Econometrics

Econometrics of France – General overview of the economy, identifying the main aggregate demand components that drive GDP growth

Econometrics – France is acknowledged due to its efforts in fighting poverty and improving employment among the citizens (Ciccone & Jarociński, 2010). The country is comprised of many sectors which work collaboratively to provide services and products to her citizens (Facchini & Melki, 2013). The country has been a member of IBRD since 1945 and was among the first country to receive their loan. The country has a population of over 66.8 million people as per the 2015 report. In overall, the country’s GDP was $2.4 trillion in 2015, which the country reported that it was growing at an annual rate of 1.2%.

Analyzing key econometrics such as GDP may not generally be the most pertinent synopsis of accumulated monetary execution for all economies, particularly when generation happens to the detriment of devouring capital stock (Ciccone & Jarociński, 2010). While GDP gauges in light of the generation approach are for the most part more dependable than assessments incorporated from the pay or consumption side, distinctive nations utilize diverse definitions, techniques, and reporting guidelines (UKDS, 2016). World Bank staff survey the nature of national records information and now and then make acclimation to enhance consistency with worldwide rules. All things considered, noteworthy disparities stay between universal guidelines and real practice (Sly & Weber, 2016).

Numerous measurable workplaces, particularly those in creating nations, confront extreme confinements in the assets, time, preparing, and spending plans required to deliver solid and far reaching arrangement of national records insights. Among the challenges confronted by compilers of national records is the degree of unreported financial action in the casual or optional economy. In creating nations a huge share of farming yield is either not traded (on the grounds that it is expended inside the family unit) or not traded for cash (Sly & Weber, 2016).

Private usage has usually been the driver of money related improvement in France and it coordinated the impact of the fiscal crisis in 2009. Regardless, in 2012, private use contracted unprecedented for over two decades in the aftermath of the crisis, amidst purchaser assurance levels that had debilitated and direct money related improvement rates (Facchini & Melki, 2013; Ciccone & Jarociński, 2010). After government use, which has remained by and large stable in the earlier decade, wander is the greatest portion of France’s budgetary advancement.

Econometrics theory was the GDP portion that was hit the hardest by the fiscal crisis in France and changed wander dove 9% in 2009. Taking after a ricochet back to 1.9% advancement in 2010, hypothesis has lamented starting now and into the foreseeable future and it contracted 0.8% in 2013. Moreover, France is a net shipper, in any case, the outside division littly affects the economy (Ciccone & Jarociński, 2010).

Quickly, organizations are the guideline benefactor to France’s economy, with more than 70% of GDP originating from this section. Immense subdivisions of organizations join the sparing cash and budgetary, security and tourism parts. Creating speaks to somewhat more than 10% of France’s GDP and France is an overall pioneer in the avionics, auto and lavishness stock undertakings (Ciccone & Jarociński, 2010). Disregarding the way that agriculture speaks to around 2% of French GDP, it is seen as a fundamental industry in France and is frequently the beneficiary of government gifts or protectionist plans (Facchini & Melki, 2013).

Econometrics – How well the country has managed to achieve the four macroeconomic objectives of high and stable economic growth, low unemployment, low inflation and avoidance of large balance of trade deficit.

There is a run of the mill see, as regularly as could be expected under the circumstances watched or reported by different economists is that France has a unique approach to her economy and operations. In fact, France is delineated as a something close to a revolt economy, where institutions and different staffs are in frequent strikes especially on matters that affect them collectively (Ciccone & Jarociński, 2010).

Like most myths, the intellectual economy myth – , in light of current conditions, executed by people with a grievance, or by people who have visited the country due to either economic interest or their personal interests. Different economic overviews or rather arguments have come up and each shows different result from the previous For each one of its deficiencies – and its qualities – however, all the economists tend to concur that France economy is healthy and well performing above average especially when compared with the G20 terms (UKDS, 2016).

Changing France is to an unprecedented degree troublesome to the time when some are imparting that nothing not another French resistance is required. According to a 2013 econometrics report by IMF, Hollande government was aiming to to cut down different demands by the French economy (Facchini & Melki, 2013); however this was qualified by a notice that more should be done to cut open spending, instead of raise responsibilities. Hollande has vowed to go basic on costs, to forsake putting any further un-convincing weight on French industry (Sly & Weber, 2016).

The failure of changing the current situation in France, has become one of the primary challenge that is undermining the country from attaining effective budgetting (Facchini & Melki, 2013); However, the approach that the government have left many economists talking, for instance, a 2013 report argued the following statements in regard to the France government.  

a) The working hours in most businesses located in France are mostly shorter than the time that European countries work. For instance, when in Germany the average working hours per year are 1904 while in France they are 1679.

b) Most employees in France retire earlier than employees in Germany, the typical retirement age in Germany is 62.3 while in France it is 60.3 and 64 in the United Kingdom.

c) In France, the employees take many events, and holidays off work than employees in Germany and UK do, specifically they take 7 days more than Germans do and 36 days more than British employees do. However, despite all the fact, the France economy remains competitive (UKDS, 2016).

One of the fundamental issues identified with France’s work markets is unmistakable and interminable business district that affiliations end up in when they endeavor to end a man from staff. Many say the fear of putting in two years in a business tribunal is a colossal execute for all the more little affiliations, who are in this way more slanted to spread brief contracts instead of persevering ones. While attempting to settle this Hollander will ensure to past what many would consider workable for a laborer to hold up a disagreeing of out of line dismissal, which starting now remains at two years after they were surrendered.

In an offer to urge boss to contract more staff, Hollande game-plans to offer a “securing prize” to self-representing endeavors. The course of action is to give some place among 1,000 euro and 2,000 euro for every power who is chosen with a remuneration of up to 1.3 times the national scarcest wage. The show is kick-start shrinking by adjusting the gathering coordinated wander holds commitment costs that may startle away executives, with Hollande’s party as to it to be much speedier than changing France’s social obligation laws for low paid labourers (Sly & Weber, 2016).

The report released by the business serve in France exhibited that the strategy approaches will target low-talented authorities, and will especially focus on change divisions, for instance, mechanized and environment. The spending strategy for plan has been connected by 80 million euro in 2016.

The present year’s measures will cost €2 billion, which the mister of reserve said would be “reimbursed in full” by meander holds from elsewhere. Hollande ensured that the measures would not be financed by cost rises.

A blend of fitting optional measures and altered stabilizers has padded the effect of the emergency. The meander force diminishment presented in the 2010 spending course of action is comparably welcome, yet extra spending ought to now be confronted. Laying out and plainly passing on a significant multiyear leave system is a need. The required solidifying addresses a chance to re-adjust open funds by cutting wasteful spending, developing legacy, property and carbon strengths and progress changing the favourable circumstances framework.

Identify and critically analyse 3 economic/political/demographic trends (Econometrics) that the country is experiencing and what the implications of these trends could be in the future.

Demographic trends in France

In 2030, the number of inhabitants in France will achieve 67.9 million, an expansion of 5.8% from 2015 (UKDS, 2016). Moderately high, yet declining, birth and ripeness rates, close by positive net movement, imply that France’s populace will build speedier and age slower than most nations in Western Europe in 2015-2030. France is a standout amongst the most urbanized nations in Western Europe and this will keep on being the situation in 2030 when 91.8% of its aggregate populace will be comprised of urban occupants.

The long haul steadiness of richness and birth rates (right around 800,000 yearly births, regardless of slight falls in 2011 and 2012) implies that the base of the French populace pyramid is still very expansive (Baltagi, 2011)While characteristic increment is still unmistakably positive, the maturing procedure is reflected in a rising number of yearly passing’s  as the populace with the most astounding dangers of biting the dust becomes bigger.

The diminishing in first social unions is measured by the entire of rates (total first marriage rate) or the general probability of first marriage. Some place around 1972 and 2012, the total first marriage rate tumbled from 91.7 to 46.6 first social unions for each 100 men and from 94.8 to 47.5 first social unions for every 100 women (Baltagi, 2011). Probability data show a strong decrease in the degree of social unions between never-married individuals up to age 50: it tumbled from 90 first social unions for each 100 never married men in 1972 to 53.5 in 2012, and from 93.4 first social unions for every 100 never-married women to 56.3 for that years

  1. (i) Estimate the consumption function for your chosen country and comment on your results

Yt = a + bXt

            Where Yt is aggregate consumption of the country in year t;

                        Xt is aggregate income (GDP) of the country in year t;

                        a is the linear intercept and b is the slope coefficient

[Note   Aggregate Consumption (Y) = GC + PC (government consumption expenditure plus Household consumption expenditure) (Year 2015)

Y = 23.9 + 07

    = 24.6

(ii) Write the estimated regression equation and comment on the results of the regression analysis

Taking values from the graph, we make a table consisting values of the recent 5 years (Excel Sheet below)

Econometrics Data
Econometrics Data

Use the formula

Where a=a and b = b

a = -138.67

b =-515.123n

Insert the values in the equation

            Yt = -138.67  – 515.123 Xt

            (iii) Calculate the confidence interval for b at 95% confidence interval. 

-512 * (1 – 0.95)

CI = 25.6

            (iv) Test the statistical significance of b

                        Exposes the error index

                        CI – Y

                        25.6 – 24.6

            = 1.0

            (v) Test the statistical significance of the model

The values are close to the mean of X have less leverages that outliers towards the edges.

(vi) Identify whether the error terms of the model are autocorrelated and/or heteroskedastic.

The error was auto-correlated, with 1.00 error index, which was explained by the value estimation and rounding off

References

Baltagi, B. (2011). Econometrics (1st ed.). Berlin: Springer.

Ciccone, A. & Jarociński, M. (2010). Econometrics & Determinants of Economic Growth: Will Data Tell?. American Economic Journal: Macroeconomics2(4), 222-246.

Facchini, F. & Melki, M. (2013). Efficient government size: France in the 20th century. EconometricsEuropean Journal Of Political Economy31, 1-14.

Sly, N. & Weber, C. (2016). Bilateral Tax Treaties, Econometrics and GDP Co-movement. Review Of International Economics.

UKDS,. (2016). Econometrics UKDS. Stat Metadata Viewer

Relevant Links

Economics Dissertation Topics

Circular Flow Model Economics Report

Did you find any useful knowledge relating to Econometrics in this post? What are the key facts that grabbed your attention? Let us know in the comments. Thank you.

The Economic Environment Project

The Economic Environment

The circular flow model of the economy

Title: The Economic Environment. The firms in this model are the businesses while the households are the consumers. The firm is responsible for the production function while the households are responsible for consumption. In his book Waste to wealth: The Circular Economy, Lacy Peter states that households in the circular flow model provide labor in exchange for payment and offer this payment in exchange for the goods and services produced. The circular flow model entails the government, consumer and business elements. The firm produces goods and services to meet the consumer demand. Households purchase these products and pay to the firms. Additionally, households also provide the labor necessary to produce the goods and services. Therefore, one cannot exist without the other. This is key to any economic environment.

The financial sector such as banks and micro finances are important to the Circular Flow Model of the economy in many aspects despite being greatly ignored. This sector is responsible for ensuring that money flows across the firms, households and the government. The financial sector allows households to save money gained from working in the firms.

This money is also used for investment purposes in factors such as the fixed assets used by the firms to produce goods and services. When the government and the households save, the money is directed towards the financial market. In order to ensure the continuance of the economy, financial sectors invest this money by lending it to the households, firms and the government hence making the flow continuous (Chand, 2016). This is critical to the economic environment. Furthermore, the financial sector determines the amount of money in the market hence the inflation rate at any one moment. The circular flow model of the economy would be incomplete without the financial sector.

Gross Domestic Product (GDP)

The GDP of a nation is the total market value of goods and services produced in the nation. GDP is effectively measured through market prices. During different times, prices tend to change especially because of inflation. Therefore, comparing the nominal GDP over different times may not be helpful as comparing the real GDP of New Zealand’s economy. Instead, real GDP, also known as the GDP in constant prices may be used to compare the market value of goods and services. Real GDP helps compare the GDP during different periods at the same set of prices. While the nominal GDP is equal on both the production and expenditure sides, the real GDP differs on the production and the expenditure mainly due to changes in relative prices between imports and exports.

Economic Environment Dissertation
Economic Environment Dissertation

One statistic that should be considered when making an international investment or expansion is the Foreign Direct Investment (FDI) rate. By understanding the level of FDI in a foreign country, it is possible to establish how competitive the market in the foreign country is. One may also use the inflation rate of the country as well as the unemployment rate to determine how suitable the new market is for the expansion. The inflation rate determines how strong or weak the local currency is hence affecting the amount of money required for the initial investment. Additionally, constant changes in the rate of inflation may be an indication of an unstable economy. On the other hand, the rate of unemployment can help predict the potential demand and supply for the goods or services. The inflation rate may also help project the cost of labor for the new branch internationally.

The Business Cycles and Business The Environment

New Zealand’s recent annual GDP was 173.75 billion US dollars while the value stood at 0.28% of the global GDP. The GDP growth rate is at 2.50%. The inflation rate has been at a steady of 4.75% since 1918 to 2016. On the other hand, the unemployment has been at an average of 6.13% since 1985 to 2016. However, the rate of unemployment fell to 5.1% during the second quarter of 2016. Although the New Zealand economy has past the peak phase, it is expected to continue growing at a healthy rate while creating new jobs.

A housing bubble occurs when an increase in demand leads to a significant increase in the house prices (Roberts, 2008). Unlike most goods and services, replenishing the supply of houses takes time hence creating a bubble with soaring house prices. Eventually, the bubble bursts due to the increase in supply and a decrease in demand. Such an event would cause the New Zealand economy to slow down significantly.

When an economic recession occurs, the number or frequency of economic environment activities decline significantly (Roubini, 2011). Some businesses are able to continue operating as long as they are able to cover their fixed cost. However, other businesses not able to cover the variable cost including labor have to shut down rather than operate at zero profit. Scarcity of supply due to high production cost leads to high prices, meaning that consumers are unable to purchase goods and services. Firms selling second hand goods, companies dealing with bankruptcies or debt problem benefit during recession. The market is also more efficient and consumers get the best value in the market.

References

Chand, S. (2016). The Economic Environment and Circular Flow of Income in a Four Sector Economy.

Lacey, P. (2015). Waste to wealth: The Circular Economy and Economic Environment. Palgrave MacMillan.

Roberts, L. (2008). The Great Housing Bubble: Why did House Prices Fall? Monterey Cypress, LLC.

Roubini, N. (2011). Crisis Economics: A Crash Course in the Future of Finance. Penguin Books.

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Economic Wealth

 How Strong is the connection between Democracy and Economic Wealth

The last two decades witnessed the collapse of communism both as an ideology and political system leading to the triumph of liberal democracy across the world. This process has exerted profound influence on redefining the architecture of the global economic and political system (Huntington 1991). As a result, the economic and political landscape of the contemporary world is characterized by democratic revivalism and formation of new states based on democratic ideals. This process has indeed deconstructed the prevailing notions of democracy and economic wealth. Traditionally, it has been argued by political and economic theorist that democracy will thrive only in a society, which enjoys a particular level of economic wealth and prosperity. However, emergence of new democratic nation states in Asia, Latin America and Africa soon after the fall of colonialism and the recent resurgence of democracy in Eastern Europe after the collapse communism inspired some scholars to perceive that economic wealth is not a pre-requisite for democracy.  The newly democratic countries remained economically poor and still continue the path of democracy without higher economic growth and wealth. At the same time, there are authoritarian regimes in Middle East and South Asia that reflect high level of economic wealth even without democratic system.  There are countries like the USA and UK which present the beautiful blend of economic wealth and democracy.  Due to this paradoxical situation across the globe, economics theorists and scholars often find it difficult to reach a consensus regarding the relationship between democracy and economic wealth.

 Given the scenario, this paper is a modest attempt to explore the relationship between democracy and economic wealth. The paper examines various theories and approaches that analyze the relationship between democracy and economic wealth and tries to explore how strong the connection is.  The paper also examines the theories in the context of the contemporary economic and political order. Concluding section provides critical analysis of these approaches and highlights the need for a realistic and contextual perspective towards the relationship between economic wealth and democracy.

Democracy and Economic Wealth: Major Theories

 Democracy, according to Schumpeter (1942) is ‘the institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people’s vote’. Thus democracy implies a political system in which power derives its strength from the people. Robert Dahl (1971) provides seven fundamental attributes to democracy including:

  • Control over governmental decisions about policy constitutionally vested in elected officials
  • Relatively frequent, fair and free elections
  • Universal adult suffrage
  • The right to run for public office
  • Freedom of expression
  • Access to alternative sources of information that are not monopolized by either the government or any other single group
  • Freedom of association (i.e. the right to form and join autonomous associations such as political parties, interest groups, etc).

Ever since the inception of democracy, its relationship with economic growth has been a serious issue of debate.  Broadly speaking, there are three fundamental theories on the relationship between democracy and economic wealth. First of all, there is a prominent school of thought that highlights the positive correlation between democracy and economic growth. Secondly, there is an equally important view that negates this theory and emphasizes that democracy is not a pre-requisite for economic growth and often the relationship is negative in the case of many countries. Apart from these contrasting schools, there is another perspective that considers the relationship between democracy and economic wealth as sceptical. They argue that the relationship is neither positive nor negative and is largely depends on other factors as well. These contrasting yet very important arguments are examined below.

Martin Lipset (1969) is regarded as the pioneer of the approach that highlights a strong correlation between economic wealth and democracy.  This perspective became popular during 1960’s and 1970’s. According to Lipset democracy will emerge and flourish only in affluent societies that are endowed with a high level of economic development and wealth. He further pointed out that economic wealth is an initial condition for democracy.  Lipset stated, ‘the more well-to-do a nation, the greater the chances that it will sustain democracy. Only in a wealthy society in which relatively few citizens lived in real poverty could a situation exist in which the mass of the population could intelligently participate in politics and could develop the self-restraint necessary to avoid succumbing to the appeals of irresponsible demagogues’.

After the seminal theory of Lipset, there emerged many academic studies that empirically investigated the positive relationship between democracy and economic wealth. The proponents of this theory also held the view that democracy lead to greater economic prosperity. After Lipset, the most influential theory on the positive correlation between democracy and economic growth was presented by Adam Przeworski, Michael Alvarez, José Antonio Cheibub, and Fernando Limongi.  On the basis of the empirical study conducted in 141 countries for the period 1950 to 1960, Przeworski reaffirmed the theory of Lipset and concluded that economically developed countries have more chances to sustain democracy. Also the theory pointed out that democracy can better promote economic wealth than authoritarian regimes.

Supporters of this positive correlation view argue that democracy provides a free and transparent political culture and equal allocation of resources among the people. This motivates citizens to invest and maximize benefit of the free market that ultimately lead to economic prosperity of the country. Democracy put restrictions on the power of the government, checks unnecessary expenditure and prevents unresponsive policies that affect economic wellbeing of the people. The theory further states that optimum utilization of resources will be possible only in a democracy that is accountable and transparent. Hence, democracy can best serve as a promoter of economic growth. Therefore these theorists highlight the strong positive co-relation between democracy and economic wealth.  The successful and prosperous economies of the USA, UK and other developed countries of West Europe were considered as the models to substantiate the theory of positive co-relation between democracy and economic wealth. The wealthiest nations of the world are generally matured democracies. On the other hand world’s poorest nation states are autocratic regimes. Sudan, Burma North Korea and Congo are examples.  Even though China shows an impressive growth rate after the globalization process, China’s GDP per capita is still $1000 making it one of the poor nations of the world (Sharma, 2012).

Nevertheless, this was questioned by many scholars who strongly criticized the positive relationship between these two concepts.  Samuel P. Huntington (1968) and others were of the opinion that democracy has weak and unstable institutions that hinders investment and economic growth. Moreover, democratic countries tend to make vulnerable policies and decisions in order to attract popular support whereas authoritarian regimes are able to make strong policies to initiate economic growth.  Economic growth needs hard policy framework that can check growth retarding business environment and factors.  Such an iron hand is not possible within a democratic structure that focuses more on sentiments of the electorate than policy priorities. Thus democracy cannot play a catalytic role in wealth creation unless there is concrete effort from the government.  Galenson (1959), Andreski (1968), Huntington and Dominguez (1975), Rao (1984-5), and Haggard (1990) etc popularized this view further.  There are empirical evidence to show this negative correlation between democracy and economic wealth.

Singapore is a classic example to show the inverse relationship between democracy and economic wealth.  When other countries in Asia heralded a democratic path following British colonialism, Singapore selected a unique single party authoritarian system that provided rich dividend to the country. When other Asian countries faced a chequered history of economic under development, political instability and social unrest, Singapore attempted a brave step towards liberalization, international trade and capitalistic growth strategy which ultimately made the country a ‘brand’ among other countries. Now Singapore serves as a regional headquarters for more than 3000 multinational companies and has world class financial and service sectors and above all a highly efficient physical infrastructure. The country consistently ranks high among ‘most attractive countries for international business’ and has achieved a per capita GDP level comparable to levels of developed western nations. According to the World Economic Forum’s Global Competitiveness Report 2006-2007, Singapore edged out Japan, Hong Kong and Taiwan to be the most competitive Asian country, while coming in fifth in world rankings. The world’s highest PC penetration among households, the well-networked broadband systems and the high-tech transport system- all symbolize Singapore’s economic achievements (Menon, 2008). All these achievements were made without a democratic government.  Other East Asian countries like South Korea, Taiwan and Hong Kong also achieved high growth rate without democratic government (Dominguez (2005).  China is another classical example to show that the relationship between democracy and economic growth is not as strong as envisaged.  Within the boundaries of the totalitarian communist rule that hardly allow democratic space to community, China is able to leverage investment, economic growth and overall development (Dominguez 2005).  At the same time, democratic countries in Asia and Africa including India, Ghana, Costa Rica, Nepal and Hungary still struggle to sustain an impressive economic growth and corruption free administration.

Economic Wealth
Economic Wealth

The positive co-relation between democracy and economic wealth is not yet visible in these countries (Dominguez (2005). Also, the emergence of democracy in these countries cannot be related to mature economic development as stated by Lipset.  After the fall of communism, there was democratic resurgence in East Europe even though these countries were not economically affluent.  Hence, there is no direct correlation between democracy and economic wealth.  More specifically, democracy can thrive even without economic wealth and at the same time, economic growth can be achieved without democratic system. This theory perhaps argues that economic wealth is better achievable under authoritarian regime than democracy. Apart from East Asian countries, there are countries of Middle East including Saudi Arabia, Kuwait, Bahrain that reflect consistent economic growth but extremely authoritarian monarchic form of government (Dominguez (2005).  Thus the theory highlights the strong negative relationship between democracy and economic wealth.

Another study conducted by Freedom House shows that ‘during 1991 and 2005, the countries that were economically free but politically repressed grew at 6.28% annually. Comparatively, the countries that were both economically and politically free grew at 2.62%. In other words, dictatorial regimes make better economic decisions for citizens than democratic ones’ (Sharma, 2012).

The third view on the debate argues that there is no consistent relationship between democracy and economic growth as assumed by scholars. Moreover, they assume that institutional structure and approach to governance are more important than the type of regimes per se. Wealth creation and prosperity are possible in both democracy and autocracy if there are proactive policies, good governance, corruption free administration and better management of economy.  As stated by Bardhan (1993) ‘A sound leadership that will resolve collective action problems and be responsive to rapidly changing technical and market conditions is more essential for growth’.  This view was supported by Bhagavati( 1995) as well. According to him, market will bring economic wealth both under authoritarianism and democracy. Nevertheless, the institutional structure should be able to make the’ right policy’ decision without compromise.  Hence, this theory confirms that there is no correlation between democracy and economic wealth and the determining factor is the nature and content of the policy.

 Hristos Doucouliagos and Mehmet Ulubasoglu(2005) studied the connection between democracy and economic growth in 70 selected countries through meta-analysis. They have derived the following conclusions:

  • There is no accumulated evidence to show that democracy is detrimental to economic growth. The findings of the data combined clearly points to a zero direct effect on economic growth.
  • Though there is no direct effect of democracy on economic growth, it has many significant indirect effects on wealth through various channels including human capital formation, economic freedom, transparency etc. Nevertheless, democracy leads to higher government expenditure and restricted international trade.
  • Though the direct co-relation between democracy and economic wealth is not to be validated globally, there still exists strong regional variation on the larger impact of democracy on economic growth. The study shows that democracy has a direct impact on economic growth in Latin America where as the relationship is very low in Asia.
  • Though the study could not establish the direct impact of democracy on economic wealth, there is positive co-relation between economic freedom and wealth creation.

There are other scholars who studied the indirect but important relationship between democracy and economic wealth.  In his paper, Democracy, Governance, and Economic Performance: Theory and Evidence, Yi Feng (2003) established that democracy indeed can make a positive effect on economic wealth and development at least indirectly.  The indirect effects implies policy certainty, political stability, the establishment and enforcement of rules that protect property rights, the promotion of education, the ability to promote private capital, and the reduction of inequality.  All these indirect indicators engender increase in investment and thus pave the way for enhanced economic growth.

In a similar study, Gerring (2005) also perceive that the connection between democracy and economic wealth is relevant, though it is indirect.  According to them, democracy creates four types of capital- human capital, social capital, political capital and physical capital – in a country. Economic growth can be achieved through the effective utilization of these channels.

Kurzman (2003) conducted a study on the relationship between democracy and economic growth using time series analysis and came out with varying findings as mentioned under:

  • Democracy has a significant impact on investment and this will have positive effect on economic growth. Free market economy and economic reforms coupled with transparency would eventually lead to more investment contributing towards economic growth.
  • Democracy increases government expenditure and this will have a negative impact on economic growth.
  • Social unrest and mass movements are intense in democracies. This is negatively co related to economic growth.

He thus concludes that democratic relationship with economic growth is always complex and greatly depends on the domestic situation, political culture, quality of regime and pace of market reforms.

Critical Analysis

While analyzing the diverse arguments on democracy and economic wealth, we can assume that there is no generalized pattern of relationship. The strength of the relationship depends on other related factors like quality of democracy, historical legacy, committed leadership, lack of corruption etc. If these pre-condition are achieved, democracy will definitely lead to economic wealth. At the same time autocratic government may lead to economic wealth but it will not be sustainable unless the government follows less repressive policies. When we examine the case of developed countries like the USA, Britain, France and Germany it is evident that democracy and economic growth exhibits a strong positive relationship in countries that have attained economic growth prior to democratization.  The countries like India, Ghana and Pakistan selected democratic path even before attaining significant level of economic wealth. Hence, the approach that believes that ‘democracy will automatically follow economic wealth’ will not be sustainable whereas the theory that ‘economic growth will follow democracy’ may be more realistic.

Conclusion

Even though empirical studies conducted across the world proved the negative co-relation or zero- effect factor in democracy- wealth paradigm, it is a fact that authoritarian regimes have very low human development indicators unlike democratic countries. In the Middle East and China, economic wealth does not provide corresponding improvement in health, education and other social indicators. Economic growth impacts on human development through different channels like increase in per capita income, poverty reduction and higher public expenditure in education, health and related sectors.

However, while analyzing the success story of non-democratic countries with high economic growth, it is clear that, the desire for appropriate policies to reduce income inequalities and to allocate proportionately to the social sectors is sometimes lacking in these countries. Thus, the important question here is the utility of ‘wealth’ if it is not utilized effectively for the benefit of the people. The record of democratic countries is far better in this case. Amartya Sen (1999) expanded this aspect and focused on enhancing capabilities of the individual than increasing economic wealth. Authoritarian regimes may be good for creating wealth but the proliferation of wealth and equal distribution of resources requires a responsive government. In this context democracy has proved better result than autocratic systems.

Democracy and economic wealth indeed have a strong relationship even though the connection is not always positive. Democracy may lead to both positive and negative effect on economic wealth and prosperity. The real ‘connection’ largely relies on the institutional framework of democracy and its rational decision to initiate bold policies of economic development.  Therefore, we can conclude that democracy is not a magic lamp that automatically provides economic wealth. Thus, the future prospects of democracy as a form of governance will depend on the effectiveness and capability to channelize these high spirit and vibrancy of democratic institutions for harnessing a growth strategy based on economic freedom, transparency, participation and accountability.

References

Almond G. A. and Verba, S. (1963) The Civic Culture: Political Attitudes and Democracy in Five Nations. Princeton, NJ: Princeton University Press.

Andreski, S. (1968)  Military Organization and Society. Palo Alto: Stanford University Press.

Bardhan, P. (1993 ‘Democracy and Development: A Complex Relationship’. Berkeley, CA: University of California, Berkeley.

Bhagwati, J. (1995) Democracy and Development: new thinking on an old question. Indian Economic Review

Dahl, R. A. (1971) Polyarchy: Participation and Opposition. New Haven, CT: Yale University Press

Doucouliagos, C.(H.), (2005). Publication Bias in the Economic Freedom and Economic Growth Literature. Journal of Economic Surveys 19, 367-89.

Feng, Y. (2003) Democracy, Governance, and Economic Performance: Theory and Evidence. Cambridge, MA: The MIT Press

Galenson, W. (1959). Labor and Economic Development. New York: Wiley

Gerring, J and Rodrigo Alfaro. (2005) “Democracy and Human Development” (Paper presented at the annual meeting of the American Political Science Association, Washington, D.C., September.

Haggard, S. (1990) Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries, Ithaca, New York: Cornell University Press

Huntington, S. (1968) Political Order in Changing Societies. New Haven, CT: Yale University Press.

Huntington, S. (1991) The Third Wave: Democratization in the Late Twentieth Century. Norman, OK: University of Oklahoma Press

Kurzman, C., R. Werum and R. E. Burkhart.(2003) Democracy’s Effect on Economic Growth: A Pooled Time-Series Analysis: 1951-1980, Studies in International Comparative Development.

Lipset, S. M. (1959) ‘Some Social Requisites of Democracy, Economic Development and Political Legitimacy’. American Political Science Review 53(1):69-105.

Lipset, S. M. (1994) ”The Social Requisites of Democracy Revisited” American Sociological Review, vol. 59 (1): 1-22

Menon, S. (2008) Singapore Economy: The way Ahead, IUP Press, India.

Przeworski, A., M.E. Alvarez, J.A. Cheibub, and F. Limongi (2000) Democracy and  Development: Political Institutions and Well-being in the World 1950-1990. Cambridge: Cambridge University Press.

Rao,V.(1984). Democracy and Economic Development. Studies in Comparative International Development, 39, 67-81.

Raudenbush, S. W. 1994. Random

Schumpeter, J. (1942) Capitalism, Socialism and Democracy. London: Harper Perennial

Sen, A. (1999b) Development as Freedom. Oxford: Oxford University Press

Sharma, Dhiraj. (2012) Democracy correlated with Economic Growth?  The Economic Times, February, 28.

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Economics Dissertation FDI India

The Impact of FDI on Domestic Competition and Industrial Growth in Emerging Economies: The Case of India

The increasing inflow of Foreign Direct Investment (FDI) over the years to emerging economies is seen with great optimism by governments and policy makers since it is expected to uplift the economic position of the host countries through positive spill-overs. Various studies have examined the impact of FDI on the domestic firms, economic growth and productivity of the host economy, highlighting the positive externalities that make this investment a worthwhile option to explore. However, the fact that this investment may sometimes negatively affect the output of the host economy or the behaviour of domestic firms is not thoroughly explored, especially with respect to developing economies where FDI may cause domestic firms to exit or prevent the establishment of small and medium enterprises. Furthermore, most of the previous studies have focused on either the domestic industry or the industrial output or exports without simultaneously analysing the effect on a combination of such factors. This study therefore incorporates the effect of FDI on domestic industry in terms of the presence, entry and exit of domestic firms and the growth in output and export orientation of the host economy. The relationship between FDI with the different variables that contribute to the domestic competition and industrial expansion and growth has been analyzed. The results of the analysis show that while FDI has a strong association with the output and export growth of the host economy; it does not appear to add value. Simultaneously, it causes a large number of local firms to exit the industry. Nonetheless, it appears to stimulate the local industrial growth by allowing new firms to enter and enhancing the market capitalization of listed firms. Furthermore, the number of micro, small and medium enterprises (MSMEs) and their employment rate also shows an upward trend with FDI. The growth in exports, especially high technology exports stresses on the presence of technology spill-overs to the host economy.

FDI Dissertation
FDI Dissertation

This study considers the impact of FDI on the host economy by taking into account various factors, each of which can be a priority for policy makers and an incentive to attract foreign investment. However, it is essential to understand how FDI affects the industry on the whole by studying the impact on each of them in isolation. The research aims to inter-relate the literature available on knowledge and technology spill-overs and competition to understand how local firms derive benefits from FDI in their country. The objective is to understand if increased inflow of FDI prevents the entry and growth of domestic firms in emerging economies. Simultaneously, it strives to determine if the entry of a foreign enterprise leads to an exit of local firms from the industry. Additionally, it is also aimed at understanding how FDI can shape the industrial output and export competitiveness of the host country.

Research Questions

  • How does FDI affect the entry and exit of domestic firms in the host economy?
  • Does FDI induce industrial expansion in the host economy?
  • Do local industries in emerging economies experience an increase in the output and export growth as a result of FDI?

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Foreign Direct Investment Mining

Foreign Direct Investment in the Mining Industry

Foreign Direct Investment (FDI) in economic terms refers to the investment that an investor makes in a foreign country in which the investor has a significant control of the business or company invested in. It applies in many sectors of the economy, including the mining industry. Different governments have varied policies that seek to govern and regulate the application of foreign direct investment in their respective countries. This exploration evaluates the situation of FDI in the mining industries in Nigeria and Argentina. In the analysis, the paper incorporates the Dickens’ framework to evaluate the impact that foreign direct investment has on the mining industry and determine whether the adopted FDI policies in the two countries, that is, Argentina and Nigeria serve in the best interest of the investors.

FDI policies in Mining

It is very important to consider a deeper understanding of the effects that mining activities will have in the country, both social, economic, political and environmental impacts before developing policy to regulate FDI in the mining sector. With the advent of globalization, each country tries as much as possible to engage in trade and allow trade in within their borders. This has led to global competition and the growth of Multinational Enterprises (MNE) and the Transnational Corporations (TNC). Many countries, especially the mineral rich countries have business opportunities within their borders to exploit their resources, but do not have the financial muscle to invest in such explorations. Due to the need for exploitation of the business opportunities within the borders amid limited resources to exploit them, governments enact policies that either encourage or restrict foreign direct investment in their respective countries (Johnson 2005, p. 15).

One aspect of the FDI policies that is very critical is the aspect of quality. The term quality in this regard refers to the foreign direct investment’s ability to enhance the welfare of the host country’s citizens in terms of social, economic, political and environmental wellbeing. Based on this requirement, governments, therefore, have to assess the impact of allowing FDI in the mining industry to take place within their countries and to device mechanism of mitigating the possible negative impacts of FDI, for the benefit of the citizens’ welfare (Vazquez-Brust et al. 2013, p. 2).

The impact of mining activities and the subsequent social conflicts depend on an array of factors, including the type of mineral mined. Some minerals when mined leave more devastating effect on the environment than other minerals. Secondly, is the technology, the technology used will determine the extent of destruction the extraction of minerals will have to the environment. Thirdly, the level of involvement by the MNCs in the mining activities will determine the impact it has on the economy. The fourth condition is the strategies of the mining companies; some companies involved in the mining business may want to optimize profit at the expense of the host country’s economic development. Finally, the culture of the host nation and its level of economic development among other conditions may also lead to conflict in the mining activities (Stiglitz 2007, p. 134).

In this respect, therefore, it is incumbent upon both the host nation and the international agencies to collectively evaluate these aspects of conflict and make decisions that are desirable and specific to every mineral extracted and the respective location of extraction. On the same breath, the researchers too have a responsibility to choose a theoretical framework, which encompasses all the conditions necessary for evaluation in order to address all research concerns (Gibson 2006, p. 19).

FDI policy in Argentina

 Considering the FDI policies in Argentina, since the year 2001, Argentina has been encouraging huge foreign direct investment, especially in the mining industry. This policy followed the massive reforms that the country made in the mining code. Argentina is a developing economy having a substantial amount of mineral resources. At present, Argentina’s third most significant product for export is Gold. Gold has attracted many investors from outside the country to come and exploit the opportunity.

Nevertheless, since the government put these policies in place in 2001, with the government encouraging foreign direct investment, the mining reforms in Argentina have not fallen short of challenges. In many parts of the country, there has been an uprising resistance to the mining activities. Those who persistently resist FDI policies claim they are doing so based on the social and environmental factors. Today, about six provinces have succumbed to this public pressure to introduce legal bans on open-pit mining within their provincial zones. This public resistance has been growing and rapidly spreading manifesting lack of consensus between the government and the public on the mining policies (Auty 2001, p. 36).

This conflict between the Multinational enterprises and the public in Argentina is a clear manifestation of varied perception about the quality of FDI, especially in the mining sector. Whereas the companies consider boosting the local economy as an improvement of the welfare of the citizens, citizens, on the other hand, consider the effect mining activities have on their environment and the subsequent effects these negative externalities to the environment extend to affect the society. Even though there is a need for the alignment of quality of FDI between the local community, the government and the respective MNEs, it is not easy to reach a common ground on the quality of FDI, which is a relative measure that depends on other aspects of the prevailing welfare standard. This is also because, the perceptions of welfare of the citizens vary from time to time and from individual to individual depending on their expectations, level of knowledge they possess and the overriding cultural values of the community (Ali 2003, p. 70).

One case in point that supports the gap in perception of citizens about the quality of FDI is the Esquel case. In this case, Meridian Gold, which is a Canadian multinational corporation, secured rights to mine a gold deposit in Esquel, a town in the province of Chubut at a cost of investment of over 200 million US dollars. The provincial government approved all the standards and environmental impact assessment reports for a potential mine. The provincial government gave the project a green light terming it as a high quality FDI, being environmentally friendly and useful economic development in the province.

Nevertheless, the community had a completely different perception. According to the community, the project was low quality FDI, dangerous to the environment, economically weak and if implemented would divide the society. The subsequent social unrest that followed compelled the provincial government to organize a referendum in 2002 in which, 80% of the citizens overwhelmingly voted against the mining activities. In the year 2003, as the social pressure continued to pile against mining activities, a judge ruled against any mining project in the province, forcing the Meridian Gold to drop the project (Mutti et al. 2012).

FDI policy in Nigeria

 Similarly, the FDI policy in Nigeria as well has had a long journey. Before the year 1988, the Nigerian government was still skeptical about allowing FDI into Nigeria on grounds that it deemed FDI as a scheme for economic and political control. In 1972, the government outlined a regulatory policy on FDI by establishing the Nigeria Enterprise promotion Decree (NEPD). This declaration was meant to regulate rather than promote the foreign direct investment in Nigeria by limiting foreign equity participation in some sectors to a minimum of 60 percent. By the year 1977, the government again made a declaration further limiting the participation of foreign equity to 40 percent in Nigeria’s business. These declarations implied that Nigeria had a restrictive FDI policy between 1972 and 1995. By the year 1988, the Nigerian government made some structural reforms that initiated the beginning of eliminating the restrictive policy on FDI. The government established the Industrial Development Coordination Committee to act as an agency responsible for the facilitation and the attraction of the flow of foreign investment (UNCTAD 2009, p. 89).

Subsequently, in the year 1995, the government repealed the restrictive NEPD and made a new one known as the Nigerian Investment Promotion Commission, with an aim to encourage foreign investors to come to Nigeria and set up businesses, which they could have 100 percent control. The only condition was to provide relevant documents and the NIPC would approve the application for a business permit within fourteen days. Other declarations followed thereafter promoting and encouraging FDI into Nigeria with some having free regulations on dividends accrued from foreign investment. In addition, the Nigerian government adopted an Export Processing Zone to enable interested investors establish businesses and industries within certain zones (Ayanwale 2007, p. 24).

The FDI friendly policies adopted by the government of Nigeria saw a steady rise in the foreign direct investment flow into Nigeria since 1995 in different sectors. There was also a rise in the foreign direct investment in the mining industry in Nigeria, which followed the putting up for sale of the Nigerian national petroleum corporation together with its branches. The civilian administration that began in 1999 also inspired the deregulation of the oil industry, subsequently opening up the mining sector for more FDI inflows (Albaladejo 2003, p. 43).

The Dickens’ Framework

Having looked at both the Nigerian and Argentina’s policies on FDI, it is evident that both countries have had their challenges in the implementation of these policies. Considering the Dickens’ framework, the manifestation of conflicting interests and perception between citizens and the Multinational in the execution of mining projects is a confirmation of a dynamic collaboration and conflict between TNCs and the government agencies. According to Dickens (2003, p. 275), in the foreign direct investments both the TNCs and the host government need each other.

However, they admit that the ultimate objectives of the host government and the MNEs significantly differ. For example, the aim of a host government is to ensure an increase in the gross domestic product (GDP), while the MNCs principal aim is to maximize profits and increase the value of shareholders in the investment. In his framework, Dickens admits that in the foreign direct investments, multinational enterprises can have both positive and negative impacts on the host country’s social, economic, political and environmental conditions. They may exploit or expand national economies, distort or improve economic development, create employment opportunities or destroy jobs, introduce and spread new technology or prevent the wider use of new technology. The MNEs can also contribute to the destruction of the environment through pollution and destruction of the landscape through mining activities, or participate in the reconstruction and the creation of a sustainable environment through initiatives aimed at sustaining the environment (Dickens 2003, p. 277).

According to Dickens (2003, p. 278), there are six major areas in the host country’s business environment that MNEs may have an impact on, and these include the area of technology, employment and labor related issues, industrial structure, capital and finance, trade and linkages and the environment. In the area of environment, the impact could be increased soil, water and air pollution, effects on urban settlement, change the extent of natural resources use among other impacts. On the trade and linkages, the effects may include changes in the propensity to export and import resources and changes in the use of local suppliers.

Foreign Direct Investment
Foreign Direct Investment

On the employment and labor issues, the effects could include changes in the volume of employment, type of employment in terms of skills and gender, wages and recruitment levels, labor relations and affect the stability of the labor market. On capital and finance, the impact could include changes in the initial inflow of capital, changes in the capital raised locally, profits retained locally and transfer pricing among other impacts. In the industrial structure area, the impact could be effects on the industry concentration, changes in the competitiveness of the local companies and impact on the creation of new local companies. Finally, in the area of technology, the impact could affect the extent of technological transfer, determination of appropriate technology and may lead to additional cost on the host nation (Yakovleva 2005, p. 45).

Dickens’ framework also has a mechanism for assessing the extent of impact of MNEs activities in the host nation’s economy. In assessing the impact of MNEs, Dickens looks at the level of control that MNEs have on the host, the increase or decrease in the general welfare, the overall macroeconomic conditions, receptivity, cultural, social and political conditions, capital mobility technology and stage development, and the extent of natural resources availability among other factors (Gibson 2006, p. 18).

The framework as elucidated by Dickens is quite relevant to the two scenarios presented both in Argentina and in Nigeria regarding FDI policies. In Dickens’ assumptions are in three perspectives, first, he assumes that in FDI deals, the government always represents the community and mediates the relationships between the MNEs and the Citizens. However, in most developing economies, this might not be the case because the community always are directly involved in the affairs deemed to directly affect their livelihood and environment (Epstein 2008, p. 113).

Several environmental studies reveal that the conflict arising when FDI deals are negotiated is because of the adamant tendency by the state and the MNEs to ignore the role played by the communities in this process. This leads to a direct involvement between the government and the MNEs, which most of the time leads to environmental and social inequalities (Martinez 2002, p. 19). In order to eliminate any conflict arising from the community, it is imperative for all the stakeholders to engage collectively in the assessment of the quality of the FDI in terms of scientific, MNEs, Community and government assessment. Any gap that continues to exist between the projects’ evaluation will make conflict resolution among these parties very difficult.

The second assumption by Dickens is that the ultimate objective of the MNEs is to maximize their profit and increase the value of shareholders. This assumption overrules the fact that some firms may also aim at strategic and ethical undertakings to do more proactive activities with the aim of maximizing their profits, as well as reaping benefits to the community and the environment (Vazquez-Brust et al. 2013, p. 7).

To bridge the gap between the divergent interests of the parties involved in the FDI arrangements, the government together with other stakeholders can develop a code of ethics to govern the conduct and activities of the MNEs. Similarly, the MNEs have a good avenue of mitigating the ill perception of the community by participating in the corporate social responsibility practices to give confidence to the community that their interests are considered. Corporate social responsibility is a very significant tool that firm can use to develop the businesses in the host country. By taking part in solving the societal problems, firms will not only build the confidence of the local people, but also create a sustainable environment in which they guarantee and secure the future of their businesses (Elliot & Cummings 2006, p. 87).

The third assumption Dickens is making in his framework is the existence of two variables that depend on each other, that is, the truncation effects and the increase/decrease in welfare. Truncation effects refer to cultural, economic and institutional aspects of the FDI policies that negatively affect the host country. The international economic analysis indicates that it is possible to reconceptualize truncation effects as institutional effects of the foreign direct investment, which contain robust effects on the welfare of the host country. They should be considered as influencing the welfare too rather than being treated separately from factors that increase or decrease the welfare (Stieglitz 2007, p. 43).

According to Mold (2004), the truncation effects can have an impact on the host country in two forms, that is, governance and social cohesion. Wealth and income distribution is one area where MNEs have a potential to bring social cohesion because research indicates that there is a strong connection between MNEs activities and the increase in the inequalities. This understanding of the inequalities has informed the engagement between the governments of Argentina and Nigeria and the MNEs in the FDI projects, in order to boost economic development and reduce the adverse effects of social and economic inequalities in their countries.

This analysis reveals remarkable undertakings of both Argentina and Nigerian government in trying to facilitate foreign direct investment in their respective countries. The policies the two countries encourage FDI in their mining industries with a view of exploiting the opportunities available and bringing in capital to their economies to the benefit of their citizens. However, there is still need to involve the citizens in the decision-making process and in the evaluation of the quality of the FDI in order to reduce the conflict arising from the community. The FDI projects could be good for the economic growth and development and may be well intended for the public, but failure to involve them in the evaluation of such projects is a recipe for misconception of the projects leading to resistance (Ali 2003, p. 72).

The mining industry is a very delicate industry in that its activities directly affect the natural environment before such activities benefit the society. This calls for a delicate balance between approval of mining projects and the execution of the same considering the need for a sustainable environment that will accommodate the citizens and the business for posterity. The bottom line of every government as representative of its citizens is to protect their interest of its citizens, which is what the government of Argentina and Nigeria is doing in their FDI policies.

Conclusion

The global economy is becoming more competitive and every nation intends to have a competitive edge in the market. Emerging economies such as that of Argentina and Nigeria with the massive endowment of the natural resources, but no capital to invest in exploitation have a responsibility to create an enabling environment. The enabling environment includes developing policies that encourage foreign direct investment to bring in foreign capital and help exploit the natural resources for economic development. Similarly, in order to have a successful FDI policy, all the stakeholders affected by such policies such as the community, the government and the MNEs need to engage collectively in trying to develop a common perception of the impact of any project before its implementation. By doing so, conflict of interest and varied perception on the quality of FDI will definitely be resolved. The MNEs too have a responsibility to embrace corporate social responsibility in order to protect the environment for a sustainable business.

References

Albaladejo M 2003, Foreign Direct Investment and Industrial realities in Nigeria: from bad to worse. QEH Working Paper, Number 102, Queen Elizabeth House, London.

Ali, S.H 2003, Mining, the Environment and Indigenous Development Conflicts. The University of Arizona Press, United States

Ayanwale A.B 2007, Foreign Direct Investment and Economic Growth: Evidence from Nigeria. AERC.

Auty, R.M. (2001). Resource Abundance and Economic Development. Oxford University Press, Oxford.

Dicken, P 2003, Global Shift: reshaping the global economic map in the 21st century, 4th ed., Sage Publication, London.

Elliot, M., & Cummings, G 2006, Exploring the risks: attitudes to risk in the global mining sector. Ernst & Young.

Epstein, M.J & Buhovac, A 2008, Making Sustainability Work: Best Practices in Managing and Measuring Corporate Social and Foreign Direct Investment, Environmental and Economic Impacts.

Gibson, R 2006, Sustainability assessment and conflict resolution: reaching agreement to precede with the Voisey’s Bay nickel mine. Journal of Cleaner Production , vol. 14, no.3-4, p. 334-348.

Johnson, A 2005, Host Country Effects of Foreign Direct Investment. The Case of Developing and Transition Economies. JIBS Dissertation series.

Mold, A 2004, “FDI and Poverty Reduction: A critical reappraisal of the arguments,” Région et développement, vol. 20, p. 92-120.

Mutti D., Yakovleva N., Vazquez-Brust D., & Di Marco M.H 2012, “Corporate social responsibility and Foreign Direct Investment in the mining industry: Perspectives from stakeholder groups in Argentina.” Resources Policy, vol. 37, no. 2, p. 212-222.

Stiglitz, J 2007, Making globalization Work, Sage, London

UNCTAD 2009, Foreign Direct Investment policy review Nigeria. United Nations: New York and Geneva.

Vazquez-Brust D., Yakovleva, N., & Mutti D 2013, Mining Foreign Direct Investment in Argentina: perceptions and challenges to sustainable development. University of Manchester, England.

Yakovleva, N 2005, Corporate Social Responsibility and Foreign Direct Investment in the Mining Industries. Corporate Social Responsibility Series. Ashgate Publishing Limited . England.

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