NCPA - National Center for Policy Analysis


May 6, 2005

All developing countries try to attract foreign direct investment (FDI) from developed nations. A new article from the Economist finds that developing countries are now attracting increasing amounts of FDI from each other.

According to the article:

  • Developing nations increased their amount of FDI from $16 billion in 2002 to $40 billion in 2004.
  • Currently, more than a third of total FDI going to developing countries came from other developing countries.

The Economist notes that much of the investment is meant to avoid burdensome taxes. For example, about two-thirds of Brazil?s $53 billion of overseas investment in 2002 was in the Cayman Islands, the Bahamas and the British Virgin Islands. But there are many productive reasons for investing in other nations:

  • It allows firms to avoid trade barriers that divide many poor countries from each other.
  • Firms can seek out cheaper labor elsewhere -- even China's own multinationals invest in Ghana and Southeast Asia, because labor is cheaper there.
  • Extracting natural resources can be easier if the firm has a national presence.

The Economist also says that many third-world multinational firms do better than their first-world counterparts when investing in the developing world. Third-world multinationals are often closer to the host country, both geographically and culturally, and they tend to be better versed in the risks of investing in a country where the politics is unpredictable and the economy unstable.

Source: "Globalization with a third-world face," Economist, April 7, 2005.

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