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Global Value Chains

Encouraging investment policy and promotion reform in times of uncertainty

Amira Karim's picture

Foreign direct investment (FDI) is often considered by economists and policymakers as integral to economic growth – a cornerstone of modernization, income growth and employment.

Yet for many countries, FDI can be elusive, and chasing it can lead policymakers to frustration.

Even economies built by FDI – for example, Singapore – are on this continuous chase, aware that attracting and retaining FDI is not an easy task. They also know that the benefits of FDI do not accrue automatically and evenly across all countries, sectors and local communities.

But first, there must be a realization of the importance of FDI. Singapore – a country once called a “political, economic and geographic absurdity” by its first Prime Minister, Lee Kuan Yew – never doubted the centrality of FDI, promoting it from the outset of its independence. Singapore saw in FDI an opportunity to develop a substantial industrial base, to create new jobs for its then-poor and low-skilled workforce, and to generate crucial tax revenues for its nascent government to spend on education and infrastructure.

Two decades after that initial strategic acceptance of FDI, Singapore emerged as a newly industrialized economy.

It is little surprise, then, that Singapore’s experience was highlighted at a recent World Bank Group peer-to-peer learning event here in the city-state. Responding to strong demand from client countries, two teams from the Trade & Competitiveness Global Practice – the Investment Policy and Promotion (IPP) team and the Singapore Hub team – co-hosted the learning forum entitled "Promoting Investment Policy and Promotion Reform in Times of Uncertainty."

Supported by SPIRA – the Support Program on Investment Policy and Related Areas – the forum enabled some 80 government officials from East Asia, South Asia and Africa to share their experiences in economic and export diversification; to discuss the role of international trade and investment agreements as leverage toward domestic reforms; and to discuss how to translate investment policy and promotion strategies into measurable results. SPIRA, implemented by the IPP team, supports client countries across all regions in attracting, facilitating and retaining different types of FDI.

Looping in local suppliers rather than forcing out international firms

Anabel Gonzalez's picture



An instructor at the Savar EPZ training center in Dhaka, Bangladesh, helps young women being trained to make shirts. Photo Credit: © Dominic Chavez/The World Bank


Increasing economic prosperity for developing countries is related not only to rising trade, but also – and more important – to transforming the traditional composition of what they produce and export. In the world today, many developing countries strive to diversify away from exporting commodities toward higher-value-added goods and services.

The evolution of trade and investment flows over the last three decades shows that foreign direct investment (FDI) can be a powerful driver of exports, a creator of well-paid new jobs and a crucial source of financing. More important, FDI may become a very rapid and effective engine to promote the transfer of technology, know-how and new business practices, helping to raise productivity and setting a country on the course of convergence. This is particularly the case of efficiency-seeking FDI – that is, FDI that locates productive processes in a country seeking to enhance its ability to better compete in international markets-.
 
The benefits of FDI are further leveraged when local firms can catalyze the presence of foreign investors to connect to global and regional value chains (GVCs). As a result of new international firms investing in a host country, great new opportunities arise for local enterprises to supply the inputs – be it goods or services – that their international counterparts need.

This has been the experience of Bangladesh, where local suppliers have grown in tandem with foreign investors in the garment sector. It is through linkages with international investors that local firms can gradually be lured into producing new goods and services that, until then, were not produced in the host country.  This is how economic diversification and greater value added are generated.

Multinational enterprises (MNEs) and their key partners (Tier 1 suppliers) are generally keen to source locally if a competitive local supplier can be found. However, they are also reluctant to absorb high search-and-find costs, and they will typically not invest in assisting local suppliers with upgrading efforts. Likewise, local firms are generally keen to supply to foreign firms, but are often not ready to make the necessary investments in technology and in processes to meet strict quality standards without a clear line of sight on potential payoff for such investment.

'If I knew that avocados had value, I would plant more of them'

Cecile Fruman's picture



Emilienne Isenady poses while showing off the crops on her land in Lascahobas, Central Plateau, Haiti.

“If I knew that avocados had value, I would plant more of them,” says Emilienne Isenady, a single mother of six in Lascahobas, in the Central Plateau of Haiti.

Emilienne grows and sells avocados to Dominican buyers and to “Madan Saras” (the local name for women brokers who buy and re-sell products in other cities), who will buy the avocados and transport them using the perilous local “tap taps” – trucks converted into public transportation. She will also sell them in the local market in Lascahobas.

Emilienne is a smallholder farmer, but little does she know that she is already part of an avocado local value chain, nor that there is a better avocado Global Value Chain (GVC) out there facing a global shortage.

Emilienne’s is guiding us to see her avocado trees. As we push aside branches, we do not see neatly planted rows of avocado trees but rather a wild two hectares of scattered mango trees, avocado trees, malanga, sweet peas and pineapples. We are accompanied by Marc André Volcy, Farah Edmond and Jean-Berlin Bernard, three “mobile agents” of the Business Support Service team for the Central Plateau Department.

The team is part of a program that the Haitian Ministry of Commerce and Industry has put in place to support entrepreneurs in micro, small and medium-sized enterprises across the country. The program is supported by the World Bank Group’s Business Development and Investment Project (BDI). There are nine other teams just like them in the nine other departments of the country, all working simultaneously on different value-chain reinforcement initiatives (in such sectors as coffee, cocoa, mango, vetiver, honey and apparel).

Marc, Farah and Jean-Berlin live in the Central Plateau, enabling them to support the avocado producers directly, visiting them often and understanding the local political economy. The team has visited about 80 other smallholder farmers like Emilienne in their department, and has invited them to two public meetings and strategic working groups to present key challenges and opportunities for their avocado cluster. The Central Plateau team has carried out the competitive reinforcement initiative of the avocado cluster in their department with training and coaching financed by a grant from the Competitive Industries and Innovation Program (CIIP), through which they have received in-class training and coaching on how to carry out their field projects.