Uneven investment flows threaten sustainable growth in emerging economies

Foreign direct investment (FDI) is often hailed as a driver of economic transformation, particularly in developing and post-conflict economies where external capital plays a critical role in recovery and modernization. Yet when inflows are unevenly distributed, the benefits of globalization can deepen regional divides instead of bridging them.

A new study published in Sustainability highlights this challenge in the Kurdistan Region of Iraq. The research "Regional Concentration of FDI and Sustainable Economic Development" reveals that nearly 93 percent of foreign investment has flowed into Erbil over the past decade and a half, leaving other governorates with just 7 percent. This imbalance, the authors warn, poses a serious risk to inclusive and sustainable development in the region.

Why is FDI concentrated in Erbil?

The study reveals that Erbil has captured about 93 percent of all FDI inflows into the Kurdistan Region, leaving only 7 percent distributed among the other governorates. This stark imbalance is explained by a combination of infrastructure advantages, higher market potential, and stronger international connectivity.

Using econometric modeling with Poisson and negative binomial estimators, the authors find that regions with better transportation infrastructure, higher mobile network penetration, and access to airports consistently attract more foreign firms. Proximity to international borders also plays a significant role, boosting investment in governorates located near trade routes and border crossings.

However, these advantages have reinforced a core-periphery dynamic in which one city dominates investment inflows while other areas lag behind. This concentration not only distorts the regional economic structure but also undermines the prospects for long-term sustainable development.

What drives the location of foreign investors?

The research highlights that both structural fundamentals and firm-specific characteristics influence where foreign investors establish operations. Large firms are especially sensitive to airport connectivity and border access, while smaller firms respond more to market potential and digital infrastructure.

The study also incorporates the Herfindahl–Hirschman Index (HHI) to measure concentration, confirming that the dominance of Erbil has intensified over time rather than diminished. Robustness tests with lagged variables show that the effects of infrastructure and connectivity remain significant, suggesting that investment decisions are shaped by enduring regional characteristics rather than short-term fluctuations.

These findings underscore the importance of physical and digital infrastructure as a determinant of foreign investment patterns. They also demonstrate that disparities in infrastructure provision can create self-reinforcing cycles of uneven growth, with investment gravitating to already advantaged areas.

What are the policy implications?

The study argues that the current concentration of FDI poses risks to both economic resilience and social equity. Without corrective measures, the uneven distribution of investment could exacerbate disparities between governorates, undermine regional cohesion, and weaken the sustainability of growth.

The authors recommend a regionally differentiated policy strategy. This includes targeted investment incentives that align with each governorate’s comparative strengths, enhanced infrastructure investment in lagging areas, and improved investor protections to create a more predictable business environment. They also call for streamlined regulations and the establishment of investment promotion agencies to better facilitate investor entry and aftercare.

The study notes that its focus is on the determinants of FDI rather than the direct outcomes for poverty or income distribution, due to data limitations. Nevertheless, it stresses that the concentration of investment is itself a critical challenge for sustainable development, particularly in post-conflict regions where balanced recovery is vital.