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Economics

Home > Economics > The global economy > Global aspects of investment and technology

Outcomes
Overview
Content
Review exercises
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Outcomes

HSC topic: The Global Economy is covered in the Board of Studies NSW Stage 6 Economics Syllabus (1999) on pages 31-33. The specific outcomes for this tutorial are:

H1:	demonstrates understanding of economic terms, concepts, and relationships.
H3:	explains the role of markets within the global economy.
H4:	analyses the impact of global markets on the Australian and global economies.
H7:	evaluates the consequences of contemporary economic problems and issues on individuals, firms, and governments.
H8:	applies appropriate terminology, concepts and theories in contemporary and hypothetical economic contexts.

Being up to date and aware of contemporary issues

This tutorial is based on figures available in 2002 and although the concepts and information included are still relevant you should keep this in mind when looking at statistics included.

Students of Economics should be aware of contemporary economic issues so you may wish to find the most current statistics on the number of TNC’s, or compare the current percentage of mergers as a method of acquisition compared to the 1997 figure of 59% of total direct foreign investment. Current facts on global capital market flows may be available from the websites included at the bottom of the page under the section called MORE.

Overview

Globalisation is a force that is shaping a new era of interaction among nations, economies, and people. With this increasing interaction across national boundaries many countries have benefited from increased trade, access to technology and investment. However, globalisation has had negative effects caused by the fragmentation of production and labour markets and the loss of political and social identity.

In this tutorial students will be able to apply their knowledge and economic skills to analyse statistical information and case studies on investment and technology. By applying these skills students should gain a better understanding of the nature and extent of global interdependence.

Content

1. Investment

   In economics, investment refers to the creation of new capital. Investment can occur when domestic companies build factories, develop new technologies or when they invest in capital equipment. Investment can also originate from overseas, the two main types are:

   1. Foreign Direct Investment (FDI) or International Direct Investment

      Foreign direct investment can take two forms:

      1. Greenfield investment to build new capacity such as the establishment of new factories.
      2. The purchasing of assets of existing local businesses by overseas investors.

      Transnational corporations (TNCs) or multinational corporations (MNCs) are companies that are based in more than one country and are the driving force behind this globalisation process. Competition and the pressure to keep costs down force these companies to locate in or relocate to countries that offer favourable conditions. Given this situation it is easy to see that the TNCs are both the vehicle for FDI as well as a product of it.

      According to the United Nations Committee on Trade and Development in 1999 there were some 53,000 TNCs with 450,000 foreign subsidiaries. Capital is becoming even more concentrated in these companies as cross border mega corporation mergers are on the increase.

      Examples are Exxon and Mobil, and the Chrysler and Daimler Corporation mergers. Mergers as a form of acquisition grew from 42% in 1992 to 59% of total direct foreign investment in 1997. Some profit-motivated corporations frequently reshuffle their resources according to changes in supply and demand and the rapid changes in technology. Others are also involved in transfer pricing polices which see many economies at a disadvantage as profits are moved offshore.

   2. Portfolio Investment
      

      Another type of investment is portfolio investment. This occurs when an overseas corporation purchases shares, debentures, or other securities in existing domestic companies. This type of investment is often speculative, as investors are usually waiting for positive movements in exchange rates or interest rates to make a profit. Although, not common practice, investors can withdraw their funds (usually at a loss) if a financial crisis occurs, recent examples are the Asian economic crisis and the non-payment of government bonds by the Russian Federation

      Over the past 20 years portfolio investment has been an important source of growth for the Australian economy. A good example is the Wizard Mortgage Corporation, which recently received large amounts of funds from overseas to help finance the expansion of the business (refer to review exercise 5 for details).

   Some facts on global capital market flows
   

   • World foreign direct investment (FDI) flows have continued to grow rapidly from US$160 billion in 1991 to US$1 118 billion in 2000.
   • Portfolio and other short-term global capital flows grew substantially world wide from US$634 billion in 1991 to over US$3 206 billion in 2000.
   • Portfolio investment to developing countries increased from US$8 6billion in 1998 to US$34.8 billion in 2000 (15% of global capital market flows).
   • Developing countries received a total of 34% of world FDI in 1996, declining to 16% in 2000. Remember, developing countries have 85% of the global population, 30% of world output, and 20% of world trade.
   • The United States share of global FDI increased from 18% in 1995 to 26% in 2000. This reflected the potential for higher returns in the information and technology industries in developed countries during 2000.
   • Global investment patterns and world trade figures are increasingly influenced by FDI and TNCs, for example in 1999 the top ten telecommunications companies controlled 86% of a US$262 billion world market.
   • TNCs contributed more than $US9500 billion to global production in 1999.
   
   
   

2. Technology

   Globalisation has also been fostered by technological progress. One of the major contributing factors occurred in 1990 when the Internet’s World Wide Web was launched. This was of followed by the free distribution of Netscape in 1994 which turned an established but little-known technology for the scientific community into a user-friendly web for people.

   Services can now be delivered all over the world due to telecommunications technology having reduced the distance between countries and the lowering of costs trading.

   This means that services such as accounting, engineering, research, and software development are now performed at locations at a distance from the purchasing organisation. It is much easier for corporations to track down and close on business opportunities around the world, to coordinate operations in all corners of the world and trade online services that previously were not internationally tradable.

   During 1999-2000 technical innovations in the information and telecommunication industries in developed economies caused share prices in these companies to increase very rapidly. This led some investors to buy technology stocks in developing countries in expectation of similar gains. This generated high levels of portfolio investment into the developing countries and a sharp rise in the price of technology stocks during this period. The global slow down in late 2000 saw a drop in the value of technology shares and an increase in capital outflows from the developing countries as investors sort higher returns in other financial markets. The volatile nature of this type of investment has adverse effects on the domestic economy by draining foreign exchange reserves, reducing the resources available for investment and slowing economic growth.

   Some facts about technology over the last decade
   

   • The average cost of processing information fell from $75 per million operations to less than a hundredth of a cent in between 1960-90.
     
   • Airline operating costs per mile came down by half in 1960-90.
     
   • The cost of a three-minute telephone call from New York to London fell from $245 in 1930 (in 1990 prices) to under $50 in 1960 to $3 in 1990 to about 35cents in 2000.
     
   • Corporations worldwide now spend more on telecommunications than on oil.
     
   • Just - in - time purchasing and delivery time in the US has been reduced from five months in 1980, to seven weeks in 1990, to nearly two weeks today.

   Source: The United Nations Human Development Report (1999).

Review exercise 1

Click on the answer that is the most correct.

1. In economics, the creation of capital goods is known as:
   1. savings
   2. enterprise
   3. investment
   4. interdependence
   
   
   
2. The purchase of shares or debentures in an Australian company by an overseas firm is an example of:
   1. direct foreign investment
   2. takeover
   3. transfer payment
   4. portfolio Investment
   
   
   
3. With the creation of a global market for videos Australian producers will:
   1. not be affected due to tariffs
   2. become more competitive
   3. ask the government for help
   4. need to increase their workforce
   
   
   
4. Transnational corporations are able to influence the global economy through their ability to:
   1. move resources around the world
   2. have access to large amounts of capital
   3. form mega corporations
   4. all of the above
   
   
   
5. A Multinational Corporation:
   1. needs OECD approval to expand
   2. operates only in developing countries
   3. is located in a few developed countries
   4. has subsidiaries in a number of countries

Answers

Review exercise 2

Graph 1

Source: World Bank Global Development Finance Report 2000

Examine graph 1 on global capital market flows and answer the following questions.

1. Calculate the percentage increase in FDI for the periods 1997-1998 and 1998-1999. Suggest a reason for the differences.

2. Outline one reason for industrial countries increasing their share of global FDI and portfolio investment in 2000.

Answer

Review exercise 3

Many of the top TNCs corporations have sales totaling more than the GDP of the smaller economies. Table 2 contains some examples.

Table 2

Country or Corporation	GDP or Sales Revenue (US$ billions 2000)
Exxon	206
General Motors	184
Ford Motor	170
Norway	158
South Africa	156
BP	148
Royal Dutch/Shell Group	149
Mitsubishi	126
Poland	136
Thailand	129
Toyota	122
Greece	115
Sumitomo	96

Source: World Bank Development Report 2000 and Forbes Magazine 2001

1. List five examples of other TNCs.

   Answer

2. Access the home page of one of the following corporations.

   • General Motors Corporation
     Corporate Information
   • Ford Motor Corporation
     Annual reports
   • Royal Dutch/Shell Group
     http://www.shell.com/royal-en/directory/0,5029,25409,00.html
     http://www.shell.com/royal-en/0,6091,,00.html
   • Campbell’s Soup Company
     http://www.campbellsoup.com/FinancialCenter/FinancialReports/AnnualReport.cfm
     
     
3. Use your research to answer the following questions.

   1. What is the total global workforce of the company?

   2. Name five countries in which this company operates.

   3. List any diversified business interests of the company.

   4. Construct a table and list 3 advantages and 3 disadvantages of a transnational corporation establishing operations in a country.

Answer

Review exercise 4

Case study: China

China opened its economy to the west in 1978 and has shown the largest drop in absolute poverty (the lack of basic goods and services such as food, clothing and shelter to adequately maintain life) of any region.

After two decades the economy has grown at rates reaching 10% per year. The number of people earning below US$1 a day fell from 260 million to 100 million. The Chinese government estimates that in 1999 the number in has been poverty reduced to 42 million.

A large part of this success in the last 10 years can be attributed to the growth in FDI. In 1990 the stock of FDI was US$19 billion, by 1999 it was US$300 billion.

China has, as a result, become the leader among developing nations and second among APEC nations. Only the United States holds a larger stock.

Most of China’s FDI consists of greenfield investment where it has a comparative advantage, while in the United States FDI is generated more by takeovers of existing enterprises.

Source: The World Bank Group “The Role Foreign Investment and Multinational Corporations in China’s Development 1998”.

1. Suggest one reason for the economic growth in China in recent years?

   Answer

2. How has globalisation improved the standard of living in China?

   Answer

3. Explain the term greenfield investment.

   Answer

Review exercise 5

Case Study: Wizard Mortgage Corporation

Wizard Mortgage Corporation, one of several the non-bank mortgage lenders offering cheap home loans received in May 2001 an estimated $50 million injection from clients of Deutsche Asset Management. This injection of cash will be used to purchase home loan portfolios and bankroll the nationwide expansion of Wizard Mortgage shop fronts to 200 by the year 2002.

This injection of funds by Deutsche gives it a 33% holding in the business founded by Mr. Mark Bourios. Deutsche Asset Management clients Ecorp/PBL had previously injected $25 million in Wizard Mortgage Corporation.

Source SMH 28/5/01

1. Using the case study and information from the tutorial define portfolio investment.

   Answer

2. Outline the reasons for Deutsche Asset Management clients Ecorp/PBL wanting to invest in Australia.

   Answer

More

The United Nations Development Project (2004), http://hdr.undp.org/statistics/ contains useful material on this area of the topic

Forbes Magazine has some interesting articles and information on this topic.