Essays on foreign investment in developing and emerging economies

peer-reviewedThis thesis consists of four individual essays which are framed by an introductory and a concluding chapter. While independent from each other, the essays all focus on the topic of foreign investment in developing and emerging economies. The first essay applies an innovative quantitative finance technique to measure investor perceptions of nationalisation risk in an emerging economy. Investment promotion agencies (IPAs) from developing and emerging economies conduct a range of promotional activities with the aim of attracting foreign direct investment (FDI) and their choice of activity is often based on investor perceptions of their location. However, to assess investor perceptions, they often use qualitative methods that provide only a measurement of risk perceptions at a point-in-time and are limited as to the information they provide about specific companies’ concerns about risk. The novel approach used in this essay provides IPAs with a method to speedily determine the risk perceptions of target companies and conduct the most appropriate promotional activities. The effect of bilateral investment treaties (BITs) on the vertical and horizontal FDI activities of multinational enterprises (MNEs) in developing and emerging countries is investigated in the second essay. BITs are legal instruments used to provide investor protections and, by extension, promote higher levels of inward FDI. While the impact of these treaties on FDI has been studied extensively, little is known about their effects on different forms of investment. BITs are shown to be more positively associated with vertical than horizontal FDI and they also tend to act as stronger substitutes for better institutional conditions in the case of vertical investments. The third essay examines the relationship between FDI from developing and emerging (Southern) countries and economic growth in recipient Southern economies. Theoretical and empirical evidence shows that Southern FDI has a lower technological content than FDI from developed (Northern) countries and, thus, may generate growth differently than Northern FDI. In this essay, Southern FDI is found to contribute to growth in economies with strong law and order, whereas Northern FDI is shown to raise growth in countries with highly skilled labour and strong property rights protection. In the final essay, the extent of foreign exchange risk associated with equity portfolio investments in emerging countries is examined. While foreign exchange risk is a prominent feature of emerging market investments, there has been no empirical work examining the extent of this risk in an equity portfolio context. Indeed, an important consideration from a portfolio perspective is that the correlation between a portfolio's equity and foreign exchange components can play a role in reducing foreign exchange exposure. Using a Value-at-Risk (VaR) technique that captures this correlation, it is shown that significant variation exists in equity portfolio foreign exchange risk across emerging markets. These essays address a number of important gaps in the existing literature on foreign investment in developing and emerging countries. Specific practical and policy implications can be drawn from the essays which, taken together, support a more positive economic effect from foreign investment in the world’s less-advanced economies