Discuss about the Contemporary Issues in Development of Finance.
The essay is based on the analytical classification and measurement of world economies based on the estimated gross national income per capital for the earlier year. The restructured GNI per capita approximations is used as the input in this study to perform the working categorization of economies that helps in determining the lending eligibility of the low and high income countries (Bulman et al., 2017). As of 1st July 2015, the low-income economies have been classified as those nations having gross national income per capita of less than $1,045 during 2014. On the other hand, the high-income economies can be classified as those economies that have gross national income per capita of $12,736 or more. In addition to this, the lower income economies and higher income economies are separated from each other. For the purpose of analysis the countries undertaken for studies are classified in composition of their income so that the study can be facilitative in demonstrating the economic scenario of the country.
The gross national income per capita represents is considered as the value of dollar of a nation final income during a given year, which is divided by the population. It helps in reflecting the average income of nation citizens. It is worth mentioning that having knowledge of a nation GNI per capita is the primary step towards understanding the nation’s economic strength and needs (Tanimura et al., 2014). The gross national income per capita of a country is very much closely related with the other indicators that helps in measuring the social, economic and environmental well being of the nations and its people. For instance, people living in countries having high amount of Gross National income per capita generally has longer life expectations, higher rate of literacy with better access to harmless water and lesser rate of infant mortality. The data undertaken for study ranges from the period of 1970 to 2010 for both Lower income countries and higher income countries.
The essay makes the use of annual balanced data so that it can assess the connection amid the foreign direct investment and economic growth, which is measured in terms of the real GDP for 30 lower income countries covering from the period of 1970 to 2010. By taking into the considerations, the current econometric method of study takes into the account the data in order to analyse the growth FDI nexus (Grimes et al., 2014). The empirical results help in indicating the two-way granger casualty relationship amid the FDI and expansion of the economy. More specifically the findings remain robust in the estimation between the foreign direct investment as a portion of gross capital formation and real GDP growth.
Description of the data and methodology:
The economic data of 30 low income and high-income countries are organised under the numerous different accounting conventions that contains the system of national accounts with government finances. Data given on low income countries necessarily consists of data on Central African Republic, Bangladesh, Comoros, Cameron, Congo, Sri Lanka, Chad and Bolivia among many others. In essence, data on global development indicators can be considered as the collection of diverse cross nation data on growth. Again, important data reflected for diverse economies point towards the fact that there subsists an association between foreign direct investments, financial markets along with rate of growth of the nation. Again, the high-middle countries data are essentially on Argentina, Andorra, Algeria and many others. There has been a progress in unifying the theory of national accounts however there are several kinds of national variations for the successful implementation of the standard (Arvis et al., 2016). Under the framework of corporate framework, it is mandatory that ownership of minimum 10% of the ordinary shares of voting stock becomes the necessary condition for the continuation of direct investment relation. An ownership of lower than 10% is considered as the portfolio investment. The FDI not only consists of the mergers, acquisition, and new form of investment but also consist of the reinvestment of the earnings and loans. A nation can be regarded as the host to the FDI ventures in their own nation and can be the participant in investment projects in other nation. A nation’s internal FDI is generally made up of the host nation foreign direct investment projects (Teo et al., 2013). On the other hand, the external FDI consists of those investment projects that are owned out of the country.
Nigeria as a nation given the amount of the natural resource base and larger market size qualifies as one of the main receiver of foreign direct investment in Africa. It is indeed regarded as one of the foremost African nation that has constantly managed to draw FDI in the past decade. However, it is worth mentioning that the degree of foreign direct investment attracted by Nigeria is ordinary in comparison to the foundations of resource and potential need (Tanner & Harpham, 2014). As evident from the data the relationship amid the foreign direct investment and growth might be periodically specific that states that relationship of foreign direct investment in low-income countries may not be similar to that of the higher income countries. The outcomes of the study established the link amid the FDI and economic expansion could not be regarded as unanimous in their submissions. A careful examination from the study states that conscious effort were not made to give due care to the piece of evidence that FDI inflows in Nigeria is made into the extractive business (Bruce & Mearns, 2016). WESP makes the use of exchange rate conversion of national information so that it can obtain the output of the aggregate individual countries under the provincial and international totals. The growth in the output each country is derived from the amount of gross domestic product is measured from 1970-2010 prices and exchanges rates.
Data for the GDP in 2005 in nationwide countries were transformed into the dollar amount, which is exchanged in terms of the time in real GDP for each of the nation. The exchange rate basis of methods is different from the one that is implemented by the IMF and the World Bank in relation to the estimates of the world and regional economic growth (Simpson, 2014). During the last two decades, the enlargement of world gross product based on the rate of exchange for low-income group nation has been below the purchasing power parity. The reason behind is that develop nations around the world on aggregate basis have witnessed a significantly higher economic growth than the lower income nation. In the years of 1990 and 2000 the share in world gross product of these nations were larger under the purchasing power parity measurements than under the market exchange rates (Flenady et al., 2016).
A large number of research interests have represented the association among the FDI and economic expansion even though most the data is not located in African nations. As evident from the growing aggregate outlay if one point of percentage increases the GDP the economic growth of higher income countries increases by 0.1% from 0.1% to 0.2% on an annual basis (Perry et al., 2014). Furthermore, increasing the FDI by the similar sum approximately increases the growth rate by 0.6 per cent in the year. Thus, this helps indicating that the foreign direct investment can be regarded as three time more efficient than the domestic investment.
The description from the data states that foreign direct investment helps in influencing the sum of capital per individual. Due to the diminishing return of capital it does not reflect economic growth in long run. As argued by (Lascu, 2014) although the FDI is positively related with the economic expansion the host nation need minimum amount of economic steadiness with liberalised market so that it can benefit from the inflows of foreign direct investment. Studies have suggested that the direct long-term impact of the FDI on the quantity of output is regarded as positive in comparison to those nations that not very advanced such as Philippines and Indonesia. The degree of economic expansion might not be considered as enabling factors in the foreign FDI.
Economic growth helps in reducing the poverty; the fast growing nations are cutting down the income gap with the economies of higher income (Delavari et al., 2013). However, growth should be upheld over the long-term and gains derived from such kind of growth should be shared in order to enhance the well-being of the citizens. During the financial crisis that began in the year 2007 it expanded from high-income countries to low income countries during 2008. This turned out to be the most difficult global recession in the last 50 years and created an impact on the sustained development of the global economy. The average amount of yearly growth of GDP per capital in the developing nations was though considered to be faster than that of the high income nations as it slowed from 5 per cent to 4.5 per cent from the period of 2009-2013 (Prince et al., 2013). The high-income nations grew at the average of 1.3 per cent even after the crisis down from the 1.5 per cent prior to the crisis. The Middle East and north African countries witnessed the largest fall with average yearly GDP growth rate falling to 2.6 per cent points prior to the before the period of crisis.
The data derived from the World Bank categorises the courtiers by calculating the average wealth of the every country inhabitants. This states that the nations populations divide the annual gross national income and it is ranked as lower income country to higher income country. Several high-income nations such as Bahrain and Kuwait have amassed great amount of wealth whereas others have been struggling with poverty with inactive financial systems and lower average standard of living (MacPherson et al., 2014). Wealth can be defined as the over consumption of the resources within a nation whereas poverty can lead to the overconsumption of the capital within the country. Poverty paves the way for the overconsumption of the resources within the nation and high rate of morality leads to political instability.
The data describes that high income nations have industrialised themselves in the early days of the industrial revolution. Wealthiest nations include from Western Europe and Asian countries comprises of Japan and Taiwan, which have industrialised themselves and have moved rapidly towards development (Jorgenson et al., 2016). Countries exporting oil in the Middle East makes up the middle-income category. South American countries such as Chile, Argentina and Venezuela are classified in the categories of upper end of middle income. Much of the African and nations located in the Asian and Eastern Europe with less amount of industrialization economics fall in the categories of low income (Lewis, 2013). These nations consists of rural populations that are moving rapidly into the cities that are expanding and exploding the populations.
According to the data obtained from the world bank as of 2003 it reported that 15 per cent of the global population lived in high income nations however these nations took over undertook more than 80 per cent of the global income. About 40 per cent of the world’s population reside in lower income countries however; they share less than 4 per cent of the world’s wealth (McCombie & Thirlwall, 2016). The data obtained from the World Bank states that 44 of the global population resided in the middle-income countries however; they only earned 16 per cent of the world’s income. According to the projections of World Bank, only 13 per cent of the world’s population will reside in high-income countries with 62 per cent of the populations living in low-income nations and 25 per cent of the population living in the middle-income nations.
The low income nations might move up and down in these categories on yearly basis but the global inequalities is reasonably well-established although the international standard of living on an average basis has increased. Depending upon the set of statistics taken into the considerations one can derive the notion that the gap amid the high and low-income nations is increasing or it is shrinking (Kuznets, 2016). The reason behind this is that several economics have witnessed significant growth in their economy such as china whereas nations such as Nigeria and Kenya have continued to struggle.
The present segment considers the impact of foreign direct investment (FDI) inflow on economy’s growth. For instance, Nigeria has a certain specific quantity of natural resources and a huge sized market and meets the criteria of receiver of FDI. Again, Nigeria has managed to draw huge amount of FDI in the past decade. Nonetheless, extent of FDI attracted by the country can be considered to be very small as compared to the base of the resource. However, the outcomes of the report divulged the fact enhancement of the whole aggregate investment by approximately 1% GDP amplified growth of the economy of several nations of Latin America by approximately 0.1% to 0.2% every year, nevertheless enhancing FDI by the indistinguishable amount improved growth by approximately 0.6% each year ().
Scatter plot is used to plot the FDI vs GDP of both the group of countries. A scatter plot is used to unearth the relationship between the two variables. A scatter plot measures the variation in one variable against a second variable. Moreover, a fit-line is added to the scatter plot. The fit-line shows the trend of the variables.
Analysis of Data:
GDP at purchase price can be defined as the price of the sum of gross value, which adds value by the entire occupant manufacturer in the economy along with any kind of product taxes but excluding the value of output. GDP is derived without subtracting the depreciation of fictitious capital assets for the diminution and degradation of the natural resources (Scully, 2014). From the data analysis, it is understood that the rate of GDP for the middle-income group of nations and higher income group of nations is not separated by large sum. The consensus derived from the literature is understood that the FDI increases with the expansion through production and gaining efficiency.
The pragmatic facts derived is not considered unanimous. However, the availability of the evidence for developed countries undertaken in the analysis seemed to sustain the thought that the production of the household firms is positively linked to the idea of productivity of the domestic firms (Sbia et al., 014). The results from the data indicate that the productivity of the domestic firms is positively related to the presence of the foreign firms. From the data analysis it can be observed that the results from the developing countries cannot be regarded as clear with few findings are of positive spill over and others reporting is restricted to the evidence. The role of the FDI on the economic expansion is very much country specific and can be considered to be positive, negative or significant based on the economic institutional and technical situations in the receiver nations.
Compared to the capital stock estimations obtained under the perpetual inventory system country balance sheets have four important advantages. Primarily they take into the considerations the non produced assets in the form of land which cannot be assessed in terms of the cumulative past investment flows (Kivyiro & Arminen, 2014). It could be considered as consistently accounting for the non-produced asset if one wants to conduct slow type of growth accounting exercise by computing the marginal product of the capital.
High and Middle Income Countries:
From the scatter of FDI vs GDP, we find that the data is most concentrated from -10 of wdi_gdppcr to 20 wdi_gdppcr. Thus, it can be said that the gdp of middle and high income countries are very close to each other. In addition, we find that with an increase in FDI there is less increase in GDP of the high and middle-income countries (Chan, 2016). This can be attributed to the fact that middle and higher income countries have reached a level of gdp. Hence, the growth potential in such countries is less.
An analysis of the fdi_gdp vs wdi_gdppcgr shows that the correlation between the two variables for High and Middle Income Countries is r = 0.1523. Hence, we can say that the correlation between FDI and GDP of Middle and High Income countries is weak, positive and linear. In addition the correlation is statistically significant, p <0.001, less than 0.05, level of significance.
Low Income Countries:
From the scatter of FDI vs GDP we find that the data is most concentrated from 0 of wdi_gdppcr to 50 wdi_gdppcr. Thus, it can be said that the gdp of Low-income countries are very close to each other. In addition, from the above scatter plot we find that there is much variation in the gdp of Liberia over the 30-year period (Omri & Kahouli, 2014). In addition, we find that with an increase in FDI there is larger increase in GDP of Low income countries. This can be attributed to the fact that there is potential for growth in low-income countries.
An analysis of the fdi_gdp vs wdi_gdppcgr shows that the correlation between the two variables for Low Income Countries is r = 0.0665. Hence, we can say that the correlation between FDI and GDP of Low Income countries is very weak, positive and linear (Alfaro & Charlton, 2013)). In addition the correlation is statistically significant, p = 0.0243, less than 0.05, level of significance.
It is important to denote that the government must be concentrating on offering the basic infrastructure so that it can support the domestic organisation and private sector that are willing to make investment in the domestic funds of the economy. The responses from the private initiatives are considered as commendable however, there is a need for more favourable policies that should be specifically targeting the opposed. The arithmetical capability indicator is considered as useful in checking and keeping track of tools for assessing the changes in national numerical capacity along with the helping the government to recognise the gaps in their ability to amass, manufacture and use the data. The combination of the statistical capacity helps in indicating that most of the developing countries have improved ever since the assessment commenced in the year 2004. The study has significantly and systematically evaluated the impact of FDI inflow in the 30 low-income countries and higher income countries from the period ranging from 1970 to 2010.
The pragmatic element of the research is attempted to confirm whether the FDI inflow create an impact on the economic studies of the macro level of finding. This represents that FDI inflows does not have positive impact on the low-income countries. The study has argued that there is a need to enhance the foreign direct investment for economic development. Countries must take into the considerations the advantage of spill over and this represents that an economy is improving before an investors can visit the nation.
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