International Investments in Emerging Economies

Yesterday we saw that private investment is becoming increasingly important for many developing countries.

Today we focus on two questions:

• What role do foreign investors play in different developing countries?
• And how can we maximise their contributions towards getting poverty to zero?

Most foreign investment in developing countries is either in the largest and most rapidly-growing emerging economies, or in countries with natural resources.

Emerging economies

The vast majority of investment in developing countries is concentrated in a handful of large and rapidly growing economies. Five countries alone – Brazil, China, India, Indonesia and Mexico – received half of all foreign direct investment (FDI) flowing into developing countries in 2012.

These five countries are also home to half of all people living in extreme poverty around the world, highlighting the business challenge of using investments to make not only faster, but more inclusive progress.

Much investment in these countries goes towards infrastructure, especially energy and transport, and to industry and trade sectors. What can we learn about business models that stimulate sustainable development and opportunities for local business at the same time as providing valuable services? How can supply chains be optimised to contribute to wider and more sustainable results?

Resource-rich countries

Around a third of investment in developing countries goes to those rich in natural resources. For these countries, investment focuses on extracting resources as well as associated infrastructure, energy and transportation, and connected value chains.

Natural resource wealth has huge potential to stimulate positive development, although it has proved notoriously difficult to manage well. Over 350 million people living in extreme poverty are in resource-rich countries. Their livelihoods have no spare capacity to cope with shocks and crises. The approach of extractives firms, which can have a major influence on whether natural resource extraction is a benefit or a curse, is therefore extremely important if people in these countries are going to be able to overcome extreme poverty. While primary responsibility for stewarding and managing natural resources lies with the domestic government, the extent that international firms integrate with the local economy, help positive state-building and make sure that global value chains are transparent in sourcing extractives will have a real impact.

How companies make and declare their profits is also critical – trade mispricing and capital flight from resource rich countries directly affects domestic budgets and countries’ capacities to reduce poverty. Companies themselves can play their part in forming a business environment that is fair and predictable, publishing data on taxes, profits and investments to the domestic authorities and to internationally recognised transparency mechanisms, such as the Extractive Industries Transparency Initiative (EITI).

Countries with little private foreign investment

There is a group of developing countries that receives little attention from international investors. In many of these countries the proportion (if not the absolute number) of people living in extreme poverty is higher and poverty is often deeper and more intense than in emerging economies.

These countries typically have far fewer domestic resources and a very long list of investment needs that are unlikely to be met by either government expenditure or aid.

Business clearly has to meet different challenges in different countries: being more inclusive in rapidly growing economies, avoiding the potential human costs of careless investment in extractives and – critically – bringing more commercial investment to poorer countries. There is one area of investment that seems to offer potential in many different environments: small and medium enterprise (SMEs). Another, mobile technology, is leapfrogging over obstacles to reach many different parts of the population. Linkages between government or aid investments and the private sector are driving faster progress.

For instance:

• SMEs established through private investment in the textiles and communications industries have created thousands of jobs in India.
• Social and corporate housing have been constructed simultaneously through private investment in Brazil.
• The use of SMS for market information, mobile money and service delivery is now reaching deep into populations, enabling small-scale traders to capitalise on the power of information.
• Smart incentives like the Advanced Market Commitment have incentivised investment by pharmaceutical companies in vaccine development when a commercial return might have been too long term.

But still many countries lack adequate private investment. What are the real or perceived risks that deter investors? And what role can the international community play?

Tomorrow’s blog will focus on ways in which the private sector can work with donors and governments to understand and mitigate risk, and in doing so, maximise opportunities for both commercial and social gain.