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We often hear of countries securing foreign investment. Stores like this are trumped as major achievements. Foreign investment also has criticisms - profits generated in a country end up going abroad, and there can be national security issues.

Would it make sense to print money instead? The usual argument against printing money is inflation. However, in the linked story, 30bn of foreign money is coming in, so the economy has to cope with that additional spending. If that was printed money instead, it seems that effect would be the same - at least in the local economy.

The other side to this is currency markets and reserves - foreign investment creates demand for the local currency, which printing money doesn't do.

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  • $\begingroup$ I assume that by 'printing money' you mean quantitative easing? $\endgroup$ – Kontorus Jun 29 '16 at 14:21
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    $\begingroup$ @Kontorus - update: apparently not - see Alecoc's comment on his answer $\endgroup$ – paj28 Jun 29 '16 at 17:04
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"Foreign Direct Investment" is to be understood as bringing in an economy productive capital, and not just purchasing power.

When an economy is seriously below full employment (of capital and labor), then a case can be made that "printing money" (i.e. creating purchasing power out of thin air) may not result in just inflation, but it may indeed bring into production input factors (labor and capital) that are currently unemployed. Compared to Foreign Direct Investment, we have the following differences:

Creating purchasing power through printing money relies on an indirect effect: you strengthen demand and expect that this will lead to increased supply, which in turn translates into higher employment/output. This may mitigated by

a) increased imports rather than increased local factor employment to satisfy the demand b) institutional issues that may obstruct bringing into production the idle local factors c) imbalance in available unemployed factors - e.g. you may have too many unemployed people but not much unemployed infrastructure.

Foreign Direct Investment in almost all cases is partly translated into imports (the foreign investors bring in their funds which are then partly paid back abroad to import capital infrastructure that is not available in the local economy), but apart from that similarity it

a) increases supply and local employment directly and b) by design it takes a priori into account the possible imbalance in the availability of local factors, and corrects from them, since it wants to arrive at a factor mix that will be able to produce.

In a more general perspective, we could say that by printing money, if the policy fails you will just burden the economy with inflation (which has transactional costs). But with Foreign Direct Investment, even if it fails eventually as a commercial enterprise, the local economy has nevertheless gained, even as a one-off, the part of the FDI that has been consumed locally: it is an inflow of real output from the outside world.

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    $\begingroup$ Can QE money be productive capital? Regarding paragraph 3, instead of just stimulating demand, what about using QE money to directly do whatever FDI would do - building a factory, toll road, etc. $\endgroup$ – paj28 Jun 29 '16 at 15:50
  • $\begingroup$ @paj28 A good question. This is not "quantitative easing" though, which by design is an indirect action, what you describe starts by the government increasing its own expenses for such investments, and then it prints money to pay for them. This is the more "traditional" Keynesian "fiscal" intervention to heat the economy. Note that usually government investments are "facilitators" of private economic activity, so here too we have an element of "indirectness". $\endgroup$ – Alecos Papadopoulos Jun 29 '16 at 16:02
  • $\begingroup$ I see - I meant "printing money" generally, didn't realise QE was more specific. I'm really thinking about a central bank creating new money, using it to invest in a private venture, and being the equity owner of that venture. $\endgroup$ – paj28 Jun 29 '16 at 19:35
  • $\begingroup$ @paj28 This touches on ideological and philosophical issues about whether government should/can act as a private business. $\endgroup$ – Alecos Papadopoulos Jun 29 '16 at 22:27
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    $\begingroup$ Ok, I'm mostly interested in practical effects rather than philosophical ones. Most governments do act as private businesses at times, a recent example being the bank bailouts. $\endgroup$ – paj28 Jun 30 '16 at 9:10
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It's very likely that the 30bn inflow from China is (roughly) equal and opposite to outflows of U.K. money to China. Put those together and the amount of money in the U.K. doesn't change. Hence very different than the BoE printing money.

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When a foreign country sends you money, you get some of their purchasing power. You can use it to buy things from foreign countries (not necessarily the same one). You could use it to buy a large machine, and it is equivalent to if the country simply sent you the machine. Of course, they will demand compensation for this, later on (that's the "investment" part).

Whatever happens within a country cannot increase its purchasing power. If the country wants to buy that machine, there is something else it can't buy instead.

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