Foreign Direct Investment Essay Example | Topics and Well Written Essays - 4250 words

Foreign Direct Investment - Essay Example IFIs have been in existence courtesy of political and economic interests. Faster economic integration, through the elimination of cross-border barriers between the member countries, raises the possibility the spread of economic crisis across the region in the event of a policy failure and the role of international financial institutions in future to alleviate the problem. This is especially true because IFIs have not acted fast or adequate enough to enable countries avoid or manage the impacts of financial crises (Marktanner and Salman 4479). The International Monetary Fund (IMF) and the World Bank are prominent IFIs, which provide financial services across the world. They were both set up at Bretton Woods in 1944 to control the post-war global economy. The establishment of IMF was inspired by the desire to manage the modalities of fixed exchange rates across states and to help nation-states ease budget shortfalls, while the World Bank’s scope at its inception was to enable na tions achieve post-war reconstruction efforts. Since then, the roles of both institutions have changed significantly following a swift evolution of the scope and mandate of international economy. These international changes have sparked concerns relating to the significance of the two international financial institutions. ... Nonetheless, the United States’ stance on the balance of payments weakened drastically in the 1960s as a result of heavy military budgets and soaring inflation rates. As a result, the suspension of the United States convertibility to gold in early 1970s led to the disintegration of the monetary system agreed upon at Bretton Woods. And for four decades now, all nations have set up internal mechanism to guide exchange rates. These range from fixed currency exchange rates to controlled floats and liberal floating systems. Benefits of IFIs Despite the shortfalls, IFIs are advantageous because the credit risk often comes out in adverse cases. As a result, the establishment of IFIs to cater for the financial needs of governments cannot be rivalled by the private sector. IFIs offer financial services at highly reduced costs, and do not exert a lot of pressures upon the loaner. This means IFIs operate in an even-handed manner, without passing extra costs to the loaner (Marktanner and Salman 4482). As the economy is mostly forced to factor in the political effects, this risk is invisible in the operation of IFIs. These organizations represent the qualified source of finances and may provide financial services at, or below the market interest rate, this being allowed even in the scenarios where global capital market reigns. In the event that the global capital markets remain steadfast, the ensuing scenario often manifests in the missing certitude in loaning each country, which essentially takes place due to the essence of the management of the economy. The challenge that a government may not have the capacity to handle the duty service is much reduced in a national economy that has