In Chapter 4 of Wolf's book, he discusses the impact that Foreign Direct Investment (FDI) can have in less developed countries. On page 84, he says, "Many developing countries recognize that foreign direct investment brings benefits that foreign borrowing does not. The investor is locked in and cannot flee the country when trouble strikes." FDI is more than an investment, it is a commitment, tying a corporation or business venture to another country's economic and political environment. In theory, this bond is what will keep foreign investors from taking advantage of the target nation through unfair agreements or other means, as they will actually become a part of its developing economy. Wolf previously discussed the importance of trust in the market, and this is where FDI proves potentially dangerous for the investor. There are many reasons not to trust the economic climate in underdeveloped countries, such as unstable political systems and lack of established banking institutions. As we discussed in class today, you can't just give a machine to a country with no infrastructure to support it. Investors are also wary of these markets simply because they are different and uncomfortable. It is natural that someone looking to invest in Sub-Saharan Africa may lack the knowledge of the intricacies of the market in the region, thus dissuading them from getting involved with the region. These factors do little to create the trusting relationship needed for FDI to occur, making investing in developing countries a risky proposition.
I recently spent Spring Term 2014 business in Galway, Ireland. During my time there, I was able to see the possibilities provided by FDI in a stable and trustworthy environment. Ireland and the U.S. have a very close relationship, and American investment in Ireland has seen prosperity strike a nation that, 35 years ago, was among the weakest in Europe. Since then, Dublin has become one of Europe's biggest tech hubs, while Galway is a center for medical devices manufacturing companies. It is obviously unfair to compare Ireland, an English speaking country with a low corporate tax rate, to any underdeveloped nation in terms of investment potential, but it does support that the concept of FDI has a very high ceiling when implemented successfully.
A closing thought: Wolf briefly touches on the fear of nationalization. This is another fearful prospect facing foreign investors. As seen in Guatemala in 1954, it can get messy. If I were an American investor, I wouldn't count on the CIA to bail me out again.
