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IS4D: Economic Growth

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Investment for Development

Adapted from: https://olc.worldbank.org/content/investment-policy-and-promotion-week

Investment Policy and Law

  • Key ingredients for investment and development include human capital, quality of institutions/governance and structural composition of exports/connectivity.
  • Foreign Direct Investment (FDI) is the largest source of development finance
  • A global network of over 80K multinational enterprises - from both developed and developing countries - and their 800K foreign affiliates
    • produce a quarter of world's GDP
    • sell more than US$25 trillion worth of goods/services, with an added value of more than US$6 trillion
  • There are many types of investment (and even different types of FDI) 
    • Portfolio, FDI, NEMs
    •  Their impact on development may vary, thus the maximization of benefits depends on the investment policies that host and home countries undertake
  • There are also many types of IIAs
    • Their impact on FDI flows may also differ depending on the type of agreement and type of FDI affected


Types of Investment

  1. Natural Resource-seeking
    • Factors: location, quantity, quality of NR
    • Oldest type of FDI, usually first vehicle for integrating with int markets
    • Political economy issues:
      • fair distribution 
      • sovereignty over NR
      • environmental impact
      • enclave economies (i.e. limited in-country spillovers)
      • need to focus on developing input industries/services
    • Relationship with trade
      • tends to be export oriented, local value-add limited
      • relies on local content policies to create linkages
    • Challenges
      • need to promote forward linkages, diversification and use of surpluses to develop other sectors
      • diversification difficult
      • governance (rent-seeking and corruption)
    • Success stories: Norway, Chile, Canada, Australia, New Zealand
  2. Market-seeking
    • Factors:
      • market dimensions and per capita income (levels and growth) 
      • consumer preferences
      • tailoring to clients and consumers  where proximity is needed
      • perishable goods, beverages
      • many services: retail distribution, financial services
    • Determined by its effect on domestic production - import competing interests are likely to resist new entry 
    • This type of FDI may be import-substituting, but in smaller economies generates needs for imported inputs
    • Challenges
      • Success occurs if there is strong competition in the domestic market, need for authorities to prevent protectionist policies and private anticompetitive conduct
      • Rarely tends to generate exports -until the domestic market is internationally competitive and saturated to push investors abroad
      • Useful to diversify the domestic economy, but is rarely a dominant engine of sustained growth
      • Opportunity to upgrade quality of local suppliers 
    • Success stories: countries that have markets big enough to grow on the basis of internal demand
      • United States; European Union; China; Japan; other BRICS
      • But all countries, big and small, tend to attract some measure of market-seeking FDI 
  3. Efficiency-seeking
    • Factors
      •  Investment will come provided countries enable firms to compete – Vicinity to greater markets, sea lanes, may play a key role
      • Key: location and competitiveness
    • Nature
      • Export oriented
      • Generator of jobs and foreign exchange
      • Significant potential gains in terms of expansion and diversification of export supply of host economy and transfer of technology 
    • Political economy
      • Determined by the level of competitiveness of the host country vis-á-vis other potential host countries (importance of signals)
      • Increasing controversy in home countries 
    • This type of FDI generates more trade of goods and services, especially of intermediates, hence imparts a liberalizing bias to host country trade policy 
    • Challenges:
      • Due to its potential impact to transform exports and generate new GVCs and jobs, most countries in the world are constantly seeking to attract this type of FDI
        • Key clear and well articulated promotion strategies; locational competition and incentives
      • Competitiveness and the investment climate of the host country is crucial, as it has to ENABLE firms to compete on the world market
        • Countries must enable investment entry and manage to retain FDI
        • Countries must facilitate the movement of technical personnel, experts, and traders
      • Countries must have means to ensure predictability and stability regarding export market access to investors who will tend to be importers and exporters
        • Importance of PTAs
        • Trade logistics for goods and services become crucial – trade facilitation to reduce trade costs
      • Long term sustainability requires the fostering of linkages between leading firms and domestic suppliers
        • Need to upgrade capacity of domestic private sector; design of behavioral incentives, supplier development programs 
    • Success Stories: China, Hong Kong, Dubai, Mexico, Malaysia, Turkey, Singapore, Thailand, Ireland, Costa Rica 
  4. Strategic asset-seeking
    • Factors:
      • Internationalization of firms
      • Increasingly globalized markets and competition - Tended to be “North-to-North”, but now increasingly “North-South”, and more importantly “South-South” and “South-North”
    • This kind of investment tends to be:
      • Focused on M&A rather than greenfield
      • Politically sensitive depending on the size and type of assets acquired
      • May not always be net job-generating
    • Political economy
      • Politically sensitive depending on the size and type of assets acquired as well as the type of investor buying assets (e.g. SOEs)
      • Home country support
      • FDI screening in host countries
    • May be trade generating as a result of GVCs; may require higher levels of IP protection and enforcement 
    • Firm specific assets: branding, know-how, human capital, distribution networks
    • Country specific assets: natural beauty, cultural heritage, historical interests, strategic locational assets


  • Investment Policy is not about choosing between foreign and domestic investment. It's about connecting them through global value chains. Trade and investment are 2 sides of the same coin.
  • Foreign investment is not a transaction, it is a relationship. And investment policy strategy should not only pursue attraction, but also enable the establishment, retention and linkages with the domestic productive sector, thereby maximizing benefits from investment.
  • Not all types of investment are the same. Countries should align the type of investment with different policies. 
  • The Investment Life Cycle: Core Areas of Policy Reform
    • Investment Vision
    • Investment Attraction
    • Investment Establishment
    • Investor Retention
    • Linkages
    • Regional Integration
    • {Incentives} {Entry} {Protection}





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