4.9 Growing Global Economics

4.9 Growing Global Economics

Foreign Investment

Foreign Direct Investment (FDI), according to the Economist magazine, is "the act of investing directly in production in another country, either by buying a company there or establishing new operations of an existing business". Foreign direct investment occurs when corporations acquire one company, or a merger of two or more companies is arranged. Acquisition means that one company buys another. Merger means they join together to become one. Acquisitions are far more common than mergers.

In the past, foreign direct investment usually meant the building of factories or branch plants by the mother company in the country where it is trying to do business. As you read in the lesson on transnationals, the reason for this is that the corporation can avoid tariffs on the goods it produces. Before the North America Free Trade Agreement, signed on January 1, 1994 between Canada, United States, and Mexico, many branch plants of American companies existed in Canada. For example, all the major American automobile companies had branch plants in Canada. Now, those same companies have specialized production deals between Canada and the United States. So, the factories in Canada produce parts of the cars that are put together in the United States and vice versa, or else they will produce just one car to be sold both in the United States and Canada.

Foreign direct investment has increased throughout the world since the 1990s, as nations become more interconnected. This coincides with the introduction of the North America Free Trade Agreement. Since that time, many Canadian companies have been purchased by larger American corporations. 

There are some concerns about foreign direct investment. For example, many people are concerned about foreign ownership of "critical infrastructure". That critical infrastructure includes the structures and services that would reduce security and safety of public health if they broke down. That includes agriculture, food production, clean water, public health, energy, telecommunications, and shipping. A large number of foreign-owned corporations provide critical infrastructure to the United States. Duncan Hunter, an American congressman from California, has stated, "We should require critical United States infrastructure to remain in American hands." (If you paid someone in Saudi Arabia to provide your daily lunch, what would you do if that person suddenly said, "Sorry, but no more lunches!" or "Pay twice as much!"?)

Economic Growth

Most of us would probably say that growth is good for the economy. If more money is being earned, then more people are more prosperous. Many nations have experienced a number of booms in their business cycle. Increased global demand for some resources create high demand resulting in an economic boom. However, increased economic activity has some drawbacks.

Infrastructure: When incomes soar, this results in population growth in nations, because people feel more confident about starting families and their ability to meet the needs of the family. Construction and maintenance of housing, schools, roads, and hospitals frequently do not keep pace. Often people complain about long wait times for services. School classrooms are overfilled, and hospitals as well as many necessary government services have waiting lists.

Social Costs: Communities can suffer with economic growth. Some problems include the following:

• Schooling: Often at the expense of their schooling, young people in their part-time jobs are frequently pressured to take longer shifts so businesses might keep up with demands. In many cases high dropout rates result because young people leave school without a high school diploma to get high-paying jobs. Experience shows that those jobs may not be sustainable, and they may not be the work people want for the remainder of their working lives.

• Employment Needs: When workers are in demand, this frequently leads to a short supply of labour. This can become so dire that workers must be brought from other parts of the country or from other nations. This, too, can lead to adjustment problems and additional funding issue at the local level.

Environmental Costs: Periods of high economic activity, especially if the economic boom is in resource-based or manufacturing industries, make excessive demands upon the environment. For example, development can generate greenhouse gases, use large amounts of water, and create long-lasting environmental damage. As land is cleared, deforestation occurs and difficult environmental challenges, such as greenhouse gas emissions and acid rain, can lead to permanent destruction of lakes and rivers.

Sustainability: Another issue of economic growth is whether the growth can be sustained. The business cycle has natural periods of highs and lows. When the economy is booming, more difficult times likely will follow. If people do not plan ahead, they can be faced with no employment and no savings.