I read the article Foreign direct investment falters in Indonesia. This article discusses how FDI in Indonesia has fallen in US dollar terms for the first time since 2011. According to reports the FDI has fallen from $7.2bn to $7bn. The value of the rupiah, Indonesia's currency, has dropped more than 15% against the dollar since September as investors are pulling out of the riskier emerging markets. As one economist put it "I don't think the long term growth prospects have been deteriorating. i just think they weren't as good as a lot of people thought they were." There are still many reasons for investors to be attracted by the large and expanding middle class and the plentiful natural resources.
As we looked at in class the FDI specific factors model shows the effects of FDI in the recipient country. With increased FDI in Indonesia they would gain a net wealth increase and an efficiency gain. Real wages would rise in Indonesia as productivity goes up because of FDI. The "donor" country would have a negative % change for their wages and the "receiving" country of FDI would have positive % change for wages. So, in this case because FDI is being pulled out of Indonesia their country is losing out on potential net wealth increases. With the economic difficulties in Indonesia the growth is continuing at a lower rate. Because of this the amount of FDI is being lowered. Indonesia is missing out on some of the improvements given from FDI, but I feel they will be fine in the long run.
I think what you said about Indonesia was correct about how everything will drop if we pull out FDI. But would you not think that by doing so the countries that are pulling our their FDI are making themselves better off by doing so?
ReplyDeleteI was thinking the same thing. However, it is also possible that the FDI is being reinvested in other developing countries instead!
DeleteI would find it interesting to see where the FDI is being redistributed by the investors. Is it going to a different developing country? Is it going into the home country? Although this will hurt Indonesia, this has the potential to provide benefits to other countries. As you pointed out, an influx of FDI will create a net gain for the host country's overall wealth. Therefore, the potential new countries would be benefiting from this reallocation of FDI. Contrastingly, if there is simply a decrease in the amount of FDI being issued then the home country would benefit by increased domestic marginal product of labor and wages. However, the investors would be hurt as they would experience a decrease in their returns to capital.
ReplyDelete