South-Based Companies Play Increasing Role in Developing Country Growth, but Wary of Risks
WASHINGTON, DC, February 20, 2008—Foreign direct investment (FDI) originating in developing countries and destined for other developing countries is on the rise, but the growing development potential of this so-called “South-South” investment is inhibited by political risks, according to a new report by the Multilateral Investment Guarantee Agency (MIGA).
Political risks are cited by South-based investors as a principal constraint to doing business in emerging markets. The MIGA review—“South-South FDI and Political Risk Insurance: Challenges and Opportunities”—looks at perceptions of political risk by companies based in emerging markets that are seeking to invest abroad, as well as challenges in mitigating those risks.
The report is based on client and insurer surveys, regional case studies conducted and commissioned by MIGA, and existing research. It is designed to provide emerging market investors with important information needed to make decisions about investing in other developing countries. “This report aims to fill a research gap by pulling together different pieces of the puzzle and then drawing a more complete picture of the situation,” said Stephan Dreyhaupt, manager of MIGA’s Online Investor Information Services.
The review is available on MIGA’s political risk insurance portal, www.pri-center.com.
South-South FDI is on the rise, but a cautious mood prevails
Over the past few years, the growth rate of outward FDI from emerging markets has outpaced the growth from industrialized countries. South-South FDI growth has been especially fast—a trend that is expected to continue, according to the MIGA survey. Nearly 90 percent of South-based companies surveyed said they expected their overseas investments to increase over the next five years. More than four-fifths planned to invest in emerging markets over the next year.
At the same time, the investors surveyed said the world is becoming a riskier place for business. Emerging markets are perceived to be riskier than industrialized countries, and the risk is expected to increase in the next five years.
Investors take increasing precautions against political risks
Although South-based companies appear to have a higher tolerance for risk compared with their North-based counterparts, they are increasingly conscious of the need to protect their investments as they go into unfamiliar markets. For instance, MENA-based investors, evolving from small, family-owned businesses to sizeable international firms, are becoming more conscious of the need for risk management, according to the Islamic Corporation for Insurance of Investments and Export Credit, which contributed to the MIGA report.
Some 80 percent of political risk insurance (PRI) providers surveyed by MIGA said they expected demand for PRI by South-based investors to go up in the next five years. South-based PRI providers appear to be responding to this demand in different ways, although some are facing capacity constraints.
“We stand ready to meet the needs of this growing market,” says Yukiko Omura, executive vice president of MIGA. “MIGA complements the work of public PRI providers, providing technical assistance and jointly underwriting projects—thus encouraging them to venture into markets where they may not otherwise feel comfortable and leveraging their underwriting capacity.”
As a small agency, MIGA also has the flexibility to tailor its guarantee products to meet the emerging needs of South-South investors, as seen by the agency’s recent $427 million guarantee for Shariah-compliant project financing for a project in Djibouti.