Commentary on a Speech given by Jaime Caruan (Monetary and Capital Markets Department Director- IMF)

I would like to comment on an interesting article that I read off of the IMF website (www.imf.org/external/np/speeches/2007/050707.htm) about risks and opportunities in globalization. In particular, I am interested in one of the paragraphs directly addressing Foreign Direct Investment, especially in China because I did research on FDI in China and Ireland for a term paper (this was my inspiration for taking this class).

According to Caruan, there was a study done that examined influencial factors of FDI in which thirty global firms took part. This study showed that FDI is predicted to increase and that many countries are undergoing government reforms that make them more attractive to foreign investors. China is noted as the leader of this movement, getting the most FDI of the emerging markets. This was not surprising to me after researching the government reforms of China such as the Open Door Policy that greatly benefit foreign investors and bring lots of foreign capital, knowledge and technology into the country.

Interestingly, Caruan comments on some risks and motivations involved with FDI that I have not previously considered. Caruan says that "...a primary motivation behind FDI was to gain a presence in faster growing markets, rather than immediate profit, and that repatriation of those profits was heavily influenced by tax considerations. Also, the high cost of hedging in emerging markets was a deterrent to FDI, underlining the significant benefits from countries developing their financial infrastructure. That high cost may explain why cross-border FDI flows have been overtaken by debt and bank flows over the last decade." First, I have a question for Prof. Dickovick: what is hedging? Next, to what extent is FDI being affected by debt and bank flows? According to Caruan, "Investors are now more ready to achieve exposure to emerging markets directly through buying bonds. An increasingly important innovation has been the ability of financial markets to provide protection against exposure to emerging markets through credit risk transfer instruments." What are the risks involved with bonds? For a country like China with lots of FDI, what risks are they facing and how are they preparing to protect themselves? Due to my research, I am very interested in finding out the answers to this question as China is an important actor in the global economy. Also, how do smaller countries with alot of FDI, for example, Ireland, handle the risks involved?