“Investors choice in changing times”
Master thesis
MSc International Financial Management
Curaçao: A country in
movement
“Investors choice in changing times”
Groningen, Maitani Ignacio
Abstract
Curaçao, formerly part of the Netherlands Antilles, has become an autonomous country since 2010. Since the debt relief program which was introduced when Curaçao gained autonomy as a country within the Dutch Kingdom, Curaçao has been granted a fresh starting point to compete in the Caribbean market. In the last years a major shift in investments has been noticed to the Caribbean region. With that, competition increased among the islands and local governments were required to design micro-economic reform programs that were ultimately the necessary tools in restructuring the economy towards greater market development and a sound investment climate. Based on the previously stated, the paper focuses through a comparative analysis on the macroeconomic factors which play a determinant role in the business cycle of small Caribbean countries in general and on the investment climate in Curaçao in particular.
Key words: FDI, Caribbean, Curaçao, growth, macroeconomic factors
Acknowledgement
Table of Contents
Chapter 1: Research outline ... 1
Introduction ... 1
1.1. Research Question ... 3
1.2. Problem indication ... 3
1.3. Paper outline ... 4
Chapter 2: Literature Review ... 4
2.1. Country size, specialization pattern, growth: Factors for investment in the Caribbean ... 5
2.1.1 Size and specialization pattern ... 5
2.1.2 Growth ... 7
2.2. Some issues related to FDI: Caribbean-Curaçao ... 9
2.2.1 Poverty ... 9
2.2.2 Inflation ... 11
2.2.3 Interest rate Policies ... 12
2.2.4 Political system „Government policies‟ ... 12
2.3 Hypotheses Construction ... 13
2.3.1 Caribbean: Investment pattern & behavior ... 14
2.3.2 Curaçao‟s investment pattern ... 15
Chapter 3: Methodology ... 16
3.1 Data sample and statistical approach ... 17
3.1.1 Dependent variable ... 18
3.1.2 Independent variable ... 19
3.1.3 Control variables ... 19
3.2 The equations ... 20
Chapter 4: Result and Interpretation ... 20
4.1 Results ... 21
4.1.1 FDI allocation in the Caribbean ... 21
4.1.2 FDI allocation to Curaçao ... 22
4.1.2.1 Correlation Matrix... 23
4.2 Descriptive analysis ... 24
1
Chapter 1: Research outline
Introduction
“Curaçao, a country in development towards greater market opportunities and independence”. A provocative title that challenges general thinking of the relationship and valuable importance of foreign direct investment (FDI) to small developing countries is what this analysis is all about. Academically there are very few studies done on this topic and while it is growing in popularity little attention has been put so far to its growing importance for investors. „Some 20 years ago small economies were considered to be granted with special advantages such as natural resources, small homogeneous populations that allowed for political consensus and open trade that positioned them for higher growth‟ (Luthria, 2009). The perception was that the growth experience of larger developing countries together with their success factors in attracting FDI could be easily applied to small developing economies. However, with time and experience the general understanding on this topic has progressed to capture the true relationship of FDI to small economies. As Luthria (2009) explained in her study, small economies are significantly different from larger developing countries as to the price they have to pay for being so small while aiming to attract FDI. This price manifests itself in higher costs for doing business (export or import), higher utility costs, small economies of scale that hinders specialization of any type, and for some limited technological possibilities. It is most often these aspects of a small economy that weight heavy on the attractiveness of a country and on the investors‟ choice for a profitable investment. So far I have summed the importance and general perception academics had on this topic, however, this relationship will be thoroughly discussed in the next chapter from an academic point of view including more components that influence investors choice and investment decision.
2 trade in the region. In addition, the emergence of a new group of political parties in the government system is an epic event for Curaçao since these were not the parties in coalition in the former signing of the dissolution agreement of the N.A. Great anticipation and uncertainty lies on the future of Curaçao as it currently stands as an independent unit within the market. „Will they be able to carry on themselves or is this a stepping stone towards the country‟s failure and with that withdrawal of local and potential foreign investors?‟
While discussions continue on this matter, significant evidence has been drawn from a recent census pointing out a stronger economy in terms of improved quality of life through social programs (the Social Insurance Bank of the Netherlands Antilles). Although considered a positive improvement, further strengthening of the economy is necessary if higher levels of FDI are to be achieved. As Ank Bijleveld (2009) former Dutch State Secretary, Ministry of the Interior and Kingdom Relations pointed out, Curaçao although small in market size and limited in terms of some aspects, offers a number of significant opportunities for investors. Ultimately the goal with the constitutional change of the island is to improve the investment climate through structural improvements of the local situation in order to increase investments and with that creating more jobs.
3 stability, rule of law, adequate infrastructure, tax and regulations conducive to doing business, growth possibilities labor policies and access to finance (Thomsen, 2000). Going by this principle, it is no surprise that small developing countries like Curaçao seek to prompt economic growth through different microeconomic government programs that aim towards reducing investors‟ uncertainty, strengthening of the market position and ultimately increasing the number of investments.
1.1. Research Question
Given the so far stated, the main research question for investigation is formulated:
1. To what extend can macro economic variables explain foreign direct investment allocation to
a small developing country like Curaçao?
1.2. Problem indication
As stated before with the disappearance of the Netherlands Antilles, Curaçao has taken an autonomous status within the Dutch Kingdom. The dissolution of the Netherlands Antilles and the obtaining of a new status required the adaptation of legislations, financial control, taxes and regulations conducive for doing business and access to finance to mention a few. Many changes have been executed already, but there still remain some changes on island level that have to take form. This particular situation is of great concern for local businesses as well as foreign investors. Although the island remains under higher supervision of the Netherlands, there is great uncertainty regarding the economic, local and financial development of the island. Therefore, set apart from previous studies, this analysis takes the aim to study those factors that are important for the economic development of Curaçao in general and the investment climate in particular in order to give direction for the unknown future.
4 Furthermore, the association of this analysis with the financial side of the study will be achieved through the object of empirical study (patterns, series, descriptive data), and through a comparative analysis of Curaçao and some similar sized Caribbean islands. A multivariate regression model will be applied using some factors that are important in the assessment of the investment climate of small developing economies. These factors are thoroughly analyzed in the following chapter.
1.3. Paper outline
The paper is structured as follows. The current chapter gives an introduction on the topic, provides the research question for investigation, followed by an explanation of the problem for analysis. The framework will continue with chapter 2, the Background study. For this section, theoretical considerations are provided on the subject of macroeconomic study on economic growth, microeconomic measures for local development and a sound business environment on the above indicated. Moreover, the concept presented in the introduction as part of the Post-Keynesian theory is further analyzed to its correlation with the subject. The framework continues with Chapter 3, Methodology. The methodological part will show how to empirically analyze the investment pattern on country and regional level is empirically analyzed. Furthermore, this section continues with data building and the importance of secondary variables, their explanatory ground and their relevance to the study. Chapter 4 continues with the results, which are thoroughly explained through discussion, along with limitations. Finally, in Chapter 5 the conclusion is build and recommendations provided for further study.
Chapter 2: Literature Review
5 These papers assume that macroeconomic forces, technological changes, economic reforms and government intervention are major contributors to the attractiveness of a country‟s investment climate. Although this assumption is reasonable, it does not provide any evidence on their impact on the investment climate and business environment of small economies such as Curaçao and the rest of the Caribbean islands. This lack of empirical evidence is quite surprising since the Caribbean has risen in the last few years in popularity as a new FDI destination after the world economic crisis. The following sections will explore on the relevance of this topic.
The first section introduces the reader to the literature on investment climate and business environment. Basic elements of economic growth and local development of a country are explained for, and causes and impacts are reviewed to their value and relevance. Further on, a concept will be created on secondary research regarding measures and techniques for predicting future economic trend(s) for the Caribbean islands. The second section will continue on some related issues of FDI, the investment trends in the Caribbean in general and Curaçao in particular and finally give an explanation of the relevance of macroeconomic factors on the economic, local and financial development of Curaçao. Lastly, in the third section final remarks are reached towards the construction of hypotheses.
2.1. Country size, specialization pattern, growth: Factors for investment in the
Caribbean
There is a strong consensus in the literature that “investors invest in specific locations mainly because of strong economic fundamentals in the host countries for example, large market size, stable macroeconomic environment, GDP growth, trade rate, interest rates, inflation rates and domestic invetsment” (Çevis & Çamurdan, 2007; Banga, 2003). However, as Banga (2003) further indicate “with the growing integration of the world markets and increased competition amongst the host countries to attract FDI, the host country‟s economic fundamentals may not be sufficient for inward FDI”. Therefore, it is important to study the components for inward FDI to small developing economies.
2.1.1 Size and specialization pattern
6 documented, neither theoretically nor empirically, however there is sufficient evidence for their impact on productivity, growth and economic activity, regardless of the country‟ size or specialization pattern. “While there is no consensus on the relationship between FDI and growth, there is a growing view that FDI is positively correlated with growth” (Griffith et all, 2008). Going by this principle, new questions arise on the importance of country size relative to growth and investment opportunities. There exists a vast literature that has analyzed the impact of economic fundamentals on inflow of FDI. The most important as recognized in the literature are market-related variables, current market size and the potential market size. As Banga (2003) argues, a large market size generates scale economies, while a growing market improves the prospects of market potential and thereby attracts FDI. To determine whether FDI inflows to the Caribbean region are large or small, one has to take into account the size of the economies in the region and their characteristics in terms of attracting FDI. In this regard, the relative importance of larger countries for FDI has decreased immensely since technology reduced the transaction cost for doing business allowing increased capital mobility (Acampo, 2002 & Thomsen, 2000). So said, it can be argued that in the current phase of globalization, country size relative to FDI has become quite irrelevant (Choi, 2003). An observation of actual data on the Caribbean region yields a semi-strong confirmation of the above explained theoretical analysis. Smaller economies tend to grow at a slower pace and have lower per capita income levels than their larger neighbors; however, there is a semi linear relation between investments, country size and their specialization pattern. An explanation for this observation follows the strengthened pressures of globalization and the removal of protectionist trade barriers in the Caribbean. Increased competition forced these small countries to look towards FDI in tourism as a means of diversification through structural developments of hotels, service, and infrastructure which in the long run would act as primary catalysts for economic and social change (Sosna, 2009). This development suggests that “the size of the domestic market is no longer an obstacle for building up a modern economy and successfully compete in the market” (Acampo, 2002). According to a recent study by Griffith et all (2008); given the scarcity of FDI during the crisis and the competing claims for its use, FDI should be encouraged and incentives provided to increase improvements in technology, efficiency, and productivity to stimulate growth.
7
2.1.2 Growth
A second issue concerns the relationship between growth and FDI. The contribution of FDI to economic growth has been debated quite extensively in the literature. The literature on FDI and growth in the Caribbean generally points out to a semi-strong relationship between the two. As is commonly known, FDI is an important element to establish growth. However, for the Caribbean islands this relationship goes farther than a simple element for economic growth; these small economies are highly dependent on foreign investments since they are for a great part commodity importing economies. In addition, the Caribbean does not represent a single market, but a large group of islands competing in each other shadows. Evidence on FDI-growth suggest that „the positive effects of FDI on a host country – commodity importing countries- might depend not only on local conditions and policies but also on the sector into which FDI occurs‟ (Alfaro et all, 2003). As mentioned before, the largest sectors of investment in the Caribbean are the tourism and financial service sector. Within the service sector, tourism is the support for the majority of the regional economies. Modest growth is expected for this sector, taking into account the fact that the business cycles of these economies tend to be highly correlated with those of advanced economies, especially the North American and European markets (Caribbean Development Bank, 2011). A sluggish growth in 2009 (under 1 percent) has been recorded for the larger islands in the region; Barbados, Jamaica, Dominica and Trinidad and Tobago. Among the smaller islands, a 1-3 percent growth has been recorded for Greneda, St Vincent and the Grenadines. In addition, a growth ranging from 0.5- 3.9 percent was posted for the Bahamas, St.Lucia, Turks and Caicos Islands, Belize, British Virgin Islands and Guyana. No clear indication for this growth level is yet available in the literature; however a reason could be the unity and membership of these islands to CARICOM.
Box 1: CARICOM Basics
CARICOM
“The establishment of the Caribbean Community and Common Market (CARICOM) was the result of a 15-year effort to fulfill the hope of regional integration which was born with the establishment of the British West Indies Federation in 1958. With the end of the Federation, political leaders in the Caribbean made more serious efforts to strengthen the ties between the islands and mainland by providing for the continuance and strengthening of the areas
of cooperation that existed during the Federation. The Caribbean Community and Common Market (CARICOM) was established by the Treaty of Chaguaramas, which was signed by Barbados, Jamaica, Guyana and Trinidad &
Tobago and came into effect on August 1, 1973”
Caricom members include: 1)Antigua and Barbuda, 2) Bahamas, 3) Barbados, 4) Belize, 5) Dominica, 6) Grenada, 7) Guyana, 8) Haiti, 9) Jamaica, 10) Montserrat, 11) Saint Lucia, 12) St. Kitts and Nevis, 13) St. Vincent and the
8 Associate members of Caricom include: 16) Anguilla, 17) Bermuda, 18) British Virgin Islands, 19) Cayman Islands
and 20) Turks and Caicos Islands
“CARICOM Single Market and Economy is intended to benefit the people of the Region by providing more and better opportunities to produce and sell their goods and services and to attract investment”
* Source: www.caricom.org
The offshore financial service sector of the Caribbean faces growing threats for its so called “tax havens” label. Several countries within the Caribbean including CARICOM states have been recently regarded by the OECD (Organization for Economic Cooperation and Development) as uncooperative tax havens. The OECD has made available for review its allegations based on tax abuse, incomplete information and standards. The Caribbean islands were unprepared for the magnitude of these allegations and the threat of being put on the blacklist of the OECD. In an effort to have these allegations lifted, Caribbean governments of Aruba, Bermuda, the British Virgin Islands, the Cayman Islands and the islands of the former Netherlands Antilles implemented some measures to bring their offshore financial sectors in line with the requirement of the Americans and the OECD (Sosna, 2009). Governments held several meetings to discuss ways in which both economic and legislative reforms could be implemented in order to be removed from the organization‟s blacklist. In line with this, the Financial Action Task Force (FATF) and the Caribbean Financial Action Task Force (CFATF) was established (Sosna, 2009). “The legislative and financial reforms undertaken by the governments continue to provide a progressive framework for the construction of stable and safe offshore financial centers within the region” (Sosna, 2009). As with the global outlook on the Caribbean region, there is a high degree of uncertainty surrounding these expectations (Caribbean Development Bank, 2011).
9 economics have been overthrown by Keynes in the General Theory, these being the „ ergodic system‟, the „gross substitution‟ and the „neutrality of money‟ (Peterson, 1995). For means of this study, only the ergodic system will be thoroughly analyzed on its relevance and value to the analysis.
An ergodic system as explained by Peterson (1995) is one in which “future events are always reliably predictable by using a probabilistic analysis of past and current outcomes”. Studies on the Post-Keynesian theory regard this proposition as a rational expectations hypothesis (REH) of future events. In this regard, Robbinson (1980) stressed that history is more important than moving the economy to equilibrium for increased levels of FDI. “Because history is so important, a bad economy creates expectations of continued badly times, it inhibits additional investments and causes worker skills to deteriorate and vice versa” (Forstater et all, 2007). While history or lagged trends is recognized in the literature to be an important explanatory variable for future events, also bad tax policy or excessive government regulations, too much spending on the less productive sector or the use of outdated techniques are recognized as factors that could lead to continued growth or decline of an uncertain future (Forstater et all, 2007).
2.2. Some issues related to FDI: Caribbean-Curaçao
FDI does not only affect the economy as has been discussed in the previous section, it also impacts other country specific components such as social, political and environmental conditions. Therefore, in this section issues such as poverty since it relates to environmental conditions-, inflation and the political system are discussed.
2.2.1 Poverty
10 firms. All three ways indicate a stable economic development as condition for economic growth and so lower poverty rates. Economic growth as measured by GDP per capita is important, but set alone is not sufficient in achieving reduction of poverty. Dollar and Kraay (2002) show an impressive casual framework of poverty reduction. (See figure 1)
Figure 1: Framework for poverty reduction
Although a reasonable assumption can be drawn from the above shown effect, Nair-Reichert and Weinhold (2001) show a different side of this relationship. According to their study, „traditional panel and time series estimators often impose homogeneity assumptions across developing countries in studies of the relationship between FDI and growth‟. This method can lead to biased estimates in an uncertain economic environment (as is the case in Curaçao) and faulty implementation of policies designed to increase quality of life. Also Carkovic and Levine (2002) dispute this positive relationship and argue that many studies have ignored the issues of endogeneity, country specific effects and inclusion of lagged dependent variables in growth regressions (Tambunan, 2005). Checking for these variables it is found that FDI has a positive effect on economic growth but is only productive when a sufficient absorptive capability of the advanced technologies it brings is available in the country. This means that the poverty level of a country is highly dependent on the efficiency level of the human capital in stock, rather than an induced level of investment (see in appendix table 1).
Caribbean: The major challenge for most of the Caribbean islands is to find creative ways that generate
employment and income for their population at rates that will enable them to live above the poverty line (UNDP, 2006). Other challenges remain external to their control, including external economic shocks and natural disasters, which are often the cause for sudden increases in social vulnerability and poverty. The most recent estimation of the total poverty in the Caribbean shows that about 38 percent of the total population lives under the poverty line (ECLAC, 2006). Education is also a challenge in the region. The overall education level is poor and increased numbers of youth unemployment forces susceptibility to joining gangs, committing crimes and remaining in poverty (USAID, 2010). This situation is a clear example of what has been earlier explained in this subsection; economic growth and the poverty level is very much dependent on the efficiency level (developed through education) of the human capital stock, rather than the numbers of investment in a country.
11
Curaçao: Although poverty is something real on the island, Curaçao is not a developing country
(Reekers, NewDay.nl). Currently, about 20% of Curaçao‟s residents live under the poverty line, which in comparison to its neighboring islands is not much (USAID). Hence, the infrastructure is fairly good, the island has of one of the busiest harbors in the Caribbean and the island itself is situated in between the North and South American economies. In addition, its economy benefits also from its strong link with the Netherlands granting it several benefits as cross-border trading and foreign direct investment. Granted the access to become an official member of CARICOM will provide the island with even more regional benefits such as fair trade. As Curaçao strives to increase through education the human capital skill on the island, the advantages to investors will multiply. Its multi-lingual workforce already has a greater than 90% literacy rate, and a focus on education will increase the intellectual capital on the island, attract talent to Curaçao, and provide a skilled workforce (Curaçao Private Economic Partnership, 2010)
2.2.2 Inflation
12
Caribbean: Yatrakis (1998) analysis demonstrates an inverse relationship between inflation and FDI for
relatively homogeneous countries in the Caribbean. This is especially noteworthy in light of the open and small economies of the Caribbean islands and their consequent vulnerability to external shocks. He further indicates, that a steady, anti-inflationary economic policy can overcome the effects of external shocks and increase investment and economic growth in the long run. Griffith et all (2008) further shows that inflation in the Caribbean has varied substantially, however, was managed to remain fairly low even with inflationary pressures as a result of oil price increase. Table 2 in Appendix provides a clear layout of the inflation rate changes for the period 2008-2010.
Curaçao: The inflation sequence in Curaçao is the result of the peg to the U.S. dollar. According to
Carolina (2010) the inflation of Curaçao is equal to the inflation rate of the U.S. in the long run based on the PPP theory. This theory has not been rejected by Carolina‟s results and gives more understanding to Curaçao‟s vulnerability to external shocks.
2.2.3 Interest rate Policies
Although considered a significant component for FDI, the overall effect of interest rate volatility on FDI remains an open subject for empirical research. A principle motive to pursue low interest rates in developing countries is the desire to stimulate growth. The evidence found so far suggest that FDI activities seem to respond to macroeconomic fluctuations along the cycle (Cavallari & D‟Addona, 2005). The interest rate is a proxy for cost of capital. Following the neoclassical theory, Udoh and Egwaikhide (2008) explain that an increase in the interest rate raises the cost of capital and therefore reduces the incentive to accumulate more capital. Similarly, a decrease in the interest rate reduces the cost of capital and stimulates investment. Furthermore, “in the case of foreign investment, two interest rates are vital to the decision to invest: the international interest rate (or the source-country rate) and the domestic interest rate. The international interest rate represents the cost of fund to the foreign investors and is therefore expected to have a negative effect on foreign investment. The real domestic interest rate, on the other hand, serves as an indicator of the rate of return on investment in the host country and it is therefore expected to have a positive effect on foreign direct investment” (Udoh & Agwaikhide, 2008).
2.2.4 Political system ‘Government policies’
13 should prevail in the host country of investment. As discussed earlier, human capital is a crucial indicator for FDI in the host-country. As Te Velde (2001) indicates, firms that are part of a global competitive network appear to have more incentives to employ skilled workers, who are able to manage the latest technologies as a way to remain competitive. Therefore, governments will design policies that encourage direct spillovers, by ensuring that the skills learned in transnational companies (TNC) are general and transferable, which could lead to new and more productive local companies during and after the operations of TNCs. Hence, governments also try to design policies that form indirect linkages between TNC‟s and local firms. The objective in this relationship is to raise the efficiency and scale of local companies (Te Velde, 2001 & Banga, 2003). Apart from the above mentioned policies, governments may provide fiscal incentives and removal of entry restrictions as other determinants of FDI inflows. However as Hoekman and Saggi (2002) conclude, although policies are useful for attracting certain types of FDI, incentives do not work at an economy-wide level (reducing poverty, economic growth etc) and therefore traditional market related determinants remain dominant factors attracting FDI. As Thomsen (2000 p.3) shows “these factors interact at various levels as policy reform and technological change bring greater competition at a global level which in turn drives firms to invest in newer technologies”. Moreover, while this process is mutually-reinforcing as he further explains, it is not necessarily self perpetuating and requires continued enforcement of national governments to pursue open and non-discriminatory policies.
Curaçao: “Curaçao's government is aiming to enhance the overall efficiency on a macro- and
micro-level. Through privatization the government strives to strengthen the forces of national economic development in general and in particular to increase the competitiveness of its products and services especially those which are exposed to global competition” (Curaçao Private Economic Development, 2010). Accordingly, some focus areas according to the designed policies are:
„Privatization & strategic partnerships for state owned enterprises and activities such as the airport and the utility company‟.
„Diversification of education and training activities, including the establishment of high-quality, commercially run schools and training institutes targeting local and regional markets‟.
„Revitalization of business contacts in the Caribbean, in the U.S., in the Netherlands and other European countries following initial interest and investment initiatives from these areas‟.
Modernization of economic legislation as part of the government policy.
2.3 Hypotheses Construction
14 and the investment climate of Curaçao in particular. Accordingly, the focus for the construction of the hypotheses will be directed to the investment pattern. This section covers two parts i.e. (1) the investment pattern and behavior for the Caribbean (2) the investment pattern for Curaçao.
2.3.1 Caribbean: Investment pattern & behavior
The evolution of trade and investment flows in and out of the Caribbean has been largely influenced by changes in the world economy over time. Historically the most important factor for its success has been in the international capitalist economy as producer and exporter of primary products. Hence, it has been also known for its incorporation as importer of technology and manufactured goods (Thomsen, 2000). The specialization of the region has been before long in the export of primary goods such as sugar, bananas and minerals i.e. oil and bauxite. Globalization has led to an increased opening and reform of the regional economy. Market-opening policies, including trade liberalization, macroeconomic reforms (such as the control of inflation, fiscal prudence and flexible exchange rates in some countries) have led to a gradual shift from primary goods to services, particularly in tourism and financial services inducing increased levels of foreign investment and trade in these services (Thomsen, 2000 & Griffith et all, 2008). This evolution brought rise to the Caribbean Community or else CARICOM which includes fifteen official members and five associate members. The formation of a common market and a commonwealth was integral in this association (See box 1: CARICOM basics).
Intra-regional trade and investment
15 expansion of trade in this sector has been driven by several inter-related factors i.e. “rapid technological change, trade and investment liberalization at a national, regional and global level, privatization, deregulation, de-monopolization and the switch in emphasis by firms away from product diversification towards a more balanced geographical distribution of production and sales”(Thomsen, 2000 p.3). In line with the above, it is noteworthy to mention, that no country can foster balanced development in the future by solely relying on foreign investments. Therefore, it is important for regional firms to develop critical mass through observation and or acquisition to compete in international markets.
Investment behavior
According to Hornbeck‟s (2008) analysis, the investment behavior towards Caribbean countries has been characterized by their strengthened investment ties with the countries in the western hemisphere. Bilateral trade and investment agreements with the United States have contributed significantly to liberalization of investment regimes in many Caribbean countries. Apart from these agreements that are already in place, other bilateral, regional agreements have been proposed by CARICOM to further gain from increased FDI to specific sectors. The objective through realization of these agreements is to promote foreign investment through “the granting of national treatment and the elimination of most restrictions on capital and repatriation of profits” (Hornbeck, 2008 p.4).
2.3.2 Curaçao’s investment pattern
16 investors, having been accepted under the IRS 'check-the-box' regulations, so that Curaçao can be treated as a limited partnership for US tax purposes. Although not with a leading position in the Caribbean regarding OFC‟s, Curaçao strives with its new constitutional status to prosper in this sector and will continue to adapt to the changing international climate for new products and services (Thomsen, 2000).
Lastly, Curaçao‟s tourism sector is still growing and is currently the third and youngest income generation activity. While tourism has contracted for many islands in the Caribbean, Curaçao has managed to keep this relatively new sector up and growing (UNCTAD, 2010). Evidence indicates that tourism represents about 15 percent of the GDP of Curaçao and about 16 percent of employment. Sustainable development of this sector promises to be an important contributor of economic development through the creation of new jobs, investments and income for the government. In addition, the industry has indirect spin-off effects across all the other sectors of the economy. Therefore, the tourism sector is an important development tool especially for developing economies (Tromp, 2007). Furthermore, as Tromp continues, the outlook for Curaçao‟s tourism industry as a consequence of its new received autonomous status may be sustainably enhanced. Administrative barriers in the past government apparatus have been reduced facilitating the decision making of process of policies and projects. The World Travel and Tourism Council estimate an average annual gain of six percent for this sector for the coming seven years. As the situation currently stands, continued growth and increasing flow of investment is expected with numerous projects already in the pipeline (Tromp, 2007, 2009).
Given the arguments so far in the literature I built the following hypotheses:
H1: Macroeconomic factors are significant sources for FDI allocation to the Caribbean region
H2: Curaçao has a strong position in the market to attract FDI compared to the other small economies in
the region
H3: FDI allocation to Curaçao is negatively correlated with the level of interest rates and inflation rate H4: FDI allocation to Curaçao is positively correlated with the level GDP, trade balance (as a measure of
trade import & export) and service balance (as a measure of service export & import)
Chapter 3: Methodology
17 and time intervals are correlated and regressed for statistical significance in a multivariate analysis. Following a thorough description of the sample and an explanation of the variables by choice and construct, the second section will develop the equations for which the hypotheses are tested.
3.1 Data sample and statistical approach
As previously stated, the focus of this country study is situated along those factors that have affected and complemented the economy of Curaçao in general as a small and open Caribbean island and the investment climate in particular while being part of the former Netherlands Antilles. This will be obtained through a comparative analysis of similar sized island economies using a multivariate regression model. Furthermore, attention will be put on the relationship among the sample‟ key economic factors and FDI in order to make a significant prediction about Curaçao‟s current position within the Caribbean market. This last part will be analyzed using the most common economic variables for a country‟s welfare as explained in the literature. The time range chosen for this study is from 2000-2009, with 2009 being the most recent and up to data entry of the economic indicators for the sample. This last period gives significant value to the volatile economic fluctuations observed after the financial crisis with emphasis on the small Caribbean islands and gives prediction(s) of contextual changes in a short period of time. The data collected along this time axis concern the economic indicators for investment in small economies with small population sizes as can be found in the Caribbean on a yearly interval. The values are imported in the limited availability of data on these islands from the International Monetary Bank (IMF) and the World Bank data base. All non available values were filtered out of the sample as to not bias the expected results and to give more significance to the value of their probability. The original range of islands for this analysis comprised 38 entities. From this sample 6 entities have been filtered out based on their economy size which is not in line with the specifications of the study (Cuba, Jamaica, Haiti, Dominican Republic, Puerto Rico and Trinidad & Tobago). Of the remaining 32 entities, 13 have been filtered out because of no industrial exposure or specialization. From the remaining 19 entities, 10 have been filtered out for limited or no data availability or no significant exposure, limiting the sample to 9 entities with significant values for a regression analysis. From the 9 entities left, one of which is Curaçao will undergo a separate analysis aiming to investigate those indicators that negatively influence and positively support FDI to the country through a regression test. The entities chosen to be taken in account are part of a group for which similar industrial sectors are important to their economic development i.e. the tourism industry and financial services.
18 remark, made previously in the literature review, is that the indicators chosen for the entire sample i.e. GDP, Inflation, Interest Rates, Export and Import of goods and services, FDI domestic; do not amplify the general indicators for investor choice but focus instead on the indicators for direct investment in small economies. The decision has been made according to the classification of countries by the Caribbean Development Bank with strong economic exposure. No research has been conducted to validate the classification of the chosen indicators; however reports on the economic development of the Caribbean region by the IMF or CDB indicate this categorization to be the most observed components for investment in the region. The following table shows the sample under study.
Table 2: Caribbean region
1. Antigua and Barbuda 2. Curaçao 3. Saint Kitts & Nevis
4. Bahamas 5. Dominica 6. Saint Lucia
7. Bardados 8. Greneda 9. Saint Vincent
3.1.1 Dependent variable
19 over a long time period and rely on more sources of information than simply flows of foreign direct investment.
IC
it= Σ
i=1INV
itConstructing the dependent variable as explained above makes it more comprehensive to indicate the strongest players within the Caribbean region. Subsequently, forecasts can be made for Curaçao based on its market position within the region. Since no previous research has been done on this topic, no subsequent factors or variables for control are taken in account in this methodological approach.
3.1.2 Independent variable
The independent variables are the 6 variables mentioned in the previous section that are directly linked to the hypotheses construction, respectively GDP in current dollars (GDP$), export of goods and services (EXP), import of goods and services (IMP), inflation (INF), and interest rate (INT). In addition to these variables, 2 extra variables i.e. trade balance (TB) and service balance (SB) are introduced in the analysis for Curaçao in particular. Quantifying and measuring for these variables has never before been done for a regional study emphasizing small economies. In an effort to introduce this topic as a stepping stone for future studies, I chose to develop a model predominantly based on the variables mentioned for significance and direction. The classification of the sample is based on the World Banks Atlas method: a/ High income economy (per capita GNP $9,631 or more) b/ Upper middle income economy (per capita GNP $3,031-$9,630) c/ Lower middle income economy (per capita GNP $761-$3,030) d/ Low income economy (per capita GNP $760 or less) (World Bank Group, 2010).
3.1.3 Control variables
There are several variables or else factors that may prove relevant in explaining how the investors‟ choice is influenced while seeking investment opportunities in a small and open economy. In line with this, I will introduce two variables that will allow for controlling additional effects that may distort the singular impact of the independent variables chosen on the dependent variable.
GDP Growth: Globalization, a phenomenon increasingly intensified in the last decade, has urged
20 Index Mundi data base on a yearly base. Missing data was completed by assuming the growth rate of the previous year.
3.2 The equations
To interpret the hypotheses developed two equations are presented. Both equations will be interpreted by an OLS regression model. The first regression will analyze the pattern of FDI allocation during the specified time period across the given sample and the second regression will analyze the impact of the influential variables on the investment inflow in Curaçao. In the following, GDP $, EXP, IMP, INF, INT, TB and SB are the independent variables, while i is the country, and lastly t signifies the moment in time.
Equation 1: FDI allocation to the Caribbean
IC ᵢ
= α+
γ* GDP $ ᵢt + δ* EXP ᵢt + κ* IMP ᵢt + ζ* INF ᵢt + η* INT ᵢt + θ* GDP growth ᵢt + ε ᵢtEquation 2: FDI allocation to Curaçao
IC ᵢ i꞊cur
= α+
γ* GDP $ ᵢt + δ* TB ᵢt + κ* SB ᵢt + ζ* INF ᵢt + η* INT ᵢt + θ* GDP growth ᵢt + ε ᵢtIn conclusion, the coefficients are to predict the impact of the independent variables and control variables on the dependent variable and its corresponding direction (sign). The focus has been so far on explaining the methodological construct of the analysis; provide arguments in line with the current study and most importantly give relevance to the expected results through a thorough literature background on the topic. Thus, the independent variables in equation 1 are expected to have a strong influence on the dependent variable, with adjacent controlling effects of GDP growth. Hence, the independent variables in equation 2 are expected to give some clear indication on the relationship, whether negative or positive, with the dependent variable.
Chapter 4: Result and Interpretation
21
4.1 Results
In this subsection the results on the regressions are presented with a brief interpretation. The statistical program used to execute the regressions is Eviews7. The results are expected to be statistically significant in a collective format, since both the independent variables and control variable are introduced at once (multivariate analysis) in the equations described above. This will prevent secondary effects or biased results as the variables are controlled for a superior end result.
4.1.1 FDI allocation in the Caribbean
The following table shows the results and subsequent strength of the impact of the variables for the first regression. Hence, the expected and attained direction and strength of the impact of the influential variables under study are displayed for better understanding. A number of 90 observations were included in the sample. Given the few numbers under study, I place the statistical significance of the variables at 3 levels assuming a normal distribution of the sample: <0.01 for a very strong significance, < 0.05 for a strong significance and 0.1 for a weak significant result. Any values outside this range are considered insignificant, at least for this model.
Table 3: Results for equation 1
Type of
variable
Variable
name
Predicted
sign
Actual
sign
t-statistics
Significance
level
Independent GDP $ + + 4.433283 0.0000 Independent EXP + - -3.031807 0.0033 Independent IMP + - -2.380333 0.0196 Independent INF - - -0.835312 0.4060 Independent INT - + 1.407080 0.1632 Control GDP growth + + 2.790108 0.0066-R-squared 0.543141 - Adjusted R-squared 0.504141
22 predicted, does not show sufficient statistical significance. INT, in contrary to the predicted sign, has a positive influence on FDI allocation, however, with a weak significance level at 0.1632. Lastly, GDP growth has a strong impact as shown by the positive sign and level of coefficient. As a multivariate analysis, statistical significance could not be proven for all the variables. Consequently, it can be concluded that not all the variables for hypothesis 1 are supported by the chosen model.
4.1.2 FDI allocation to Curaçao
In similar matter as in table 3, the results are presented for the second equation in table 4 together with their corresponding direction and significance level. A number of 10 observations were included for the sample. All variables were checked for their significance and meaningful basic interpretations were made. For this part of the study, the influential variables were tested for their impact on FDI allocation to Curaçao. These figures should give a better understanding of the key economic variables that influence investment inflow and further development towards an independent country.
Table 4: Results for equation 2
Type of
variable
Variable
name
Predicted
sign
Actual
sign
t-statistics
Significance
level
Independent GDP $ + + 0.409955 0.7094 Independent TB + - -2.678151 0.0752 Independent SB + - -1.789149 0.1715 Independent INF - + 0.540666 0.6263 Independent INT - + 0.685297 0.5424 Control GDP growth + + 0.837477 0.4638-R-squared 0.831378 -Adjusted R-squared 0.494134
23 has a positive impact on the dependent variable (also as a univariate variable), however not statistically significant. An appropriate explanation for this output will be given latter in this chapter. Also INT (interest rate) has a positive impact on the dependent variable, though not statically significant. As a univariate variable, INT is shown to have an expected negative influence on the dependent variable, however with a weak statistical significance.
4.1.2.1 Correlation Matrix
The following table shows the results and subsequent strength of the degree of linear relationship between the variables for the second regression. The correlation coefficient (r) may take on any value between +1 and -1. All numbers that approximate values of r = +1.0 and r = -1.0 may indicate a prefect linear relationship.
Table 5 Pred. FDI$ GDP$ TB SB INF INT GDP_
FDI$ — GDP$ + 0.420181 — TB + -0.78743 -0.659645 — SB + 0.484480 0.705223 -0.840568 — INF - 0.585558 0.425485 -0.698522 0.639912 — INT - -0.187691 -0.730472 0.411102 -0.338069 -0.313307 — GDP_ + 0.444657 0.541542 -0.505188 0.661462 0.379064 -0.143407 —
24
4.2 Descriptive analysis
Before continuing with an in-depth analysis of the chosen model, a brief description is given for the basic characteristics of the sample. The tables below illustrate the descriptive statistics for each variable as part of the two analyses (Table 8: Caribbean in general and Table 9: Curaçao in particular).
Table 8
GDP$ EXP IMP INF INT GDP%Mean 1.57E+09 46.18889 63.76667 2.076667 7.108222 2.221111
Median 6.83E+08 46.00000 65.00000 1.700000 6.950000 2.700000
Maximum 7.23E+09 70.00000 90.00000 8.700000 13.10000 7.000000
Minimum 0.000000 0.000000 0.000000 -0.600000 -0.600000 -3.200000
Std. Dev 1.82E+09 11.08790 12.40157 1.830703 2.889362 2.253312
25
Graph 1
As can be seen in graph 1, the Bahamas is the largest FDI recipient in the sample with Dominica being the smallest of all. As to the rest of the sample, gradual growth in FDI can be observed with some outliers during specific period in time. Antigua and Barbuda, Barbados and Sint Lucia show a visible peak in FDI allocation during the period 2006-2007. Taking notice on the last 3 years in the time interval, -2007 to 2009-, Antigua and Barbuda, Barbados and Curaçao show some meaningful numbers in FDI. This indicates that these 3 islands were the largest recipients in 2009 though with smaller numbers besides Bahamas.
Graph 2 validates the conclusion drawn earlier on GDP growth. Small observable differences can be seen among the islands, with some visible outliers during specific periods in time. Antigua and Barbuda has maintained a quite stable and positive growth over the years compared to some irregularities seen for some islands. In addition, although a smaller growth in the last few years, Grenada shows an overall positive growth for the entire time interval. Furthermore, the greatest peak in the whole sample is noted
26 for Grenada in 2002-2003, followed by Antigua and Barbuda and Saint Vincent in 2008. Curaçao as the focal unit under study shows some significant variation in overall growth over the time interval. This can be explained by external shocks for which the economy is highly vulnerable, and island level changes (governmental and structural) observed over the last decade as part of the process of realizing the autonomous status.
Graph 2
From graph 3 it is apparent which islands have the highest standard of living. GDP is often considered an indicator of a country‟s standard of living. It refers to the market value of all final goods and services produced within a country in a given period. The island with the highest standard of living is the Bahamas, followed by Barbados and lastly Curaçao.
27
Graph 3
Table 9
GDP$ TB SB INF INT GDP%Mean 2.68E+09 -1.37E+09 1.04E+09 2.360000 6.200000 1.100000
Median 3.11E+09 -1.25E+09 1.07E+09 1.600000 6.250000 1.250000
Maximum 3.93E+09 -9.69E+08 1.28E+09 6.300000 9.000000 3.800000
Minimum 0.000000 -1.96E+09 8.65E+08 0.400000 3.000000 -2.600000
Std. Dev 1.46E+09 3.74E+08 1.55E+08 1.673453 2.149935 1.693779
The table above continues with the descriptive statistics for the second analysis. In this subsection, focus will be put on the influential variables in the analysis for Curaçao. The central tendencies of all the independent variables it shows that overall there are quite some high scores, which may prove a smaller than expected variance for the key factors influencing investment inflow in Curaçao. With focus on TB
28 and SB, it can be concluded that Curaçao‟s economy is predominantly reliant on the export and import of intangible services as can be observed by the central tendencies for these particular variables. Furthermore, the mean for the variable INF shows a rather small number, as could also be observed in the group analysis. As mentioned before, this might indicate that inflation is presumably controlled for a stable market, as these islands have small and open economies which are highly vulnerable to impacts external to their markets. Hence, a country with low inflation is much more attractive for bigger investments. At the other hand, the overall interest rates (INT) in Curaçao prove to be quite high as can be seen by the mean and the medium. Lastly, during the time frame chosen, there has been substantial growth which is an attractive factor for potential investors.
The model described above presents a number of limitations that may have influenced the impact and direction of the already shown results. It is important to put attention to this part since it gives reference to further research that might adopt a similar approach. The sample is reduced only to 9 islands, which although carrying the necessary characteristics for the chosen method (small and open economies with large market exposure), represents but a small percentage of the totality. The time range spans over a decade which may have brought several limitations to the model‟s strength. On one hand, monthly observations were primarily aimed for; but nevertheless, only yearly observations were obtainable from the data sources. Theoretically, monthly observations give more value to the study since it carries irregularities and a noticeable pattern or variation. On the other hand, a period of solely a decade may represent a rather small range for a clear observation of FDI allocation. However, available data on these particular islands were retrievable only for this time range. Given this particular format, there is no direct potential harming effect of the time range variable on the analysis.
4.3 Discussion & Interpretation
The results of the study reject hypothesis 1 for not enough statistical significance for all variables, validate hypothesis 2, reject hypothesis 3 based on a different than expected positive association of the variables, and partly validates hypothesis 4 for the GDP variable while it rejects the correlation of the TB and SB variables. Each hypothesis will be thoroughly analyzed and discussed for a significant interpretation.
Hypothesis 1. Many theoretical studies in the literature point to the short-run influence of
29 formation, and productivity, nonetheless, besides these and as shown with the statistical model, more factors might influence FDI allocation and more strongly FDI decision. Furthermore, macroeconomic factors allow for a more fine grained analysis of differences within a specific region, and therefore may offer more accurate evidence for investment decisions to small developing countries or any other specific location. Ultimately, the choice for movement is dependent on characteristics of the firm, products, the host country itself and most importantly the overall movement of rivalry firms to the specific country or region, this as an indication of a growing market with profitable opportunities. Small markets as indicated in the literature provoke little market seeking or strategic asset seeking. Much of the FDI inflows to the Caribbean have been either of the natural recourse seeking or efficiency seeking type that is motivated by low labor cost. Since the region as a whole has not developed an adequate technological base or highly skilled industrial workforce, FDI has for most part been attracted by natural recourse seekers, cheap labor and political stability. With reflection on the literature and on the results for the first regression, it can be concluded that there is more to the decision for investment allocation to the Caribbean than only sub-national macroeconomic factors. In fact, investment in the Caribbean as mentioned above has an underlying interest that is not at all times in line with the countries national aspects (macroeconomic condition) but rather a firm specific interest ranging from tax benefits “tax haven”, cheap labor, and deployment of natural recourses at low costs. Going by this principle, Hypothesis 1 as a multivariate regression is rejected since statistical significance could not be proven for all the literalized variables.
Hypothesis 2. Furthermore, although having a substantial growth over the years and having smaller
30 can be safeguarded. This stability is crucial for successfully building up the new country “Pais Kòrsou”, attain greater inflows of foreign direct investments and increase the welfare of the citizens.
Hypothesis 3. Having in mind the limitations explained in the previous section and with focus on
hypothesis 3, conclusions can be accordingly drawn. In contrast to the expected direction, it seems that both inflation and interest rate have a positive impact on FDI allocation. In theory, the effect of inflation on FDI allocation to Curaçao is expected to have a negative sign (Hypothesis 3). However, the results show the opposite. This can be argued with a history of low inflation and sensible fiscal activity which signals investors about the commitment and credibility of the government. A low inflation rate is taken to be a sign of internal economic stability in the country which encourages FDI (AZAM, 2010). Curaçao‟s inflation rate, despite many international influences, has shown on average a moderate rate of inflation during the time range. This is explained by Curaçao‟s major dependence on its trading partners, the USA, Venezuela and the Netherlands (for imports) as well as the fact that the Antillean guilder is pegged to the US dollar since December 1971, which is an important factor in the fiscal regime of the island. Accordingly, these have all been significant factors in the rather low inflation rate over the years. Despite this long period of quite stable inflation rates, inflation is likely to increase owing to an increase in food prices and fuel tax in the coming years as international markets struggle within confined boundaries. Continuing with the second variable under study, it does seem that interest rates have a positive influence on FDI allocation to Curaçao. Curaçao is known for its several advantages, including real domestic interest rates which are very attractive for investors to earn profitable returns on their investments. This is a systematic or else strategic set designed by the government to encourage big investments. Consequently, it regulates the misbalance between job supply and demand, and contributes to the objective for sustainable growth of the economy and greater development.
Hypothesis 4. In the case of hypothesis 4, GDP level does appear to be positively correlated with FDI
31 observed over the time range, has created additional demand for imports (of products and services), causing an increase of trade deficits, which explains the negative correlation of TB and SB. Trade balance as shown in prior studies is greatly influenced by economic growth. Accordingly, FDI contributes either positively or negatively to the economy of the host country through increasing imports and exports, and can either improve or deteriorate the country‟s trade balance depending on the relative demand for these two forces.
Chapter 5: Conclusion and Recommendation
The current research paper brings contributions to a rather young field of study. This analysis contributes to the professional practice by improving understanding of some unexplored aspects that might be of relevance in the short-run, at least for Curaçao, as a new country with an autonomous status within the Dutch Kingdom. Furthermore, it is of academic relevance because it adds to the so far limited literature on the unique characteristics of Caribbean countries in terms of their business cycle, investment climate and business relationships (regional and internationally). This branch of study holds a number of factors that shed light on the growing importance of sub-national components, which can defy investors‟ perspective.
In the first section of this chapter concluding remarks are given on the main question under analysis. The main ideas and discoveries as well as existing literature on the present situation of Curaçao are considered for a fitted conclusion. The second section advices on the importance of continues research on the factors that foster the performance and further development of Curaçao economy and issues that are crucial to seizing the opportunities of globalization.
5.1. Conclusion
32 In contrast to investment flows to developed countries which by far have been market seeking, investment flows to the Caribbean have been in response to import substitution policies. Further, these small developing countries possess special advantages such as natural resources, small homogeneous populations that allow for political consensus and open trade that positions them for higher growth amidst their market size.
Furthermore, with globalization more countries are interested in seeking reforming actions that push local development and look for opportunities in foreign markets in order to sustain their competitiveness. In this process, Curaçao is working hard to strengthen the economy through the implementation of reforming policies, improving the quality of life through social programs like the Social Economic Initiative program, and getting on the global investment map. In the foreign direct investment behavior research, investment allocation, investment patterns, investment preference and sub-national macroeconomic factors are studied for more evidence. Especially, GDP, inflation, interest rates, the balance of payments (trade balance and service balance) and investment preference are studied. Compared with the economic factors relevant in the investment allocation process to developed countries, small and open developing countries as studied in this research paper have shown to embrace some unique characteristics in terms of inward investment. Product factors, company strategy, export cost and foreign market factors should be considered.
The changes observed for Curaçao in this analysis have been accompanied by other changes in the economy, namely, changes in the population, the external environment and the distribution of economic activity among the different sectors. Among the variables analyzed, GDP as a substitute for market size is found to be the primary determinant of FDI inflow among the studied countries. With a positive and strong significance it can be concluded that market size (GDP) is a key component of FDI in both the Caribbean as a whole and Curaçao in particular. Furthermore, the balance of payment characterized by the trade balance and service balance also shows to be directly correlated with GDP as it fluctuates with demand and supply for goods and services. Inflation rates were low to moderate except when external shocks resulted in peaks in the rate, which indicated a relatively stable pattern over the time frame.
The following table provides a clear overview on the hypotheses. In alternative forms of data interpretation, improved findings can be recorded for a few variables in the second regression equation. For each hypothesis a corresponding argumentation is given for the subsequent results.
Table 10: Statistical conclusion
33 literalized variables
Hypothesis 2 Validated -
Hypothesis 3 Rejected Based on the positive association of the variables to the
dependent variable contrary to the expected sign direction.
Hypothesis 4 Rejected The GDP variable is validated for its clear association and
strong significance, while the two other variables (TB and SB) showed a different than predicted negative correlation to the dependent variable.
5.2 Policy Recommendation
Curaçao as observed has quite a strong market presence. Although at a relatively early stage of aggressively promoting its international development, it already offers significant opportunities for investors. To seize these opportunities, Curaçao should consider two very important aspects to its development;
(1) These opportunities remain in those sectors which promote Curaçao‟s comparative advantage regarding high value services like the financial sector and Oil refinery which cater to the international markets. For small economies such as the Curaçao economy, international cooperation and policy coordination is indispensible for international investment recognition. Therefore, it is imperative that Curaçao follows the supervisory and regulative standards set by the IMF and BIS (Bank of International Settlements) to avoid confidence discouragement of investors in the investment climate. Furthermore, a multi-lingual population, high educated and well trained human capital, state of the art information technology and e-commerce, a favorable tax regime, controlled inflation fluctuation, preferential trade relationships based on the Caribbean Basin Initiative (CBI II), a legal system similar to the legal structure in the Netherlands, and last but not least a sophisticated financial sector are all key factors to why Curaçao is a strong player within the Caribbean market albeit a relative small economy.
34 CARICOM. Through this action, it will become more economically integrated within the region while holding the numerous advantages mentioned above. Currently, Curaçao is faced with high trade barriers within the region, despite its strong and successful relationship with its international partners. Consequently, Curaçao fails to seize the opportunities the Caribbean market has to offer.
With considerations on the above, and the fast pace of globalization today, regional cooperation and integration are now as imperative as ever before. As Curaçao explores new opportunities beyond its horizon, it could benefit from the ongoing economic expansion in the region while the developed countries still struggle to recover from the economic crisis. Besides the obvious benefits from integration, this expansion also provides a platform for more effective integration into the world economy. Globalization on itself provides many opportunities, but at the same time leads to more competition, risks and vulnerabilities. Consequently, this combining of forces through integration and cooperation is the most effective way to proceed as: (a) it increases the economic power of their small economies (b) giving them the chance to take advantage of the opportunities presented by globalization (c) and by guarding them against negative shocks both externally and country specific.
Finally, as Curaçao engages in new forms of economic development towards greater market opportunities, considerations should be given to the following to empower the investment climate; (1) fostering of a stable macroeconomic environment (2) development of human capital and (3) improvement of productivity through the adaptation to new technology and improvement of the infrastructure. It is through integration, alliances and cooperation that the inherent weaknesses of a small economy can be overcome thus putting the investment climate on a small island like Curaçao on the level where it can successfully conquer high numbers of investments and ultimately compete in the global market.
