The report has outlined the overview of development of outbound foreign direct investment of Chinese MNCs in three stages from the late 1970s to 2007. Since 2003, there is an impressive surge in Chinese outward FDI as a result of policy liberalization, government’s support and globalization.
The report further analysed the determinants, the location and the entry strategies of Chinese MNCs in internalization process. Haier Group, the world’s fourth largest white goods manufacturer was selected as illustration for the purpose of analysis.
Finally, the report pointed out the similarities and differences between MNCs from emerging countries and those from developed countries. Beside the existing literatures applied for both Chinese MNCs and developed country MNCs, there were some specific difference in planning and implementation of Chinese MNCs as an emerging outbound investor.
Overview of the Development of China’s Outward Foreign Direct Investments (OFDI) and Multinational Corporations (MNCs)
Overview of Development of China’s Outward FDI
China has been well known for its absorbing a huge amount of FDI since the implementation of the open-door policy in the late 1970s as the largest host country for inward FDI in the developing world since 1992 and the second largest host country for inward FDI in the world after the United States since 1993 (Yang, 2005). However, China’s outward direct investment (ODI) has also experienced dramatic changes since the late 1970s, particularly in the late 1990s with strong governmental promulgation of the “going-global” strategy in order to promote international competitiveness and secure a supply of key resources (Zhang, 2009). The below Figure 1 and 2 (Zhang, 2009), respectively, illustrate the trend of China’s annual ODI flows and stock from 1980 to 2007. The surge in ODI flows and stock since 2003 is the most impressive characteristic of the trend of Chinese ODI and stock in contrast to small outflows and stock in the first decade and moderate outflows and stock in the second decade. The evolution of China’s ODI can be classified as three stages based on the ODI flows and stock, accompanied with the emergence of Chinese MNCs.
Figure 1: China’s ODI Flows, 1980-2007 (US$ millions)
Figure 2: China’s Annual Stock, 1980-2007 (US$ millions)
The first stage (1978-1991) is characterized as experimental and subject to strong state regulations as well as poor capital conditions. In its early outward-oriented investment following the open-door policy in the late 1970s, China’s investment abroad was small with the restriction to the state-owned companies under the government’s political considerations. In this period, Chinese MNCs were mainly large state-owned enterprises operating in monopolized industries, such as financial services, shipping, international trading, and natural resources. The CITIC Group, COSCO, China State Construction Engineering Corporation, CNPC, Sinochem, CNOOC, China Minmetals, and COFCO are examples of such MNCs emerged during this stage. The amount of investment in the entire period was insignificant, with average annual flows of US$451 million and stock value of about US$5 billion by the end of 1991 (Zhang, 2009).
The first wave of Chinese multinational corporations with a relatively large amount of overseas investment was demonstrated in the second stage (1992-2002). The average ODI flows in this period were US$2.89 billion, triple in value compared to the first stage. Stock value increased to US$37.2 billion by the end of 2002, increasing over seven times after 11 year period. The large fluctuation of ODI flows in the period was consequences of changes in domestic and international economic and political environments including Deng Xiaoping’s southern tour in 1992, initiating further reforms with more liberalized ODI policy, the going-global strategy initiated in 1999, the Asian financial crisis in 1997, and the entry of China into the World Trade Organization (WTO) in 2001 (Zhang, 2009).
China has been emerged as one of the leading sources of FDI in the developing countries as well as in the world in the third stage (2002-2007) with a surge in both the growth rate and absolute volume. China’s ODI flows rose nine-fold, from US$2.5 billion in 2002 to US$22.5 billion in 2007, and the ODI stock almost tripled from US$33 billion to US$96 billion during 2003-2007. Recent average annual ODI flows are US$12.85 billion, compared to US$2.89 billion in 1992-2001 and US$0.45 billion in 1980-1991. In 2007, China ranked the third-largest outward direct investor in the developing world. By the end of 2008, there were over 10,000 Chinese companies established in over 160 countries and regions. This period has also witnessed the remarkable surge in ODI in the form of mergers and acquisitions (M
Seigniorage As An Unlimited Source Of Government Revenue Economics Essay
Does seigniorage represent an unlimited source of government revenue? Discuss theoretically as well as with reference to empirical evidence that is available.
Government can always print money to meet its budgetary deficits and the revenue generated by mere printing of money is termed as seigniorage. Neumann (1996) explained it as gross flow of resources to the government sector, in real terms, associated with money creation. Seigniorage can also be termed as “raising of revenue by money creation and can be used by the government to finance expenditure when taxes cannot be raised from other sources” (Mohammad Ali Moradi 2001).
This essay will start with a theoretical model of seigniorage followed by an empirical study with respect to limitations of seigniorage as a revenue source. The main objective through out this essay would remain to explore whether seigniorage is an unlimited source of revenue for the government?
Theoretical Model of Seigniorage. The0 essay focuses over seigniorage in real terms. The approach presented below, for theoretical understanding of seigniorage and its limitations as a source of government’s real revenue, has been inspired from Olivier Blanchard (2003).
M = Nominal Money Stock.
Change in nominal money stock.
P = Price Level.
Then real revenue (in terms of goods) of the government, which it can generate by printing additional money,, will be called seigniorage.
(1) can be rewritten as follows.
is rate of nominal money growth and is real money balance.
(2) explains a relationship between seigniorage, real money balances and the rate of nominal money growth. Now we need to determine how much balance of real money are people willing to hold and how it is related to nominal money growth. We know that, under equilibrium in financial markets, LM relationship can be written as follows.
LHS in (3) is equal to real money supply (supply equals demand in equilibrium) and RHS is equal to real money demand (Y = real income and = a function of interest rate ). (3) implies two important characteristics which are as follows.
Higher Y (real income) will induce people to hold larger balances of real money ().
Higher rate of interest will increase the opportunity cost of holding money.
Both conditions 1 and 2, stated above, hold in the time of stable economics conditions and during hyperinflation, but in the case of latter, we need to modify (3) further.
We know that nominal interest rate is
i = Nominal Interest rate
r = Real Interest rate
= Expected inflation.
Put (4) in (3)
During hyperinflation, it would not be a bad approximation that both Y and r remains constant whereas fluctuates too much. Therefore Y and r in (5) can be assumed constant.
and are assumed to be constant in (6)
(6) tells us that real money balances depend upon expected inflation and as expected inflation increases, opportunity cost of holding money also increases and people will reduce their real money balances.
Now put (6) in (2)
Seigniorage = (7)
Now if government selects a constant rate of nominal money growth during hyperinflation and this rate is maintained forever (this is one of the assumptions) then how much seigniorage can be generated by this constant nominal money growth rate. If nominal money growth rate is constant forever, inflation and expected inflation would both equal nominal money growth (again we assume that output growth is zero). This implies that
Put (8) in (7)
Seigniorage = (9)
According to (9), net effect of nominal money growth on seigniorage is ambiguous. It has a dual relationship.
Given real money balances, seigniorage increases by printing more money. (first expression of in (9)).
When more money is printed, inflation increases and in turn real money balances decrease (second expression of in (9))1.
It also means that while government prints money, the nominal revenue collected by the seigniorage increases. But the advantage in real terms is off set by increased inflation caused by printing money and eventually real seigniorage revenue declines after a certain increase in nominal money supply. Real seigniorage will start declining after a particular point where the cost of printing money (inflation) will be greater than nominal revenue generated through it. The above discussion can be represented by the following diagram (adopted from Romer 1996).
The Seigniorage (S) Laffer curve (Source: Romer 2006, p.422)
In the above figure
gm = rate of money growth, S = Seigniorage revenue and Smax = maximum seigniorage revenue corresponding to gmax. and gmax is the maximum money growth after which real seigniorage starts to decline.
Is Seigniorage an un-limited source of revenue? The figure above is quite similar to “Laffer Curve” which represents the relationship between tax revenue and tax rate in the same manner, as has been described above between seigniorage and money growth.
The above figure and the empirical evidence (described later in this essay) suggest that seigniorage is not an unlimited source of revenue. When rate of growth of nominal money is low, there is small reduction in the real money balance which leads to an increase in seigniorage. But when growth in nominal money is higher, the reductions in real money
1. When Seigniorage
balances are also larger (due to increasing inflation). There comes a point, gmax (as described in the above diagram), after which any further increase in the money growth decreases real seigniorage.
Seigniorage and Inflation Tax. Inflation is a sort of tax on real money balances. So inflation tax can be represented by the following equation.
Inflation Tax =
= rate of inflation
= real money balances.
Now, we know that = , therefore above equation becomes
Inflation Tax = = Seigniorage
Empirical Evidence of Seigniorage: We already know that printing of money causes the holders of cash and cash equivalent in an economy to pay the inflation tax, which regress the real benefit from the seigniorage, as it was explained by Kiguel and Neumeyer (1989). The same phenomenon can be observed in Pakistan during the last few decades.
The empirical evidence about seigniorage and inflation endorses that seigniorage and inflation tax are correlated notions as when seigniorage exceeds a certain limit the inflation tax becomes harder to avoid and devaluation of the real money takes place as elucidated by Keynes (1923). The empirical evidence described in this essay has been inspired from Arby (2006) who discussed in his paper that during 1970s the seigniorage remained handicapped in creating the real revenue when inflation boosted until 20% on average. After 1970 (when inflation remained below 20%), a direct relation between inflation and seigniorage was being observed in Pakistan.
Increasing Inflation and decreasing Seigniorage in Pakistan. An inverse relationship, at very high and low inflation rates, between inflation and seigniorage was observed in Pakistan during early 1970s and early 2000s. The inverse relationship was observed due to following reasons.
During early 1970s, inflation was around 20% and government could not generate more real resources by simply printing money. Seigniorage as percentage of GDP declined from 7.4% in 1972-73 to 5.3% in 1973-74. Moreover during early 1970s government was relying more on monetary supplies and the commercial banks were also nationalised. Therefore, the large portion of seigniorage distributed by commercial banks went into the pockets of government. This phenomenon is also supported by findings of Baltensperger