4.5 Role of Foreign Direct Investment Data Response (2)

Posted by: Evangel on: February 19, 2012

• In: Articles | Section 5: Development Economics
• 1 Comment

“Upwardly mobile Africa: key to development lies in their hands”

Question 1: Define the term ‘foreign direct investment’.

Foreign direct investment (FDI) refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.

Question 2: Describe the extent of FDI involving China and Latin American Countries.

China is investing greatly in Latin American countries. The article states, “China has diversified its investment in Latin America from natural resources to manufacturing and the services industry.” This means that China’s foreign direct investment to Latin American countries has expanded to multiple aspects ranging from “oil from Venezuela to timber from Guyana and soybeans from Brazil.”

Question 3: From the article and the table shown above, discuss the benefits to China that result from the Chinese government and Chinese firms investing in Latin America.

According to the article, China believes that its relationship with Latin American countries is a “win-win” relationship, where “the region sells China raw materials, such as copper, iron and oil, while Latin American countries receive goods from China, including mobile phones and cars.” Certainly, this relationship is beneficial to China; it gets natural resources that it lacks most likely at a very low price, since China is more developed than the countries in Latin America. Using those resources, China is able to grow more quickly. In addition, this relationship allows China to export more. Using the natural resources from Latin American countries, China produces processed goods, such as mobile phones and cars, and exports them to Latin American countries. As the article says, “China is Brazil’s largest trading partner and biggest export market. Trade with Chile, China’s second-largest trading partner in the region, reached $17.7 billion in 2009.” Seemingly, this relationship that is constructed through foreign direct investment is advantageous to China in that China can lower its cost and export more through a freer trade with Latin American countries. 

Question 4: Evaluate the impact of inflows of FDI on a developing country of your choice.

Foreign direct investment is beneficial in the short run to both investor and investee. For example, China is benefitting from its investment to Brazil as it receives materials to develop their own economy and from a bigger international market where it sells the processed goods. At the same time, Brazil increases its exports of natural resources to China. Hence, this shifts Brazilian domestic aggregate demand curve further to the right, increasing real GDP level. In addition, it imports China’s goods easily due to the friendly relationship. FDI is also beneficial to Brazil in the long run, since it eventually shifts the long run aggregate supply curve to the right—an ultimate goal of many nations. Nevertheless, FDI is not always beneficial. In the long run, Brazil may be affected negatively due to FDI. The article states, “In Brazil and Argentina, manufacturers have accused China of dumping products in their markets, prompting new tariffs on some Chinese importers. Other countries worry about China’s aggressive efforts to win access to energy reserves.” Dumping is the selling of a good in another country at a price below its unit cost of production, and hence a killer for a developing country that is trying to grow its production of manufactured goods. Also, in many case, country that is less developed does not get paid sufficiently for its exports, while the manufactured goods it receives are outrageously priced. This means that developing countries, such as Brazil, do not benefit from the relationship generated through China’s foreign direct aid in the long run unless Brazil uses its investment effectively without government’s corruption to grow their economy so that it can compete with China.