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Foreign investment can be a significant driver of development in poor countries. Many of East Asia’s fastest-growing countries—Malaysia, Singapore, and Thailand—benefited from investment from abroad. However, foreign investment can also breed instability, corruption, and exploitation.

The CDI strives to reward rich countries that pursue investment promotion policies that are good for development. It looks at two kinds of capital flows: 1) foreign direct investment, which occurs when a company from one country buys a stake in an existing company or builds a factory in another country; and 2) portfolio investment, which occurs when foreigners buy securities that are traded on open exchanges. The investment component is built on a checklist. Do the rich-country governments, for example, offer political risk insurance, encouraging companies to invest in poor countries whose political climate would otherwise be deemed too insecure? Do they have tax provisions or treaties to prevent overseas investors from being taxed both at home and in the investment country?

Ireland places at the bottom of the investment component. It is one of only three CDI-ranked countries without a national agency to offer political risk insurance and also lacks policies to fully prevent double taxation of corporate profits earned abroad. Ireland is joined at the bottom of the rankings by Greece, which restricts pension fund investments in developing countries, and Austria, which offers little remedy for double taxation. Top-ranked United Kingdom, Norway, and Germany do better on each of these dimensions and have also participated aggressively in international arrangements to control corruption, such as the Kimberley Process to track and eliminate trade in “blood diamonds” that have financed warlords in countries including Angola and Sierra Leone.

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