A Comparison Model of Investment in Developing Countries

The goal of this research is to test a new investment model in developing countries. Many articles challenge the logic of investments by the World Bank or The International Monetary Fund in developing countries. For the most part, the basis for investments in poor economies has been linked to the "factors of production" model. However, there has been a hypothesis put forth by Hidalgo, et. al., of a model that approaches the economic analysis from a new perspective. The research offers the idea of examining the notion of "closeness" between products by investigating large global export data on categories of goods. It suggests that, for each pair of export groups, there exists an optimal matching of export products such that if a region is good at exporting product "A," it will also be good at exporting product "B," but not "C." In reality, product C may be too far of a reach for the country to "leap" in production. Technologies and infrastructure needs may be lacking without careful planning and strategic planning. However, this difference may not be obvious to donor agencies or country governments without the use of such a model.This paper first gives background into the Hidalgo, et. al., model. It then lists problems with the model to demonstrate that the model needs to be refined to be of full use to policy makers and donors. The third, and as yet incomplete, part of the current paper is to develop a process whereby the record of investment in products can be compared using the suggested model of pairing. Two countries, Ghana and Viet Nam, have been chosen for initial study to determine their levels of development along the lines of the model, and to compare that development with what has been encouraged by donor agencies over time. If the probability is high between two products, those products have a "short" variance between them. If the probability is low; the products are not well paired. This research aims to set up a method to test existing country exports against newer investment according to the hypothesis and see if the probabilities are high or low. In effect, the aim is to post facto see if it were a so called "good idea" to invest in product B.This paper was presented at the 18th International Conference of the International Trade and Finance Association meeting at Universidade Nova de Lisboa, May 22, 2008, in Lisbon Portugal.