Frontier markets

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Josh Tetrick

Frontier markets are impacted by a severe lack of liquidity, volatility and political instability, abject poverty, hyperinflations, crime, poor regulation, and endemic corruption. Frontier markets include the least-developed economies, such as Kenya, Nigeria, Liberia, Bangladesh, and Kazakhstan. This set of characteristics creates both subjective negative perceptions and objective financial risks.

Instead of the world’s poorest countries receiving the bulk of FDI, it is in fact the middle-income countries that attract the most FDI. For example, Brazil had FDI totaling more than $18 billion in 2004 – a number almost double that of the entire continent of Africa. A basic foundation – political stability, guarantees against expropriation, reasonably stable currency – must be in place before the vast majority of foreign investors will consider investing in developing countries (extractive sectors are the exception).

Though foreign investors do pour capital into some conflict zones – notably, in the diamond and oil industries – there is obviously a preference for stability. Investors look to reliable power, electricity, access to clean water, health care facilities, roads, communications, and access to airports. Potential foreign investors will also look to ease of entry through ports and clear and stable tax laws.