5. Economic growth and public policy
Suppose Hondamaha, a motorcycle manufacturing firm headquartered in Japan, builds a production plant in Arizona.
This is an example of foreign direct investment in the United States.
Explanation: Foreign direct investment refers to a capital investment that is owned and operated by a foreign entity. Foreign portfolio investment refers to an investment that is financed with foreign money but operated by domestic residents. Therefore, this is an example of foreign direct investment.
Which of the following policies are consistent with the goal of increasing productivity and growth in developing countries? Check all that apply.
a) Imposing restrictions on foreign ownership of domestic capital
b) Protecting property rights and enforcing contracts
c) Pursuing inward-oriented policies
d)Providing tax breaks and patents for firms that pursue research and development in health and sciences
Explanation: Less developed countries hoping to boost productivity and economic growth should pursue policies that increase physical capital per worker, human capital per worker, and technological knowledge. Physical capital accumulation can be encouraged by reducing taxes on income from saving, protecting the property rights of firms acquiring new capital, and encouraging foreign investment in the domestic economy. Foreign investors increase the stock of capital per worker and bring new technology. Encouraging research and development also leads to improvements in technological knowledge. An outward-oriented growth strategy gives countries access to goods, services, and ideas from foreign countries, thereby boosting living standards and productivity.
In less developed countries, what does the term brain drain refer to?
a) The emigration of highly skilled workers to rich countries
b) Rapid population growth that increases the burden on the educational system
c) Lower productivity due to a malnourished workforce
d) Rapid population growth that lowers the stock of capital per worker
Explanation: The brain drain occurs as the best and brightest workers from poor countries leave for higher compensation and better living standards in rich countries. As the skill level of the workforce in less developed countries dissipates along with their most skilled professionals, the countries become even poorer and less capable of developing technological knowledge and enhancing productivity.