Lessons in Transition

Q: What have been the most successful approaches to attracting direct foreign investments: offering prospective investors tax breaks and similar benefits, or improving the overall investment climate of the country?

Empirical research has demonstrated that investors are not lured by tax breaks and monetary or fiscal investment incentives. They will take advantage of existing schemes (and ask for more, pitting one country against another). But these will never be the determining factors in their decision making. They are much more likely to be swayed by the level of protection of property rights, degree of corruption, transparency, state of the physical infrastructure, education and knowledge of foreign languages and "mission critical skills", geographical position and proximity to markets and culture and mentality.

Q: What have been successful techniques for countries to improve their previously negative investment image?

The politicians of the country need to be seen to be transparently, non-corruptly encouraging business, liberalizing and protecting the property rights of investors. One real, transparent (for instance through international tender) privatization; one case where the government supported a foreigner against a local; one politician severely punished for corruption and nepotism; one fearless news medium ? change a country's image.

Q: Should there be restrictions on repatriation of foreign investment capital (such restrictions could prevent an investment panic, but at the same time they negatively affect investor's confidence)?

Short term and long term capital flows are two disparate phenomena with very little in common. The former is speculative and technical in nature and has very little to do with fundamental realities. The latter is investment oriented and committed to the increasing of the welfare and wealth of its new domicile. It is, therefore, wrong to talk about "global capital flows". There are investments (including even long term portfolio investments and venture capital) ? and there is speculative, "hot" money. While "hot money" is very useful as a lubricant on the wheels of liquid capital markets in rich countries ? it can be destructive in less liquid, immature economies or in economies in transition.

The two phenomena should be accorded a different treatment. While long term capital flows should be completely liberalized, encouraged and welcomed ? the short term, "hot money" type should be controlled and even discouraged. The introduction of fiscally-oriented capital controls (as Chile has implemented) is one possibility. The less attractive Malaysian model springs to mind. It is less attractive because it penalizes both the short term and the long term financial players. But it is clear that an important and integral part of the new International Financial Architecture MUST be the control of speculative money in pursuit of ever higher yields. There is nothing inherently wrong with high yields ? but the capital markets provide yields connected to economic depression and to price collapses through the mechanism of short selling and through the usage of certain derivatives. This aspect of things must be neutered or at least countered.

Q: What approach has been most useful in best serving the needs of small businesses: through private business support firms, business associations, or by government agencies?

It depends where. In Israel (until the beginning of the 90s), South Korea and Japan (until 1997) ? the state provided the necessary direction and support. In the USA ? the private sector invented its own enormously successful support structures (such as venture capital funds). The right approach depends on the characteristics of the country in question: how entrepreneurial are its citizens, how accessible are credits and microcredits to SMEs, how benign are the bankruptcy laws (which always reflect a social ethos), how good is its physical infrastructure, how educated are its citizens and so on.

Q: How might collective action problems among numerous and dispersed small and medium entrepreneurs best be dealt with?

It is a strange question to ask in the age of cross-Atlantic transportation, telecommunication and computer networks (such as the Internet). Geographical dispersion is absolutely irrelevant. The problem is in the diverging self-interests of the various players. The more numerous they are, the more niche-orientated, the smaller ? the lesser the common denominator. A proof of this fragmentation is the declining power of cartels ? trade unions, on the one hand and business trusts, monopolies and cartels, on the other hand. The question is not whether this can be overcome but whether it SHOULD be overcome. Such diversity of interests is the lifeblood of the modern market economy which is based on conflicts and disagreements as much as it is based on the ability to ultimately compromise and reach a consensus.

What needs to be done centrally is public relations and education. People, politicians, big corporations need to be taught the value and advantages of small business, of entrepreneurship and intrapreneurship. And new ways to support this sector need to be constantly devised.

Q: How might access of small business to start-up capital and other resources best be facilitated?

The traditional banks all over the world failed at maintaining the balancing act between risk and reward. The result was a mega shift to the capital markets. Stock exchanges for trading the shares of small and technology companies sprang all over the world (NASDAQ in the USA, the former USM in London, the Neuemarkt in Germany and so on). Investment and venture capital funds became the second most important source quantitatively. They not only funded budding entrepreneurs but also coached them and saw them through the excruciating and dangerous research and development phases.

But these are rich world solutions.

An important development is the invention of "third world solutions" such as microcredits granted to the agrarian or textile sectors, mainly to women and which involve the whole community.

Q: Women start one-third of new businesses in the region: now can this contribution to economic growth be further stimulated?

By providing them with the conditions to work and exercise their entrepreneurial skills. By establishing day care centres for their children. By providing microcredits (women have proven to be inordinately reliable borrowers). By giving them tax credits. By allowing or encouraging flexitime or part time work or work from home. By recognizing the home as the domicile of business (especially through the appropriate tax laws). By equalizing their legal rights and their pay. By protecting them from sexual or gender harassment.

About The Author

Sam Vaknin is the author of "Malignant Self Love - Narcissism Revisited" and "After the Rain - How the West Lost the East". He is a columnist in "Central Europe Review", United Press International (UPI) and ebookweb.org and the editor of mental health and Central East Europe categories in The Open Directory, Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor to the Government of Macedonia.

His web site: http://samvak.tripod.com

---

Seven Investment Terms Everyone Should Know

For those who have never given their financial future a... Read More

Five Sure Fire Way to Secure Your Financial Future

"You can be poor when you're young, but you can't... Read More

Stock Market Retirement Investment Plan

For a successful retirement investment plan to work in the... Read More

Options Education: Financing the Calendar!

As a trader, one of the key things that I... Read More

Introduction To FOREX

The Foreign Exchange Market, better known as FOREX, is a... Read More

Sitcom Investing

A fickle stock market encourages good-humored mockery.Recently, as I watched... Read More

Creating Momentum with Options - Pro and Cons of At-the-money, In-the-money, and Out-of-the-money

To create momentum in your options trading you need to... Read More

Lobster Trapping for Investment Ideas

Recently, my family and I took a trip to Maine... Read More

Use of a Franchise Business as a Family Tax Planning Strategy

Suggesting the use of a franchise business as a vehicle... Read More

New U.S. Mint Coins a Golden Opportunity

In April, the U.S. Mint revealed plans to strike in... Read More

The Perfect Mutual Fund

The Perfect Mutual Fund is the one you build yourself!The... Read More

Just what is Arbitrage Investment?

In the simplest of terms, Arbitrage means to exploit price... Read More

Discipline in Trading and Investing

The one thing I can think of that most affects... Read More

California Deparment of Corporations and Franchise Opportunities Law

What CA Needs To Do To Address Issues in FranchisingWe... Read More

Advice for International Investors on How to Safeguard Their Profits

What are the risks?Today, investors are increasingly turning to global... Read More

July 2005: Hurricane Forecasts for Weather Traders

Tropical Storm Arlene formed as a tropical depression on June... Read More

The Realities Of Market Timing

Market timing systems are based on patterns of activity in... Read More

Gold; What Type of Gold to Buy

JewelryThe advantages are:? Gold Jewelry is the easiest of the... Read More

Sell Discipline for Investors: Importance and Execution

Investors usually don't have an aversion to buying an asset.... Read More

Almost Anyone Can Open A Roth IRA!

The Roth is kind of weird until you get used... Read More

Should You Put Your Annuity in an IRA?

Let me start by answering that question...if an annuity fits... Read More

Types of Investment

The word 'investments' is one that most of us are... Read More

Investors: Avoid These 5 Common Tax Mistakes

For many investors, and even some tax professionals, sorting through... Read More

401(k) Plans

I've been in and interested in the stock market so... Read More

Landlording 101, Tricks of The Trade

Looking Inside Your Tenant's Mind Basic Mind-Reading Report 101 for... Read More

Critical Investors Business Daily Responsibilities - If not Followed Could Cost You Millions!

When thinking about the investors business daily responsibilities in today’s... Read More

The Three Legged Stool

My paternal grandparents were born near Lake Como, Italy. My... Read More

Help with My Annuity

The cries are heard from the distance, "I need help... Read More

Finding a Broker

"Hey Joe! I need help finding a broker. I notice... Read More

Makin The Sauce

Let's face it, you're on a roll. After getting down... Read More

What If You Absolutely Positively Could Not Lose - Would You Play the Stock Market?

Seniors on fixed incomes face a unique problem. Where do... Read More

Numismatics are for Collectors, Not Investors

As a precious metals investor, you may heard much about... Read More

Expand Your Pool of Investors for Your Company

If you own a company that sells complicated products and... Read More