14.1 Globalization: opportunities and threats to developing country  (Page 3/4)

Foreign Direct Investment (FDI) : According to the United Nations, FDI is defined as “investment made to acquire lasting interest in enterprises operating outside of the economy of the investor”.

Direct investment in constructing production facilities, is distinguished from portfolio investment, which can take the form of short-term capital flows (e.g. loans), or long-term capital flows (e.g. bonds) (Stiglitz, 2003). Since 1980, global flows of foreign direct investment have more than doubled relative to GDP (World Briefing Paper, 2001).

Capital market flows : In many countries, particularly in the developed world, investors have increasingly diversified their portfolios to include foreign financial assets, such as international bonds, stocks or mutual funds, and borrowers have increasingly turned to foreign sources of funds (World Briefing, Paper, 2001). Capital market flows also include remittances from migration, which typically flow from industrialized to less industrialized countries. In essence, the entrepreneur has a number of sources for funding a business.

Migration : Whether it is physicians who emigrate from India and Pakistan to Great Britain or seasonal farm workers emigrating from Mexico to the United States, labor is increasingly mobile. Migration can benefit developing economies when migrants who acquired education and know-how abroad return home to establish new enterprises. However, migration can also hurt the economy through “brain drain”, the loss of skilled workers who are essential for economic growth (Stiglitz, 2003).

Diffusion of technology : Innovations in telecommunications, information technology, and computing have lowered communication costs and facilitated the cross-border flow of ideas, including technical knowledge as well as more fundamental concepts such as democracy and free markets (Stiglitz, 2003). The rapid growth and adoption of information technology, however, is not evenly distributed around the world—this gap between the information technology is often referred to as the “digital divide”.

As a result, for less industrialized countries this means it is more difficult to advance their businesses without the technical system and knowledge in place such as the Internet, data tracking, and technical resources already existing in many industrialized countries.

Negative effects of globalization for developing country business

Critics of global economic integration warn that (Watkins, 2002, Yusuf, 2001):

• the growth of international trade is exacerbating income inequalities, both between and within industrialized and less industrialized nations
• global commerce is increasingly dominated by transnational corporations which seek to maximize profits without regard for the development needs of individual countries or the local populations
• protectionist policies in industrialized countries prevent many producers in the Third World from accessing export markets;
• the volume and volatility of capital flows increases the risks of banking and currency crises, especially in countries with weak financial institutions
• competition among developing countries to attract foreign investment leads to a “race to the bottom” in which countries dangerously lower environmental standards
• cultural uniqueness is lost in favor of homogenization and a “universal culture” that draws heavily from American culture