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Prema-chandra Athukorala

operations of MNEs are therefore a key factor that impinges on the designing of national development policy in the context of a rapidly globalizing world economy. Foreign direct investment (FDI)2 – the only ubiquitous quantitative indicator of the scale of MNE activity – grew dramatically from an average annual level of US$59 billion during 1980–84 to US$844 billion during 2000–04, recording an annual compound growth rate of about 5 per cent (compared with a 3.8 per cent rate of growth in world merchandise trade).3 The share of FDI in total private capital flows increased

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Prema-chandra Athukorala

enterprises in Asian development (appreciation of the real exchange rate).4 This is, of course, part of the natural economic adjustment resulting from the economy’s choice to absorb foreign capital. But the problem with this natural (equilibrium) phenomenon is that capital inflows may well be temporary, and hence in due course real depreciation is likely, which may require a painful and politically unpalatable economic adjustment. Moreover, capital inflow-induced real appreciation can have an adverse impact on economic adjustment during the boom period, hampering the country

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Prema-chandra Athukorala

creating. As a formal test of this relationship, we estimated the following regression: WMSHit ϭ␣ϩ␤1 MNEXSit ϩ ␤2WYit ϩ ␤3RERit ϩ ␤dDitϩ␮ it (3.1) As we have already defined, the dependent variable and the explanatory variable of interest are respectively the world market share in manufactured exports (WMSH) and the share of MNE affiliates in total manufactured exports (MNEXS). WY is world income, RER is the real exchange rate, and Manufacturing for export 65 D is a matrix of the country dummy variables included to capture unobserved country-specific fixed effects, ␣ is

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Prema-chandra Athukorala

for better harnessing FDI in the context of an overall strategy of economic transition. A key theme running through the analysis is that both the rate of FDI involvement in the economy and the national developmental gains from FDI depend crucially on the level of economic transition as reflected in the extent of privatization/restructuring of state-owned enterprises, market-based decision making and the creation of a legal and institutional framework for foreign and domestic private investment (Lankes and Venables 1996, McMillan and Woodruff 2002). The chapter begins

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Prema-chandra Athukorala

This book takes a fresh look at unresolved issues associated with the role of multinational enterprises and foreign direct investment in economic development in light of the experiences of developing countries in Asia.
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Subhash C. Jain and Ben L. Kedia

Reshaping India in the New Global Context 7.  In search of a dream In 1991, India’s economy was essentially in shambles. During 1965 to 1990, under the administration of Lal Bhadur Shastri, Indira Gandhi and Rajiv Gandhi, the country was condemned to a dismal 3–4 percent increase in GDP, known as the “Hindu rate of growth.” That forced India to change. Guided by Manmohan Singh, then finance minister, the government liberalized the economy, scrapped licensing and opened up to traders and investors. In a few years, the results were spectacular. A