The Development Impact of Foreign Direct Investment
August 25, 2017
If there is no intention of having an effective voice in the management of the enterprise, then instead of FDI, this would typically be considered foreign portfolio investment. Where the measurement discussion comes into play, is how to quantify an effective voice. The Organization for Economic Co-operation and Development (OECD) published a report in 1996,  which specifies that FDI requires ownership of 10 per cent or more of the ordinary shares or voting power, with some caveats included.
Institutions such as the World Bank and the International Monetary Fund (IMF) measure and report FDI values for the majority of countries in the world.  In developed countries, the discussion surrounding FDI tends to focus on inflows, as opposed to the net value or outflows. Articles published by sources such as The Economist attempt to find reasons for contractions in FDI inflows, considering changes over the years as well as comparisons across countries.  The United States had the highest estimated FDI inflows in 2016 by a significant amount, followed by the United Kingdom, Hong Kong, and China.  When ranking countries based on outbound FDI, the United States is also at the top of the list. 
FDI outflow has been at the center of policy debates in the United States from as far back as the Kennedy administration.  The major concerns that are raised when discussing outbound FDI are the negative impacts that it could cause in the home country, on issues such as income, employment, and balance of payments. However, the benefits of outbound FDI are also significant. Specifically, FDI into developing countries has a substantial development impact, and is an effective strategy to promote economic growth, to reduce poverty, and to improve the overall quality of people’s lives. 
While the United States had the largest value for FDI outflow in 2016, only a fraction of that investment went to emerging markets. In fact, 74% of the United States outbound FDI was directed towards high income, developed countries, and this percentage has only been rising over the past several years.  Part of this trend can be attributed to a shift in the US economy and investments towards high technology services and financial industries, but the inherent political risk of investing in a developing country is also a factor. 
Political risk insurance, available through private and public insurers, is one way for countries to overcome political risk, and make investments in emerging markets. When the political environment becomes too turbulent for private risk insurers, public agencies such as the Multilateral Investment Guarantee Agency (MIGA) and the Overseas Private Investment Corporation (OPIC) play a strategic role in allowing the investment to continue. As part of the World Bank Group, MIGA has a unique structure. In addition, with shareholders in most countries of the world, MIGA is at times more suited than private sector insurers, specifically when providing insurance for longer tenures and in riskier environments. The risks that MIGA can insure against are currency inconvertibility and transfer restriction; expropriation; war, terrorism, and civil disturbance; breach of contract; and non-honoring of sovereign financial obligations.  OPIC, a United States Government agency, has the more specific goal of aiding American investment in developing economies. Access to insurance from these public insurers allows private investors to begin, complete, or maintain projects, which in many cases may not have otherwise occurred.
MIGA supports outward investments from any member country, including the United States. A relevant example is the Apache Corp. oil and gas project in Egypt, which MIGA supported in 2013.  OPIC had insured the Apache Corp., an American company, for many years, before having difficulties renewing reinsurance contracts due to the Arab Spring. OPIC then had to approach several reinsurers, one of which was MIGA, in order to regain the total level of insurance that was in place in the previous years. Specifically, MIGA took on $150 million of Apache’s policy with OPIC, and insured against the possibility of the Egyptian government cancelling its concession or breaching the contract. 
The development impact of insuring projects in emerging markets is substantial. In the above Apache Corp. situation, while the company was already established in Egypt, it had indicated that it planned on continuing and expanding its projects in Egypt. By providing insurance during a challenging political period, MIGA and OPIC demonstrated their support of private investment during uncertain times.  Further developmental impacts of this project included: employment and training of Egyptian nationals; advancing the oil and gas technology within Egypt; and supporting domestic supply of oil and gas. In order to provide insurance, MIGA also has social and environmental performance standards that all projects must adhere to; a set of requirements designed to help projects achieve specified social and environmental outcomes.
Foreign Direct Investment in emerging companies, as well as the political risk insurance that enables it, is an important part of supporting emerging economies. MIGA’s plan for the future is to continue to grow and to insure more projects, facilitating investment from countries, including the United States, into emerging markets.
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