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Emerging Economies

Does political risk deter FDI from emerging markets?

Laura Gómez-Mera's picture

Investors touring a factory in Canada. Source - Province of British Columbia“Ask anyone you meet on the street whether political risk has risen in the last few years, and you’d likely get a convincing yes,” a high official from Canada’s Export Development Center recently wrote.
Investors have always worried about the political landscape in host markets. But it’s true. Concerns over political risk are on the rise.
The most recent EIU’s Global Business Barometer shows that the proportion of executives that identified political risk as one of their main concerns increased from 36 percent in 2013 to 42 percent in 2014. MIGA’s Political Risk Survey tells a similar story: 20 percent of investors identified political risk as the most important constraint on Foreign Direct Investment (FDI) in developing economies. Indeed, according to risk management firm AON, political risk is now tenth on the list of main risks facing organizations today and is likely to rise in the ranking in the next few years.
With FDI from emerging markets also on the rise, are the concerns of these investors any different?

New Voices in Investment: How Emerging Market Multinationals Decide Where, Why, and Why Not to Invest

Gonzalo Varela's picture

Emerging market multinationals (EMMs) have become increasingly salient players in global markets. In 2013, one out of every three dollars invested abroad originated from multinationals in emerging economies.

Up until now, we have had a limited understanding of the characteristics, motivations, and strategies of these firms. Why do EMMs decide to invest abroad? In which markets do they concentrate their investments and why? And how do their strategies and needs compare to those of traditional multinationals from developed countries?

In a book we will launch tomorrow at the World Bank, “New Voices in Investment,” we address these questions using a World Bank and UNIDO-funded survey of 713 firms from four emerging economies: Brazil, India, Korea, and South Africa.

Three Perspectives on Brazilian Growth Pessimism

Otaviano Canuto's picture

Over the last few years, Brazil’s growth has significantly decelerated. Accompanying this slowdown, a change in commentary on Brazil’s economic future has emerged, and is reflected in a recent ratings downgrade of Brazilian sovereign paper and an overall much-bleaker growth outlook both for the near and medium term. 

In a new 'Economic Premise' note, Philip Schellekens and I examine three contributing factors to this change in sentiment: macroeconomic management, the external environment, and microeconomic fundamentals. Among these, we argue that the relative lack of progress on the microeconomic reform agenda has been far more detrimental to the growth outlook than either the credibility cost of recent macroeconomic management or the negative influence of a less supportive external environment. 

Weekly Wire: The Global Forum

Roxanne Bauer's picture
These are some of the views and reports relevant to our readers that caught our attention this week.

Please Do Not Teach This Woman to Fish
Foreign Policy
Is there anyone out there who doesn't think small business is the lifeblood of any economy? From Washington to Warsaw, politicians and pundits just can't speak highly enough of plucky entrepreneurs. Even in poor countries, entrepreneurship is one of the most important forces underpinning economic growth, but the best way to raise living standards and reduce poverty is not necessarily to make everyone an entrepreneur. So why do so many costly development programs apparently ignore this fact? Once upon a time, people who wanted to fight poverty believed in direct approaches that solved identifiable problems one by one. If you wanted to make farmers more productive, you gave them fertilizer. If you wanted to boost manufacturing, you set up factories. To help both of these sectors grow and export goods, you built roads and ports. These kinds of investments quelled hunger and raised incomes in many countries. But recently, an indirect approach arose with promises of still greater benefits.

Where Next for Aid? The Post-2015 Opportunity
This joint ODI-UNDP paper looks at whether development aid will remain important in the post-2015 era, and asks how the old aid model should change in response to a dramatically new world and new sustainable development challenges. The paper suggests that the label “international public finance for sustainable development” – or IPF4SD – is a more accurate description of the types of interventions that need to be funded in the post-2015 era. This finance will also be needed over the long-term. The authors suggest ways in which these funds could reliably be raised over the long-term, as well as how the architecture which mediates IPF4SD could be improved.

Emerging market sovereign bonds: Does it cost more to issue a bond under the English law?

Dilip Ratha's picture

It seems it does. During 2008-2012, post-crisis, launching under English law increased spreads by more than a third on average. In other words, by choosing the UK law, a nation rated B+ (for example, Ecuador, Ghana, Greece, Pakistan and Zambia) apparently paid 7.7% interest rate per annum instead of 6 percent, and a nation rated BB (for example, Bangladesh, Nigeria, Serbia or Vietnam) paid nearly 5.7% instead of 4.5% (figure 1). Such an increase in spread is equivalent to a rating downgrade of 3 notches or more.

Emerging Markets Sell-Off: What’s Next?

Otaviano Canuto's picture

The last weeks of summer have been marked by renewed pressure of capital outflows and exchange rate devaluations in several systemically relevant emerging markets. In fact, this is just the latest round of a global portfolio rebalancing that has been in motion since May 22, when talk of the US Federal Reserve shrinking – and eventually reversing – its asset purchase program (QE -quantitative easing) was made public.

Chart 1 (taken from the Financial Times) uses figures of emerging market mutual funds and exchange-traded funds (ETFs) to illustrate this shift. According to Morgan Stanley analysts, as a result of outflows and central bank interventions on currency markets, reserves in the developing world – excluding China - have shrunk by US$81billion, or roughly 2% of the total, during May, June and July.

Kaushik Basu at an Italian festival of thinkers

Merrell Tuck-Primdahl's picture of the freewheeling talks in Athens’ open spaces by Socrates and Plato, last week’s Festival Economia Trento in Italy explored themes related to ‘Sovereignty in Conflict’, covering the Euro-zone debt crisis, global manufacturing chains, a new and more somber wave of globalization, welfare and social citizenship and a range of other topics.

Fluttering banners with the faces of Michael Spence, James Mirrlees and others lined the cobbled streets and media stages as well as giant video screens populated the piazzas lined by renaissance buildings and historic chapels, with the Italian alps serving as a picturesque backdrop. Performances at the Teatro Sociale in the evening provided extra color. Click here to watch a brief video interview with Kaushik in Trento. 

Financial Globalization in Emerging Countries: Diversification vs. Offshoring

Sergio Schmukler's picture

Starting in the early 1990s many emerging economies have embraced financial sector reforms and liberalization. As a consequence, they have become more financial globalized, triggering an important debate about the pros and cons of this process and its relation to financial crises. Notwithstanding all the attention, there are different dimensions of globalization, which are many times not clearly defined and which might add noise to the discussion.

In a recent World Bank policy research working paper and VoxEU column, we argue that there are at least two interconnected, albeit essentially distinct facets of financial globalization. The first one is financial diversification, that is, the cross-country holdings of foreign assets and liabilities. The second one is financial offshoring, that is, the use of foreign jurisdictions to conduct financial transactions. While the former focuses on who holds the assets, the latter deals with where the assets are transacted.