MBA 674- Globalization, New Economy and Ethics
MBA 674- Globalization, New Economy and Ethics 21022
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Foreign Direct Investment and The Role of O’Neill’s Growth Environment Scores According to the U.S. Department of Commerce, FDI occurs whenever a U.S. citizen, organization, or affiliatedgrouptakesaninterestof10%ormoreinaforeignbusinessentity.Foreigndirectinvestment occurswhenafirminvestsdirectlyinfacilitiestomarketorproduce aproductinaforeigncountryand once a firm undertakes FDI, it becomes a multinational enterprise. FDI takes two forms; 1. Greenfield investment: - This form of FDI involves the establishment of a new operation in a foreign country. It is generally costlier and slower to execute compared to merging or acquiring a stake in a foreign entity. 2. Merger or Acquisitions: As the name implies, business firms merge with or acquire foreign firms to get exposure to foreign markets. Types of Acquisitions; a. Minority: 10-49% interest in the foreign firm’s voting stock. b. Majority: 50-99% interest in the foreign firm’s voting stock. c. Full Outright Stake: 100% interest in the foreign firm’s voting stock. Alternative Channels to Foreign Direct Investment Exporting Licensing The Growth Environment Score (GES) model developed by Jim O’Neill, comprises of 13 variables; 5 macroeconomic variables and 8 microeconomic variables. Macroeconomic Variables Microeconomic Variables Inflation Use of mobile telephones Government Deficit Use of the internet Investment Spending Life expectancy External Debt Education Degree of Openness Rule of law Corruption Stability of government Itispertinenttonotethattheflowandstockofforeigndirectinvestmentsinanycountryisdependent on the attractiveness of its growth environment scores. Consequently, the higher the GES score, the more productive a country’s economy, and the more attractive its economy for foreign direct investment. According to Jim O’Neill, education is the most important variable in driving the working population to higher productivity. This explains the higher relative attractiveness of China for FDI inflows compared to India. Inflation, a key macroeconomic variable effectively determines the purchasing power of a country’s citizen. A lower and stable inflation fosters the transparency and credibility of the financial system, bolsters investor confidence with respect to the certainty ofthe value ofmoney, increases the value of disposable income, thereby increasing consumer spending and increases business investment spending. The net result of a low and stable inflation is increased aggregate output, expenditure and income, a recipe/prerequisite for foreign direct investment in an economy. The evidence of achieving a low and stable inflation for increased FDI is a typical example of Brazil. Achieving a relatively and stable inflation, with improved macroeconomic variables facilitated the return of foreign direct investments by foreign firms and countries. This ultimately led to an appreciation of the Brazilian Real, which in turn led to higher purchasing power of the Real with respect to the purchase of foreign assets and goods. The case of Brazil tells us that a lower and stable inflation will improve the standard of living of citizens and the country in general. Benefits of Foreign Direct Investment With the benefits of International trade and Globalization, FDI leads to increase in the variety of products in an economy, which could lead to improvement in the standard of living. The entryofWalmartinto Mexico andChina. A further push forWalmartin India to help dealwith its agricultural waste. Foreign direct investments can be seen as a reward for a country that develops its growth environment scores. For a developing nation that improves its inflation rate, technological readiness, legal and political system, external debt position and in general a favourable and steady macroeconomic policy, etc., could experience the sharing and transfer of intellectual properties in an advanced nation to a developing nation (that has embraced the ethos of improving its growth environment scores), thereby leading to efficiency, development in the areas of health, construction and the general welfare of an economy. Foreign direct investment could be a driving force of a country to further improve its growth environment scores to maintain or sustain the flow of foreign direct investment in its economy. We are living in a world, where individuals, organizations (small, big or multinational) and countries, have developed an eagle’s eyes system to watch the relative productivity of other countries. A drop in political stability, a signal of crisis, an improvement in infrastructure compared to previous levels etc., all determine the future of foreign direct investment in a country’s economy. Put simply, the flow and stock of foreign direct investments in an economy is dependent on whether it sustains and improves its growth environment scores relative to current levels. In other words, foreign direct investment is path-dependent on the previous and present levels of foreign direct investments, which in turn is dependent on the attractiveness of the economy’s GES compared to its previous and current GES. The question is what we can we do to increase our productivity? The answer is We are coming to your country because we see and envision sustenance and growth. Michael Santoro: China 2020 History and Future of ACFTU in China History of ACFTU in China The traditional role of the ACFTU was to provide services to workers such as hobby centres and sports outings. It did not attempt to represent workers against management or bargain collectively over layoffs, working conditions, and pay. The ACFTU has always been an arm of the state and controlled by the Communist Party. The ACFTU regards itself as a union with Chinese characteristics concerned more with harmonious relations than with confrontation. In 1980, when workers took to the streets to show support for the students occupying Tiananmen Square, the ACFTU sided with the government. Nevertheless, as a result of the reform era, the ACFTU is undergoing some changes. It lost over 30 million members due to layoffs in connection with the restructuring of state-owned enterprises (the dismantling of the iron rice bowl). Consequently, the ACFTU turned to migrant workers in the newly emerging private sector, especially those that worked for foreign companies. At the end of 2006, the ACFTU claimed to have almost 41 million workers as members. Of the most dynamic shifts in ACFTU was the unionization of Wal-Mart. Despite the ACFTU’s seeming success with unionizing Wal-Mart, indigenous, independent labour organizers in the region still view it as an arm of a repressive regime. Han Dongfang (A highly respected labour activist who spent 2 years in jail for hisunionorganizingactivities)termedtheWal-MartACFTUunionan“instantnoodle union that gives people false hope”. According to Michael Santoro, regionalism plays an important factor in determining the independence and effectiveness of the ACFTU in representing workers. He further states that the ACFTU has historically reverted to its traditional role in promoting a harmonious society in areas where workers have significant material differences with employers and where there is a possibility of confrontation and conflict. According to AFL-CIO general counsel Jon Hiatt, the ACFTU has in recent times focused more on the productivity and enforcement of workplace discipline for its workers rather to the detriment of its more constitutional duty to protect workers’ right. This kind of behaviour exemplified by the ACFTU, according to Michael, has let off a bad signal for independent labour rights organizations partnership with the ACFTU in China. The Future of ACFTU Michael posits that close partnership with the ACFTU could undermine the activities of a small but independent labour movement in China. However, he recommends engagement with ACFTU only if the independent associations will help push the ACFTU toward stronger orientation and ultimately greater independence from the government and Communist Party. He observes that independent grassroots organizers and advocates are playing an important role in advancing worker rights, which merit the material and moral support of the internal labour movement. Michael believes that the coming decade will witness the rise of trade unionism as the primary response to the labour rights of migrant workers. He further stipulates that the ACFTU’s evolvement into a true trade union is partly dependent on the independence ofthelegalandpoliticalsystem’saswellastheextent to whichthelegal system promotes greater democracy and human rights. Finally, Michael Santoro decries the uncertainty of the evolvement of the ACFTU into a true independent trade union, and thus recommends a cautious approach by the international labour movement in promoting labour rights of Chinese workers. The cautious approach employed by international labour movement in China, include training sessions and sharing of expertise on questions of health and safety as well as collective bargaining. Michael believes the cautious approach of promoting labour rights to be wholly appropriate for labour unions and to serve as a relevant model for how foreigners should responsibly operate in China. Globalization, Technology and Education and its impact on middle class and poor Globalization and Its Impact on the Middle Class and Poor Nilekani believes that globalization among other factors, is a channel through which the Indian people, especially its middle class and poor, can have access to a variety of resources and opportunity. Globalization can help open up India’s borders and facilitate upward mobility of its poor to middle class levels and the middle class to wealthy levels. Put simply, Globalization can help increase the per-capita wealth of India. With the vast number of people expected to come of age and join the workforce, India will not be able to provide jobs through its domestic market alone. Because of Globalization, Indians can now travel abroad to further their education and intellectual needs as well as gain work experience in more developed economies, be gainfully employed and later return to India equipped to lead a generation of intellectuals and entrepreneurs that create more markets and jobs for its young workforce. Technology and its Impact on the Middle Class and Poor Nilekani believes that “technology in general and information technology in particular has a huge role to play in providing better public services but also in enabling anopen,inclusive andlesscorrupt society. Technology hashelpedtransform India’s Railway System, through the computerization reservation system has helped create efficiency by allowing the poor to bypass the long queues for tickets and the ineffectual often exploitative bureaucracy. However, Nilekani decries that while access and information have improved from its lowest point, much of the rural India have lacked access to technology (via mobile phones, Internet) as a result of the terrible state of infrastructure in the rural regions. Consequently, the private sector has helped push for the supply of IT products and services, bolstered by the demand for IT-based services in rural India. Technology has helped create upward mobility for the poor via internet and computers, via the IT kiosk through the provision for all kinds of services from checking crop prices to accessing e-governance services, getting treated through telemedicine, and for education. For the rural India, internet and computers are their passports to all kinds of opportunity. Education and its Impact on the Middle Class and Poor As India as begun to grow economically, Education has become an effective channel for the upward mobility of India’s massive middle class and poor. Indians now perceive education as a chance for better employment prospects than what was previously thought. The poor in India previously sought government jobs, which guaranteed lifetime security and easy hours. Jobs such as sweepers, cooks, janitors. With the advent of the educational system, the poor have increased their hope for a better life by choosing appropriate schools for their children, which in turn improved the quality of education services in the public and private sector. According to Nilekani, limiting education also limits the ability of poorer people to increase their access to resources even in successive generations- and it shuts the poor out of economic opportunities. It fences them within unfair social systems and limits their ability to question them. Literacy has always had a revolutionary impact, and throughout history, universal education led to rapid, widespread social reforms. In the case of India, education can trigger cultural and social change. An evidence of this is when the educated class became the pivot on which the Indian independence movement turned. A key tenet of Education in India by Nilekani is the English language. Nilekani states that “English is emerging as the language of aspiration for the Indian population- as a passport to a lucrative job and entry into the country’s growing middle class. Chinese Pyramid and Corporate Social Responsibility Michael Santoro asserts that the Corporate Social Responsibility system in China is a flawed system but noble experiment that has yielded significant benefits for some Chinese workers. However, despite the flaws of the CSR system, the resources devoted to CSR make it possible to bring marginal improvements in working conditions on a scale not otherwise possible. He also strongly affirms that theCSRmovementmustbemeasuredbyhowmuchitimprovesthelivesofordinaryworkersinChina. The Chinese Pyramid attempts to describe the limitations of the Corporate Social Responsibility System in China. It is important to note that the CSR in China is a private and voluntary system, and thus covers only a fraction of export-sector workers. Therefore, the Chinese Pyramid helps to give a graphical picture of the sets of Chinese workers covered or not covered by the CSR system. Third-Tier These are workers that work for the famous brand-name companies such as Nike, Adidas, Disney, Liz Claiborne etc. These companies have insincere and hypocritical CSR programs. The Second-Tier These are workers that work for the many private factories that specialize in products less popular than famous global brands such as Nike, Adidas, Disney, Liz Claiborne etc. First-Tier These are labourers working for the private-sector factories that manufacture for the domestic market. Much of the Corporate Social Responsibility system is undertaken by companies at the third-tier layer of the pyramid below. These are the companies that have insincere and hypocritical CSR programs. The effectiveness of factory monitoring, which is a barometer/gauge of the strength of the CSR conducted, is dependent on the seriousness with which brand-name companies approach corporate social responsibility. In the event that the third-tier companies become exposed as a result of their lack of adequate factory monitoring (and consequently the unreliability of their CSR systems), by NGOs, labour activists and the press, they are faced with two options; 1. Resist change and continue with an incoherent and ineffective CSR programs. 2. Devote substantial financial and human resources to CSR via the following channels; I. They adopt all of the hallmarks of effective CSR programs II. They consent to the independent monitoring of their plants & factories. III. They have written, detailed and specific monitoring criteria for independent inspectors. IV. They consent to unannounced inspections. V. They publish the results of their factory audits publicly, usually on the company website. VI. They monitor their subcontractors and also attempt to devise strategies for remedying the underlying problems exposed by the factory audits. Despite the positive drift by the top-tier layer companies to responsible and accountable CSR systems, the potency of the feedback loop of these CSR systems are often decreased or rendered worthless by social responsibility evasion and deception. The social responsibility evasion and deception is a system designed to fool and bypass factory audits. Example includes false time cards and payroll records, coercion of employees to lie during interviews, the renaming of certain factory buildings to create a false hood of a smaller community rather than a business. Summary of the Corporate Social Responsibility System in China 2020 The CSR system does not reach most Chinese workers. The CSR system covering Chinese workers in the export sector, are mostly insincere and hypocritical. The CSR system that are practiced with integrity and that adopt independent factory audits, are often evaded by unscrupulous subcontractors. Why the Corporate Social Responsibility has failed to deliver? The lack of a positive market place premium for ethical behaviour, which is primarily the failure of the social responsibility industrial complex (the variety of NGOs that oppose violation of labour conditions and rights) to place value in their various certification procedures. The reasons for the absence of this market place premium are as follows; a) The lack of credibility of the CSR system as a whole because of cases of hypocrisy and ineptitude in monitoring exposed by confrontational NGOs and the media. b) The persistent balkanization of CSR: - NGOs such as the Fair Labour Association, SA8000, and Ethical Trading Initiative (ETI) have separate standards of CSR, and have failed to implement the necessary initiatives to add value to their certification programs. The role of government and corporate social responsibility in economic development The Role of Government According to Jim O’Neill’s growth environment scores (GES), the political stability of a country goes a long way in determining the standard of living of its citizens as well as the perception of the economy in the eyes of the world. A country whose government faces greater difficulty in adopting changes that could bring about real positive changes, will be the ones to have the slowest growth in GDP, Jim O’Neil (2012). The government is seen as an agent that provides the basic requirements for economy to thrive, develop and grow. Basic requirements such as Health and Primary Education, Higher Education, Infrastructure, Macroeconomic policies (Inflation, Exchange rate, Ease of doing business etc.,) determine the level of economic development in a country. If a government fails to provide these basic requirements, it becomes a predator to economic development in its territory. Consequently, the existence of the provision of these basic requirements is a barometer to explaining the status of economies worldwide ranging from developed, developing and emerging – Global Competitiveness. A government is responsible to promoting the fundamental human rights of its citizens and the rule oflaw,whichinturniscreditedbyasoundandindependentlegalandjudiciarysystem.Consequently, anindependentfunctioninglegalsystemupholdsthevaluesofprotectinglifeandproperty,protection of intellectual properties, providing justice to aggrieved parties and maintaining order and sanity in the economy. Robertson notes that “greater political stability will address the concerns of those countries or business firms who don’t yet invest in Africa and may face slow growth in the future, ultimately boosting growth as new capital is attracted to the African continent as well as the increase in per capita GDP both in Africa and in the participating countries. An example is the case of China’smassive foreign direct investments in Africa to cater for its raw material needs and slow growth concerns. The role of Corporate Social Responsibility Corporate social responsibility is one of the hotly debated topics in the business and global community. What is corporate social responsibility? What are the benefits of corporate social responsibility? What are the limitations or the risks of corporate social responsibility? What is the future of corporate social responsibility in the economic development? What is Corporate Social Responsibility According to Milton Friedman, the social responsibility of a business is to increase profits as long as the company stays within the rules of the law. Cultural relativism contends that a company should adopt the ethics of the culture in which one is doing business. The righteous moralist monolithically applies home-country ethics to a foreign situation, while the native immoralist believes that if a manager of a multinational sees that firms from other nations are not following ethical norms in a host nation, that manager should not either. The concept of social responsibility refers to the idea that businesses should consider the social consequences of economic actions when making business decisions and there should be a presumptioninfavourofdecisionsthathavebothgoodeconomicandsocialconsequences.Advocates of this approach argue that businesses, particularly large successful businesses, need to recognize their noblesse oblige (A French term that refers to honourable and benevolent behaviour that is the responsibility of successful enterprises). In other words, businesses must act in honourable and benevolent manners that have positive social and economic implications for the society. In termsof a domestic economy, the concept ofcorporate social responsibility entails that indigenous businesses must and should the following; Make good decisions that lead to good results that positively impacts their immediate community, the society and the economy in general. For example, a technology company develops a product that gives its huge profits and in return for community patronage and use ofgovernmentsocialamenities,canorganizeprogramsthatbenefitthelivesofpersonsinthe society and economy in general. Must not engage in the production of goods and services that could lead to the loss of lives, environmentdegradationandworsenthestandardoflivingofthe immediate community and the economy in general. Corporate Social Responsibility advocates for greater responsibility for successful Multinational Corporations. According to Michael Santoro, “Multinational enterprises have a fair share duty to promoting economic reforms which ultimately bringing about social and political reforms in the areas of labour rights, product safety, internet freedom and rule of law”. He further advocates for the promotion of fundamental human rights by Multinationals by proposing that fundamental human rightsarecorrelativedutiesofcorporations’dutiestoactinasociallyresponsiblemannerthatbenefits the society. He concludes that the existence of a human right, absent some overriding moral justification or excuse, imposes a secondary duty on actors not to violate that right or to remedy the violation, even in cases in which those actors are not themselves directly involved. What a responsibility? Recent economic history and future business opportunities in China, India and Africa Talk about what Africa has achieved through time, and the future business opportunities. Read Robertson to get this. India’ s Demographic dividend- Young Population, Talent pool etc., A rising middle class. Read Venkatesan’s Conquering the Chaos to understand the future business opportunities in India Read Robertson and China 2020 to get the future business opportunities in China. Michael Santoro- China 2020 China’s New Labour Contract Law in China The most important pro-worker initiative is the new Labour Contract Law that went into effect in January 2008. The new Labour Contract Law marks the transition from a labour system in which the government was the sole employer and where a worker’s life could be so crucially affected by the arbitrary whims of an immediate supervisor, to one in which employees- for a moment only in theory- enjoy substantive and procedural workplace rights. However, though Chinese workers face fewer social welfare due to the dismantling of the “iron rice bowl”, many workers’ interests will be recognized as substantive legal rights and guarded by procedural rights. The new Labour Contract Law was passed in June 2007, and it specifies the following; It requires employers to provide written contracts to all long-term workers and that short-term workers be hired as long-term workers with social insurance benefits after their contracts have been renewed twice. It contains severance pay provisions and tightens the conditions that allow a company to fire a worker. It empowers company-based branches of the state-run All China Federation of Trade Unions (ACFTU) to bargain with employers over salaries, bonuses, training, and other benefits and job duties. Michael states that the Labour Contract Law will take may years before achieves its “on paper” potential because of the global economic slowdown and the underdeveloped nature of legal rights and the legal system in China, Michael highlights the following consequences of enforcing the Labour Contract Law; Significant economic effects on China’s manufacturing industry; I. Higher administrative costs for firms as a result of the requirement to give written employment contracts to all employees. II. Firms will have less flexibility to hire and fire. III. The Severance provisions in the employment contract will increase operational costs of firms as well as worker benefits. IV. Further costs to business firms in the event that the ACFTU becomes more of an independent trade union as well as bargains actively for its workers at the factory, regional or industry level. Other Temporary or Short-term effects of the passage of the new Labour Contract law Outright evasion of compliance with the new Labour Contract Law through not-so-pleasant and shocking means. An example is Huawei Technologies in the southern province of Guangdong, which called on workers who had been with the company for more than eight years to “voluntarily resign”. Huawei intended to rehire some and sign them to a contract and to pay compensation to the workers they intended not to rehire. Consequently, Huawei’s plan was widely condemned and eventually the ACFTU persuaded the company to withdraw its plans. The moving away of smaller firms further away from the reach of NGOs and government authorities to evade government enforcement of labour laws. Michael justifies the reaction of company owners (ranging from ignorance/avoiding the reality of the enforcement of the labour law to outright attempts to circumvent the labour law), based on two important events; 1. The complexity and diversity of the factories producing for the export sector. 2. The current state of the Chinese political and legal system: - A less independent legal system does little to protect violation of labour rights as well as human rights. Companies Likely to be negatively affected by the Compliance costs Small companies as opposed to Larger companies are most likely affected with complying with the new Labour Contract Law as a result of; i. Perhaps these small companies may not have been paying the minimum wage and other worker benefits and compensation (which in turn could be due to lack of scrutiny by NGO’s and the fact that they appear at the lowest Chinese Pyramid). ii. The lower scale of operations and lower administrative overhead operated by small companies compared to larger companies, would definitely alter and definitely increase their operating cost structure. iii. Lastly, these costs could likely smaller companies to go out of business, which in turn would lead to an increase in unemployment rate and reduction in the output of goods and services produced generally in the Chinese economy, as evidenced by the Gross Domestic Product. Companies Likely to be least affected by the Compliance costs Larger companies, especially famous-brand name companies are likely to be able to cope or absorb the costs of complying with the new Labour Contract Law as a result of the following factors; Higher economies of scale (through large production volumes, specialized employees (human capital) and specialized equipment) and higher competitive advantage enjoyed by larger companies could make them least vulnerable in absorbing the higher costs of compliance. The already existing compliance with the minimum wage, other worker benefits and compensation (due to scrutiny from NGOs and the need to attract more workers) and an existing relatively higher administrative overhead compared to small companies, would give them a lower net compliance cost. Their ability to develop long-term relations with other famous brand names could help them cushion or reduce the costs imposed by the Labour Contract Law. Michael highlights the two factors that determine the actual costs of complying with the new Labour Contract Law as well as the associated increase in labour costs; The actual costs of compliance will depend primarily on; The degree of compliance with legal requirements prior to the passage of the law (the higher the compliance prior to the passage of the Labour Contract Law, the lower the post-compliance costs will be, in complying with the Labour Contract law) The ability of firms to efficiently absorb the administrative costs of compliance He affirms that the result of both factors above have a long-term implication on China’s foreign export sector manufacturing—**Significant consolidation. **Because of the higher costs associated with adapting to the specifications of the law, many smaller firms might be forced to go out of business, while others merge to achieve the economies of scale needed to absorb the higher costs of compliance. According to Michael, although industry consolidation can help provide a buffer or absorption shock to reduce the loss of comparative advantage enjoyed by the Chinese manufacturing industry (in terms of the labour productivity of Chinese workers as well as differences in labour costs), the passage of the new Labour Contract Law has slowed China’s pace of its “race to the bottom”. The “race to the bottom” terminology explains how brand-name companies search the world over to outsource their manufacturing to the cheapest location and how in response developing countries attempt to attract investment capital by competing with each other through ever lower wages and harsh working conditions. In other words, China risks losing some of the brand-name companies to other countries with lower wages. 1More importantly is the changing dynamics in China’s economy & manufacturing industry; rising wages, a consumption-driven economy and a more educated workforce, would further slow China’s pace of its “race to the bottom”. Michael Santoro posits that China’s ability to outweigh the increased labour costs associated with the new law ultimately depends on the productivity of its labour workforce and the relative efficiency of its entire supply chain. O’Neill’s view of inflation for the developing world. A low and stable inflation is necessary for planning by businesses, which encourages investment spending by businesses and higher purchasing power for consumers. Importantly, a low and stable inflation is a clear sign of transparency that makes an emerging economy attractive for foreign direct investment inflows from the foreign business community. Jim O’Neill stresses that for the N-11 economies or an economy in general to achieve a low and stable inflation, they require an independent central bank to maintain its focus on the stability of the monetary and financial system of the economy in particular. An example of the importance of low and stable inflation on economy performance is the case of Brazil. Higher trending inflation created uncertainty for businesses and lower investment spending, and importantly for consumers as the real value of the Real was not only very low but uncertain itself as a result of an upward-trending volatile inflation rate. Two major forces fuelling economic growth Demography Productivity Demography Demography is destiny. More working people make an economy easier to grow because of the larger output produced. And as more people work, they earn more wages, which increases consumption, the greatest factor contributing to a country’s economy growth. The power of demography is exemplified in the United States population in the 1970s (201 million) and in 2011 (300 million). The major reason why the United States outperformed Europe economically from 1980 to 2010 was not necessarily because US workers were productive than Europe workers but that more people in the United States had more people entering the workforce and working longer hours. The dividends of demography can be likened to the competitive advantage a business organization can possess/demonstrate by producing a large volume of goods at a lower price per goods sold compared with a relatively lower volume with higher price per goods sold. According to Jim O’Neill, countries with aging population and low-fertility rates will have the slowest GDP growth rates. Jim O’Neill strongly posits that with relatively modest growths, the combined BRIC GDP would surpass that of the United States by 2020 partly as a result of an overwhelmingly larger population of the BRIC countries. Productivity According to Jim O’Neill, as more people enter into the labour force, an economy would have increased output with the exception of the absence of productivity. Thus, countries with a young, expanding labour force that are becoming increasingly efficient will have the largest gains in the gross domestic product measure of economic growth. Jim O’Neil further affirms that the most important variable in driving a country’s working population to higher productivity is Education. Forecast accuracy of GES model- What was Underestimated and Overestimated? The Growth Environment Score (GES) model developed by Jim O’Neill, comprises of 13 variables; 5 macroeconomic variables and 8 microeconomic variables. Macroeconomic Variables Microeconomic Variables Inflation Use of mobile telephones Government Deficit Use of the internet Investment Spending Life expectancy External Debt Education Degree of Openness Rule of law Corruption Stability of government Initially, the GESmodelwasapplied to atime periodfrom2000-2050.Theforecast accuracy ofthe GESmodel was tested by applying the assumptions and sensitivities employed in the model to 1960 and projecting from 1960 to the next forty years based on availability of dat. He asked an important question; What would the future look like starting from 1960? Sample Data United States, Germany, France, Italy, Japan, Brazil, Argentina, India, South Korea and Hong Kong Factor Sensitivities The rate at which the BRIC would converge to the developed world’s productivity levels. Investment rates Demographics Outcome of the 1960-2004 Out of Period Forecasts The growth rates projected by the GES model closely mirrored the actual growth rates for the above countries. The model was accurate with respect to developed economies. What was Underestimated? Growth in South Korea, Hong Kong and Japan were underestimated. These economies were successful because of combined improving demographics with rapid improvements in productivity. What was Overestimated? The GES model overestimated growth in countries where governmental policy impeded development, such as India, Brazil and Argentina.These economies had not been successful as a result of the inability to improve productivity,despite having the benefits of a larger population. Emerging markets vs. growth markets vs. N-11. Jim O’Neill made the observations with respect to the differences in emerging markets, growth markets and the N-11 countries. Growth Markets Economies- The BRIC Economies- Brazil, Russia, India and China and 4 Members of the N-11 Countries including Indonesia, South Korea, Mexico and Turkey 1. These economies have demographic advantage and productivity momentum to outpace the world average. The world average here could mean the size of the largest 7 economies (G7 economies) or the largest 20 economies (G20 economies) as well as their contribution to global GDP. 2. These economies have superior growth environments, financial infrastructure, market size and depth required by international investors. Furthermore, these economies’ markets provided a varietyof liquid investment opportunities thatfacilitated or enhanced foreign direct investments into their economies. AccordingtoO’Neill,growthmarketsareeconomieswhoaccountforatleast1%ofglobalGDP.Hestated thatthe1%contributionto globalGDP isaproofthattheseeconomieshave sufficientsize andresources to cater for themselves and more importantly have a direct influence on other markets. These markets quadrupled the size of their GDP from 3 trillion to 12 trillion (2000-2010), represent 33% of global GDP, and have experienced upward mobility of their citizens, drawing many of their citizens from poverty. N-11 Economies These economies are Nigeria, Bangladesh, Pakistan, Philippines, Vietnam, Egypt, South Korea, Mexico, Turkey, Egypt and Iran. 1. 7 economies are not advancing rapidly enough as a result of poor environment scores. They are as follows; Nigeria, Bangladesh, Pakistan, Philippines, Vietnam, Egypt and Iran. These economies have demographics advantage and lower productivity gains with the exception of Vietnam who has a relatively higher GES but lower size of GDP. 2. 4 economies have superior growth environment scores compared to developed economies but lower demographic advantage. They are Indonesia, South Korea, Mexico and Turkey. Emerging Markets These are countries’ economies that fall outside the Growth economies and N-11 economies as a result of relatively much lower population and lower productivity gains. Jim O’Neill strongly asserts that the N-11 members would need to rely more on productivity gains to surpass the economic growth and GDP size of developed economies solely because they lacked the type of vast populations recorded and enjoyed in the BRIC economies. Furthermore, O’Neill presents the conditions for any country to have a large economy beyond the original 4 BRIC economies as follows; Large population. Strong evidence of growth. Strong growth environment scores (GES). Globalization, Technology and Education and its impact on middle class and poor India’s demographic dividend- a young population- once thought of as a factor that puts a drag on India’s economic growth, but now thought of as a potential for unprecedented growth rate among other economies in the world. However, certain factors must be put in place for India’s demographic dividend as a potential source of growth to ultimately become a reality. Globalization and Its Impact on the Middle Class and Poor Nilekani strongly affirms that “India has far more to gain than lose by embracing globalization more fully”. He also states that “the most important driver of growth lies in expanding access to resources and opportunity”. In this light, Nilekani believes that globalization among other factors, is a channel through which the Indian people, especially its middle class and poor, can have access to a variety of resources and opportunity. Globalization can help open up India’s borders and facilitate upward mobility of its poor to middle class levels and the middle class to wealthy levels. Put simply, Globalization can help increase the per-capita wealth of India. With the vast number of people expected to come of age and join the workforce, India will not be able to provide jobs through its domestic market alone. Because of Globalization, Indians can now travel abroad to further their education and intellectual needs as well as gain work experience in more developed economies, be gainfully employed and later return to India equipped to lead a generation of intellectuals and entrepreneurs that create more markets and jobs for its young workforce. Furthermore, Nilekani postulates that India’s growth has been fuelled by its domestic market, which accounts for two-thirds of its GDP and is powered by an already 300-million strong middle class, a group larger than the United States. This middle class makes it attractive for global retailers, especially in the light of the slowing markets of the West. Globalization via the opening of its national borders and favourable well thought-out foreign direct investment policies would usher in a variety of products for Indians. Global retailers, like Wal-Mart with superior cost management systems can utilize India’s local supply chain, provide cold storage systems, while providing low-cost products, and also reduce the agricultural waste generally recorded from farmers with lack of access to cold-storage systems. Technology and its Impact on the Middle Class and Poor Nilekani believes that “technology in general and information technology in particular has a huge role to play in providing better public services but also in enabling an open, inclusive and less corrupt society. Technology has helped transform India’s Railway System, through the computerization reservation system has helped create efficiency by allowing the poor to bypass the long queues for tickets and the ineffectual often exploitative bureaucracy. However, Nilekani decries that while access and information have improved from its lowest point, much of the rural India have lacked access to technology (via mobile phones, Internet) as a result of the terrible state of infrastructure in the rural regions. Consequently, the private sector has helped push for the supply of IT products and services, bolstered by the demand for IT-based services in rural India. Technology has helped create upward mobility for the poor via internet and computers, via the IT kiosk through the provision for all kinds of services from checking crop prices to accessing e-governance services, getting treated through telemedicine, and for education. For the rural India, internet and computers are their passports to all kinds of opportunity. Education and its Impact on the Middle Class and Poor As India has begun to grow economically, Education has become an effective channel for the upward mobility of India’s massive middle class and poor. Indians now perceive education as a chance for better employment prospects than what was previously thought. The poor in India previously sought government jobs, which guaranteed lifetime security and easy hours. Jobs such as sweepers, cooks, janitors. With the advent of the educational system, the poor have increased their hope for a better life by choosing appropriate schools for their children, which in turn improved the quality of education services in the public and private sector. According to Nilekani, limiting education also limits the ability of poorer people to increase their access to resources even in successive generations- and it shuts the poor out of economic opportunities. It fences them within unfair social systems and limits their ability to question them. Literacy has always had a revolutionary impact, and throughout history, universal education led to rapid, widespread social reforms. In the case of India, education can trigger cultural and social change. An evidence of this is when the educated class became the pivot on which the Indian independence movement turned. A key tenet of Education in India by Nilekani is the English language. Nilekani states that “English is emerging as the language of aspiration for the Indian population- as a passport to a lucrative job and entry into the country’s growing middle class. English is no longer a British tongue rather it is more the language of international business and a powerful key in opening up geographical borders and gaining access to markets. Trends in FDI Over the past 35 years, the world economy has experienced a marked increase in both the flow and stock of FDI. The average yearly outflow of FDI has accelerated faster than the growth in world trade and world output. For example, between 1992-2012, the total flow of FDI from all countries increased around ninefold, while world trade by value grew by fourfold and world output by around 55%. As a result of strong FDI inflows, by 2011 the global stock of FDI was about $21 trillion. The foreign affiliates of multinationals had more than $27.8 trillion in global sales and accounted for one-third of all cross-border trade in goods and services. The value added by multinationals (revenues less outside purchases of materials and services) reached $7 trillion in 2011, roughly one-tenth of global GDP. FDI has grown more rapidly than world trade and world output for several reasons 1. The fear of protectionist pressures, despite the general decline in trade barriers over the past 30 years, business firms’ see FDI has a way of circumventing future trade barriers. 2. Much of FDI has been driven by the political and economic changes that have been occurring in many developing nations. The general shift towards democratic political institutions and free market economies has encouraged FDI. 3. The globalization of the world economy through the opening up of national markets to global markets has learnt considerable support to the trends in FDI. In fact, international trade is the bedrock upon which FDI has taken roots and emerged a positive-upward trend with accompanying success stories. You can imagine a world of no FDI with closed economies. Direction of FDI Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in other developed markets. The United States has been an attractive target for FDI as a result of the following reasons; Large and wealthy domestic markets. Dynamic and stable economy. Favourable political environment. Openness to FDI. The United Kingdom and France have historically been the largest recipients of inward FDI. Even though developed nations still account for the largest share of FDI inflows, FDI into developing nations has increased markedly. Most recent inflows into developing nations have been targeted at the emerging economies of Southeast Asia. In particular, China has taken the sport light in attracting FDI inflows; $60 billion (2004) to $124 billion in 2011. In Latin America is the next most important region in the developing world for FDI inflows, attracting total inward investments of $216 billion, Brazil has historically been the largest recipient of FDI inflows. At the other end of the scale is Africa, who has longed received the smallest amount of FDI inflows, $42 billion in 2011. The inability of Africa to attract greater investments is primarily as a result of the following reasons; Political instability Unstable macroeconomic environment Inconsistent economic policies. Theories of Foreign Direct Investment st The 1 set of theories explain why a firm will favour direct investment as a means of entering a foreign market when two other alternatives, exporting and lindnsing, are open it. The 2 set of theories seek to explain why firms in the same industry often undertake foreign direct investment at the same time and why they favour certairdlocations over others as targets for foreign direct investment. The 3 set of theory, called eclectic paradigm, attempts to combine the two perspectives from the 1 & 2t ndtheories into a single holistic explanation of foreign direct investment. (Eclectic to mean taking the best aspects from those theories) st 1 Theory- Internalization Theory/Market imperfections Approach This theory explains why firms often prefer FDI over licensing as a strategy of entering foreign markets. According to internalization theory, licensing has three major drawbacks as a strategy for exploiting foreign market opportunities; 1. Licensing may result in a firm’s giving away valuable technological know- how to a potential foreign competitor. Example in the 1960s, when RCA licensed is leading-edge colour television technology to Japanese companies, including Matsushita and Sony. Over time, these 2 Japanese companies assimilated RCA’s technology and used it to penetrate the US market to compete directly against RCA. Consequently, RCA has a minor share in its home market as opposed to Matsushita and Sony, who have greater market share. This concept is related to the Product Life Cycle theory, where goods produced in an originating country become widespread and then production begins in other countries, which could export those same goods back to the originating country. 2. Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. With licensing, control over manufacturing, marketing and strategy are traded in return for royalty fees. A wholly owned subsidiary would not fit well with licensing as a result of its in-built organization structure of 100% local ownership. 3. Licensing is not appropriate choice of penetrating a foreign market when the firm’s competitive advantage is based not as much on its product as on the management, marketing, and manufacturing capabilities that produce the products. The problem with licensing in this situation is that such capabilities are often not amenable to licensing. Future of Corruption
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