The paper 'Economic Stability Issues' is a wonderful example of a Macro and Microeconomics Case Study. This paper will explore the meaning of economic stability and discuss how the phenomenon affects international business, particularly foreign direct investment (FDI) in a country. To achieve this, the paper will discuss the economic stability of two ASEAN countries – Vietnam and Singapore – and explore the suitability of these countries as preferred locations for FDI. Meaning of economic stability and how it affects international businesses A country’ s economic stability can be thought of in terms of the country’ s financial system’ s capacity (a) to facilitate an efficient allocation of economic resources – both intertemporally and spatially and the effectiveness of other economic activities such as economic growth, wealth accumulation and social prosperity; (b) to evaluate, price, allocate and deal with economic risks; and (c) to maintain its capacity to perform these critical functions even when impacted by external shocks or growing imbalances – essentially through self-corrective approaches (Schinasi 2004, p.
8). Economic stability is viewed in terms of macroeconomic stability and includes price stability and sound fiscal policy, as well as the budget deficit, inflation, the balance of payments, and so forth (Buxheli 2011, p.
34). When there is macroeconomic stability, the situation implies that there is sustainable economic growth, a low level of inflation and exchange rate risk, and a low degree of unemployment (Neuhaus 2006, p. 147; Sheeba 2011, p. 626). Countries that have macroeconomic stability also have in place fiscal discipline and sufficient forex reserve coverage (Neuhaus 2006, p. 147). The factors that characterize macroeconomic stability have a significant impact on the level of investment, especially FDI in a country.
According to Sheeba (2011, p. 626), an economy that is economically stable will attract FDI. In contradistinction, the volatility of macroeconomic factors was explored by Baniak and others (2005), who found out that it reduces FDI (cited by Buxheli 2011, p. 34). According to Neuhaus (2006, p. 147), an absence of macroeconomic stability creates a high level of uncertainty in any investment project, be it domestic or foreign. The level and predictability of the rate of growth determines the potential for future investment projects. Any risk that emerges from the probable depreciation of the host nation’ s currency leads to a decline in FDI since a depreciation lowers the profits denominated in the donor country’ s currency.
Additionally, a low level of inflation and a steady fiscal balance improve the credibility of the government with regard to its long-term economic policy. On top of this, high deficits may necessitate governments to introduce capital controls, which may scare foreign investors. As pointed out by Banga (2008, p. 128), a large and continuous budget deficit in an economy may be a pointer to economic instability in the host country, and as such, it has a negative ramification on FDI flows.
On the other hand, a stable macroeconomic environment clears the way for solid growth, which in turn increases the market potential, makes the economy stable and may propel the country into a virtuous circle (Neuhaus 2006, p. 147). Bucheli (2011, p. 34) also analyzed various studies conducted by Dassagupta and Ratha (2000), Al Nasser (2007), Schenider and Frey (1985), and Venables (1997) to determine the impact of macroeconomic stability on FDI. The major findings from these studies presented by Buxheli (2011) were that stable economies enhance and sustain economic growth and thus incentivize more investments than unstable economies; per capita, income and balance of payments are significant parameters that influence foreign investments, and risk more probably has a negative impact on investments.
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