Economics Article
It is important to analyze the form of FDI, that is, how the money gets there. Much of the FDI has been in the form of large acquisitions of domestic companies by foreign private-equity firms such as Bain Capital, KKR, and Lone Star. In December of 2012, Bain Capital bought a Spanish call-centre business, Atento, which was struggling with debt. Atento is now growing strongly and plans to make an IPO in the near future, and it is far from alone.
Additionally, positive FDI represents net inflows of capital. Since many local banks are crippled by bad debts – owed to them by struggling companies unable to pay those debts – they are unable to lend as much money to others, money which would have funded a start-up or new enterprise and supported growth. FDI helps to increase the availability of capital, and meets the demand that the debt-laden banks are unable to meet. PwC, a consultancy, states that this year, in part due to FDI, southern European banks will shed over $20 billion in loans, and the EU as a whole will settle as much as $109 billion.
This form of FDI is beneficial for Southern Europe, because it means that foreign firms are not just snapping up domestic companies, sucking them dry, and making a quick buck. They are selecting promising companies, re-structuring them and paying their debts, allowing them to thrive. This pattern of investment has helped improve conditions. In the first quarter of 2014, Spain’s GDP grew for the first time in two years, and unemployment is falling, according to figures by Moody's Analytics. Meanwhile Portugal’s GDP has grown for the past two quarters, with industrial production rising.
While the euro crisis tunnel is still dark for many countries, these signs of life bring much welcomed hope that some may have already begun to climb back up on their feet.
By: Jonathan Wood
Countries in the EU, and even the EU itself, have far stricter regulations on just about everything as compared to countries, for example China, where regulations are far less abundant. So long as a developing country is somewhat stable there is no reason, therefore, for a company to prefer a highly regulated market, such as in the EU or even the US, over a substantially less regulated market. Although FDI has slightly increased in Southern Europe since their economic decline it is not as high as it was before the economic collapse. In 2007 FDI was approximately $2 trillion, in 2013 it was about $1.4 trillion. Not so say that regulation will prevent FDI, but the increase in FDI has been significantly lower than expected on account of regulations. Why is China’s economy expanding at a rate of almost 8% when the US’s economy is only expanding at a rate of about 2%? There is far less regulation which is encouraging more investment. My conclusion is not that regulation is in anyway bad, although I would argue that we have too much regulation, but that the more regulation that exists incurs less investment.
ReplyDeleteRegarding your point on regulation, you are correct that in some ways it has stifled growth in the EU, such as for European-wide firms who face different quality standards for exports in different countries. However, that point is less prevalent in your Chinese-American comparison. While both countries do have harmful regulations, and America perhaps more of them such as the 2010 Dodd-Frank law, that does not account for nearly all of the differences in growth. Much of China's growth has derived from them approaching their potential GDP growth rate as they move under-utilized farmers to factories, where they are more productive. Much of China's recent slow down is due to the fact that most of its citizens who were not needed in the country-side for maximum productivity have already moved, and thus its major source of growth is depleting. The moving of millions from the far west to the eastern factories on the coasts prompted massive transit, infrastructure, and other projects, all of which, with the decline in new peoples moving, are also slowing.
DeleteJust like in the American "Gilded Age" an influx of workers, in modern China from the west and in the late 19th century US from immigrants, in addition to low regulation has seen substantial growth. So I would agree, both are important to substantial economic growth. However, when removing the influx of industry workers from the equation one can see that decreased regulation still leads to more economic growth.
Delete