Trade, foreign direct investment and the Doha development round



Foreign Direct Investment (FDI).


Definition.

Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development. Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firm’s home country. As such, it may take many forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with a local firm with attendant input of technology, licensing of intellectual property, In the past decade, FDI has come to play a major role in the internationalization of business. Reacting to changes in technology, growing liberalization of the national regulatory framework governing investment in enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of FDI. New information technology systems, decline in global communication costs have made management of foreign investments far easier than in the past. The sea change in trade and investment policies and the regulatory environment globally in the past decade, including trade policy and tariff liberalization, easing of restrictions on foreign investment and acquisition in many nations, and the deregulation and privitazation of many industries, has probably been been the most significant catalyst for FDI’s expanded role[1] .

Effect.

The most profound effect has been seen in developing countries, where yearly foreign direct investment flows have increased from an average of less than $10 billion in the 1970’s to a yearly average of less than $20 billion in the 1980’s, to explode in the 1990s from $26.7billion in 1990 to $179 billion in 1998 and $208 billion in 1999 and now comprise a large portion of global FDI.. Driven by mergers and acquisitions and internationalization of production in a range of industries, FDI into developed countries last year rose to $636 billion, from $481 billion in 1998 [2] .
For small and medium sized companies, FDI represents an opportunity to become more actively involved in international business activities.

Progress.
With the advent of the Internet, the increasing role of technology, loosening of direct investment restrictions in many markets and decreasing communication costs means that newer, non-traditional forms of investment will play an important role in the future.
Many governments, especially in industrialized and developed nations, continue to pay very close attention to foreign direct investment because the investment flows into and out of their economies can and does have a significant impact.

Importance of FDI.

Making a direct foreign investment allows companies to accomplish several tasks:

• Avoiding foreign government pressure for local production.

• Circumventing trade barriers, hidden and otherwise.

• Making the move from domestic export sales to a locally-based national sales office.

• Capability to increase total production capacity.

• Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc.[3] .



Doha Development Round


The Doha Development Round (or Doha Development Agenda) is the current trade-negotiation round of the World Trade Organization (WTO) which commenced in November 2001. Its objective is to lower trade barriers around the world, which will help facilitate the increase of global trade.
As of 2008, talks have stalled over a divide on major issues, such as agriculture, industrial tariffs and non-tariff barriers, services, and trade remedies.
The most significant differences are between developed nations led by the European Union, the United States , and Japan and the major developing countries led and represented mainly by Brazil, China, India, South Korea, and South Africa.
There is also considerable contention against and between the EU and the USA over their maintenance of agricultural subsidies, seen to operate effectively as trade barriers.
The Doha Round began with a ministerial-level meeting in Doha, Qatar in 2001. Subsequent ministerial meetings took place in Cancún, Mexico (2003), and Hong Kong (2005). Related negotiations took place in Paris, France (2005), Potsdam, Germany (2007), and Geneva, Switzerland (2004, 2006, 2008).

Issues:

  • Agriculture

Agriculture has become the most important and controversial issue. Agriculture is particularly important for developing countries, because around 75% of the population in developing countries live in rural areas, and the vast majority are dependent on agriculture for their livelihoods.
The proposal moved by Developing Countries in Qatar (in 2001) called for substantial improvements in market access; reductions (and ultimate elimination) of all forms of export subsidies; and substantial reductions in trade-distorting support. EU and USA have been asked by Developing Countries, led by Brazil and India, to make a more generous offer for reducing trade-distorting domestic support for agriculture.

  • Access to patented medicines

A major topic at the Doha ministerial regarded the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The issue involves the balance of interests between the pharmaceutical companies in developed countries that held patents on medicines and the public health needs in developing countries.

  • Special and differential treatment (S&D)

S&D are special treatment given to developing countries in WTO agreements. They can include longer periods to phase in obligations, more lenient obligations.
The negotiations have been split along a developing-country/developed-country divide. Developing countries wanted to negotiate on changes to S&D provisions, keep proposals together in the Committee on Trade and Development, and set shorter deadlines. Developed countries wanted to study S&D provisions, send some proposals to negotiating groups, and leave deadlines open. Developing countries claimed that the developed countries were not negotiating in good faith, while developed countries argued that the developing countries were unreasonable in their proposals. At the December 2005 Hong Kong ministerial, members agreed to five S&D provisions for LDCs, including the duty-free and quota-free access.
Duty-free and quota-free access (DFQFA) currently discussed covers 97% of tariff lines and if the USA alone were to implement the initiative, it would potentially increase Least Developed Countries’ (LDCs) exports by 10% (or $1bn). Many major trading powers already provide preferential access to LDCs through initiatives such as the Everything but Arms (EBA) initiative and the African Growth and Opportunities Act.

Implementation issues

Developing countries claim that they have had problems with the implementation of the agreements reached in the earlier Uruguay Round because of limited capacity or lack of technical assistance. They also claim that they have not realized certain benefits that they expected from the Round, such as increased access for their textiles and apparel in developed-country markets. They seek a clarification of language relating to their interests in existing agreements.

Benefits

All countries participating in the negotiations believe that there is some economic benefit in adopting the agreement.
A study by the University of Michigan found that if all trade barriers in agriculture, services, and manufactures were reduced by 33% as a result of the Doha Development Agenda, there would be an increase in global welfare of $574.0 billion.
A 2008 study by World Bank Lead Economist Kym Anderson found that global income could increase by more than $3000 billion per year, $2500 billion of which would go to the developing world.


http://www.wto.org/english/tratop_e/dda_e/dda_e.htm


Globalization: trade, transactional costs, free flow of goods, people and capitals


Globalization is a process that has allowed a reduction of transaction costs: the transport of goods, movement of people and movement of capitals. This has no connotations, either positive or negative, but is a consequence of increased economic interconnection of physical and informative flows. The abatement of these costs generated some consequences, positive or negative, depending on how these opportunities could be exploited.
Globalization has enabled the spread of technical innovations that have enabled the development and improvement of living conditions around the world. This happened with different degrees of adaptation, depending on the country.
Countries with more initial opportunities (given the good geo-climatic location and performing institutions) have a higher chance of developing a global interconnection (this was the case of interconnection between North America and Europe that were closer in terms of culture, knowledge and education).
Developing countries however, such as Africa and parts of Asia, have had more difficulty in integrating globally. In their past they were colonies, economically dependent on trade with the European motherland, and this fact led to their lack of preparation to enter the globalized world. However, they had the benefit of the arrival of technological innovations and improvements that have increased in these countries the quality of life, have led to the lowering of infant mortality, and the raising of the average age of life. And all these facts are demonstrated by the demographic transition that is still in progress in these countries. The same transition that has taken place in Europe at the beginning of '900 thanks to the incoming of Second Industrial Revolution.

Exports of goods and services (% of GDP)
Exports of goods and services represent the value of all goods and other market services provided to the rest of the world. They include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, financial, information, business, personal, and government services. They exclude compensation of employees and investment income (formerly called factor services) and transfer payments.

export % GDP.jpg
source: World Bank statistics database


Globalization has also resulted in the liberalization of capital movements. This fact in itself has tremendous opportunities for growth but also enormous dangers. In fact, the capital goes where there is the higher return. And moreover , the capital can move very quickly, with no connection to a country or a land.
So financial capital moves to where there are higher returns on speculation (international financial markets centers) or where the best performance was given by the strongest abatement of cost and wages of workers.
The transfer of capital, delocalization, cut-price production, and the phenomenon of dumping in some cases have generated a destructive combination. This is the case of the former Soviet Republics that after 1989 opened to the globalized world without being prepared with solid institutions and markets and they have been destroyed and economically impoverished.
The globalization, the opening of the flows of goods, people and capitals, is a phenomenon that has occurred (although to a lesser extent), in the early XX: it was called the first globalization, or Golden Age or Belle Epoque. This first wave of globalization brought wealth and improving the life quality. The following years of commercial closure, tariffs raising (it was a real trade war) 1920-1930's) have destroyed all the improvements and they led to two world wars.
This shows us that the solution is not closure of markets or restriction of trade flows.
Globalization has also allowed greater freedom of movement of people. This allowed them to go in search of better living conditions, in addiction to that it has allowed the transfer of knowledge and expertise, but also led to large-scale migration, which resulted in demographic and social problems. Maybe globalization is a phenomenon impossible to impede, because it is a phenomenon made by continued incremental improvements in which we can see the intersection of technology, economics, finance and population movements.


Gross National Income per capita
GNI per capita (formerly GNP per capita) is the gross national income, converted to U.S. dollars using the World Bank Atlas method, divided by the midyear population. GNI is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. GNI, calculated in national currency, is usually converted to U.S. dollars at official exchange rates for comparisons across economies. To smooth fluctuations in prices and exchange rates, a special Atlas method of conversion is used by the World Bank. This applies a conversion factor that averages the exchange rate for a given year and the two preceding years, adjusted for differences in rates of inflation between the country, and through 2000, the G-5 countries (France, Germany, Japan, the United Kingdom, and the United States). From 2001, these countries include the Euro area, Japan, the United Kingdom, and the United States.

GNI per capita (WB).jpg

source: World Bank statistics database

Globalization amplifies the phenomena that it meets: it improves the economic conditions where institutions and markets are suitable to accept it, instead it destroys those countries where markets are weak and unruled.
These weaker countries must be given the instruments to face the opening and globalization of flows, and fit to them, without becoming victims.
Therefore, in this case International Financial Institutions play a fundamental role: Word Bank, World Trade Organization, International Monetary Fund must supervise a proper use of trade tariffs. Developing countries must be able to protect their infant industries and their workers from international competition. They must be able to build and strengthen their comparative advantage and becoming in this way more competitive on the world market.
The protection should not be total and blind: Countries can't maintain their trade balance in positive only through repeated and huge competitive devaluation of the currency (as it did in the past the People Republic of China) because this is a wrong economic tool that can led to devastating consequences.

Current account balance (BoP, current US$)
Current account balance is the sum of net exports of goods, services, net income, and net current transfers. Data are in current U.S. Dollars.

trade balance (WB).jpg
source: World Bank statistics database
  1. ^ http://www.oecd.org/dataoecd/10/16/2090148.pdf
  2. ^ http://www.unctad.org
  3. ^ http://www.goingglobal.com/articles/understanding_foreign_direct_investment.htm