Chapter 10: International Trade, Foreign Investment and the Global Economy
10. 1. International trade, foreign investment and the global economy* EXTERNAL SECTOR POLICY Institutional change is nowhere more apparent than in China’s external policy, where policies since 1979 have transformed its exports and investment sectors. For developing countries such as China, one of the key driving forces in economic development operates not only through domestic expenditure but also by attracting foreign direct investment (FDI). For poor countries, in particular, the availability of foreign funds and technologies is crucial. These economies tend to have few domestic resources, either public or private, to invest in developing crucial physical and other technical infrastructure to underpin economic growth. The use of FDI to further economic development is well understood (see, for example, Stern 2002). For instance, the movement of capital from more to less developed countries, where returns are greater, is a key component of the ‘catching up’ process in the growth literature. The track record of developing countries in attracting foreign long-term capital rather than short-term capital is mixed. Many developing countries have attracted short-term capital flows, which are useful for improving the liquidity of their usually ‘thin’ financial markets, but they have also often brought about destabilising financial crises, seen in the second half the 1990s, in particular in the Asian financial crisis. In contrast, longterm capital or foreign investment in manufacturing capacity, research and development (R&D) facilities, and infrastructure is more attractive insofar as this type of investment is geared toward building and developing national capacity. This type of capital...
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