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
- 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
- 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
- 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
- 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
Summary:
- 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}
New Paradigms