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Oct 22,2009
Non-Traditional Sources of FDI
+ Brandon Fuller
Interesting research from Christian Krieger-Boden, Peter Nunnenkamp, and Maximiliano Sosa Andres on the growing role of investors from emerging and developing economies in global foreign direct investment (FDI) flows.
Pessimists worry that developing countries (and China in particular) use FDI flows to access or even dominate scarce natural resources, particularly in poor African countries. Optimists hope that investors from developing and emerging economies will be less risk-averse than their rich country counterparts due to their familiarity with the sorts of political uncertainty and economic instability that tend to prevail in developing countries.
The research suggests that the fears about resource-domination may be exaggerated:
Our paper rejects popular concerns about the resource-seeking motive of FDI from emerging economies…In contrast to widespread belief, the endowment of host countries with raw materials proves to be of minor importance for FDI from non-traditional sources, compared to FDI from traditional sources. In other words, it is not only resource-rich countries that have favourable chances of attracting FDI from non-traditional sources.
But so too are the hopes that developing country investors will somehow be less risk-averse:
Perhaps most striking, however, is that the findings from our paper contradict the view of non-traditional investors being less risk averse than their peers based in advanced source countries…In other words, any hope is misguided that the familiarity of non-traditional investors with macroeconomic instability, political uncertainty, and corruption at home would make them less sensitive to such risk factors. Consequently, host countries are well advised to stabilise their economies and to contain political uncertainty by institutional reforms and better governance. Any deviation from that path might not only deter traditional investors but also investors from emerging markets, and the chances of spreading the benefits of FDI across a wider spectrum of developing countries would remain slim.