Thursday, June 13, 2024

Portfolio investment- alternative to FDI


Foreign investment is essential for almost every developing country because of its ability to generate sufficient domestic savings for investment in development projects. In the 21st century almost every developing country is the recipient of foreign investment in some form or other. Unfortunately, most of the investment in developing countries consists of Foreign Direct Investment (FDI) where foreign entities acquire factories, plantations, mines, etc. where control and final say is exercised by foreigners.
The reasons for opting for FDI are varied and sundry. First and foremost, huge sums are made available to the Third World primarily by Western banks through the FDI route because of the huge capital inventories found in the Western countries. Foreign entities soon acquire valuable real estate and access to native raw materials at throwaway prices as Western currencies are hopelessly overvalued vis a vis Third World currencies creating acute shortages of commodities and real estate in the latter countries.
When we become aware that some American multinational corporations (MNC) have budgets that are larger than the budgets of developing countries, the danger of allowing these corporations to operate within underdeveloped economies become clear. And once the foreign behemoths settle into a developing country, it is impossible to eject them without inviting censure and sanctions from the MNC’s parent country.
Very few countries have benefited from FDI. Where infusion of the latest products and technologies was expected of foreign companies setting up base in a developing country, there has been a vile dumping of obsolete products and outdated technologies that have outrun their utility in their own countries. Moreover, where large scale employment was expected to be generated by the foreign company, only marginal employment opportunities have been created. Indeed when large employment avenues have been created, they have only undermined the morale of the workforce because of long hours of work, low wages and few if any other benefits.
By the time the MNC leaves the host country, it leaves behind a trail of destruction, deprivation and denial only because the foreign entity operates solely on the profit motive and it does not accept any other obligations or duties to the host country. It literally takes decades for native economies to recover from the ravages caused by departing foreign companies.
Foreign corporations that have taken the FDI route in developing countries generally do not pay taxes which is a sore irritant for the host country. In almost every case MNCs have paid taxes to their parent country and not to the country where their operations are located. This little benefit too that has been taken away from native governments that are now wondering about the benefits of FDI so stridently touted by Western economists.
Another contentious issue apart from taxes is non-observance by MNCs of the host country’s laws. Foreign companies have different standards of hygiene, safety and compensation than those that govern domestic companies. As a result, there is always confrontation between the MNC and the host country which never really bothers the former because it is rare for a Third World country to take punitive action given the apathy and inertia that generally afflicts developing countries’ governments. When the MNC faces real trouble, bribes and payoffs are utilized to silence government officials and inspectors.
Finally, foreign corporations do not have any social agenda to implement in the countries they operate in. This means that very few benefits accrue to the poor masses in such countries where initially the MNCs are welcomed with great fanfare and pomp as they are seen as bringers of change and a modicum of prosperity to the poor. If things get worse, the foreign company will organize a sports event or fund a charity which are just tokens of gross irresponsibility.
Yet curiously enough FDI has not been phased out of the Third World because of the ease with which it can be acquired. Initially there is lot of conviviality and bonhomie between foreign investors and host governments that turn sour very soon. Very few developing countries can envisage a situation where they would use punitive or draconian measures to generate domestic savings as China did. In their eyes any kind of investment is better than no investment at all.
As a consequence, many developing countries have built up a large external debt in an attempt to meet claims for hard currencies by foreign entities. The latter will not accept payment in native currencies under any condition.
Lastly, the advent of FDI has meant setting up of colonies and camps to house foreign expatriate personnel who don’t generally mix with the native people. They get private housing quarters guarded by security personnel and constitute a separate community in time hated and resented by almost everyone in the host country. In truth, FDI is the surest path to neo-colonization as happened in South Africa and India with the De Beers and East India Company, respectively.
However foreign portfolio investment offers an attractive alternative to the FDI route. Here risk is shared by all the shareholders and there is no question of benefiting foreigners only as happens with FDI. It is observed that when there is portfolio investment by foreigners, the enterprise becomes smart, more efficient and market savvy. There is usually some infusion of foreign personnel into the enterprise whose strict work ethic percolates down the organizational hierarchy as native staff shape up to meet the high performance standards set by foreigners.
Money begins to be efficiently managed in such enterprises as foreign investors are hard-nosed and thrifty and they do not like wasteful expenditures. There is more frankness and transparency about the organization’s accounts and operations as is there more responsibility and accountability on the part of staff and their bosses. Western standards are high in these areas than those found in domestic enterprises.
Moreover, there is no question tax evasion wherein there is foreign portfolio investment and there is little room for confrontation with the government over these issues. New ideas are generated rapidly in such enterprises because employees are allowed a voice in the running of the organization.
Access to portfolio investment in developing countries sends positive signals to foreigners who no longer view Third World countries as closed to them. Poor countries are now seen as ready to do business with foreign capital. This is especially true of small investors in the West who may wish to invest in foreign portfolios. Foreign portfolio investment may result in new or improved infrastructure set up by the enterprise and there is no question of exploitation of labor or pitting locals against foreigners.
Foreign portfolio investment leads to cohesive and integrated enterprises. There no question of foreigners acquiring a stranglehold over any industry because of regulation by the government. Strict care has to be taken to ensure that no hot money or money of suspicious origin enters the stock market.
When the host government does not have sufficient access to foreign currencies to meet claims by foreign investors, it can postpone payment or arrange payment in domestic currencies thereby opening up a new avenue of trade opportunities. Or it can pledge repayment subject to availability of hard currencies at the time of signing contracts with foreign investors.
Foreign portfolio investment may become a boon for Western investors as opportunities for such investment are rare in their countries. If small investors in the West are encouraged to invest in Third World countries, then everyone would be better off and a lot of goodwill would be generated between the East and West.

Kamal Wadhwa is freelance writer based in Mumbai. He can be contacted at

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