Putting it to Work in Developing Countries - Nathan Associates

2. THE CASE FOR FDI
International business has consistently and dramatically
expanded FDI activity because it
makes business sense to do so. The governments
of many developing countries once regarded foreign
direct investment with suspicion, fearing
economic domination by multinational enterprises.
This is no longer the case. Now investment
promotion agencies in developing countries
pursue FDI aggressively. This reversal of
attitude is the result of the undeniable benefits
of FDI—regarded as integral to the development
success of countries as diverse as Ireland,
Costa Rica, and Mauritius.
THE BUSINESS CASE
Foreign direct investment is a business transaction.
Any understanding of how FDI works and
how it benefits host countries must begin with
an understanding of what foreign direct
investors are seeking when they invest—natural
resources, markets, production efficiency, or
strategic assets. 1
NATURAL RESOURCE-SEEKING FDI
Access to natural resources has motivated foreign
direct investment since before the 19th century.
Focused largely on the extractive industries of
oil- or mineral-rich developing countries, this
investment has also encompassed forest
resources, plantation agricultural production,
and large-scale fisheries—all of which capitalize
on natural endowments of geography, climate,
geology, and water. Much FDI-financed
exploitation of natural resources has taken the
form of extraction and export of primary commodities
in bulk form. In some cases, FDI has
led to the establishment of facilities for not only
producing, but also processing, packaging, and
transporting extractive resources and primary
agricultural products. FDI’s role in developing
Chile’s salmon industry is one example, though
in the food industry in general, large developedcountry
retailers often organize international
value chains through nonequity contracting
arrangements rather than by FDI. 2 For largescale
oil and mineral extractive activities, the
developed world generates most resource-seeking
FDI, but developing country multinationals are
increasingly engaged—witness China National
Petroleum Corporation’s $4 billion deal to
acquire PetroKazakhstan, or AngloGold Ltd of
South Africa’s $1.5 billion purchase of Ghana’s
Ashanti Goldfields. Indeed, China’s rapid economic
growth has induced it in recent years to
become a significant investor in many natural
resources.
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