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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

Students of Economics should be aware of contemporary economic issues. One issue facing investment in Australia at the moment is Chinese investment in Australia's natural resources.

During the economic boom 2000-2008 China exported more than it imported and experienced large current account surpluses. By 2008 these surpluses totalled $US 2 trillion. The Chinese Government invested approximately half of these surpluses in US Treasury Bills which were a safe investment with a steady interest rate. They also made investments in other United States banks and financial institutions. As the global economic financial crisis developed the Chinese government lost significant amounts of money in these financial investments. As well in 2008 the US government commenced printing money reducing the long term value of US Treasury Bonds. This meant further losses for China.

Since China is the largest importer of Australian raw materials such as coal and iron ore, the Chinese government switched its investment strategy and decided to invest more in Australian raw material exporters such as OZMIN and Fortescue (iron ore and coal exporters).

In 2009 Chinalco, a Chinese company, proposed investing in Rio Tinto, Australia's second biggest miner. This would give the Chinese government a strategic stake in some of Australia's key mineral assets such as the Hammersley Iron Ore business of Rio Tinto, the world's biggest iron ore mine. Australian mining firms need access to Chinese investment but there is controversy in Australian about China gaining control of key mineral assets. This is because China is also the biggest customer for raw materials and may drive the price Australia receives for its exports down.

Follow the Rio Tinto Chinalco situation on google.

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 purchase 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.

      Some profit-motivated corporations frequently reshuffle their resources according to changes in supply and demand and rapid changes in technology. Others are also involved in transfer pricing strategies which put many economies at a disadvantage as profits are moved offshore.
      
      In dealing with the Global Financial Crisis governments around the world took action to directly invest in many of these large foreign transnational corporations, purchasing majority shares. In this way the US Government became the owner of Bank of America and General Motors, the British Government became the owner of Royal Bank of Scotland.

   2. Portfolio Investment

      Another type of investment is portfolio investment - which is 'indirect' investment spending for the sole purpose of deriving income, not involving a controlling interest in the company. 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, interest rates or share prices to make a profit. Although, not common practice, investors can withdraw their funds (usually at a loss) if a financial crisis occurs to avoid further losses. Shareholders in the international investment bank Lehman Brothers lost all their money when the company went bankrupt.

   Some facts on global capital market flows
   

   • For most of the past decade, global capital flows have fuelled economic expansion around the world. Capital flows fluctuated between 2 and 6 percent of world GDP from 1980 to 1995; between 1995 and 2006 global capital flows grew more than 300%. The fastest increases were experienced by advanced economies, although emerging and developing economies also experienced increased financial integration. The large imbalances in global capital flows were followed by the global financial crisis which has caused global capital flows to reverse.
     
     
   • World foreign direct investment (FDI) flows continued to grow rapidly from $US143 billion in 1991 to $US1285 billion ($US1.3 trillion) in 2000 and over $US1.7 trillion 2007. In the GFC and global recession these flows fell to less than 30% of what they were previously.
     
     
   • Portfolio and other short-term global capital flows grew substantially world-wide from $US634 billion in 1991 to over $US3 206 billion in 2000. In 2007 almost $US3 trillion a day was being invested in shares, financial instruments and currency trading. However during the global financial crisis, the amount of funds invested shrank rapidly. Some forms of share trading such as short selling (selling stocks that the seller does not own, but borrows) was banned. This reduced the size and liquidity of the share market.
     
     
   • Portfolio investment to developing countries increased from $US8 6billion in 1998 to $US34.8 billion in 2000 (15% of global capital market flows). In the GFC and subsequent recession the amount of investment directed to emerging and less developed economies fell by almost 80%.
     
     

2. Technology

   Globalisation has also been facilitated by technological progress. One of the major contributing factors occurred in 1990 when the Internet’s World Wide Web was launched. This was 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 throughout the globe.

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

   This means that services such as tele-marketing, 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 in 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. For example, many businesses around the world outsource their tele-marketing to call centres in other countries such as India and Ireland.

   In the 21st century technical innovations in the information and telecommunication (ICT) industries in developed economies caused share prices to increase very rapidly up to 2008. This led some investors to buy 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 stocks during this period. The GFC and global recession in late 2008 saw a drop in the value of shares and an increase in capital outflows from the developing countries as investors withdrew funds to safer investments in the United States and Europe. The volatile nature of this type of investment has had adverse effects on domestic economies by draining foreign exchange reserves, reducing the resources available for investment and slowing economic growth. For example, in 2009 many of the former transition economies of Hungary, Latvia, Ukraine and Czech Republic were experiencing foreign exchange difficulties and  applied to the International Monetary Fund for emergency loans to pay for imports.

   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 between 1960-90.
     
   • Airline operating costs per mile came down by half between 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 - Global FDI inflows 1991-2007

Source: World Bank Global Development Finance Report 2008

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

1. Calculate the percentage increase in total FDI inflows for the period 1991-2000. Outline the likely factors contributing to this growth.

2. Calculate the percentage increase in total FDI inflows for the period 2000-2007. What do you think might have caused the slower growth rate? (research the answer).
   
   
3. Calculate the proportion of FDI inflows to developing economies compared to the proportion of FDI inflows to high-income economies in 2007.
   
   
4. Outline the reason for industrial (high-income) countries receiving such a large share of global investment in 2007

Answers

Review exercise 3

Many of the top TNCs 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	390
Wal Mart	374
Shell	355
Argentina	326
BP	292
South Africa	277
Toyota	264
HSBC	247
Portugal	244
Total	217
Nigeria	214
Chevron	214
ING	115
Sumitomo	197

Source: World Bank Development Report and Forbes Magazine

1. Write a paragraph using the above statistics to compare the value of some TNCs with the value of some developing countries’ GDP.
2. List five examples of other TNCs.
   
   
3. Access the home page of one of the following corporations (the annual reports of each may be the best place to find information).
   • Ford Motor Corporation
     
   • Royal Dutch/Shell Group
     
   • Campbell’s Soup Company
     
     
     
4. 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.
      
5. Research the impacts of the GFC and global recession on Toyota.

   Answers

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. Income growth in China from 1978 to 2008 showed the largest increase in income for any country or region in the world's history. By 2009 China was the world's third largest economy after the United States and Japan.

For almost three decades the economy has grown at rates averaging 10% per year. The number of people earning below $US1 a day fell from 260 million to less than a few million in 2008.

From the early 1990's FDI flowed into China. This FDI at first came from Taiwan and then increasingly from other industrialised countries such as the United States, European Union countries and other Asian countries.

China has, as a result, become the leading destination for FDI 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.

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

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

3. Explain the term greenfield investment.

   Answers

Review exercise 5

Case Study: Wizard Mortgage Corporation

Wizard Mortgage Corporation and RAMS, were several of the non-bank mortgage lenders offering cheap home loans. These firms borrowed money very cheaply in the United States and on world capital markets. They could lend the money and funds at very low rates of interest in Australia. As a result, their proportion of home loans in the market increased and the major banks, who had higher interest rates, fell. When the international global financial crises arose these firms were not able to borrow cheap funds overseas and they were unable to provide the finance for the home loans they had already approved. As a result they were in great financial trouble and were purchased by the major banks; Westpac buying RAMS. This reduced the availability of home loan finance. The major banks are the major lenders once again in the home mortgage market, and there is less competition and higher interest rates for mortgage lenders.

1. Explain the business model of RAMS and Wizard in developing home lending in Australia
   
   
2. How did the entry of RAMS and Wizard influence the market for home loans?
   
   
3. Identify the impact of the global financial crisis on the mortgage market in Australia.

Answer

More

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