Discuss some of the motivations firms have for setting up production facilities in other countries. Will the effect on the host country differ depending upon the motivation? Explain. Will the effect on the source country differ depending upon the motivation? Explain. What relationship might trade barriers (or the lack of trade barriers) have in determining a company's primary motivation for producing abroad?
The reasons for the foreign investment are high profit returns, and the rate of return is dependent upon the capital invested, the tax reductions and employees' fund. The foreign investment or production company is highly welcomed by the government because the company is expected to bring in foreign exchange. THz enhances the purchasing power of the country in international currency; thereby the nation has to rely minimum on loans and international borrowing.
The major motivation that the international investor has towards foreign investment is that cheap labor that the company has to recruit. Considering the example of China and India, both the countries are admired and preferred by the international investors and production units for the simple reason that the labor cost is minimum. The other factors include the capital cost, property cost and maintenance. In case of China and India, for international investors the land prices and initial investment cost is under expected and affordable range, as compare to the investment being carried out in United States and Europe.
The foreign companies are always in a better position to dictate their terms, the companies are offered minimum tax cuts, and are always appreciated and supported for their launches. However this also depends upon the economical conditions of the country, where the investment is being poured in. The host country is always appreciable and supportive of the investment company, the company is offered land at subsidized rates, and utility costs are also reduced, the company is offered certain incentives and housing schemes for its employees. Secondly through that national forum, the company achieves acknowledgement at international scale.
It is obvious that the host companies are likely to suffer because of the inflow of foreign investment in production and industrialization. The host companies are found to be focused on the old technological setup, therefore their brand is expected to face certain competition from the rival foreign company. These circumstances persuade the host company to plan of investing in other country, i.e. comparatively poorer.
It is primarily important that the country develops trade agreement with other nations, for the simple reason that foreign investor finds is feasible to invest into that country. Secondary the trade agreements are much like an acknowledgement from both the countries and their likeliness to work and invest together i.e. joint ventures.
Explain the major causes of the foreign debt crisis faced by many developing countries. How has it been managed up to this point? Are there better solutions that you might suggest for resolving the situation?
The economical conditions of the country are much influenced by the proportion of exports and imports. If the imports keeping on surging, the country is likely to borrow money so that it can overcome its economic shortcomings. The government plans that surging import, is likely to increase the local production, and will contribute significantly towards the foreign reserves of the country. The country therefore borrows debts and loans from international monetary agencies or other lending institutes. However the expectations always go wrong, for the simple reason that the internal growth is dependent upon the political, social conditions that persists in the country. Developing countries are often satisfied with the surging imports, for the simple reason that the imports are focusing more on industrial machineries; thereby the government expects that production from those assembled units will be manifold to cater for the current economic unbalance.
The local investor intends to invest accordingly, but because the political and social situations of developing countries are always unpredictable therefore the local investor finds it difficult to invest although the machineries have been imported. The local investor is more interested in the government and its scheme, and if the government and its policies are expected to vary on short notices, definitely the local investor in never in the mood to invest without any assurance or guidance from the government. The developing countries are therefore observed facing economic stagnation, and are found in the troublesome position to return their loans back. Such situations leave the government with no other option but to start borrowing with minimum interest rate, and emphasize on the foreign investment.
The developing countries are listed among the most corrupt countries in the world; the corrupt practices of the developing countries turn the exchange empty without any return. The government is found utilizing the borrowed money for strengthening the governmental departments, and purchasing luxurious items in the name of local requirement. This improper use of funds and loans therefore turn the developing countries in debt problems.
Such situations are also the functions of many outdoor parameters i.e. oil prices, political and economic activities of the neighboring countries, military expeditions.
Following are the solutions to cater for such situations,
Proper auditing by the international observes from United Nations or lending agencies, to ascertain and verify the usage of sanctioned loans.
The government should work on forging understanding a good relationship with the local industries, their grievances should be addressed periodically, and their activities and plans should be appreciated. The government should offer them policies and incentives with assurance i.e. those policies and incentives are firm, and independent of the political condition of the country.
The country should focus more on strengthening the political situation of the country, so that investors within the local community can be encouraged and motivated.
Explain the relationship between the current account of the balance of payments and the international investment position of a nation. Since the late 1980s, the U.S. has become the world's largest debtor nation. Explain why some observers feel that this net negative balance of international indebtedness is a problem and why others do not.
The country's economic policies and budgetary are based on the expected earning and spending. The country has to ensure that the level of export and import are in harmony, and no major increase of import should be appreciated unless the exports are surging. To maintain the equilibrium the country is likely to borrow money and pay for the shortcomings. Therefore the balance of payment can be controlled and monitored if the specific amount of investment is made in the country, the international investment is preferred. If the relationship between the current account of the balance of payments and the international investment position are not synchronized than the country is leaky to experience economic stringency. The government has to adopt such polices and offer certain incentives that appreciate and promotes the investors from abroad to bring money into their country, and the proportion of the money poured can be used by the government to return their loans, and promote economic activities at macro level.
Taking into account the conditions experienced by the United States, the country is the largest debtor. However being largest debtor is not matter of concern, but the subject of importance is the usage of all the sanctioned loans. United States has invested and utilized the borrowings to promoting economic activates of its citizens, who have then further supported by government by investing locally and internationally. Microsoft and Dell are the good examples, the industries that initially relied on the government for economic assistance, are now contributing significantly towards the country's foreign reserves. The activities and performance of the local investors have increased the purchasing power of the dollar currency. From this e conclude that it is more important that how and where the borrowed money is invested, than the amount borrowed.