World Bank report highlights developing economies' increased FDI involvement

Developing countries are evermore involved in outward and inward FDI, stressed the World Bank's latest Global Investment Competitiveness report, presented at the United Arab Emirates' Annual Investment Meeting (AIM) – an international gathering aimed at promoting FDI, especially between emerging and developed countries. 

Foreign investment from developing countries has increased 20-fold in the past 20 years, accounting for nearly 20% of the global FDI flows by 2015, according to the report. On the other hand, more than 40% of the nearly $1750bn of global FDI flows was directed to developing countries in 2016, providing much-needed private capital. 

While larger developing countries, especially the Brics, are driving this phenomenom, about 90% of developing countries of all sizes and income levels are now undertaking outward FDI. Domestic policy choices in developing countries, and global economic conditions, have shaped this trend in the investment landscape. 

For many developing countries, foreign investment has become the largest source of external finance – surpassing official development assistance, remittances, or portfolio investment flows – because FDI can transform economies through skill transfer, innovation, productivity enhancement, access to foreign markets, and the creation of better paying and more stable jobs for host countries, in sectors attracting FDI as well as supportive industries, the report emphasised.

“Yet the financing required to achieve the 2030 Sustainable Development Goals [SDGs] remains prohibitively large and largely unmet by current FDI inflows – especially in fragile and conflict-affected situations. To maximise the development impact of FDI and thus help meet the SDGs, private investment will have to expand into areas where it has not yet ventured, notwithstanding the associated risks. The benefits of FDI extend well beyond attracting needed capital,” the report said.

Multinational companies in developing countries have proved more willing to target higher risk countries compared with their counterparts in the developing world, said Peter Kusek, senior economist at the World Bank Group and a co-author of the report. Chinese companies are a good example of this, he added, which is one of the reasons why China's FDI stock jumped from 12% 20 years ago, to one-third of the global outward FDI stock in recent years. 

Nonetheless, “governments must de-risk the investment climate by ensuring a proper business-friendly environment that is firmly backed by legal protection from political risk, thereby creating a predictable environment that is safe. For foreign investors, security of their investment is more crucial than incentives,” said Mr Kusek.

That said, “nations are in the same market for the same pool of investors, so we need to be competitive in our investment regulation and in ease of doing business", said Paulo Portas, deputy chairman of Portuguese Chamber of Commerce and former minister of state for foreign affairs of Portugal.

Jamal Al Jarwan, secretary-general of the UAE International Investors Council, said: “Another major factor is corruption level in an economy and, as an investor, we raise caution to our fellow investors of the downside risks in investing in a country that ranks very high in corruption perception indices."

About 100 countries participated in this year's AIM conference – the eighth edition since its launch in 2010.