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Foreign direct investment and development: Insights from literature and ideas for research

Christine Qiang's picture
 The Leeds Library by Flickr user Michael D Beckwith

For many decades, academia and policy making has debated about the role of Foreign Direct Investment (FDI) in development. Such question has been very difficult to elucidate, not only because the discussion has being colored by many ideological dogmas, but also because the very fundamental characteristics of cross border investment have evolved over time. Indeed, over the last five decades, the paradigm of FDI has changed significantly. Traditionally FDI has been visualized as a flow of capital, flowing from “North” to “South” by big multinational enterprises (MNEs) from industrial countries investing in developing countries, traditionally aiming to exploit natural resources in the latter or to substitute trade as a means to serve domestic consumption markets. Such paradigm has changed significantly.
Today, FDI is not only about capital, but also --and more important-- about technology and know-how, it no longer flows from “North” to “South”, but also from  “South” to “South” and from “South” to “North”. Further, FDI is no longer a substitute of trade, but quite the opposite. Today FDI has become part of the process of international production, by which investors locate in one country to produce a good or a service that is part of a broader global value chain (GVC). Investors then, have become traders and vice-versa. Moreover, FDI is now not only carried out by only big MNEs, but also from relatively smaller firms from developing countries that are investing in countries beyond their home countries. Last but not least, cross-border investment is no longer only about portfolio investment and FDI. International patterns of production are leading to new forms of cross-border investment, in which foreign investors share their intangible assets such as know-how or brands in conjunction with local capital or tangible assets of domestic investors. This is the case of non-equity modes of investment (NEMs) –such as franchises, outsourcing, management contracts, contract farming or manufacturing.

How 3 banks in emerging economies are banking women

Rebecca Ruf's picture

Two billion people worldwide still lack access to formal and regulated financial services. In 2015, the Bank Group with private and public sector partners committed to promoting financial inclusion and achieving Universal Financial Access by 2020.  We've invited our partners to reflect on why they've joined the UFA2020 initiative and how they're contributing toward this goal. This contribution comes from the Global Banking Alliance for Women. #FinAccess2020

Photo: GBA Stock Image

As a global community, we’ve made great strides toward achieving the World Bank Group’s goal of universal financial inclusion by 2020. According to the Global Findex, 700 million people gained access to formal financial services between 2011 and 2014. This is equivalent to nearly the entire population of Europe. But the latest numbers from the Global Findex also revealed a startling fact: The gender gap in financial inclusion remains stubbornly intact, with women in emerging economies 20% less likely to have a bank account than men and 17% less likely to have borrowed formally. 

Women who lack access to financial services face a number of related obstacles, including lower income and business growth, lower asset ownership – making it harder to borrow – and lower levels of financial capability. These factors, combined with increasing financial responsibility for their households, make enabling women to fully benefit from financial services an important development objective. Recognizing that commercial banks can and must play a vital role in closing the financial access gender gap, the Global Banking Alliance for Women (GBA) made a commitment in April 2015 with a subset of its members – Banco BHD León of the Dominican Republic, Banco Pichincha of Ecuador and Diamond Bank Plc of Nigeria – to provide financial access to 1.8 million previously unbanked women in Latin America and Africa by 2020. 

Does competition create or kill jobs?

Klaus Tilmes's picture

Greater competition is crucial for creating better jobs, although there may be short term tradeoffs.

Job creation on a massive scale is crucial for sustainably ending extreme poverty and building shared prosperity in every economy. And robust and competitive markets are crucial for creating jobs. Yet the question of whether competition boosts or destroys jobs is one that policymakers often shy away from.

It was thus valuable to have that question as a central point of discussion for competition authorities and policymakers from almost 100 countries – from both developed and developing economies – who recently gathered in Paris for the 14th OECD Global Forum on Competition (GFC).

According to World Bank Group estimates the global economy must create 600 million new jobs by the year 2027 – with 90 percent of those jobs being created in the private sector – just to hold employment rates constant, given current demographic trends.
Yet the need goes further than simply the creation of jobs: to promote shared prosperity, one of the urgent priorities – for economies large and small – is the creation of better jobs. This is where competition policy can play a critical role.
Competition helps drive labor toward more productive employment: first, by improving firm-level productivity, and second, by driving the allocation of labor to more productive firms within an industry.
Moreover: Making markets more open to foreign competition drives labor to sectors with higher productivity – or, at least, with higher productivity growth. Making jobs more productive, in turn, generally increases the wages they command.
That’s in addition to cross-country evidence on the impact of competition policy on the growth of Total Factor Productivity and GDP, and the fact that growth tends not to occur without creating jobs. Thus there’s compelling evidence that – far from being a job killer, as skeptics might fear – competition (over the long term) has the potential to create both more jobs and better jobs.

The key question then becomes whether such long-term benefits must be achieved at the expense of short-term negative shocks to employment – especially in sectors of the economy that may experience sudden increases in the level of competition.
Progress toward better jobs is driven partly by the disappearance of low-productivity jobs, as well as the creation of more productive jobs in the short run. Competition encourages that dynamic through firm entry and exit, along with a reduction in “labor hoarding” in firms that have previously enjoyed strong market power.

A good diagnosis for the city economy?

Dmitry Sivaev's picture

One walks into a doctor’s office knowing what hurts but with little knowledge of what should be done to fix it. Identifying proper treatment requires sophisticated tests, participation of experts and, often, second opinions.

Cities, arguably, are as complicated as human bodies. Our knowledge of diagnosing cities, however, is far less advanced than in human biology and medicine.  Most mayors know very clearly what they want for their cities – jobs, economic growth, high incomes and a good quality of life for the people. But it is very difficult to identify what prevents private-sector firms, the agents that create jobs and provide incomes, from growing and delivering these benefits to a city. And we have no X-ray machine to aid in the effort.
As a part of the World Bank Group's Competitive Cities project, we thought hard about ways to help cities identify the roots of their problems and design interventions to address them. We set out on a journey to put together methodologies and guidelines for cities that want to figure out what they can do to help firms thrive and create jobs.  We learned from our own experience of working with cities, and from other urban practitioners. We reviewed many methodological and appraisal materials, and we trial-tested our ideas.

So what have we achieved? We certainly didn’t invent an X-ray machine, but we have developed “Growth Pathways” – a methodology and a decision-support system to help guide cities and practitioners through diagnostic exercises.

Why are payment services essential for financial inclusion?

Massimo Cirasino's picture

Joint Development Bank's ATM, Lao PDR. IFC Photo Collection

While some 700 million people have gained access to a transaction account between 2011 and 2014, there are still about 2 billion adults in the world who lack access to transaction accounts offered by regulated and/or authorized financial service providers. The increased role that non-banks play in financial services, particularly in the payments area, has contributed to making them available and useful to many people who were previously locked out of the financial system. 
There is broad recognition that financial inclusion can help people get out of poverty as it can help them better manage their finances. Access to a transaction account is the first step in that direction. A transaction account allows people to take advantage of different (electronic) ways to send or receive payments, and it can serve as a gateway to other financial products, such as credit, saving and insurance.

Payment services are usually the first and typically most often used financial service. Understanding how payment aspects can affect financial inclusion efforts is important not only for the Committee of Payments and Market Infrastructures (CPMI) of the Bank for International Settlements and the World Bank Group, but for all stakeholders with interest in increasing financial access and broader financial inclusion.

SMEs are good business for Kenya’s growing banking sector

Gunhild Berg's picture

Maasai women make, sell and display their bead work in Kajiado, Kenya. 2010. Photo: © Georgina Goodwin/World Bank

Kenya’s financial sector has expanded rapidly over the last decade and lending to businesses—including small and medium size-enterprises has played a big part. As the Kenyan economy is enjoying a period of relatively high growth, the financial sector’s ongoing ability to channel credit affordably and efficiently to SMEs will be needed to underpin inclusive and sustained economic development.
To better understand the SME finance landscape in Kenya, a World Bank-FSD Kenya team embarked on a study with the Central Bank of Kenya to explore the supply-side of SME finance. In addition to quantifying the extent of banks’ involvement with SMEs, the study shows the exposure of different types of banks to the SME market, the portfolio of services most used by SMEs, and the quality of assets. Our report also discusses the regulatory framework for SME finance, the drivers and obstacles of banks’ involvement with SMEs, and their specific business models. 

Competitive Cities: Bucaramanga, Colombia – An Andean Achiever

Z. Joe Kulenovic's picture

Modern business facilities, tourist attractions, and an expanding skyline: Bucaramanga, Colombia. 

When the World Bank’s Competitive Cities team set out to analyze what some of the world’s most successful cities have done to spur economic growth and job creation, the first one we visited was Bucaramanga, capital of Colombia’s Santander Department. Nestled in the country’s rugged Eastern Cordillera, landlocked and without railroad links, this metropolitan area of just over 1 million people has consistently had one of Latin America’s best-performing economies. Bucaramanga, with Colombia’s lowest unemployment rate and with per capita income at 170 percent of the national average, is on the threshold of attaining high-income status as defined by the World Bank.  

Bucaramanga and its surrounding region are rife with contrasts. On the one hand, it has a relatively less export-intensive economy and higher rates of informal business establishments and workers than Colombia as a whole. Indeed, informality has often been cited as a key constraint to firms’ ability to access support programs and to scale up. On the other, Santander’s rates of poverty and income inequality, and its gender gap in labor-force participation, are all better than the national average, and it has consistently led the country on a number of measures of economic growth, including aggregate output, job creation and consumption.   
But the numbers tell only part of the story. A qualitative transformation of Bucaramanga’s economy is under way. Once dominated by lower-value-added industries like clothing, footwear and poultry production, the city is now home to knowledge-intensive activities such as precision manufacturing, logistics, biomedical, R&D labs and business process outsourcing, as well as an ascendant tourism sector. Meanwhile, Santander’s oil industry, long a major employer in the region, has been a catalyst for developing and commercializing innovative technologies, rather than just drilling for, refining and shipping petroleum.

All these achievements are neither random nor accidental: They are the result of local stakeholders successfully working together to respond to the challenges of globalization and external competitive pressures.

Dancing with angels, racing with gazelles and dreaming of unicorns

Simon Bell's picture

From IFC photo collection. Reuters/Thomas Mukoya

There has been a lot of discussion around the topic of SMEs and job creation.  While SMEs can foster innovation, help diversify an economy, spread economic activity beyond the main urban hubs, give opportunities to women and youth and much more, their role in creating jobs – in the current economic environment – is key.

Interesting work by the Kauffman Foundation (see graph below) shows than virtually all new net job creation in the U.S. economy has been generated by firms that are less than five years-old and which, almost by definition, are more than likely to be small.  Although there is a huge amount of job churn in this class of enterprise (which are new and therefore probably small), the “net” impact is powerful.  A small subset of these firms are “gazelles” – or very fast growing enterprises – which grow from 5 to 500 employees in a five-year period, generating impressive results.

Celebrating entrepreneurship and agents of change in developing countries

Ganesh Rasagam's picture

Around the world, entrepreneurs are often hailed as “drivers of innovation” or “agents of change.” But what does this really mean for the poor or vulnerable — those who are far removed from bustling tech hubs? In developing countries, innovative entrepreneurs are creating jobs and boosting economic development, while extending essential products and services to those who need them most.

In Kenya, for example, Peter Chege, an entrepreneur from Nairobi, is helping local farmers adapt to climate change. According to some models, cereal yields are expected to decrease by 10 percent to 20 percent by 2050 due to droughts and rising temperatures. Peter is developing and installing hydroponics systems for farmers in Kenya, Uganda and Rwanda that will allow them to grow produce without soil, significantly increasing their crop yields while reducing water usage.

In Jamaica, farmers lose a significant portion of their produce to spoilage because they lack direct access to the markets. Instead, they must haggle about prices with middlemen, resulting in increased costs and delays. To address this inefficiency, Jamaican entrepreneurs Jermaine Henry and Janice McLeod developed AgroCentral, a mobile app that matches farmers with buyers in the hotel and restaurant trade. The result? Greater revenue for farmers, lower prices for buyers, and reduced waste.

Jermaine Henry and Janice McLeod, AgroCentral
Growth-oriented entrepreneurs like Peter, Jermaine and Janice are the backbone of local economies. They create new jobs in high-value sectors, like climate technology, agribusiness, and digital innovation, while also extending access to products and services — such as mobile banking and medicine — to poor or remote communities. They also advance the fight against climate change by providing clean water, delivering affordable off-grid power, and improving climate-smart agricultural techniques.

Winning Streak: Sub-Saharan Africa Leads the Way in Doing Business Reforms

David Bridgman's picture

It was another landmark year for doing business in Sub-Saharan Africa.
After a record-setting 2015, the region was once again recognized for its impressive performance in this year’s report, Doing Business 2016: “Measuring Regulatory Quality and Efficiency.
Sub-Saharan Africa alone accounted for 30 percent of all the reforms implemented worldwide in the past year, passing 69 reforms in 35 economies. The region even boasts half of the world’s top-10 improvers: Benin, Kenya, Mauritania, Senegal and Uganda all made major leaps in the global ranking.
So what have we learned from a second consecutive year of strong results?
First, countries are owning the reform process. That means that technical teams within government ministries are becoming experts in the mechanics of regulatory reform. This is in part thanks to the Ease of Doing Business initiative, an annual peer-to-peer learning platform that the World Bank Group has supported over the past six years. The most recent Ease of Doing Business conference, which took place in Uganda in May 2015, gathered reformers from 16 countries to share their experiences. Exchanging best practices and lessons learned not only has helped fast-track the reform process but has also strengthened reform agendas.
Second, momentum for reform is positively contagious. Rwanda has led the pack over the past decade, and its success has encouraged other Sub-Saharan African countries to follow suit and push through business-environment reforms. This has proven to be a smart move in the wake of the downturn in commodities prices, highlighting the need for Sub-Saharan African countries to further diversify economic growth.

Third, the World Bank Group’s Trade & Competitiveness Global Practice (T&C) has played a major role in the region’s reform story, with active business-reform advisory programs in 34 countries. If anything, this year’s Doing Business results are an encouraging sign for T&C’s programs and motivation for client governments.
Fourth, this year was not an exception but part of a bigger narrative in the African region. Over the past decade, Sub-Saharan Africa has implemented 25 percent of all reforms globally, making it the second-most-active region in terms of improvement on the distance to frontier score.
The impact of these reforms has been immense. In 2005, incorporating a company in less than 20 days meant having to set up shop in either Burundi, Ghana or Rwanda. Today, that number has expanded from three countries to 28.  From 2014 to 2015, only 30 percent of economies in region had implemented reforms. Today, 75 percent have done so.
As Sub-Saharan Africa continues its reform journey, T&C is committed to providing support every step of the way by strengthening multi-year advisory programs that help economies unleash their private-sector potential.