Globalisation

What is FDI?

The purchase of land, equipment, buildings or the construction of new equipment by a foreign MNC

What else does FDI refer to?

The purchase of a controlling interest in existing operations and businesses by a foreign MNC

What is an MNC?

A firm with a base of operations in more than one country

How is Kenya’s flower industry an example of globalisation?

It represents a global value chain where local production is entirely driven by international demand, foreign investment, and advanced logistics to connect to consumers thousands of kilometres away.

What are the arguments that the flower industry supports economic development in Kenya?

• Creates jobs, Sher one of the biggest firms employs 40,000

• GDP has risen by 5.8%, positive multiplier effect

• Horiculture accounts for 14% of Kenyas GDP

• Provides higher living standards, through the provision of services e.g. healthcare, childcare, housing etc

What are the arguments that the flower industry does not support economic development in Kenya?

• Tax avoidance from large firms

• Tax competition from other LEDCs, e.g. Ethiopia offering tax breaks

• Damage to local ecosystems through water depletion etc

• Damages to local fishing industry, resource competition

• Grounds for corruption from officials

• Privatisation of the environment from local workers

What does unsustainability refer to?

When something meets the needs of a currrent generation but compromises the ability of future generations to meet their own needs

What do MNCs often bring with them?

• Technologies of production

• Tastes and styles of living

• Managerial services

• Business practices such as advertising

What is the objective of MNCS?

Profit, they will invest where they can maximise the return on their capital

How do MNCs benefit from locating in LEDCs?

Experience lower costs due to:

• Exploitation of raw materials

• Exploitation of the agricultural potential

• Low wage-, non-unionised, often predominantly female labour

• Fewer legal restrictions

Also experience higher revenues due to these lower costs

What are the macroeconomic effects of FDI on the BoP?

Impact on the BoP:

• Effect 1, initially FDI is an inflow on the financial account

• Effect 2, when MNCs set up in an LEDC they outsource a supply of capital goods, creating an outflow on the CA

• Effect 3, goods and services produced by the MNCs may be intended for export and will therefore generate an inflow on the CA

• Effect 4, in the LR profits made by the MNC are repatriated representing an outflow on the CA

Overall impact is INDETERMINATE

What are the impacts on growth and employment by MNCs?

Results in an increase in investment, rightward shift in AD, in the SR creating a positive multiplier process and increases GDP and employment.

In the LR investment increases LRAS as it is increasing the quantity and quality of capital, leading to an increase in the production capacity of the economic and LR economic growth.

MNCs also lead to rightward shifts in the LRAS curves of LEDCs because:

• May undertake infrastructure improvements to LEDCs

• Provide services to their employees

What is the impact of MNCs on inflation?

• FDI is an increase in investment that in the SR increases AD, creating a positive multiplier and increases GDP and employment. Could lead to demand pull inflation, dependign on how near an economy is to full employment GDP

• There may be cost push inflation fuelled by a tight labour market

Why might MNC cause cost push inflation?

MNC competition for labour with domestic firms means wage rises, firms costs rise, firms increase their prices to ensure that profits don’t fall, workers’ purchasing power falls, workers/unions demand higher wages to ensure that workers’ real incomes don’t fall, firms costs rise, repeat

What are the benefits of FDI?

• Provision and transfer of expertise in finance, management and marketing (Increase LRAS)

• Provision of employment

• Provision of tax revenue

• Positive impact on the BoP

What are the problems with FDI?

• MNCs stifle domestic competition and therefore the growth of domestic industry and entrepreneurship

• MNCs use their economic power to influence government policies

• Tax competition

• MNCs engage in transfer pricing

What is transfer pricing?

How a company prices internal transactions—and how that affects profits, taxes, and economic decisions.

What is globalisation?

A process through which national economies have become increasingly integrated and inter-dependent.

What does economic integration refer to?

The merging together of national economies and the blurring of the boundaries that separate economic activity in one nation state from another.

What factors prevent the free trade of the FoPs?

• Tariffs

• Quotas

• Government subsidies

• Administrative and regulatory barriers

What are the characteristics of globalisation?

• Greater trade in goods and services between the world’s economies

• Greater transfer of technology and information between the world’s economies

• Greater labour migration

What are the causes of globalisation?

• Reduced transport costs

• Imrpoved communications

• The rise of MNCs

• The growth of trading blocs

What are the benefits of globalisation?

• Benefits of free trade (CA, AA)

• Higher real GDP and living standards

• Imrpoved allocative efficiency, reduced barriers to trade, capital flows and labour migration are more geographically mobile meaning they can move to where in the world they are most productive

• Benefits of FDI

What are the costs of globalisation?

• The benefits accrue mainly to consumers in the developed world and multinational companies originating from such economies

• Environmental costs arising from poor regulation in LEDCs

• Increased exposure to external economic shocks created by a greater dependence on developed economy markets

• ‘Brain drain’ workers in LEDCs may be attracted to labour markets in MEDCs due to the higher wages on offer