Chapter 13: Globalization: Foreign Investment and Foreign Aid Beyond Economic Growth: An Introduction to Sustainable Development By Tatyana P. Soubbotina 1

Overview of Chapter 13: Globalization: Foreign investment and foreign aid What is foreign investment and foreign aid?  Three forms of capital flows Private capital flows  Bank loans, foreign direct investment, & portfolio investment Official development assistance  Grants, loans, and institutional funding 2

What is foreign investment and foreign aid? Three forms of capital flow to developing countries  Private capital flows are investments from foreign private companies  Remittances from migrant workers  Aid from foreign governments Private capital flows are increasing and foreign aid is decreasing (Fig and Table 13.1) 3

Private capital flows Private capital flows are shifting from bank loans to foreign direct investment (ownership or a long-term stake) and portfolio investment (stock or bond purchases)  FDI is mainly in developed countries and is unevenly spread across developing countries (Fig. 13.3) FDI increases economic growth, advances technology, and brings access to foreign markets FDI is less concerned with local needs and brings risk of financial crisis from “lost confidence”  “Capital flight” in former Soviet Union hinders development 4

Official development assistance Official development assistance (ODA) is an important source of financial flows for the poorest countries ODA has been decreasing and is a small share of GDP  ODA is less than 3% of low-income countries’ GDP  Only four high-income countries provide more than 0.7% (!) of GDP in ODA ODA consists of grants, loans, and IMF, UN, or World Bank funding Aid may be “tied” to purchases from “donor” country or to enacting reforms (usually market liberalization)  Conditional aid may reduce domestic support for reforms  Aid has reduced debt of some heavily indebted poor countries 5