This document discusses different types of international financial flows including foreign direct investment, portfolio investment, foreign aid, and remittances. It provides definitions and details for each type. Foreign direct investment is defined as investments made to acquire a lasting interest in an enterprise in another country. It discusses factors like approved FDI, registered FDI, and trends in FDI inflows for countries like the Philippines. Foreign portfolio investment consists of foreign purchases of stocks, bonds, etc. in developing countries. Foreign aid criteria and measurements like official development assistance are outlined. Reasons why donors give aid and recipients accept it are summarized.
2. International flow of financial
resources
Private foreign direct and portfolio
investment
Foreign direct investments
Foreign portfolio investment
Public and private development
assistance
Individual national governments
Private NGOs
Remittances of earnings by international
migrants
3. Foreign direct investment
Foreign direct investment (FDI) is a
category of investment that reflects the
objective of establishing a lasting interest
by a resident enterprise in one economy
(direct investor) in an enterprise (direct
investment enterprise) that is resident in an
economy other than that of the direct
investor
OECD Benchmark Definition of Foreign Direct
4th edition
4. Foreign direct investment
Refers to investments made to acquire a
lasting interest by a resident entity in one
economy in an enterprise resident in
another economy. The purpose of the
investor is to have a significant
influence, an effective voice in the
management of the enterprise
Balance of Payments (BOP) Manual
5. Foreign direct investment
flows
New or additional investments paid by a
foreign entity to a resident enterprise in
another country during the period
Capital or equity contributions or
remittances from abroad,
Reinvested earnings,
Technical fees and royalties converted to
equity,
Bonds and other debts converted to equity
and imports converted to equity
6. Approved foreign direct
investment
The amount of proposed contribution or
share of foreigners to various projects in
the country as approved and registered
by the BOI, the PEZA, the SBMA and
the CDC
Do not represent actual investments
generated but rather foreign investment
commitments which may come in the
near future
7. Registered foreign direct
investment
Represent foreign equity investments or
paid up capital and excludes
intercompany loans
Not all approved FDIs are translated
into registered FDIs
Capital inflows from approved FDIs are
spread or expected to be fully
implemented after five years or more
14. FDI spillovers
Skills via labor mobility
Exports and infrastructure improvement
Imitation
Competition
Vertical linkages
Horizontal, backward and forward linkages
Source: Lesher, M. and S. Miroudot. October 2008.
“FDI Spillovers and Their Interrelationships with Trade”
OECD Trade Policy Working Paper No. 80
15. Benefits of foreign direct
investments
Provides management resources where
that could be scarce
Investments can provide a critical
component of technology and
innovation
Brings in additional capacity to employ
the country’s labor and other economic
resources
16. Arguments against foreign
direct investments
Exploitation of economic resources by
foreigners
Foreign direct investment competes with
Filipino enterprise
Foreign direct investments promote
control of the nation’s politics by
foreigners
Foreign investment is inimical to society
and its progress
17. Private portfolio investment
This consists of foreign purchases of the
stocks (equity), bonds, certificates of
deposits and commercial papers of less
developing countries
Benefits:
Investor – increase returns on investment
while diversifying risks
Recipient LDC – raising capital for
domestic firms
18. Foreign aid
Refers to any flow of capital to less
developed countries that meets the
following criteria:
Its objective should be non-commercial
from the point of view of the donor
It should be characterized by concessional
terms
○ Concessional terms mean that the interest
rate and repayment period for borrowed
capital should be less stringent than
commercial terms
19. Foreign aid
It encompasses all official grants and
concessional loans, in currency or in
kind, that are broadly aimed at
transferring resources from developed to
less developed nations on
development, poverty or income
distribution grounds
20. Problems in measuring foreign
aid
Dollar values of grants and loans cannot be
simply added
Different significance to donor and recipient
Foreign aid is tied as
By source
By project
Distinguish between
Real
Nominal
21. Official Development
Assistance
Flows of official financing administered
with the promotion of the economic
development and welfare of developing
countries as the main objective, and which
are concessional in character with a grant
element of at least 25 percent
Organization of Economic Cooperation and
Development (OECD)
22. Official Development
Assistance
Promoting sustainable social and
economic development and welfare;
Contracted with governments of foreign
countries with whom the Philippines has
diplomatic, trade relations or bilateral
agreements or which are members of
the United Nations;
No available comparable financial
institutions;
Grant element of at least 25%
23. Grant element
Reduction enjoyed by the borrower whenever
the debt service payments, which shall include
both principal and interest and expressed at
their present values discounted at ten percent
(10%), are less than the face value of the loan
or loan and grant
The grant element of a loan or loan and grant
is computed as the ratio of (i) the difference
between the face value of the loan or loan and
grant and the debt service payments to (ii) the
face value of the loan or loan and grant.”
24. Global trends
Net ODA disbursements consistently rose
in real terms since the late 1990s and
reached $105 billion (at constant 2004
prices) in 2005, up from about $58 billion in
1997
In 2005, the G8 pledged to increase global
ODA to $154 billion in 2010
Aid flows reached $120 billion in
2009, there’s still a $30 billion shortfall in
the annual ODA level agreed upon by G8
in 2005
29. Global initiatives toward aid
effectiveness
Ownership
Alignment
Harmonization
Managing for results
Mutual accountability
30. Why donors give aid
Political motivations
Marshall Plan
Alliance for Progress
Economic motivations
Foreign exchange constraints
○ Savings constraint or gap
○ Foreign exchange constraint or gap
Growth and savings
Technical assistance
Absorptive capacity
31. Why LDC recipients accept aid
Economic reasons
Role of aid over its amounts and conditions
Unproductive projects
Plundered by corrupt public officials
Greater political leverage to suppress
opposition and maintain power
Increased interference with internal
government affairs
Rich nations have an obligation to support
LDC economic and social development
32. Effects of foreign aid
Aid has promoted growth and structural
transformation in LDC
Retard economic growth rather than
supplement domestic savings and
investment
Aid weariness
Notes de l'éditeur
Foreign direct investment (FDI) is a category of investment that reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor. The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise. The direct or indirect ownership of 10% or more of the voting power of an enterprise resident in one economy by an investor resident in another economy is evidence of such a relationship. Some compilers may argue that in some cases an ownership of as little as 10% of the voting power may not lead to the exercise of any significant influence while on the other hand, an investor may own less than 10% but have an effective voice in the management. Nevertheless, the recommended methodology does not allow any qualification of the 10% threshold and recommends its strict application to ensure statistical consistency across countries.
Incorporated or unincorporated enterprise in which a direct investor who is resident in another economy owns ten percent or more of the ordinary shares or voting power (for incorporated enterprise) or the equivalent (for an unincorporated enterprise)
Represent the amount of proposed contribution or share of foreigners to various projects in the country as approved and registered by the BOI, the PEZA, the SBMA and the CDC. Approved foreign investments do not represent actual investments generated but rather foreign investment commitments which may come in the near future. This consists of equity, loans and reinvested earnings. In the operationalization of computing for approved FDIs as approved and registered with the Investment Promotion Agencies (IPAs), all FDIs including those with less than 10 percent of the ordinary shares are included. The reason is that approved FDIs as rendered by the IPAs have long lasting interest unlike portfolio investments.Approved FDIs in the Information and Communication Technology Sector (ICT) includes investment commitments in the manufacturing of ICT equipments, spare parts and accessories including professional, medical and scientific instruments as well as ICT services e.g., wholesale trade of computers, electronic parts and equipments; telecommunications; renting of computers and other office equipments; computer services and other related activities.
Registered FDIs only represent foreign equity investments or paid up capital and does not include intercompany loans. Hence, not all approved FDIs are translated into registered FDIs since the former consist of intercompany loans and reinvested earnings. In addition, capital inflows from approved FDIs are spread or expected to be fully implemented after five years or more, based on the experience of investment promotion agencies.On the other hand, the BOP FDIs cover cash and non-cash transactions on foreign direct investment flows that are coursed through the banking system. Machinery, equipment and reinvested earnings, which are not cash transactions are included if data are available.
Amid uncertainties over the global economy, global FDI flows rose by 16 per centin 2011 to $1,524 billion, up from $1,309 billion in 2010. While theincrease in developing and transition economies was driven mainly by robustgreen field investments, the growth in developed countries was due largely tocross-border M&As.FDI flows to developed countries grew strongly in 2011, reaching $748 billion, up 21 per cent from2010. FDI flows to Europe increased by 19 per cent, mainly owing to large cross-border M&Apurchases by foreign TNCs. The main factors driving such M&As include corporaterestructuring, stabilization and rationalization of companies’ operations, improvements in capitalusage and reductions in costs. Ongoing and post crisis corporate and industrial restructuring, andgradual exits by States from some nationalized financial and non-financial firms created newopportunities for FDI in developed countries. In addition, the growth of FDI was due to increasedamounts of reinvested earnings, part of which was retained in foreign affiliates as cash reserves.Private companies invest more on regions and countries with the highest financial returns and greatest perceived safety. Where debt problems are severe, governments are unstable and economic reforms are only beginning, the risks of capital loss can be high. The objective of investors in not to develop nor establish business but to maximize the return on capital. In reality investors are not concerned with poverty, inequality, employment conditions and environmental problems.
Compares FDI inflows to the Philippines with flows to Singapore, Thailand,Malaysia, Indonesia, and Vietnam from the mid-1970s up to the year 2007. The figure shows thathuge differences are evident in FDI inflows to the ASEAN 6 countries with the Philippines receivingthe lowest level of FDI inflows particularly in the 1990s and the 2000s. Table 6 and Figure 4 presentFDI stock in these countries. Both show that in 1990, cumulative FDI inflows to the Philippinesamounted to US$ 4.5 billion while Vietnam registered a total of US$ 1.65 billion. In 2000, Vietnamsurpassed the Philippines total of US$18.2 billion as its total FDI reached US$20.6 billion. In 2007,Vietnam soared to US$40 billion while the Philippine total barely increased at US$18.96 billion
In the 1980s, FDI inflows to the Philippines were very small and erraticowing largely to the economic and political instability that beset the countrythroughout the decade. As a result, the Philippines missed out on the rapid growth of Japanese FDI after the appreciation ofthe yen following the Plaza Accord of 1985. During the period 1983–1989,FDI inflows registered a negative average growth rate of -7.5 percent.With the completion of the democratic transition process in the 1990salong with FDI liberalization, substantial improvements were felt as FDIinflows grew by 23.4 percent on the average from 1990 to 1999. However,with another political turmoil in the early 2000s, average FDI inflows fellby 8.69 percent between 2000 and 2003. As a percentage of GDP, averageFDI inflows increased from 0.54 percent of GDP in the 1980s to 1.21 percentof GDP in the 1990s. In the recent period, this reached an average ofaround 1.7 percent of GDP
In the last two decades, changeswere seen not only in the distribution of FDI by sector but also in thesources of FDI. Historically, the US was the Philippines’ largest source offoreign investment. It is evident from the table that its dominance hasbeen substantially diluted by the presence of Japan, Netherlands, HongKong, Singapore, UK, and Switzerland. Between 1989 and 1999, thecumulative share of the US fell drastically from around 56 percent to 25percent, respectively. This dropped further to about 21 percent in 2003.The cumulative shares of Japan and Netherlands both increased from 15percent to 22 percent and from 5 percent to 12 percent, respectively. Amongdeveloping countries, Singapore and Hong Kong have been the mostimportant investors, followed by Taiwan, South Korea, and Malaysia
Japan led all other countries as it intended to pour in PhP 17.4 billion worth of investments, accounting for 39.6 percent of the total FDI during the second quarter of 2012. The amount is almost the same as the PhP17.5 billion commitments made by Japan in the same period last year. These investments are mostly intended to finance projects in manufacturing. Joining Japan as top sources of FDI are the Netherlands, with PhP 9.8 billion investment pledges or a share of 22.3 percent, and the United States of America (USA), cutting in 9.7 percent of the pie or PhP 4.3 billion
On a semestral basis, Japan led all other countries, committing PhP 22.3 billion or 35.7 percent of the total FDI applications, followed by the Netherlands, sharing PhP 12.1 billion or 19.4 percent, and the USA cutting in PhP 6.4 billion or 10.2 percent share. Of these three countries, Netherlands posted the highest increase at 49.4 percent compared to its year ago pledges while Japan registered a 0.4 percent increase. On the other hand, the USA suffered a decline of 57.4 percent during the period
Spillovers are the increase in the productivity and efficiency of domestic firms as a consequence of the presence of foreign firms in the domestic economyOccurs when domestic firms are able to improve their productivity by copying some technology used by the MNCs in the domestic marketOccurs during set up of production facilities and provides technical assistance to improve products Skills via labor mobilityWorkers gain new skills through explicit and implicit training provided by foreign firms. They takethese skills with them when they later accept employment in domestic firms or start their ownfirms.Exports and infrastructure improvementsSince MNCs engage in international trade, they lay the groundwork for domestic firms to benefitfrom distribution networks, logistic services and infrastructure improvements. Domestic firms canalso learn about the regulatory frameworks with which exporters must comply.ImitationThis takes the form of reverse engineering, where a domestic firm creates a similar product basedon the design of a good or service that a foreign affiliate produces. Note that imitation is onlysuccessful if the domestic firm has the technical capacity and ability to source the necessary inputsto produce a similar product.CompetitionThe entry of foreign firms increases competition in the domestic market forcing domestic firms tobecome more productive.Vertical linkagesThrough backward and forward linkages, spillovers are transmitted in the domestic economy. Asforeign firms set up vertical production networks, domestic firms are able to participate in theirproduction chains. Since these suppliers must meet certain quality standards, they benefit from theexperience and knowledge of the foreign firm.Horizontal linkages occur between MNCs and domestic producers within the same sector. A horizontal spillover canoccur when local firms copy some technology used by multinational affiliates in the domestic marketBackward linkages represent connections between domestic firms and their multinationalcustomers where domestic firms supply intermediate inputs to foreign firms. A backward spilloveroccurs when the MNC provides training and help in the management and organization of domesticfirm suppliers as well as technical assistance and information to help domestic firms become reliablesuppliers of high quality products that are delivered on time. Another backward spillover occurs whenmultinational affiliates assist local suppliers in finding additional customers including their sisteraffiliates in other countries.Forward linkages are connections between a domestic firm and its multinational suppliers where domestic firms purchase intermediate inputs from foreign firms. A forward spillover occurs when a multinational affiliate provides training and other technical support to their customers
Policy perspective of developing country governments, the volatility private portfolio investments in relation to interest-rate differentials and investor perceptions of political and economic stability makes them the subject of crafting medium or long term development strategies. Therefore developing countries that rely too heavily on private foreign portfolio investments and tends to hide the structural weaknesses of their economy are more than likely to suffer serious long term consequences
This paper adopts the definition of ODA by the Organization ofEconomic Cooperation and Development (OECD) as “flows ofofficial financing administered with the promotion of the economicdevelopment and welfare of developing countries as the mainobjective, and which are concessional in character with a grantelement of at least 25 percent.”
Republic Act No. 8182, or the Official Development Act of 1996,defines ODA as “a loan or loan and grant which meets thefollowing criteria:(a) It must be administered with the objective of promotingsustainable social and economic development andwelfare of the Philippines;(b) It must be contracted with governments of foreigncountries with whom the Philippines has diplomatic,trade relations or bilateral agreements or which aremembers of the United Nations, their agencies andinternational or multilateral lending institutions;(c) There are no available comparable financialinstitutions;(d) It must contain a grant element of at least twentyfive percent (25%). Grant element...is the reductionenjoyed by the borrower whenever the debt servicepayments, which shall include both principal andinterest and expressed at their present valuesdiscounted at ten percent (10%), are less than theface value of the loan or loan and grant. The grantelement of a loan or loan and grant is computed asthe ratio of (i) the difference between the face valueof the loan or loan and grant and the debt servicepayments to (ii) the face value of the loan or loan andgrant.”
Grant element...is the reductionenjoyed by the borrower whenever the debt servicepayments, which shall include both principal andinterest and expressed at their present valuesdiscounted at ten percent (10%), are less than theface value of the loan or loan and grant. The grantelement of a loan or loan and grant is computed asthe ratio of (i) the difference between the face valueof the loan or loan and grant and the debt servicepayments to (ii) the face value of the loan or loan andgrant.”
A World Bank study in 2007 showed that net ODA disbursements consistentlyrose in real terms since the late 1990s and reached $105billion (at constant 2004 prices) in 2005, up from about $58billion in 1997.In 2005, the Group of 8 pledged to increase global ODA to $154billion in 2010 to help achieve MDG targets, particularly in halvingpoverty.The global financial crisis in 2008, however, derailed themomentum for rich donor countries to sustain their developmentassistance.A UN report, entitled “The Global Partnership for Development ata Critical Juncture,” noted that although aid flows reached an alltimehigh of $120 billion in 2009, there’s still a $30 billion shortfallin the annual ODA level agreed upon by G8 in 2005.
The Philippines has continued to enjoy sizeable amounts offoreign assistance from multilateral and bilateral donors overthe last ten (10) years, totalling more than $119 billion during thePeriod or an annual average of $12 billionOf the total ODA commitments in 2000-2009, $109 billion werein the form of loans while only $10 billion were in the form ofpure grants
It can be observed that ODA loans were highest in2000 and 2001, but steadily showed declines from thereon until2007-2009 within which ODA levels slightly increased. From thegraph, it can be noted that ODA commitments would increaseat the beginning of a new government, such as during the firstfew years of Presidents Ramos and Estrada, but would declinetowards the end of the term of government, such as in the caseof President Ramos and President Arroyo. The same downtrendcannot be said, however, towards the end of President CoryAquino’s term when aid flows from the international communitywere only starting through the newly-created Mini-Marshall Planand donors had not yet suffered the “donor’s fatigue” syndrome.
By type of loan, project loans accounted for the bulk, at $96.5billion or 88%, while the balance of $12.6 billion or 12% arein program loans. In 2009, the $9.6 billion in ODAswere for 95 projects amounting to $7.7 billion or 80% and for 11programs worth $1.9 billion. Among the big-ticket projects forfunding are road and transport systems such as the controversialNorth Rail Project, with $400 million from China, the Subic-Clark-Tarlac Expressway Project ($379.63 million from JBIC), MetroManila Strategic Mass Rail Transit System Development Project($692 million from JBIC), LRT Line 1 Capacity Expansion ProjectPhase II ($206.13 million from JBIC).On the other hand, major government programs that receivedforeign funding included the Power Sector Restructuring Program($300 million from ADB), the Health Sector Development Program($213 million from ADB), and the Metro Manila Air QualityImprovement Sector Development Program ($536.11 millionfrom JBIC).
By funding source, GOJ-JICA was the biggest source ofODA loans over the last decade, with an aggregate amountof $57.2 billion, accounting for more than half of the total netcommitments during the period (Figure 2). This was despitethe marked drop in Japanese aid in the second half of theperiod, averaging only $4.39 billion compared with $7.04billion in 2000-2004. In 2009, GOJ-JICA extended roughly$3.5 billion, the lowest level during the decade.Multilateral funding agencies ADB and World Bank were the nextlargest donors, accounting for 17% and 15%, respectively, of thetotal ODA portfolio.Other major funding sources were the United Kingdom ($3.57billion), France ($1.3 billion), Germany ($1.3 billion), and Korea($935 million).
The Philippines is one of the signatories to the Paris Declarationon Aid Effectiveness in 2005 which outlined the followingcommitments:Ownership - Developing countries will exercise effectiveleadership over their development policies and strategies,and coordinate development actions.Alignment - Donor countries will base their overallsupport on receiving countries’ national developmentstrategies, institutions and procedures.Harmonization - Donor countries will work towards amore harmonized, transparent, and collectively effectivesystem.Managing for results - All counties will manage resourcesand improve decision-making for results.Mutual accountability - Donor and developing countriespledge that they will be mutually accountable fordevelopment results.
Marshall Plan Aimed at restructuring the war-torn economies of western Europe as a means of constraining the international spread of communism. There has been a shift in the emphasis toward political, economic and military support for friendly less developed nations considered geographically strategic. Aid programs to developing countries are oriented toward purchasing their security rather than promoting long term social and economic development. Recent increases in aid to African countries with public health crises including HIV assistance may be due in part to concerns that disease may spread internationally or lead to destabilizing state collapse and possible havens for terrorists. Alliance of Progress Inaugurated early in 1960s that promotes Latin American economic development was formulated primarily as a direct response to the rise of Fidel Castro in Cuba and the perceived threat of communist takeovers in other Latin American countries. As soon as the security issue lost its urgency and other more pressing problems came into lights the Alliance for Progress stagnated and fizzled out. It only shows that when foreign aid is seen primarily as furthering the interest of the donor country, the flow of funds tend to vary with the donor’s political assessment of changing international situations and not relative to the potential needs of the recipients. Economic motivations Foreign exchange constraints Two gap model is that most developing countries face either a shortage of domestic savings to match investment opportunities or a shortage of foreign exchange to finance needed imports of capital and intermediate goodsGrowth and savingsTechnical assistanceFinancial assistance needs to be supplemented by technical assistance in the form of high-level worker transfers to ensure that aid funds are used most efficiently to generate economic growth. This labor gap filling process is thus analogous to the financial gap filling process. Absorptive capacityThe amount of aid should be determined by the recipient country’s absorptive capacity which is the ability to use aid funds wisely and productively (meaning as donors want them to be used). Donor countries decide which LDC are to received aid, how much, in what form (loans, grants, financial or technical assistance), for what purpose and what conditions on the basis of the donor countries’ assessment of LDC absorptive capacity.
Foreign aid is a crucial and essential ingredient in the development process. It supplements scarce domestic resources, helps transform the economy structurally and contributes to economic growth. LDC’s acceptance is based largely on their acceptance of what the donor’s perceptions of what the poor countries require to promote their economic development.Role of aid over its amounts and conditions. LDC would like to have more aid in the form of outright grants or lonf-term low-cost loans with minimum strings attached.A good deal of aid in this form has become wasted in showcase but unproductive projects or actually been plundered by corrupt government officials and their local cronies due to less accountability on the part of donor recipients. Aid is seen by both the donor and the recipient as providing greater political leverage to the existing leadership to suppress opposition and maintain power itself. In such instances, assistance takes the form not only of financial resource transfer but of military and internal security reinforcement as well. The problem is once is aid is accepted, the ability of the recipient government to extricate themselves from the implied political or economic obligations to donor and prevent donor governments from interfering in their internal affairs can be greatly diminishedWhether on grounds of basic humanitarian responsibilities of the rich toward the welfare of the poor or because of the belief that the rich nations owe the poor nations conscience money for past exploitation, many proponents of foreign aid in both developed and developing countries believe that rich nations have an obligation to support LCD economic and social development.
Aid weariness is the concept whichstates that taxpayers wanted to focus more on