Investment Details

Foreign investment can be a significant driver of development in poor countries. Many of East Asia’s fastest-growing countries—South Korea, Malaysia, Singapore, and Thailand—benefited from investment from abroad. However, foreign investment can also breed instability (witness the 1997 Asian financial crisis) as well as corruption and exploitation, a prime example being the pollution and unrest in Nigeria’s oil-producing regions.

The Index looks at what rich countries are doing to promote investment that is actually 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 component is built on a checklist of policies that matter. Do the rich-country governments offer political risk insurance, encouraging companies to invest in poor countries whose political climate would otherwise be deemed too insecure? If so, do they filter out projects likely to do egregious environmental harm or exploit workers? Do they have tax provisions or treaties to prevent overseas investors from being taxed both at home and in the investment country?

The lowest scorers are Ireland and New Zealand, which do not provide political risk insurance and do little to prevent double taxation, and Austria, which restricts pension fund investments in developing countries. Top-ranked Britain does better on all these counts and has participated aggressively in international arrangements to control corruption, such as the Kimberley Process to track and eliminate trade in “blood diamonds” used to finance warlords in countries such as Angola and Sierra Leone.

For more, go Inside the Index.