Financial crisis effect on global FDI flows - Free Essay Example

Sample details Pages: 4 Words: 1180 Downloads: 4 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? The global crisis that started in mid-2007 brought an abrupt stop to the sustained rise in international financial integration over the previous decade (figure 1). Global capital flows had steadily increased from less than 7 percent of world GDP in 1998 to over 20 percent in 2007, led in particular by a dramatic expansion of flows to and from advanced economies. These flows simply evaporated during the crisis, turning sharply negative in late 2008 on heavy selling of foreign assets worldwide. Understanding international capital flows is highly relevant for policymakers. Economic theory Don’t waste time! Our writers will create an original "Financial crisis effect on global FDI flows" essay for you Create order argues that international capital mobility allows for savings to be funneled towards the countries with more productive investment opportunities and for a better sharing of macroeconomic risk between countries subject to different shocks. Hence, the analysis of this financial issue will help to study the factors that have lead to a decrease in global FDI flow and consequently report to stakeholders such as the government and other economic policy makers who will thereby devise strategies to counter any forthcoming similar issues and hence, stimulate foreign direct investment globally. INTRODUCTION In 2007, the financial crisis, which started in the United States subprime market, developed into the most brutal financial crisis since the Great Depression. Only an unprecedented fiscal and fiscal stimulus in the developed economies prevented an even more severe global recession, but the price tag for the economic downturn still remains a record-breaking high. Even the overwhelming estimated costs devalued the true worth of the crisis, as they do not take into consideration productivity losses; moreover, they ignored the unconstructive effects of the crisis on individual and societal development, and it will now take years to recuperate from the setback towards the achievement of the millennium development goals. While some developed markets and a number of large emerging economies are now showing some signs of upturn, the outcome of the crisis on emerging countries has not yet fully unfolded. It is probable that the pessimistic economic and social consequences of the economic downturn, for instance on employment, will be felt in due time particularly, given that a double-dip recession in the developed markets cannot be ruled out. The crisis affected developing economies mainly via the trade channel, increase in commodities prices, and financial linkages. Some emerging market economies which entered the crisis with strong fiscal positions or with large war chests of foreign exchange reserves were able to implement counter-cyclical macroeconomic policies. However, most low-income countries were in a much weaker position and were not able to respond to the crisis with adequate policy actions. As a consequence, the severity of the external shocks directly passed through to their economies. PROBLEM STATEMENT FDI is considered to be the most attractive of capital flow for emerging economies as it is expected to bring latest technology and enhance production capabilities of the economy. During 2003-2007, FDI flows followed an upward trend, fuelled by steady world economic growth, ongoing liberalization in investment regimes and the implementation of large-scale internationalization strategies by a growing number of transnational corporations (TNCs). This led to an unprecedented level in FDI flows in 2007, with flows reaching a historic record of $1.8 trillion. The financial instability triggered by the United States sub-prime crisis which began in summer 2007 has led to a progressive deterioration of the investment situation. Various indicators during the first half of 2008 already suggested a decline in world growth prospects as well as in investors confidence. This deteriorating climate began to leave its first negative marks in investment programmes, including FDI, in early 2008. Accord ing to UNCTADs 2008-2010 World Investment Prospects Survey conducted April-June 2008, 40 per cent of the respondent companies at that time had financial instability or had a negative or very negative impact on their investment expenditures and programmes. The global economic slowdown is projected to continue and recession is still gripping a number of major economies, tighter credit conditions and falling corporate profits, many companies have announced plans to curtail production, lay off workers and cut capital expenditure, all of which has implications for FDI. Aims and Objectives The main aim of this research is to study the effect of the recent financial crisis on the global FDI flows. In order to ease the analysis, there are several objectives that need to be taken into consideration. -Analyze the factors that have lead to the financial crisis. -Study its effect on global FDI flows. -Identify the fiscal policies of international institutions to counter the crisis and stimulate global FDI flow. -Measure the effectiveness of the policies implemented. Methodology The research will consist of both qualitative and quantitative data collection method. Firstly, a a literature study will be undertaken to evaluate past research and hence, address criticism to the theory proposed. In describing the chronology of the impact of the financial crisis on global FDI flows, the proposed study will review and include, where applicable, primary data related to the global FDI flows. A documentary analysis will be carried out from publications of international institutions which reports the Balance of Payments statistics on FDI and economic growths of most countries. The IMF publication International Financial Statistics is an important source of information. UNCTAD and OECD publications are alternative sources but the IMF data gives a more broad analysis by accessibility of data for a larger set of countries. The secondary data collection method will also cover journalistic coverage and other publications. Hence, a regression analysis may be utilized to identify the relationship between different variables. As far as primary data collection method is concerned, interviews with financial analysts may be tape-recorded. Moreover, a questionnaire may be designed to gather information from top management of firms in the financial sector. Benefits of the research The purpose of this research is to investigate the current trends in the cross-border Foreign Direct Investment flows and to identify gaps in current economic policies and to ultimately help countries to devise public policies in the restoration of constructive environment for a quick recovery in FDI flows. Thus, structural fiscal reforms should seek at ensuring more stability in the global monetary system, improved commitment to an open environment for inward and outward FDI and the implementation of policies aimed at promoting investment and innovation are key issues in this respect. Thus, this research will help stakeholders, especially economic policymakers, to deal effectively with crisis and its economic aftermath. Hence, it is important for them to resist the enticement of quick fix solutions or protectionism, and to maintain a favorable business and investment environment overall. The printing and stationary costs consist of printouts for the working papers pertaining to literature review, research proposal and for the overall project. The internet fees are forecasted/ partly incurred while searching for information online. It is based on the local cyber caf rate. The transport costs include bus tickets for groupworks and the forecasted amount to be incurred in carrying the survey is inclusive. The tape-recorder is an important element since interviews will be carried out with stakeholders. The Questionnaire costs include costs for the printing and distributing questionnaires to the targeted population.