Custom «Economics-Regional Economics» Essay Paper

Introduction

There is an unprecedented economic growth in Scotland accompanied with a number of factors such as peace, security, and trade among others. The city of Glasgow is hosting The Commonwealth Games 2014. This is a great opportunity for the country to spur the economic growth. In this regard, what draws a big public discourse is whether this big sporting event will create a big economic development in the country. At the moment, Scotland enjoys a steady economic growth coupled with great attraction of forein direct investment. The city has been now drawing interests of a host of investors across the globe. This is a great impetus towards achieving economic stability. It is prudent to note that the country should put in place mechanisms and pillars upon which future growth is leant. Economic growth and development are periodical and, therefore, their sustainability is critical (Armstrong &Taylor 2000).

The Commonwealth Games 2014 is expected to attract around 2 million spectators to Glasgow during the 12 days competition. In this competition, a total of 71 countries and territories from the Commonwealth will participate. It is one of the biggest sporting events that Scotland is hosting in the nearest future. A basic principle of the G2014 bid document and the G2014 legacy agenda is to develop local communities in Glasgow by a range of social interactions. This is because several programs and improved infrastructures, such as housing, transport, and sports facilities, will play a critical role in enhancing the life of the people. While health and wellbeing have been given a considerable priority, crime, justice, and security are equally major aspects, which should call for the attention of key authorities. Available research studies use a holistic approach in the organization of the event so that it can encourage participation. In addition, this will stimulate a change, which encourages social and economic growth and stress on the role of the young generation. This paper takes a critical analysis of economic indicators, which are relevant in measuring economic benefits of the event. In addition, the paper discusses alternative methodologies that are available and their relative strength and weaknesses, including likely costs of implementation.

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Economic Growth Indicators

Cost Benefit Analysis

Cost benefit analysis (COBA) is the process of carrying out an assessment of monetary social costs and benefits of a capital investment project within a given period (Mishan 2007). The process of cost-benefit analysis comprise of:

1. Project appraisal. It is an economic method for project analysis, commonly applied in business and government spending projects. Project appraisal reveals a number of aspects which are critical for decision making.
2. Incorporation of externalities into the equation. The technique aims at taking care of the social factors, the sustainability of the environment, and economic costs and benefits. COBA can be used to find out an estimate of social welfare the project has on the people.
3. Time equation. COBA takes into account the economics of time, which is referred to as discounting. It is critical when projecting environmental impacts of a project in the future.

Phases in Carrying out the Cost Benefit Analysis

Stage 1(a) Calculate the value of social costs & social benefits. This comprise of the calculation of:

• Tangible Benefits and Costs: for instance, direct costs and benefits;
• Intangible Benefits and Costs: for instance, indirect costs and benefits;

Stage 1(b) - Sensitivity analysis of issues: this is the process of splitting up the uncertainty involved in the estimation process.

Stage 2: - The process of discounting the future value of benefits - costs and benefits grow with time. People prefer enjoying the benefits now rather than in the future; therefore, the value of future benefits should be discounted.

Stage 3: - Comparison of costs and benefits in order to find out the net social rate of the return of the whole project.

Stage 4: - Comparison of the net rate of the return from different projects as the organizers of the event may have limited funds at their disposal. Towards this, choices have to be made on expenditure.

An estimated example of the cost benefit analysis of Commonwealth Games 2014 in Glasgow:

Strength

It brings out the true picture of economic viability of a project or an event.

Weaknesses

• It involves technical analysis, which requires expert;
• Estimation process, sometimes, can be misleading;
• There is a problem of valuation of items in monetary values.

In a nut shell, cost benefit analysis is mainly an appraisal method that strives to put monetary values on all benefits accruing from a project and then compares the total value with the project's total possible cost. It has several possible applications, although there are intrinsic difficulties with the issue of valuation. In fact, the process of COBA is a comparative process, which gives an opportunity to assess and make judgments about which projects is profitable.

Costs of Implementation

The cost of implementing this technique is not very expensive. It may cost £15000 to complete it successfully. This amount is insignificant if the total cost of the project and the value of the decision required to ensure that the project is profitable are put into consideration.

Foreign Direct Investment

The Glasgow 2014 Commonwealth Games is a major economic boost to to Glasgow and Scotland in general. This is because the event will bring development which will, in turn, create an economic injection in the country. The city has been attracting enormous direct foreign investments, which not only benefit the economy, but also play a critical role in changing lives of people. Foreign direct investments are critical in analyzing and measuring the economic benefit of the event in the country. The intent of the study by Haskel, Pereira and Slaughter (2007) was to shed light on whether there are spillovers emanating from Foreign Direct Investment (FDI), and the willingness by host nations to offer payment in order to attract more FDI. The need to address the issues raised is vital, given the fact that policy makers and the general public need answers. Amid these requirements, there are limited empirical studies that have been dedicated to this area. As such, the authors had to carry out the research. In the study, the productivity of domestic firms was correlated with the existence of FDI, given that Haddad and Harrison (2007) found out that, in Morocco, there was a positive correlation between increased industry level of FDI with lower productivity of local firms. On the other hand, the authors cite a case in Venezuela, in which a negative spillovers correlation existed in manufacturing firms because of intense competition.

The variability of results on the relationship between spillovers of FDI and the need to attract more FDI require empirical research to unravel the state in the UK. In their methodology, the authors begin with reviewing current literature on spillovers of multinational corporations (MNCs) and relevant theories applied on the subject. In the review, they assess the behaviour of MNCs and possible avenues of spillovers, which they blend with theories that have been developed on the same field. This gives credentials to their basis of addressing limitations of other studies or new areas that no research has been dedicated to in order to give a new insight.

The authors then search for data from other literature that pertain to the calculation of productivity and the impact of foreign firms. Their main data source was the Annual Respondents Database (ARD) made out of the Annual Censuses of Production and Construction (ACOP and ACOC), which is the official body that collects and stores information on any firm in the UK. Other source of data used included the Office for National Statistics. The data covered the period of interest, 1992, in which the FDI experienced an inflow in the UK. The author used a specified set of functions to work out production followed up by measurement of gross output. With the models developed, the researchers were able to answer specific questions that are not only beneficial to the government departments but also to foreign firms. They also came up with a mechanism to answer the question how much should the government pay to attract FDI?

They concluded that most economies pay subsidies in order to attract FDI. In order to justify this claim, Haskel, Pereira and Slaughter (2007) buttress that social returns are more effective than private returns in FDI since spillovers accrue to domestic firms due to high level of productivity. They found out a positive correlation between Total Factor Productivity (TFP) and employment sharing with foreign firms in specific industries. In addition, “Our estimates suggest that the per-job value of spillovers are less than per-job incentives governments have granted in recent high-profile cases, often several times” (Haskel, Pereira & Slaughter 2007, p. 494).

Other scholars have carried out case analyses and industrial reform agendas. For instance, Moran’s (2001) study was able to show an affirmative correlation between countries that receive FDI and spillovers. This was demonstrated by firms dealing with machinery, transportation, and electronics. Nonetheless, the cases cannot be assumed to have similar effects to the general corporate environment. This is because the quantitative information based on the cases cannot be applied to other firms. Caves (1974); Blosmstrom (1986), and Driffied (2000) have all shown that there is a positive correlation in production level and the inflow of FDI. The potential reason for this correlation is the existence of spillovers. The correlation could be a result of batting-average consequence in case FDI leads to the departure of low producing plants in the domestic market. The closure of the domestic firms would raise market for products of the foreign firms.

Alternatively, it may be that multinationals tend to concentrate in high productivity industries. These studies concur with the finding of Haskel, Pereira and Slaughter (2007) and, as such, make their study relevant. Even though the variables used differ, the overall effect of how spillovers from FDI can either benefit or compromise the stakes of FDI in local production is common.

The Glasgow 2014 Commonwealth Games is a key point in Glasgow’s economic growth and development since it brings an array of development projects, which have a long-term positive economic impact in the city and the country at large. The city of Glasgow has experienced a steady inflow of developers and investors. Many parts of the city have changed in terms of new construction, as well as settlement. The development of infrastructure has been quite strategic. This is because the planners not only unveiled International Financial Services District but have also come up with the Clyde Waterfront. This has been possible because of programs and projects, such as the Digital Media Quarter. In addition, the construction of Riverside Museum and residential developments, for instance, Glasgow Harbour, which have contributed immensely to job creation in the city.

Weakness of FDI as Measure of Economic Growth

It is quite difficult to measure social benefits and monetary value of foreign direct investments.

Strength of FDI as Measure of Economic Growth

It is easy to calculate and less costly.

Costs of Implementation

The cost of implementation of this method is not very expensive. It may cost £10000 to complete it successfully. This amount is insignificant if the total cost of the project and the value of the decision required to ensure that the project is profitable are put into consideration.

Rise in Real per Capita Income

Per capita income is an economic indicator, which is used to measure economic development of a country. The principle behind the concept of per capita income stipulate that an increase of real per capita income is an indication that a country has made a positive progress in living standards, which is critical in achieving economic goals. In relation to the Commonwealth Games 2014 in Glasgow, the event will increase country’s welfare rate faster than change in the price level occur, hence, ensuring a high per capita income.

Rise in the Overall Welfare

Economic well-being of the people is fundamental in the measurement of economic growth and development in a country. In case the general public has access to goods and services, the welfare of the people is evident. However, the availability of goods and services must be accompanied with the ability to purchase them.

Strength

It is easy to calculate since it involves the application of already known formula.

Weakness

It may be misleading when actual population is analysed. This is because it represents the whole country not households.

Recommendations

The choice of financing option for the event

Choosing the appropriate financing option has always been a challenge not only to companies but also governments, especially, in a case where a firm cannot define its strategic objectives (Hoover 2001).

Export-Import Bank Financing

Export-import financing would be another ideal for Glasgow Commonwealth Games 2014. The main advantage of this type of financing is that the credit risk is assumed by the Government (Alexander 1998). This removes the risk of financing funds and enables the country to export its products without a long list of associated risks that encompass other financing options. In addition to the above, export and import financing can be arranged to cover 100 percent of the amount requested. It also increases the purchasing power of a firm, especially, in a case where a firm is involved in the purchase of raw materials for its manufacturing and production processes (Sletten 1994).  

Furthermore, this option presents another list of advantages to the country. According to Daniels, Radebaugh and Sullivan (2011), “increased sales in foreign markets by offering competitive terms of sale, protection against credit losses on foreign customers, and accelerated cash flow through faster collections are key advantages of export imports financing.” The advantages of this type of financing do not end there – export and import financing offers the benefits of liquidity that is a key in boosting working capital and is instrumental in enhancing the borrowing credentials of the firm.  This plays a significant role in providing an opportunity for making use of the discounts of the supplier. However, despite having a long list of advantages for an investor, this financing option is also encompassed by a number of limitations. Firms, seeking export and import financing, must demonstrate the capacity and expertise to successful gain entry into foreign markets. This rigorous procedure in accessing funds for financing Scotland’s huge portfolios could present a number of technical difficulties. 

As discerned from the above discussions, the Export-Import Bank’s financing remains the best options for the country. However, to meet its large and huge scale of marketing targets, the organizer of the game should:

v  -Determine the amount of capital it requires;

v  -Explore other available less risky sources of financing with capacities to provide the amount required for a successful organization of the vent;

v  -Provide an effective use of its cash reserves to fund the event. This is aimed at minimizing the levels of debts in financing and achieving a balance between debt and equity.

In conclusion, Cost benefit analysis remains one of the most favourable techniques of measuring the economic benefits which the city of Glasgow will derive from hosting The Commonwealth Games 2014.