No part of the world has changed as rapidly over the past 40 to 50 years as Asia, particularly East Asia and Southeast Asia.
For most of the countries in that part of the world, such as South Korea, Taiwan, Thailand, the Philippines, Malaysia, and Indonesia, the change occurred in the decades before the mid-1990s, and it was mainly driven by foreign investment.
In the decades before the early 1990s, these countries transformed from traditional, agriculture-based societies into rather modern societies with a strong export-oriented manufacturing sector. Foreign investment was an important contribution.
However, these countries haven’t changed as drastically in the decades after the mid-1990s because China has been soaking up most Asia-directed foreign investment. Furthermore, many of the benefits of foreign investment were reversed during the 1997 Asian financial crisis.
Foreign investment can come in many different forms.
The simplest, and most dangerous, form is dollar-denominated loans extended to local governments, local banks, and local companies.
Local banks would, for example, receive loans at an interest rate of 5 percent, and lend it to local borrowers in local currency at an interest rate of 15 or 20 percent. As long as a country’s currency depreciated at less than 10 percent per year against the dollar, the banks would operate at a profit.
The fact that this kind of foreign investment was just a dollar-denominated loan was often hidden behind a contractual facade. For example, the loan could have been disguised as an equity investment in a non-bank business. Instead, it was used to play the financial market, with the aim of profiting from lending rate discrepancies or similar financial benchmark figures.
Economies based on that kind of foreign investment regularly melt down, as happened during the Asian financial crisis. Such meltdowns have happened in all parts of the world, before and after the Asian financial crisis, most frequently in Latin America.
Foreign investment that comes in the form of financing packages that must somehow be repaid is dangerous territory.
Foreign portfolio investment, where foreigners buy stocks on a local exchange, isn’t much better.
Both financing packages and portfolio investments are linked to the exchange rate of local currencies, and if they are not carefully managed, their overall impact on the wealth of a country can easily be negative. This means that this kind of foreign investment can easily leave a country poorer than it was before the “investment.”
From the perspective of developing countries, the purpose of foreign investment is to bring foreign money into the country to spur economic development. But that effect can only be achieved if the foreign money is, over the long term, converted into tangible assets.
This occurs, for example, when a foreign company builds and operates a toll road in a developing country. It does not occur if a foreign company gives a dollar loan to a local entity so that the local entity can contract the foreign company to build the toll road for them, nor does it occur if a local entity gets that loan (repayable in dollars) to purchase the necessary equipment from the overseas company.
If a foreign investor is actually converting their own money into assets in the country where they invest, it is referred to as foreign direct investment. However, on the scale of toll roads or other large infrastructure projects, there is far less foreign direct investment than the business sections of newspapers make people believe.
Foreign direct investment into production facilities does occur, for example, when Nike sets up a shoe manufacturing plant in Indonesia, or when Isuzu moves its pickup truck production to Thailand, in both cases because of lower wages.
Such foreign investment is generally considered beneficial to countries that receive it because it generates jobs.
On the other hand, one should be careful not to overestimate the positive effect of such foreign investment, for all the profits are typically repatriated, and the actual asset transferred to a developing country isn’t much to brag about. Production facilities typically become obsolete within 5 to 10 years, and then their worth is barely above scrap value.
Another kind of foreign investment isn’t much better. That is when Western “services” companies like Walmart and Carrefour, or franchisors such as McDonald's and KFC, or banks like HSBC or Citibank move in. They simply displace local businesses and lead to job losses because they generate a higher turnover with fewer staff and at lower costs, and they also repatriate the profits.
And then there are foreign investors who buy into local companies, such as when a big US tobacco company buys a well-established local company, primarily to gain a distribution foothold. Local sellers who receive the money from overseas buyers usually have nothing better to do with the cash than to bring it to a developed Western country in order to receive a residence permit there, and subsequent citizenship. Such schemes are foreign investment indeed, but not in the developing country where the company is purchased.
They generate net capital outflow, not capital inflow.
One can look at it from any angle: the best foreign investment a country can possibly get comes from foreigners who personally want to relocate to a developing country and bring capital with them, in the range of $100,000 to $1,000,000. This is normally capital that really stays in the country into which it is brought.
The figures don’t sound as impressive as the $100 million amounts from financial market machinations or foreign portfolio investments, but the money brought along by relocating foreigners is at least genuine, not just a number in the clouds that will never rain down.
Precisely this kind of foreign investment is highly sought after by many countries around the world. Developing countries? Ha! No, it’s the most developed countries that seek that kind of foreign investment. And they know why.
Just check the “investment immigration” pages of the US, Germany, Canada, the UK, France, or any other wealthy country. Anybody who brings a good amount of money (typically around $1 million) into the country and invests it in a new business (not the stock market) receives a fast-track residence permit.
One can look at it from any angle. The secret of genuine foreign investment in any country of the world is attracting wealthy foreigners to live in the country that wants to attract foreign investment. Everything else is either not genuine or outright trickery.
Countries that want to attract foreign investment should concentrate on making their countries as attractive as possible for wealthy foreigners to live in.
Countries that want to attract money from outside could make foreigners feel comfortable by providing good security and permitting a fair amount of personal freedom not available anywhere else (for example, permitting personal drug use). They shouldn’t obstruct intimate relationships with locals. Actually, intimate relationships between wealthy foreigners and locals are a country’s best option to bind foreigners and their investments to the country.
Countries can grant citizenship to foreigners who pay for it (by investing $100,000 or more), and investments in higher amounts will likely follow naturally.