POLSCI 160 Lecture Notes - Lecture 30: Foreign Direct Investment, Panic Selling, 1997 Asian Financial Crisis
5 Jan 2017
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Cons to Globalization
● Free movement of goods leads to labor exploitation in developing countries
○ However, the workers’ gain is relative to their situation before the poor work
● Free financial flows can make financial crisis more likely and severe
○ Can lead to runs on currencies, quicker spreading of crisis
● Free movement of capital allows investors to choose the countries that are most
favorable to investment
○ Could lead to investment in the lowest labor, environmental standards
○ “Race to the bottom” on standards and tax rates
Who Benefits from Free Trade
● Plentiful factors prosper and scarce factors suffer under free trade
○ Developed countries are plentiful in capital and skilled labor
■ Scare in unskilled labor
○ Developing countries are plentiful in unskilled labor
● Trade increases national income, though some are hurt from it
○ Embedded Liberalism: compensating the losers from trade
■ Includes social programs (welfare, unemployment insurance)
○ Losers of trade often organize against free trade
Finance and Globalization
● What is Finance?
○ Banks: take deposits and make loans
○ Insurance: pay to shift the risk
○ Equities: sell shares of ownership
● International Finance: all forms of cross-border investments
● Capital Mobility: the ability for investors to move their money in and out of a country
○ Central feature to the globalized world
● Foreign Direct Investment (FDI): the purchase or construction of assets in another
country
○ Ex: building a factory in another country
○ Value if harder to define, as there are no public markets
● Portfolio Investment: the purchase of financial assets
○ NOT the purchase of real assets
○ Stocks: part ownership of a firm, a claim on profits and a vote on management
○ Bonds: loans to a firm or government where they promise to pay the buyer back
with interest over a period of time
■ Governments use to cover deficit spending
■ Firms use to finance operations or invest in new facilities
○ More liquid than FDI (easier to sell)
■ Sold through markets, no need to find a buyer and negotiate
● Any investment poses several risks for both parties
○ Must follow through on the promise to pay back
○ Must be able to pay the money back
○ Must succeed in the business venture]
Financial Crises
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Document Summary
Free movement of goods leads to labor exploitation in developing countries. However, the workers" gain is relative to their situation before the poor work. Free financial flows can make financial crisis more likely and severe. Can lead to runs on currencies, quicker spreading of crisis. Free movement of capital allows investors to choose the countries that are most favorable to investment. Could lead to investment in the lowest labor, environmental standards. Race to the bottom on standards and tax rates. Plentiful factors prosper and scarce factors suffer under free trade. Developed countries are plentiful in capital and skilled labor. Developing countries are plentiful in unskilled labor. Trade increases national income, though some are hurt from it. Embedded liberalism: compensating the losers from trade. Losers of trade often organize against free trade. Capital mobility: the ability for investors to move their money in and out of a country. Foreign direct investment (fdi): the purchase or construction of assets in another country.
