By investing in technology or education individuals and entire nations can reap long-term rewards. Spending money in the short-term will improve efficiency, increase output and stimulate growth for years to come.
Businesses and even the general public in developed nations find it quite easy to find funds which they can use for investments. A standard bank loan or mortgage allows borrowers to obtain finance to invest in property or machinery.
In developing nations it can be much more difficult to find credit as there may be an underdeveloped financial sector or poorly defined property rights so borrowers have nothing to use as collateral. Another problem may be that people do not save much of their wealth in financial institutions meaning that banks do not have enough deposits to make even prudent loans, which will in turn drive up the interest rate making borrowing more expensive.
The availability of finance can be improved by implementing banking reforms and recognising paralegal property rights so that people can use their assets as security for a loan. Microfinance schemes, which deal with customers who save or borrow small amounts, have the potential to increase access to financial services for all members of society.
Also of importance is finding some way, probably through tax reform, to encourage the public to save a higher proportion of their income. This means that higher levels of savings are held in financial institutions and are available for lending to others, lowering the interest rate charged to borrowers.
Although the majority of capital available will generally be domestic, there are also notable sums available through Foreign Direct Investment (FDI) which involves firms from other countries investing in a host nation. FDI can potentially bring colossal amounts of investment very quickly, and is also likely to be accompanied by improved business methods and technologies. However foreign capital does tend to be more erratic than the domestic equivalent, and can cause serious problems if it is suddenly withdrawn.
East Asia exemplifies both the benefits of a high domestic savings rate, and the dangers of unrestricted international capital flows. Until the 1990s most East Asian countries depended on a high savings rate to finance a huge investment in capital which led to increased output and encouraged decades of strong economic growth.
However during the 1990s it started to attract substantial amounts of foreign capital, which was quickly withdrawn at the first sign of economic trouble, causing widespread financial panic. These capital outflows were allowed to take place because the poorly regulated financial markets in that region imposed few restrictions on the movement of capital.
From these experiences the international community should learn that while they should try to attract FDI to bring investment, jobs and growth, there also needs to be some regulation and restriction of capital outflows so that another financial panic can be avoided.
Those firms which do invest in developing nations should be encouraged to treat their workers fairly, and preferably sign up to the UN Global Compact which has agreed some ethical principles for multinational companies. However a balance must again be found as unnecessary regulation will only discourage investment and will harm the country that imposed the conditions.
Multinational corporations, contrary to the opinion of some people, are not evil incarnate, they just want to keep their costs low. The aim is to appeal to mutual self-interest so that corporations have good reason to invest in developing nations, while developing nations have good reason to attract them.