4
$\begingroup$

Why don't all investors focus their intentions on development projects in less developed countries? Wouldn't this benefit all parties since the recipient country would be more developed and the investor would make a profit? In other words can it be said that development projects are the type of investments where no one is placed at a disadvantage and everybody prospers? ( p.s. please don't criticize if you find this is a stupid question or I sound redundant, I'm a 17 year old economics student excited to learn as much as I can)

$\endgroup$
  • $\begingroup$ Since you're new to economics, one thing to keep in mind as a rule of thumb is that there are always winners and losers. One subject that might be interesting for you is the so-called "resource curse". There's a lot of good literature on it, especially re: the coal boom-bust period in the USA. $\endgroup$ – heh Oct 10 at 21:07
6
$\begingroup$

A lot of this comes down to risk. A developing country usually don't have very strong "institution" and are much more prone to various kinds of crisis (think military coup, hyperinflation, terrorist attack, nationalization*). An investor might also not be as familiar with the developing country in question* (and hence the risk).

As a result, investors require higher return (the "premium") to invest in these countries. You can see the risk premium by country here.

This is why developing credibility could be very helpful in terms of drawing foreign investment into a country.

* Added from comments below.

$\endgroup$
  • 1
    $\begingroup$ I would also add familiarity with the country: for example, you're less likely to know about real estate in a foreign country. $\endgroup$ – Kent Shikama Oct 7 at 14:51
  • 1
    $\begingroup$ You might also mention the ability to prove and maintain property rights is a problem. Even if ownership can be proven there is still the trouble to keep the property. Sometimes nationalizations happen. An example... reuters.com/article/us-venezuela-crystallex-idUSKCN1B527D $\endgroup$ – H2ONaCl Oct 8 at 22:36

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.