Set 4The Cutting Edge Economists and governments agree these days on the crucial importance of foreign direct invest-ment (FDI). They see it both as the global market’s "seal of approval" on a country’s policies and prospects, and as a force, especially in developing countries, for far- reaching economic change. This consensus is surprising when you remember that FDI remains politically sensitive in many poor, and some not-so-poor, countries. But the benefits are so great that reservations on this account have been put aside. The point about FDI is that it is far more than mere "capital": it is a uniquely potent bundle of capital, contacts, and managerial and technological knowledge. It is the cutting edge of globalization. The outlook for FDI- in total, and country by country--is therefore a matter of great interest. Forecasting it, however, is far from easy. The determinants are complicated, and not always susceptible to measurement. Up to now, so far as this column is aware, detailed forecasts have not been attempted. In a report published this week, the Economist Intelligence Unit (EIU), a sister company of The Economist, has ventured into this uncharted territory. It provides a forecast for FDI extending to 2005 for no fewer than 60 countries (accounting for virtually all of the world’s actual and projected flows of FDI). The main difficulty arises from the fact that FDI depends closely on what the EIU calls the business environment--a necessarily broad term that includes, on the firm’s definition, 70 separate indicators. Some of these are political, and to the extent that they can be measured at all have to be gauged through surveys that ask investors questions such as, "Is the quality of the bureaucracy and its ability to carry out government policy very high, high, moderate, low or very low" It is one thing to compile this kind of evidence into a backward-looking aggregate which can then be tested for its ability to explain past movements in FDI. It is quite another to use it for forecasting- because to do that the researcher has to predict how political and other conditions will change. There is no alternative but to blend together different kinds of information. First, take whatever evidence econometrics can yield about the way the forces driving, FDI-- size of host-country market, expected growth, input costs, geography and natural resources, and the policy framework--have worked in the past. Next, add conventional forecasts of relevant economic aggregates. Third, unavoidably, make more qualitative and speculative assessments of changes in other, "non-economic", conditions. All this the study tries to do. It is academically impure, because it has to be. But the workings and the supporting information are in plain view, and the results are very interesting. Global FDI flows are projected to shrink markedly this year, from ＄1.1 trillion in 2000 to less than ＄800 billion. Almost all of the reduction is forecast to be in FDI to rich countries, driven by the slowdown in America and by the diminishing pace of mergers and acquisitions (which are a principal driver of FDI in the developed economies). FDI to poor countries merely pauses, at around ＄220 billion. In subsequent years, flows recover across the board, but growth in flows to poor countries continues to outpace, modestly, growth in flows to rich ones. By then, the global stock of FDI will have risen to more than ＄10 trillion, according to the report, from less than ＄6 trillion last year. The United States, unsurprisingly, is expected to dominate the rankings in 2001-2005, much as it does today, accounting for more than 25% of global inflows. The analysis shows that America’s business environment is about as good as one would infer, statistically speaking, from its income. Britain, in contrast, is one of 14 countries with a somewhat better business environment than its income would lead you to expect (or, to put it less kindly, with a lower income than its business environment would lead you to expect). Britain is expected to remain the world’s second-biggest recipient of FDI, accounting for more than 9% of the total in 2001-2005. In terms of FDI per head, Britain currently ranks seventh, behind (in descending order) Ireland, Belgium, Hong Kong SAR, Sweden, Singapore and the Netherlands. On this measure, the United States ranks fourteenth. The study’s most encouraging finding is that scores for business environment are rising almost everywhere. FDI is a competitive undertaking, but not a zero-sum game: rising scores for business environment drive the totals higher. Comparing 2001-2005 with 1996-2000, the EIU marks down only two economies, Hong Kong SAR and Malaysia, and in neither case by enough to alter the overall assessment--"very good" for Hong Kong SAR and "good" for Malaysia. Thailand, Poland, Hungary and Mexico are among those expected to move in the other direction, from "moderate" to "good", likewise Germany, Denmark and France from "good" to "very good".
A．the administrative system.B．the political situation.C．the government policy.D．the country’s history.
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