University of Papua New Guinea International Economics Lecture 17: Foreign Investment

The University of Papua New Guinea Slide 1 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 Guinea Slide 2 Lecture 17: Foreign Investment Michael Cornish Introduction Positives on the capital account: –FDI –Foreign portfolio investment –Remittances –Foreign aid

The University of Papua New Guinea Slide 3 Lecture 17: Foreign Investment Michael Cornish FDI inflows:

The University of Papua New Guinea Slide 4 Lecture 17: Foreign Investment Michael Cornish Total Net Resource Flows to Developing Countries:

The University of Papua New Guinea Slide 5 Lecture 17: Foreign Investment Michael Cornish Developing Country FDI v Domestic Investment:

The University of Papua New Guinea Slide 6 Lecture 17: Foreign Investment Michael Cornish 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 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 52 UAE 46,5 53 General Motors 46,2 54 Hungary 45,6 55 Ford Motor 45,1 56 Mitsubishi 44,3 57 Mitsui 41,3 58 Nigeria 41,1 59 Citigroup 39,1 60 Itochu 38,4 61 DaimlerChrysler 37,5 62 Royal Dutch/Shell 37,3 63 BP 37,0 64 Romania 36,7 65 Nippon T&T 36,1 66 Ukraine 35,3 67 Morocco 33,5 68 AXA 32,5 69 General Electric 32,5 70 Sumitomo 31,9 71 Vietnam 31,3 72 Toyota Motor 30,4 73 Belarus 29,9 74 Marubeni 29,9 75 Kuwait 29,7 76 Total Fina Elf 26,5 77 Enron 25,2 78 ING Group 24,9 79 Allianz Holding 24,9 80 E.ON 24,3 81 Nippon life insurance 23,8 82 Deutsche Bank 23,5 83 AT&T 23,1 84 Verizon Comm. 22,6 85 US Postal Service 22,6 86 Croatia 22,4 87 IBM 22,1 88 CGNU 21,5 89 JP Morgan Chase 21,0 90 Carrefour 21,0 91 Crédit Suisse 20,8 92 Nissho Iwai 20,5 93 Bank of America Corp 20,2 94 BNP Paribas 20,2 95 Volkswagen 19,7 96 Dominican Republic 19,7 97 Uruguay 19,7 98 Tunisia 19,5 99 Slovak Republic 19,1 100 Hitachi 19,0 Source: De Grauwe & Camerman, How Big are the Big Multinational Companies?, 2000

The University of Papua New Guinea Slide 7 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 Guinea Slide 8 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 Guinea Slide 9 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 Guinea Slide 10 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 Guinea Slide 11 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 Guinea Slide 12 Lecture 17: Foreign Investment Michael Cornish

The University of Papua New Guinea Slide 13 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 Guinea Slide 14 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

The University of Papua New Guinea Slide 15 Lecture 17: Foreign Investment Michael Cornish

The University of Papua New Guinea Slide 16 Lecture 17: Foreign Investment Michael Cornish

The University of Papua New Guinea Slide 17 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 Guinea Slide 18 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 Guinea Slide 19 Lecture 17: Foreign Investment Michael Cornish Flows to Developing Countries:

The University of Papua New Guinea Slide 20 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 Guinea Slide 21 Lecture 17: Foreign Investment Michael Cornish Top 20 Remittance Recipient Countries (2004)