Category: Economics Dissertations

Our sample economics dissertations are an ideal tool for any student struggling to start their own economics dissertation. It is worth noting that economic management is an essential part of any organisation and there are many components of economic management. By browsing our collection of economics dissertation topics, you will get ideas for your economics dissertation through the following economics subjects:

Hyperinflation, Macroeconomics, Economic Policy, International Monetary Fund, Economic Development, Interest Rates, Oil Price, Economic Growth, FDI, Microeconomics, Supply, Demand, Regional Development, Employment Economics and Financial Economics.

Economics Dissertation Topics

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.

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.

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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New Economy and New Culture

Global Business Environment

New Economy and New Culture

Moving towards a New Economy. Traditionally an economy was defined in terms of deciding factors influencing the distribution of limited and scarce resource among the competing forces in highly competitive environment. The scope of the subject was limited to efficient performance of production processes. The agenda of fairness has been rarely incorporated in the economic system.

Economic theories were not contributing enough to resolve the economic and practical problems. Freedom of mind lost its connection with reality and introduced hypothetical theories to resolve the economic issues prevalent in the environment. These theoretical frameworks present comprehensive and ample method of evaluating the individual behaviors but at same time produce variety of testable issues which demand extensive and profound scrutiny.

Behaviors of individuals are examined and analyzed by numerous economic endeavors and economic agents. It is very difficult to define culture as it implies numerous meanings, transformed into various aspects without any mutually agreed definition.

Culture is associated with the subject of humanities and social sciences and its meaning varies widely across disciplines. It ascribed different meanings in different centuries and the most recent one focused on the intellectual development of entire civilization and entire lifestyles of individuals which supplement the cultural values. Culture is social frame work which defines the attitudes, beliefs, norms values shared by large group. The main objective of relating economy with cultural dimensions is to investigate the role of cultural instruments in economic development and economic performance of the society (Throsby, 2001).

New Economy and New Culture

Some of the extremists believed that new economy would be free of all the inflationary problems which would lead to recession or economic downturn because of technological development. According to (Wired, 1998) new economy would evolve with the help of technological change, globalization in the economy and skills and creativity of individuals in the society.

Development in information technology would largely impact the work in production industry. Technological change is revolutionary change which enhances the workers ability and skills and affects the social choices of individuals (Zuboff, 1988).

Globalization would narrow down the geographical boundaries and expand the market across the borders and scope of the new economy would be globalized. This globalization would redesign the rules of competitiveness in the economy. It has differential effect in the society and has enabled to achieve free market mechanism against protectionism (Brink Lindsey, 2001).

The effect of globalization has also deprived local culture from its unique cultural factors. So the cultural factors have also evolved along with the economy because of dramatic changes in the world. New economy demands completely new skill set among workers. Ne economy values creativity and innovation of the individuals to compete in global market.

New economy capitalizes on the value of intangible assets and provide dynamic and information rich environment for operation to its workers. (Malone, 1999) New economy has produced heterogeneity and flexibility in cultural instruments of the society and has established unique relationship between culture and economy. Contribution of creative sector in the economy has highlighted that the problems of cultural policy are almost the same as problems of economic policy.

New economy is described as global, networked and information rich economy with creative and innovative workforce. It generates niche- marketed goods and services staffed by intelligent and culturally rich workers and satisfy the creative and cultural needs of individuals. Cultural needs of individuals evolve with the growth in creative sector of the society (Healy, 2002).

The focus of cultural values has shifted from direct economic contributions produced by creative industries towards indirect economic benefits like creativity and innovation, employability and social inclusion. Social and cultural values, capital and human characteristics are highly considered factors in the formulation of cultural policy which is associated with the economic policy (Böhm & Land, 2009).

Development in the work life and labor markets demands the understanding of motivational factors of workers. Creativity and innovation has generated new appeal for culture in the new economy. Cultural context of economics can be easily explained as economic agents observe and breather in the cultural environment which regulates their behaviors and outline their preferences. Cultural economy helps to scrutinize the social and economic dimensions of the society.

Contemporary Business and Economy

Evolution in the economy and international standards have created intimidating business environment for several multinational companies and their brands operating globally. Newly evolved business environment poses challenges of economic downturn, high cultural sensitivity because of cultural shifts in the society, lack of motivation and job satisfaction among the workforce and corporate scandals leading to lack of trust in capital markets.

These challenges are attributed to globalization of market, development in information and technology and diversity in the workforce. Organizations operating in this highly unpredictable working environment are struggling to restore their trust in the corporate world. Some organizations are trying to regain their position in this hostile environment by setting ethical standards, strict rules, establishing transparent processes, addressing public concerns, performing cultural audits and by establishing social challenging performance targets. All these efforts pave path towards the formation of new economy and new culture collectively described as cultural economy (Goodman, 2004).

Organizations in contemporary business environment are highly susceptible to social, cultural and moral issues of the society. Changes in the operating environment of businesses largely sway the skill requirement of businesses.

Business organizations are adapting and transforming their operating activities according to the cultural, social and moral standards of the society. This transformation largely influences the competitive position of the business in competitive landscape. It also helps in developing positive image and repute of the business in the society.

Change agents like economic environment, technology and globalization have forced the organizations to capitalize on the cultural economy in order to adapt and perform landmark success in their industry. Implications of contemporary issues raised by the environment could be easily modified and capitalized by balancing their business environment with new economy and new culture (Crane & Matten, 2010.).

Importance of New Economy and New Culture

Cultural processes and values adapt to material environment. The role of culture in the economic development of third world countries could be effective by identifying their cultural integrity and cultural aspirations of poor people and improving their material circumstances according to their cultural traditions. Development of culture and economic circumstances are intertwined in the society.

Development projects introduced by NGOs in under developing countries for raising their living standards and economic conditions largely depend on the understanding of their cultural traditions. This explained that culture determines the scope of material process in economic context (Throsby, 2001). The driving force in international market is culture and creativity. The impact of culture is evident not only to the economy but also to their society. Increase importance of culture in economy and society has transformed the way of creation, consumption and enjoying cultural products.

Culture is not only significant mean towards economic growth but also fundamental factor in social cohesion and development of human civilization. Cultural industries deal with the conception, production and commercialization of creative products which have social and economic importance in the market.

From 1999 to 2003, growth in cultural and creative industry in European Union was 12.3% more than economic growth. In 2004 cultural sector employed 5.8 million people in Europe. Moreover the jobs created by cultural and creative sector provide sense of assurance and commitment, job involvement and satisfaction to their workers.

Cultural industries contribute towards enhancing the economic performance of the countries. The Great Wall of China as cultural heritage is source of tourist income and attracts national investment. It enhances the value of the brand of the national products and mobilizes the economy. This example illustrated the economic and social contribution of culture in the society (Pol, 2007).

The concept of knowledge-based economy provides economic support to creativity and talent and emphasizes on the framework of cultural growth and development. Traditional production factors have evolved and change in the new economy. Key underlying factors of social and economic growth are knowledge, creativity, innovation and skills. It has not only changed the economic structure but revolutionized the development of economy and society.

Economic growth and development largely relies on the application new ideas and creativity in the cohesive economy. Influential component of culture, behavior of individuals and social groups emphasize and lead toward the development of society. The idea of cultural materialism enabled better understanding of the relationship between culture and economic development. Development of society largely depends upon the development of culture and arts.

The UN is also taking initiatives, passing resolutions and policy papers to ensure that to introduce cultural industries in the policy formation of developing and under-developed countries. This explained that efforts are being done to shift from narrative importance of cultural economy towards the performative. Realizing the importance of cultural economy, international and national organizations are taking practical initiatives to incorporate cultural dimension in their economy (Anon., 2009).

Qualitative research on arts and culture have exhibited that it positively contribute towards the better health and well-being of individuals, improve the social identity and cohesion, community development and economic benefits to the society. Cultural and art oriented projects enhance the personal motivation of individuals and provide social esteem leading to healthy benefits to the society. Cultural economy fosters intercultural understanding which helps to accommodate diversity in cultures and populations.

Cultural exhibitions and festivals played significant role in validating the diversity in the workforce and overcome the problem of social isolation in the work environment (Coalter., 2001). Highly competitive nature of business demands the workforce to be highly motivated and satisfied which in turn would contribute towards the high productivity and improved economic performance. Economic effect of art and culture could be explained by dollar value generated by creating jobs for artists, investment in tourism and revenue generated from the cultural artifacts. Cultural economy helps in the creation of energetic and creative work environment which is very crucial for contemporary business and economy (Azmier, 2002).

Historically business environment was confined to geographic boundaries but globalizations and development in technology has revolutionized the business environment. Human capital is considered as most important asset for the enhancing the productivity and economic activity of the businesses.

Cultural economy nourishes the creative and social needs of employees and work as knowledge multiplier in securing sustainable competitive advantage for organizations. Cultural economy has also enlightened the creative insight of businesses to develop products and services matching the cultural traditions and integrity of the people. It is also encouraging workforce to actively participate in contemporary business environment. Policy makers and businesses largely comprehend the significance of cultural industry in the economy and its importance to survive in global and competitive market.

In contemporary business environment market value of the products largely rely on the uniqueness of products its performance and innovative appeal in establishing unique competitive edge from the market. Customers highly value the innovative and unique product which is coherent with their cultural identity (Thomasian, 2009).

The twentieth century is dominated by knowledge workers and challenges of global market place. These global challenges demand the creativity and innovation in the business processes and products offered by businesses. Cultural economy serves the dynamic needs of global marketplace and contributes creativity by ensuring the sustainable competitive advantage based on creative and innovative workforce.

According to (FREY, 2009) institutional effect of culture on economy is extremely challenging to evaluate. Some of the researchers examine the institutional effect by estimating social value created by cultural institutions. Social value is subjective in nature and cannot quantify the value created by cultural institutions in the society. Cultural economics is considered as branch of economics which incorporates psychological and social elements in economic to influence the intrinsic motivation of individuals.

Monetary value of economic effect of cultural economy could be easily evaluated by the revenue generated, creation of new jobs and with the ancillary businesses attached to it. Hence this new term of cultural economics is largely affecting and supporting the contemporary businesses and economy. It helps to overcome the challenges of competitive, global and technologically efficient market place and intrinsically motivate it workforce by fulfilling the cultural and social needs

Relationship with the Banking Industry

The agenda of this study is to investigate the normative assumption which states that cultural economy completely relies on the real economy of the world. The business environment under study is financial services sector or banking sector. Cultural economy has evolved and restructured its long term relationship with the economy and social factors.

The basic assumption is that cultural economy is largely substituting the finance and manufacturing industry in the urban society. The research conducted by Pratt in 2012 explained that normative connection between culture and economy is inconsistent. The experience of recent recession has forced the economist to reconsider the relationship of culture with the economy.

The assumption that is recession cultural industry would hit a setback was completely rejected when in recent austerity creative industry flourished as compare to other periods. While banking industry was highly leveraged and with risky loans caused failure of banking systems. The problem rose because of over extension of assets which multiplied the problem and state financed the bank’s debt it lead to the issue of sovereign debt (Pratt, 2012).

The relationship of cultural economy and financial institutions like banks are questioned frequently because of financial and sovereign debt crisis. Investigation of this relationship leads to the formation of new economy concentrated on the logical position of cultural economy.

Social mobility of people from lower class and middle class towards cultural products to have fun and luxurious aspect of cultural factors forced cultural market modernize the way of entertainment. Banking industry provided finances to Greek state but with the shrinkage in public or state investments cultural consumption by the people remain same. In comparison to financial sector it flourishes and exploits the city resources (Souliotis, 2013).

These empirical researches exhibit that cultural economy has more complex and intricate relationship with the banking industry. In case of recession cultural industry and financial service industry move in opposite directions. Prior researches could not clearly identify the underlying reason behind this deviation form normative assumptions of cultural economy. Moreover it is proposed that economic desire is based on the individualistic behaviors while cultural desires are based on collective behaviors of the society.

These evidences explained the fact that banking industry is not influenced or affected by cultural economy. These two parts of economy stand alone. Underlying reason may be the social mobilization of the social classes in economy. Upward social mobilization and luxurious entertainment were some the driving forces which motivated the cultural consumption even in austerity.

While at the same time shrinkage of public funds and shortage of bonuses for the employees of financial services in the period of recession explained that it portrays negative relation during crisis. There may be some hidden underlying variables which demand more research on this complicated phenomenon between cultural industry and banking sector.

References

Anon., 2009. Measuring The Economic Contribution Of Cultural Industries. 2009 Framework for Cultural Statistics Handbook No. 1. Montrea: UNESCO Institute for Statistics.

Azmier, J.J., 2002. Culture and Economic Competitiveness: An Emerging Role for the Arts in Canada. Canada West Foundation.

Böhm, S. & Land, C., 2009. No measure for culture? Value in the new economy. Capital & Class, 33(1), pp.75-98.

Brink Lindsey, 2001. Against the Dead Hand: The Uncertain Struggle for Global Capitalism. New York: Wiley.

Coalter., F., 2001. Realising the Potential of Cultural Services: Making a Difference to the Quality of Life. London: Local Government Association.

Crane, A. & Matten, D., 2010.. Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford University Press.

FREY, B.S., 2009. Cultural Economics. CESifo DICE Report.

Goodman, D.M.B., 2004. Meeting the Global Challenges of the Contemporary Business Environment. New York: Royal Society for the encouragement of Arts.

Healy, K., 2002. What’s New for Culture in the New Economy? The Journal of Arts, Management, Law and Society, 32(2), pp.86-103.

Malone, M.S., 1999. Reflecting on a New World of Business. In Impart, pp.36-42.

Pol, H.v.d., 2007. Key role of cultural and creative industries in the economy. UNESCO Institute for Statistics.

Pratt, A.C., 2012. A world turned upside down: the cultural economy, cities and the new austerity. In Pratt, Andy C. “A world turned upside down: the cultural economy,. Proceedings of the Regional Studies Association Winter Conference., 2012.

Souliotis, N., 2013. Cultural economy, sovereign debt crisis and the importance of local contexts: the case of Athens. Elsevier, 33, pp.61-68.

Thomasian, J., 2009. Arts & the Economy: Using Arts and Culture to Stimulate State Economic Development. Washington: National Governor Association.

Throsby, D., 2001. Economics and Culture. Cambridge University Press.

Wired, 1998. Encyclopedia of the New Economy. Wired Magazine.

Zuboff, S., 1988. In the Age of the Smart Machine: The Future of Work. New York: Basic Books.

The Economic Environment Project

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Negative Interest Rates

Discuss the macroeconomic effects of negative official interest rates. What relevance, if any, do the macroeconomic models have in explaining this phenomenon and predicting its likely consequences?

The negative interest rate is a recent phenomenon emerged from the global financial crisis in 2008. The negative official interest rate has become worldwide phenomenon and a part of policy initiatives by central banks around the world (Collignon, 2012) to deal with the problems of low rate of economic growth, massive unemployment and disinflation by injecting some easy money in search of some viable solution for economic recovery.

The interest rate is most crucial variable for financial industry as it has widespread effects on share prices, exchange rate and income distribution between exporting firms and consumers. IMF (2012) has mentioned the negative effects on insurance and savings in form of pension funds and financial stability is threatened in case of persistent negative interest rates. This policy can have negative consequences for growth and independence of central banks in the hands of irresponsible government decisions (White, 2012).

Money market suffers as important intermediaries like money market funds could be compelled out of business because of lost profitability that shift the interest of investors to more profitable market oriented business.

The consumers also suffer from negative interest rate in form of high global commodity prices. The reason behind this phenomenon is the changing interest and speculative behaviour of investors into high yielding assets like oil and food. The increased inflation rate results in lower purchasing power of consumers that hindered the economic recovery (Belke et al., 2010).

The negative interest rate dampen saving as it encourage people to spend more rather to save, this has long term negative effects for the people who are dependent on interest income. On the other hand the savings are not properly used for investment because of deteriorating investment efficiency.

The benefit of low interest rate includes the increasing capacity of banks to lend as a major problem the banks faced during the financial crisis was undercapitalization that restricted their capacity to make loans for recovery.

The negative interest rate can increase the wealth of households in form of higher asset prices and lower the capital cost for making investments but at the same time it gives rise to additional borrowing that increases the debt levels.

Negative interest rates can be explained in terms of Keynes theory of interest rate and theory of speculative demand for money. According to Keynes the equilibrium interest rate is the rate that equates money supply and money demand. Keynes began by asking “why an individual would hold any money above the needed for transaction and precautionary motives when bonds pay interest and money does not.” Keynes believed that such an additional demand for money exists because of uncertainty about future interest rates and the relationship between changes in the interest rate and the price of bonds. As there is an inverse relation between bond price and interest rate, Keynes speculative demand for money is the money held in anticipation of a fall in bond prices and a rise in interest rates (Froyen, 2005).

Here we observe a phenomenon of liquidity trap. It is the situation at a very low interest rate where the speculative demand for money schedule becomes nearly horizontal as shown in figure.

One implication of negative interest rates could be the liquidity trap which can lead to deep recession with deflation. It can be explained with the help of an example. In the 1990s, the interest rate in Japan was the lowest in the world and in 1998 the interest rate on Japanese six month treasury bills turned slightly negative. In such a situation Japan experienced prolonged recession accompanied by deflation which is the negative inflation rate (Mishkin, 2007). Usually it is believed that the low interest rates are a good thing because they make borrowing cheaper. But the case of Japan shows that low and negative interest rates were a sign that Japanese economy was in real trouble with falling prices and contracting economy.

Secondly, it is not attractive for the lenders to lend below 0%, as that will guarantee a loss, and a bank offering a negative deposit rate will find few takers, as savers will instead hold cash.

Countries like Denmark and Sweden introduced negative interest rates in recent years on temporary basis. In Denmark the purpose of adopting negative interest rate was to limit an unwanted rise in its currency. For this they moved to negative deposit rates. It did not cause any financial meltdown nor did it cause any noticeable change in the interest rate charged by banks for bank loans. Recently, European Central Bank has adopted the negative interest rates of -0.1% on Eurozone banks to encourage them to lend to small firms rather than to hoard cash. It is meant to boost the economy by increasing the lending to consumers and businesses.

Consequences of adopting Negative Interest Rates

This development can have unpredictable consequences. Those consequences may include the possibility that banks will pass on to customers the costs for depositing money with the ECB.
Also the negative return on keeping funds with the central bank might encourage banks to invest in riskier assets to secure a return.
As an alternative investment, banks may increase their purchases of government bonds and it would have potentially serious consequences if banks are holding bonds to such an extent that government borrowing costs are artificially low. If a financial shock occurs, the banks and governments could find themselves so intertwined and interdependent that they drag each other and the economy down.

References

Belke, A., Bordon, I. G., & Hendricks, T. W. (2010) ‘Global Liquidity and Commodity Prices–a Co-integrated VAR Approach for OECD Countries’. Applied Financial Economics, 20(3), 227-242.

Collignon, S. (2012) ‘Fiscal policy Rules and the Sustainability of Public Debt in Europe’. International Economic Review, 53(2), 539-567.

Froyen, R.T. (2005) Macroeconomics: Theories and Policies (8th ed.). Prentice Hall: Upper Saddle River.

International Monetary Fund Staff (2011) ‘Global Financial Stability Report: Durable Financial Stability: Getting There from Here’. International Monetary Fund.

Mishkin, F. S. (2007) The Economics of Money, Banking, and Financial Market. (sixth ed.). Pearson Education.

White, W.R. (2012) ‘Ultra Easy Monetary Policy and the Law of Unintended Consequences; Federal Reserve Bank of Dallas’. Globalization and Monetary Policy Institute.

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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.

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.