Kusi Hornberger's blog

Over the last two decades the number of investment promotion agencies (IPAs) has mushroomed from only a few dozen in the early 1980s to roughly 250 agencies worldwide today.  Despite this growth, relatively little attention has been paid towards whether or not investment promotion agencies actually have an impact on the growth in FDI to a location. 

Figure 1: Bogota, Colombia # of inbound FDI projects (by quarter) between 2003-2011

 Source: fDi Markets Database, Authors Calculations

Over the past decade foreign direct investment (FDI) has become a major force in developing and transition economies. In 2010 the volume of FDI to developing and transition economies for the first time exceeded the FDI to rich economies. In a speech on Democratizing Development Economics delivered at Georgetown University last September, World Bank President Robert Zoellick pointed out that “In the 2000s, Foreign Direct Investment (FDI) inflows were the single biggest source of capital for developing countries and a critical input for technology transfer in developing country firms.”

Figure 1: Comparison of Outbound FDI vs. Official Development Assistance (ODA) from Development Assistance Committee (DAC) countries in 2009 (US$ billions)

Source: OECD, UNCTAD

Few would dispute China’s importance to the world economy today; from small villages to large cities, its presence is now felt almost everywhere. The Economist recently went so far as to call China “the indispensable economy,” reporting that more and more multinational companies are realizing an increased share of their revenues from inside Chinese borders. China has also become the largest export destination for many countries in the northern and southern hemispheres.  Yet with this focus on China’s large market size, economic growth, and ability to attract inbound trade and investment, less attention is being paid to the role of its private sector and outbound foreign direct investment (FDI).

The Chinese private sector is increasingly also playing an important role in the world today.  In nearly any country you travel to these days you can feel the presence of Chinese business. New data backs up this story.  Though China still trails the United States (a whooping 5,450 new outbound FDI projects in 2010) and other traditional outbound FDI leaders (UK, Germany and Japan) by a long distance in absolute numbers (Figure 1), according to the Financial Times fDi Markets database, it reported the fastest year-on-year growth for the last five years in outbound FDI projects (23% compound annual growth rate (CAGR)) of any major industrialized economy.

Survey data suggest it might not be that easy for manufacturing multinationals to find information on suitable industrial investment sites in many countries around the world.

It will probably come as no surprise that FDI in the manufacturing sector is in decline. According to UNCTAD, the services and primary sectors continue to capture an increasing share of FDI as the years pass. Despite these trends, manufacturing still represents somewhere between 30 to 45% of total cross-border FDI inflows annually, and there have been more than 3,000 new manufacturing investment projects annually over the last decade.

Which raises the practical question: How do companies and their advisors locate suitable investment locations for their manufacturing projects when considering entry in new markets? The World Bank Group’s Investing Across Borders database suggests that it might not be that easy in most countries around the world. The database's index on Access to land information compares countries on the ease of access to land-related information through the countries’ land administration systems, including land registries, cadastres and land information systems and finds that globally of the 87 countries surveyed the average score is relatively low 41.4 out of 100 (Figure 1 below the jump; click on the image for a larger version).

Low-carbon FDI in areas such as renewables, recycling and low-carbon technology manufacturing is already large (some $90 billion in 2009), but its potential is huge. This is one of the conclusions of UNCTAD’s 2010 World Investment Report, released last month. The report is the most recent in an annual series exploring the latest trends and prospects for FDI flows and recent policy changes, and also offers a deeper analysis of a topically relevant issue of the day.

This year’s report attempts to dive into the hot topic of foreign investment and climate change. It’s definitely worth checking out for anyone interested in the climate change agenda. The report is also supported by the world’s most authoritative database of FDI statistics – an excellent source of data on FDI stocks and flows for anyone who is interested.

But if you do not have the time to bury your head in the nearly 200-page report or database, here are some of the highlights from my reading:

Editor's Note: Kusi Hornberger is an Investment Policy Officer with the Investment Climate Advisory Services of the World Bank Group.

Imagine you’re an investor interested in starting a mobile telecommunications company in the Philippines. You know that the Philippines places restrictions on foreign direct investment (FDI), but you have no idea how these might apply to your particular situation. Where can you turn to find out? A new World Bank Group report and database called Investing Across Borders has the answer. It turns out that the Philippines only allows a maximum of 40% foreign equity ownership in wireless services and infrastructure -- meaning you will be stuck as a minority shareholder.  

Investing Across Borders 2010 has plenty of other data on FDI regulations that will prove useful to business people and policy makers alike. It is the first World Bank Group report to offer objective data on laws and regulations affecting FDI that can be compared across countries. As one might expect, the report finds that overly restrictive and obsolete laws are an impediment to FDI.