The Process of Economic Development

A FMOLS Analysis of FDI Flows to Latin America

“…For example, TNCs have the incentive to charge high prices for inputs to subsidiaries operating in high-tax countries and charge low prices for the output which these subsidiaries sell back to the parent company. In this manner the TNC is able to attain a number of strategic objectives, viz., it is able to keep its reported profit rate low and thus reduce its overall corporate taxes; it is also likely to avoid bad publicity and potential expropriation via accusations of price gouging from the host country government (see Cypher and Dietz, 2014).…”

“…For example, some argue that a policy that keeps the real exchange rate undervalued relative to that of its key investment partners is, ceteris paribus, likely to enhance FDI flows because it artificially reduces the unit costs of the country=s factors of production and thus enables investors to make a significantly larger investment in terms of the domestic currency. Others contend that a policy that leads to a real appreciation of the domestic currency is likely to encourage FDI inflows because it enhances the foreign currency (dollar) value of the remittances of profits and dividends back to the parent company (see De Mello, Jr., 1997;and Cypher, 2014). In light of the conflicting views in the literature on the impact of the exchange rate on FDI flows, it is best, from a policy standpoint, to pursue a credible strategy that maintains the country=s real exchange rate in line with that of its key trading and investment partners.…”

“…Critics of the role of TNCs contend that FDI inflows divert resources away from capital formation because they generate substantial reverse flows in the form of remittances of profit and dividends to the parent companies. They also argue that the reported reverse flows are probably a gross underestimate because of the widespread practice of intra-firm transfer pricing by TNCs, i.e., under-voicing of subsidiaries' exports and over-invoicing of their imports of capital goods and technology (see Cypher and Dietz, 2014;Montecinos and Cordero, 2010;and Ram and Zhang, 2002). , in order to assess the net contribution of FDI to the financing of private capital formation, one must subtract from gross (or net) FDI inflows the repatriation of profits and dividends to the parent companies, often residing in the U.S. for many of the countries in question.…”

“…The empirical evidence also suggests that FDI flows are less volatile because they involve long-term commitments that often lead to the establishment of foreign subsidiaries as well as the acquisition of existing entities via international mergers (see Bosworth and Collins, 1999;Kumar, 2007;and Montecinos and Cordero, 2010). FDI has been referred to as the "good cholesterol" because it is less likely than portfolio investments to leave emerging markets at the first hint of economic trouble as evidenced by their relative stability and growth during the financial and economic crises that have buffeted emerging markets during the 1990s and beyond (see Kumar, 2007;and Cypher, 2014). Finally, to the extent that FDI flows are directed to the establishment of new enterprises in leading manufacturing sectors--so-called "Greenfield investments"--as opposed to the buying of existing firms via mergers and acquisitions--so-called "Brownfield investments"--the economic impact of these flows on long-term regional growth and development is likely to be greater (see Zhuang, 2012).…”

The Prospect of Dollarization in Nigeria: An Empirical Review

“…Nigeria and Panama have relatively identical population growth rate but very diverse PCI as shown in figure 3. Using the Solow model, it was explained that higher levels of savings and investment contributes to higher level of PCI [60]. Nigerians have a poor saving culture.…”