illustrate, the gradual opening up of the economy and the careful monitoring of flows of hot money are needed for developing countries to withstand currency shocks and liquidity crunches.
Finally, in this globalized world, no country can be immune to the flow of foreign capital from the West. Hence, prudence and caution must be exercised before committing one’s economy to be open to foreign capital.
If there are any lessons to be learnt from the Asian Financial crisis of 1990s, it is that foreign capital is as fickle as it is fun to have and hence, when the party is over, it would be the first to leave.
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Cross Border Mergers and Acquisitions and Some Recent Trends in this Field
February 12, 2025
