How the Globalized Economy Works Today 325response to market supply and demand. According to liberal thinking, floating exchange
rates will result in market equilibrium, in which supply equals demand. Second, capital
frequently moves through investment. Direct foreign investment (FDI) includes the
building of factories and investing in the facilities for extraction of natu ral resources.
Portfolio investment includes investing in another country’s stocks or bonds, either
short or long term, without taking direct control of those investments.
MNCs play a major role in the movement of capital. Before World War II, most
MNCs were in manufacturing— General Motors, Ford, Siemens, Nestlé, and Bayer
were among the many MNCs in this category. Today, there are about 60,000 MNCs
(depending on one’s definition), with 51 MNCs among the largest 100 economies in
the world. They account for 70 percent of worldwide trade. Of the largest, 60 percent
have their headquarters in either the United States, Canada, or Western Eu rope with
about 34 percent headquartered in Asia. Large MNCs include such well- known names
as Walmart, Exxon Mobil, Royal Dutch Shell, Toyota, and General Motors, but also
less well- known companies, like Sinopec, HSBC Holdings, Carrefour, Royal Bank of
Scotland, Gazprom, and Tesco. Those MNCs provide both foreign direct investment
and portfolio investments.
Indeed, between the 1960s and the 1980s, private international capital provided
essential lending to the successful Asian “tigers,” including Taiwan and South Korea.
In fact, the infusion of private investment in par tic u lar emerging economies— China,
Brazil, Argentina, Chile, South Korea, Mexico, Singapore, Turkey, and Thailand— has
played a major role in their economic success. Yet the very volatility of private capital
flows makes them unreliable for sustained development in some parts of the world,
and private capital alone cannot explain economic outcomes in these countries.
The poorest of states typically have more difficulty attracting private investment.
Until recently, African countries typically have received the least. Separate institutions
within the World Bank were established to provide capital to states that were unable
to attract private investment alone. The International Finance Corporation (IFC) and
the International Development Association (IDA) were created in 1956 and 1960,
respectively, for that purpose. The IFC provides loans to promote the growth of private
enterprises in developing countries. The IDA provides capital to the poorest countries,
usually in the form of interest- free loans. Repayment schedules of 50 years theoreti-
cally allow the developing countries time to reach economic takeoff and sustain
growth. Funds for the IDA need to be continually replenished by major donor coun-
tries. In 1988, the Multilateral Investment Guarantee Agency (MIGA) was added to
the World Bank group. This agency meets its goal— augmenting the flow of private-
equity capital to developing countries—by insuring investments against losses. Such
losses may result from expropriation, government currency restrictions, or civil war or
ethnic conflict. Even with these changes, since the mid-1980s, the flows from both