Table Of ContentPRIVATE FOREIGN INVESTMENT IN DEVELOPING COUNTRIES
Published for the Development Centre of the
ORGANIZATION FOR ECONOMIC
CO-OPERATION AND DEVELOPMENT
Paris
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INTERNATIONAL STUDIES IN ECONOMICS AND ECONOMETRICS
VOLUME 7
PRIVATE
FOREIGN INVESTMENT
IN DEVELOPING COUNTRIES
A Quantitative Study on the Evaluation
of the Macro-Economic Effects
by
H. C. BOS, MARTIN SANDERS, and CARLO SECCHI
Netherlands Economic Institute
Division Balanced International Growth
Rotterdam
D. REIDEL PUBLISHING COMPANY
DORDRECHT-HOLLAND / BOSTON-U.S.A.
Library of Congress Catalog Card Number 73-91763
ISBN-13: 978-90-277-0439-9 e-ISBN-13: 978-94-010-2142-5
DOT: 10.1007/978-94-010-2142-5
Published by D. Reidel Publishing Company,
P.O. Box 17, Dordrecht, Holland
Sold and distributed in the U.S.A., Canada, and Mexico
by D. Reidel Publishing Company, Inc.
306 Dartmouth Street, Boston,
Mass. 02116, U.S.A.
All Rights Reserved
Copyright © 1974 by Organization for Economic Co-operation and Development
No part of this book may be reproduced in any form, by print, photoprint, microfilm,
or any other means, without written permission from the publisher
T ABLE OF CONTENTS
PREFACE VII
PART I Evaluation of Private Foreign Investment-A Critical Survey
of Current Approaches
TaWeofCon~nh 3
1. General Introduction 5
II. Problems in and Criteria for Evaluating the Impact
of PFI 10
III. The Contribution to GNP 17
IV. The Balance of Payments Effect ofPFI 31
V. Issues Concerning Other Effects of PFI 36
VI. The UNCT AD Study on PFI 42
PART II A Macro-Economic Methodology for the Appraisal of the
Effects of Private Foreign Investments in Less Developed
Countries 47
Table of Contents 49
Summary of Part II S3
1. General Introduction 57
II. A Model of a LDC's Economy with Special Refer-
ence to PFI 61
III. The Economic Effects of PFI 79
IV. Other Economic Effects of PFI not Considered by
the Model 90
V. The Interdependence - Simultaneous and Over
Time .. of the Effects of PFI 97
VI. The 'Cumulative' Effects of PFI 101
VII. The 'Marginal' Effects of PFI 108
VIII. Cumulative and Marginal Effects Compared 118
IX. Sectoral Disaggregation and Input-Output Analysis 138
X. Various Practical Situations and the Use of the Model 144
XI. The Use of the Model for Decision Making 146
XII. The Use of the Model for Empirical Investigations 148
VI T ABLE OF CONTENTS
XIII. Evaluation and Conclusions 150
List of References 152
PART III Empirical Application of the Macro-Economic
Methodology 153
Table of Contents 155
I. General Introduction 161
II The Choice of Countries 163
III. The Main Modifications Introduced 165
IV. Estimation of the Parameters and Solving Procedure 168
V. India 170
VI. The Philippines 204
VII. Ghana 230
VIII Guatemala 270
IX. Argentina 300
X. A General Comparison of the Empirical Outcomes 324
XI Alternative Assumptions About Import Substitu-
tions 331
XII. General Conclusions on the Empirical Application
on the Methodology 337
PAR T IV The Appraisal of Private Foreign Investment Projects - A
Social Cost-Benefit Approach 339
Table of Contents 341
I. Introduction 343
II. Principles of Social Cost-Benefit Analysis 345
III. Basic Characteristics of Private Foreign Investment
Projects as Distinct from Domestic Investment
Projects 364
IV. The Impact of the Special Characteristics of Private
Foreign Investment on the Methodology of Social
Cost-Benefit Analysis 371
V. Outline of a Social Benefit-Cost Scheme for Ap-
praising Private Foreign Investment Proposals 376
VI. Some Refinements and Complications 392
VII. Social Cost-Benefit Analysis as a Tool in Negotiating
With Foreign Firms 396
AUTHOR INDEX 399
SUBJECT IN DEX 400
PREFACE
This study is the result of research undertaken by the Netherlands Economic
Institute, Division Balanced International Growth, Rotterdam, under the
auspices of the O.E.C.D. Development Centre. In the division of labour
agreed with professor Grant L. Reuber, who directed a parallel study under
the auspices of the Centre' , the N.E.I. research deals with the evaluation of
economic effects of private foreign investment in developing countries. The
effects studied are confined to macro-economic effects which are quantifi
able. The lack of a satisfactory methodology for the assessment of these
effects seemed to justify this limitation in the approach to the evaluation of
private foreign investment.
The study is organized as follows. Part I reviews briefly and critically the
literature about the evaluation of private foreign investment and suggests the
need for an appropriate macro-economic methodology. Part II develops the
principles and techniques for such a methodology which is applied empirical
ly to data for five developing countries in Part III. While Parts II and III are
concerned with the effects of aggregated volumes of private foreign invest
ment, Part IV considers, independently of the previous parts, the appraisal of
projects financed through foreign investment and discusses the special fea
tures of social benefit-cost analysis of such projects.
Parts I and IV were prepared by Martin Sanders, M.A., senior economist of
the N.E.I., Carlo Secchi, now associate professor at the Faculty of Economics
of the University of Trento and of Luigi Bocconi University, Milan (Italy),
developed the methodology of Part II and carried out the applications of
Part III. In the empirical work he was assisted by Mrs M. Hulsman-Vejso
va, M.A., of the N.E.I. and by J. Kol, M.A., and H. B. H. Visscher, M.A., of
the Centre of Development Planning of the Netherlands School of Eco
nomics. Professor H. C. Bos, director of the N.E.l., directed the study and is
responsible for the final result.
The authors wish to acknowledge gratefully the indispensable cooperation
received from the research institutes and persons who provided the data for
, Private Foreign Investment in Development, Clarendon Press, Oxford 1973.
VIII PREFACE
the country studies in Part III. In organizing the collection of these data the
Secretariat of the O.E.C.D. Development Centre has also given helpful assis
tance.
Miss 1. Bovenkerk and Mrs B. Elderson typed the various drafts of the
manuscript with great patience.
The study was financed by the Government of the Netherlands through a
grant to the O.E.C.D. Development Centre.
The study was concluded in the summer of 1972 and does not take
account of later developments.
Rotterdam, September 1973 Netherlands Economic Institute
Division Balanced International Growth
H.C.BOS
PART I
EVALUATION OF PRIV ATE FOREIGN INVESTMENT
A CRITICAL SURVEY OF CURRENT APPROACHES
T ABLE OF CONTENTS
CHAPTERI. GENERAL INTRODUCTION 5
1.1. Introduction 5
1.2. Scope of the study 8
CHAPTER II. PROBLEMS IN AND CRITERIA FOR EVALUATING
THE IMPACT OF PFI 10
2.1. Introduction 10
2.2. The effects of PFI, a schematic classification 10
2.3. The effects relevant for this study 12
2.4. Criteria for measuring the effects of PFI and the question of
alternatives 13
2.5. Aggregate vs project approach 16
CHAPTER III. THE CONTRIBUTION TO GNP 17
3.1. Outline 17
3.2. The direct income effect
18
3.2.1. Positive contributions to GNP
18
3.2.2. Negative contributions to GNP 20
3.2.2.1. Price distortion
21
3.2.2.2. Payment to labour
22
3.2.2.3. Depletion of natural resources
23
3.3. Indirect income effects
23
3.3.1. Forward and backward linkages 23
3.3.2. The terms of trade 24
3.3.3. Pre-emption of investment opportunities
25
3.4. Other considerations 26
3.4.1. Take-overs 26
3.4.2. Financing PFI 26
3.5. The question of profits made by foreign investors 27
