Foreign direct investment can be a source of financial intermediation between global capital markets and smaller, less liquid investment opportunities in emerging markets and less-developed countries (LDCs).
Foreign companies (including banks) that make direct investments in emerging markets are often multinational entities with access to deep global capital markets. They can raise capital through equity and bonds and use these funds to make direct investments in other countries through FDI. By extension, FDI can provide a source of finance for some of the most difficult sustainable development issues in emerging and frontier markets,where the interplay of basic economic-development needs and the lack of basic social infrastructure deters other types of foreign capital investment.
Companies should include the impact of FDI in their SDG impact thesis to provide a signal and ultimately attract sustainable investors to finance and monitor these investments. Companies that make positive contributions through FDI can also benefit from co-investments or other financial benefits from development finance institutions.
Maximizing the impact of FDI
FDI is generally regarded as having great potential to promote economic development by strengthening productivity, promoting growth, and helping to diversify the economy. In the context of emerging and frontier markets and the SDGs, FDI can provide a range of macro- and micro-economic benefits. FDI does not, however, automatically contribute to sustainable development. As with any investment, it must be made with consideration of its economic, social, and environmental impacts—especially at the local level.
Please refer to the UN Global Compact: Scaling Finance for the Sustainable Development Goals, Part 1: Foreign Direct Investment, pages 9‒20, for some examples:
- inherent benefits
- local markets
- country alignment
- priority sectors
Leveraging Corporate Intermediation for Impact
The corporate-intermediation process of FDI is an opportunity to maximize the impact of downstream investments by integrating considerations of SDG impact into the strategy and governance mechanisms of the parent company and its subsidiary.
Please refer to the UN Global Compact: Scaling Finance for the Sustainable Development Goals, Part 1: Foreign Direct Investment, pages 9‒20, for some examples:
- investment criteria
- corporate governance
- capital market transactions
