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investing
If developing countries are growing
faster than developed countries,
why wouldn't you invest most of
your money there?
Yair Livne, Econ PhD from Stanford GSB
Investing in developing countries carries some specific risks
that may deter the average investor from allocating the majority
of their portfolio to investments in those countries.
These risks translate into lower risk-adjusted RoI than what
the country's growth rate might suggest, which explain why
these kind of assets do not make up majority of most recommended
portfolios. This is a partial list:
Regulatory risk - in many developing countries investment
carries risks relating to government and the rule of law.
This can take many forms:
• Nationalizing foreign investment: countries like Venezuela
have nationalized foreign investments in their countries,
or severely tax those. This can virtually wipe out an
investment overnight.
• Arbitrary or unexpected taxation: for example, the Indian
government just last week proposed a retroactive tax
on foreign takeovers of Indian assets, mainly targeting
Vodafone which has been in dispute with the government.
This specific move may not be directly related to personal
investment in developing markets, but is a good example
of how unpredictable the tax environment can be in such
markets.
• Corruption: governments and related bureaucracies may
be very corrupt, requiring bribes to allow business to operate
smoothly. This will take a toll on the investment, just
like a tax.
• Weak or biased legal system: say the target of your investment
cheats you as an investor or you end up involved in
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