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Honduras

Why does efficiency-seeking FDI matter?

Cecile Fruman's picture
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.
 

Changing lives along the road in Honduras

Marcela Silva's picture

We arrived in the village of La Redonda-El Aguila, Honduras at ten o’clock in the morning, when the temperature was already about 94 degrees Fahrenheit. We were warmly welcomed and invited to take a short walk to the place they had prepared specially for us to hold our meeting. We were offered bean tamales and coffee, and began the meeting with members of two road maintenance microenterprises that are supported through a World Bank-financed project.

The microenterprises program was launched in 2013 under the Second Roads Rehabilitation and Maintenance project with a goal of creating 10 microenterprises to maintain 310 kilometers (192 miles) of roads. The routine maintenance work includes cutting and clearing vegetation on both sides of the road to ensure good visibility, cleaning drainage systems, keeping the roads free of debris and occasionally patching holes in the road. Microenterprise members earn wages from their work, which they invest into their households and communities.

Each microenterprise is supported by a supervisor, usually a civil engineer, who teaches members how to do the road maintenance work efficiently and effectively. Additionally, members learn how to meet conservation standards, as well as gain understanding of why maintenance activities are so important to extend the life of the road. The supervisor performs a progressive evaluation and on-the-job training for all micro-entrepreneurs. Upon completion of the training, the microenterprise is granted a contract to carry out labor-intensive routine maintenance activities over a stretch of road (at a ratio of about three kilometers per partner) for a period of 12 months, which is renewable subject to satisfactory performance. 

Ultimately, the program empowers entrepreneurs to become permanent contributors to the conservation of their roads. 

Rio + 20, Latin America and the World Bank

Ede Ijjasz-Vasquez's picture

También disponible en español

 

Latin America will attend the Rio+20 conferences safe in the knowledge that they have done a good job over the past few years, but with the shared international need to keep pushing for environmental policies which will help create a more sustainable world.

The region is home to examples of world-class innovative projects, but also faces far-reaching challenges for the future in terms of green growth. The decisions that we take today will shape development for the next 20 or 30 years, according to this video blog from Ede Ijjasz-Vasquez, Director for Sustainable Development for Latin America and the Caribbean.