Foreign direct investment in emerging markets linked to peace
FDI could benefit both investors and the prospects of peacefulness, according to new research about the links between business and peace.
Economies that often fly under the radar can be the most lucrative from a business perspective.
Emerging or frontier markets generally have lower levels of peace and economic achievement and in turn receive less global attention from investors.
Returns on investments are up to eight per cent higher in countries with lower levels of peace than higher levels of peace, according to the World Bank.
With the exception of resource-rich countries, foreign direct investment (FDI) in emerging markets is scarce, evidenced by FDI flows being more than two times higher in countries with higher levels of peace.
Since 1980, FDI contributed the equivalent of only 0.84 per cent of the gross domestic product of the lowest peace countries, compared to two per cent in the most peaceful.
FDI to emerging markets fell to its lowest rate in 20 years in the final quarter of 2018, according to the Institute for International Finance.
What can foreign direct investment offer emerging markets?
Historically, low peace countries do not attract enough FDI. In some cases, this reflects the lack of information about structural improvements taking place in their socio-economic systems.
Foreign direct investment is an important factor of development in emerging markets and can assist in development after institutional, infrastructural, and economic devastation that many low peace countries experience during and after conflict.
High unemployment presents a risk of contributing to a vicious cycle if the social and economic environment fails to absorb the potential of the working-age population, and instead channels them towards destructive practices or radicalisation.
However, economic performance and peacefulness are often mutually reinforcing. FDI can create local jobs that could allow a large cohort of people to contribute meaningfully to a peaceful, prosperous society. In turn, the business environment is stimulated, which can have flow on effects to employment and standards of living.
The procurement of new skills, introduction to new technologies and exposure to managerial expertise can elevate and empower the local workforce for long-term economic success.
Capital injection, a widening tax base, and integration with the global economy also drives the emerging market towards independence and investment-ambitious economic activity.
Of the eight countries that improved from the ‘low’ to ‘mid’ peace groups between 2008 and 2006, five are emerging markets. Compared to other countries with low levels of peace, they had greater economic freedom, better relations with neighbours, less hostility to foreigners, and performed better in youth development – all factors that attract, and can be products of, FDI.
FDI can bring meaningful economic development to a peacebuilding process, while simultaneously being a sound instalment in the broader strategy of a foreign investor.
Read the Business and Peace Report here.