Strategic FDI: How Developing Economies Can Attract Investment That Transforms

Foreign Direct Investment (FDI) remains a cornerstone of development strategies across emerging markets—but quality, not just quantity, determines its impact.

A Strategic Approach to FDI

Foreign Direct Investment is the largest source of external finance for many developing countries, positioning it as a central pillar of economic strategy. However, a singular focus on boosting inflows is insufficient. The impact of FDI varies profoundly depending on its form and the policy environment into which it arrives.

This strategic briefing addresses two core questions for policymakers and business leaders: what type of FDI most effectively drives sustainable development, and what steps must countries take to attract such high‑quality investment?

Evidence points decisively toward Greenfield Vertical FDI as the most powerful catalyst for inclusive, long‑term economic transformation. Achieving this form of investment requires more than short‑term incentives—it demands a holistic, patient, and disciplined approach that prioritises stability, good governance, and institutional strength.

Understanding FDI: Modes and Motives

To craft effective policy, governments must understand FDI not as a monolith but as a spectrum of forms with varying implications for development. Two primary axes define this spectrum: mode of entry and strategic intent.

On one axis lies the method of entry: Greenfield or Brownfield. Greenfield investment involves establishing new operations from the ground up—factories, logistics hubs, or service centres—which directly add to national productive capacity. Greenfield FDI signifies fresh capital formation and often stronger spillovers. Brownfield investment typically entails acquiring or leasing existing assets through cross‑border mergers and acquisitions. While Brownfield FDI may inject capital and know‑how, it often represents a change of ownership rather than a net addition to the economy.

The second axis concerns strategic motivation. Horizontal FDI occurs when a company replicates its domestic production in a foreign country to access local markets. The intent is primarily market‑seeking. Vertical FDI, on the other hand, segments the production chain internationally—often locating resource extraction, intermediate manufacturing, or services in countries where costs or capabilities provide an advantage. These investments are typically efficiency‑seeking and link host countries to global value chains. Global value chain integration is especially powerful when local firms serve as suppliers in these chains.

Why Greenfield Vertical FDI Delivers More

Among these forms, Greenfield Vertical FDI stands out as the most developmentally potent. It brings with it three key advantages: capital formation, job creation, and meaningful integration into the global economy.

By definition, Greenfield investment creates new productive infrastructure. In labour‑intensive sectors, this can produce large‑scale employment, directly within new facilities and indirectly through supply chain multiplier effects. In contrast, Brownfield investment often leaves job numbers unchanged, and at worst, can displace domestic firms and entrepreneurs. For example, evidence from cross‑border acquisitions demonstrates that Brownfield vs Greenfield outcomes differ markedly in job creation and economic spillover.

Vertical FDI also unlocks superior technology transfer. In Horizontal FDI, multinational corporations (MNCs) and local firms are often in direct competition. This can result in the MNC guarding proprietary processes, limiting spillover. In Vertical FDI, however, local firms frequently become suppliers to the MNC. The success of the global enterprise depends on the efficiency and quality of its partners—creating a commercial incentive to invest in training, technology sharing, and productivity enhancements. These “backward linkages” are the beating heart of global value chains. Technology spillover studies consistently highlight this benefit.

The Caveats: Sector‑Specific Risks

While Greenfield Vertical FDI is broadly beneficial, sectors such as extractives and agriculture present notable challenges.

Resource‑based investment, especially in mining, can deliver substantial revenues but carries high governance risk. In countries without robust institutions, such projects can exacerbate corruption, create enclave economies with minimal domestic linkages, and inflict lasting environmental harm. For instance, the phenomenon often termed the “resource curse” becomes acute without strong regulation and oversight. FDI in extractives requires a high degree of policy maturity. Similarly, large‑scale agricultural investment must be managed with care. Without clear land rights and community safeguards, FDI in agriculture can displace local populations and inflame social tensions. Yet, with proper frameworks, this investment can modernise food systems, improve food security, and create rural employment.

A Hierarchy of Policy Needs

To attract high‑quality FDI, policymakers must think in layers. Incentives alone cannot compensate for weak fundamentals. A four‑level framework offers a practical roadmap:

Level 1: Macroeconomic and Political Stability Stability is the bedrock. FDI is capital‑intensive and long‑term, making investors highly sensitive to risks such as political upheaval, regulatory unpredictability, or macroeconomic volatility. Without a stable environment, even the most generous incentives will fail to persuade cautious capital.

Level 2: Institutional Quality and Governance Once stability is secured, the next priority is institutional credibility. Rule of law, contract enforcement, protection of property rights, and anti‑corruption mechanisms are indispensable. Transparent institutions not only reduce transaction costs but are especially critical in resource‑rich countries seeking to avoid exploitative deals. Macroeconomic stability and governance are consistently ranked among top investor concerns.

Level 3: Infrastructure and Human Capital With solid foundations in place, countries must build the enablers of competitiveness. This includes physical infrastructure—ports, roads, energy grids—and digital infrastructure such as broadband connectivity and data systems. The real value of these assets can be multiplied by policy. For instance, a railway developed for a mining project can also serve farmers and passengers if governments mandate shared access, turning private assets into public goods. A skilled, educated workforce is equally important. Trade openness and smart regulatory frameworks further enhance competitiveness.

Level 4: Proactive Investment Promotion Only when these foundational layers are established can a country effectively deploy proactive policies. Effective Investment Promotion Agencies (IPAs) can market the country’s advantages and help investors navigate bureaucracy. Well‑designed Special Economic Zones (SEZs) can create pockets of excellence with superior infrastructure and regulatory efficiency, acting as a magnet for export‑oriented FDI. SEZs in Vietnam are often cited as exemplary models. Finally, targeted incentives and international investment agreements can help secure marquee investments.

From Passive Recipient to Strategic Partner

Attracting FDI is not just about opening doors; it’s about building the kind of economy that global investors want to enter—and stay in.

The evidence is clear: Greenfield Vertical FDI offers the strongest returns in terms of job creation, industrial upgrading, and long‑term productivity. To attract this form of investment, countries must move beyond ad hoc approaches and embrace a strategic model rooted in good governance, institutional strength, and long‑term planning.

FDI is not a lottery—it is a courtship. Countries that take control of the narrative, improve the investment climate, and align incentives with national goals can transform themselves from passive recipients into active partners in global value creation. By doing so, they lay the groundwork not just for growth, but for shared prosperity, resilience, and global relevance.