From countries just beginning to modernize, to the rich country club at the Organization for Economic Cooperation and Development (OECD), the world is awash with opportunities for development. While central bankers have control over an economy’s monetary levels and politicians control fiscal affairs, these two groups often cannot jumpstart growth without outside help. Enter foreign direct investments (FDI). In simple terms they are inflows or outflows of capital from one country to another, with common examples including companies building factories abroad or investing in the development of an oil field.
Countries with the Most FDI
Each year more than $1 trillion in FDI flows into countries around the world, but the distribution is far from equal. According to the UN Conference on Trade and Development (UNCTAD), the countries with the greatest share of FDI to GDP in 2011 were:
- Hong Kong SAR (China)
- Sierra Leone
- Congo republic
What’s striking about this list is that the economies fall into two camps: countries known for natural resource development and countries known for financial business services. Mongolia, Liberia, Guinea, and Congo have significant mineral resources and have garnered the attention of big mining companies such as ArcelorMittal (NYSE:MT). Others are known for the sort of offshore banking companies that individuals use to avoid taxes elsewhere.
Economies by Total FDI
Viewing FDI as a percentage of GDP does not indicate the size of the economy being invested in. Some of the economies listed above are much larger/smaller than others in terms of GDP alone, and when you rank economies by total FDI dollars received the picture changes almost completely.
- United States: $258 billion
- China: $220 billion
- Belgium: $102 billion
- Hong Kong (China): $90 billion
- Brazil: $72 billion
- Australia: $66 billion
- Singapore: $64 billion
- Russia: $53 billion
- France: $45 billion
- Canada: $40 billion
These 10 countries together received more than half of the global FDI, with the United States and China accounting for over 20%. While several of these countries do have natural resources that could entice foreign investment, the real draw is the size of their populations. A large population means a lot of consumers, and a multinational company generally wants to be near its consumers. Proximity allows a company to reduce the cost of shipping goods and allows it to keep a close eye on shifting consumer tastes. Sitting in an office half way across the world could cause a company to lose out.
Trouble with Politics
Foreign investment is often used as a political scapegoat for the world’s ills, and there are certainly times when it deserves a bad rap. Big companies can run roughshod over developing countries, breeding corruption and removing a country’s wealth rather than injecting it back into the domestic economy. It is this overwhelming force that spawned the concept of a resource curse. Globalization, which tends to go hand in hand with FDI, is not the most popular or well-liked economic concept, even if it does benefit consumers in the end. Officials under pressure to fix the economy can earn brownie points by pointing a finger at foreign companies bent on “owning the country,” with “buy domestic” legislation and non-tariff barriers to trade reducing the ability of outsiders to gain market access.
The Positive Side
Foreign direct investment isn’t all bad, however. Inflows are a sign that the outside world considers an economy a worthwhile place to park capital and are a signal that a country has “made it.” FDI allows countries without the domestically grown know-how to develop resources that it may not have been able to otherwise. Profits from the use of capital can be used to build infrastructure, improve healthcare and education, improve productivity and modernize industries. The trick is to balance the desire to fill state coffers with the knowledge that those funds have to improve the lives of the greatest number of people in the long run. Nothing creates instability quite like kleptocracy.
The Bottom Line
How can a country entice the rest of the world to hand over cash? Countries can increase the inflow of FDI by creating a business climate that makes foreign investors feel as if their capital is safe. Low tax rates or other tax incentives, protection of private property rights, access to loans and funding, and infrastructure that allows the fruits of capital investment to reach market, are a few of the incentives that countries may offer. Obtaining a good ranking in the World Bank’s Doing Business report and staying out of the cross hairs of Transparency International’s Corruption Perceptions Index don’t hurt either.
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