Today we face an interesting paradox. The number of people in the world living in extreme poverty has decreased dramatically
in the past three decades. In 1981 half of the population in the developing world lived in extreme poverty. By 2010, despite a 60 percent increase in the developing world’s population, that figure dropped to 21 percent.
While extreme poverty has diminished, however, the gap between the richest and poorest countries has increased dramatically. In 1776, when Adam Smith wrote The Wealth of Nations
, the richest country in the world was approximately four times wealthier than the poorest. Today, the world’s richest country is more than 400 times richer than the poorest.
What separates them?
One answer is knowledge, diversification and the composition of exports, all areas in which foreign direct investment (FDI) has an important role to play. FDI matters, but not all FDI is created equal
While FDI is important for economic growth, not all FDI is the same. One way to differentiate is by an investor’s motivations using a framework established by British economist John Dunning
Natural resource-seeking investment: Motivated by investor interest in accessing and exploiting natural resources.
Market-seeking investment: Motivated by investor interest in serving domestic or regional markets.
Strategic asset-seeking investment: Motivated by investor interest in acquiring strategic assets (brands, human capital, distribution networks, etc.) that will enable a firm to compete in a given market. Takes place through mergers and acquisitions.
Efficiency-seeking investment: FDI that comes into a country seeking to benefit from factors that enable it to compete in international markets.
This last category – efficiency-seeking FDI – is particularly important for countries looking to integrate into the global economy and move up the value chain.