Foreign vs Domestic Investors

Foreign Direct Investment [See Why is FDI Important here] is good when the money comes into the host country. However, foreign investors tend to be focused on short term returns. Temporary changes in the local geo-political or political landscape, or direction indicators from central banks in wealthy countries tends to have an exaggerated panic-stricken, paranoid influence on such investors. When FDI investors run for the exits in such circumstances, the consequences for the host country can be quite disastrous. Stock markets panic and make the overall investment climate appear to become undesirable rapidly and irrationally.

Hence, Domestic Investment is a far better option for emerging economies. When a country enters a cycle of sustained growth due to trends such as a positive demographic dividend, then certain segments of the country’s population invariably have high disposable incomes. Such segments of the population have to be educated and motivated to invest in productive investments rather than investing in assets or spending on consumer goods. See Prof Richard Werner’s presentation below where he makes his case for the benefits of investment credits for creation of goods and services in order to achieve sustainable growth. It is quite silly for investors in emerging economies, particularly folks with high disposable incomes, to invest in assets (real estate) or in high end consumer goods (imported cars, etc) when the critical, pivotal need is domestic investment in goods/services creation. And when such investment is essential for sustainable long term growth.

The question of who captures most of the profits from the creation of new value is also very important. It is safe to assume that most of the financial returns derived from new goods/service offerings is captured by the investors. So, in a high growth emerging economy it would be preferable for domestic investors to derive most of these benefits as opposed to foreign investors. Indeed, all businesses including foreigner funded ones do create jobs and this results in multiplier effects in the local economy. However, as mentioned earlier, the finicky behaviour of foreign investors exposes the host country’s economy to far greater risks than any possible rewards.