gE Blog Series: Developing Countries Series Part 5 - Investing in Developing Economies

As growth in emerging economies outpaces debt-burdened developed countries, there are many opportunities for investment. So who is investing in developing countries and why?

Siemens, the German engineering group, is investing about €3bn ($3.7bn) in India, China, Russia and Brazil over the next three years. They are doing this to produce technology especially adapted for a quick roll-out in emerging markets. The investments in India include technology for traffic management, solar-powered X-ray machines, wind- power generators and a "smart" camera. As more and more companies emerge in each prospective domestic market, it becomes important to expand now and not wait around for others to take the share of that market.

By establishing greater production capacity in a large market such as India, Siemens benefits from the low cost of engineering skills and the avoidance of duties and shipping costs incurred by importing machinery. By some estimates, engineering skills are 10 times cheaper in India than they are in Germany. This is just one of many examples of multi-national coorporations now expanding into developing markets. However there are many conditions in developing countries that will deter foreign investment from companies and individual investors. But what can the country do to attract foreign direct investment for the long term growth and future of companies there?

One is to ensure adequate cash flow in the sector. Among the highest priorities identified by investors were adequate tariff levels and high probability of collecting receivables. If the cash is not coming in, a company will not survive. Another important idea is to maintain the stability and enforceability of laws and contracts. They want the rules and regulations to remain credible and enforceable—not altered at the government’s convenience once they have made investment decisions based on those rules. A government’s willingness and ability to honor its commitments are key. Finanlly, governments need to improve their responsiveness to the needs of investors, and meanwhile reduce their interference in investments. Investors like efficiency in the host government, which can reduce processing delays and opportunity costs for investors. Investors pointed to their ability to exercise effective operational and management control of their investments without government interference as a big step for them.

As you can see, investments in foreign countries can be beneficial for both those investing in the foreign companies and for companies looking to expand abroad. The opportunities are there for high growth, so why not jump on board?