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Investment Policy and Promotion

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.

Why does efficiency-seeking FDI matter?

Cecile Fruman's picture
Today we face an interesting paradox. The number of people in the world living in extreme poverty has decreased dramatically in the past three decades. In 1981 half of the population in the developing world lived in extreme poverty. By 2010, despite a 60 percent increase in the developing world’s population, that figure dropped to 21 percent.

While extreme poverty has diminished, however, the gap between the richest and poorest countries has increased dramatically. In 1776, when Adam Smith wrote The Wealth of Nations, the richest country in the world was approximately four times wealthier than the poorest. Today, the world’s richest country is more than 400 times richer than the poorest.

What separates them?

One answer is knowledge, diversification and the composition of exports, all areas in which foreign direct investment (FDI) has an important role to play. 

FDI matters, but not all FDI is created equal
 
While FDI is important for economic growth, not all FDI is the same. One way to differentiate is by an investor’s motivations using a framework established by British economist John Dunning:
  • Natural resource-seeking investment: Motivated by investor interest in accessing and exploiting natural resources.
  • Market-seeking investment: Motivated by investor interest in serving domestic or regional markets.
  • Strategic asset-seeking investment: Motivated by investor interest in acquiring strategic assets (brands, human capital, distribution networks, etc.) that will enable a firm to compete in a given market. Takes place through mergers and acquisitions.
  • Efficiency-seeking investment: FDI that comes into a country seeking to benefit from factors that enable it to compete in international markets.

This last category – efficiency-seeking FDI – is particularly important for countries looking to integrate into the global economy and move up the value chain.
 

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.

Halting the 'race to the bottom’ in corporate conduct: Governance reform, focus on ethics must repair the damage

Christopher Colford's picture

When terms like “criminal conspiracy” and “felony” appear in confessions and plea bargains, the criminal-justice system sits up and takes notice. And when the confessed felons are some of the world’s largest corporations, the private sector ought to be jolted into action, too.

The continuing shame of confessed corporate misconduct – in this case, lawbreaking conducted with such a degree of guile that the U.S. Attorney General called it “breathtaking flagrancy” and that the FBI labeled it criminality “on a massive scale” – reached a new intensity this month: Four of the world’s largest banks confessed to taking part in a five-year-long conspiracy to manipulate the world’s foreign-exchange markets.

This latest in a series of stern legal judgments has damaged the corporate reputations of some of the world’s most pivotal financial institutions – with guilty pleas, to felony charges no less, entered by Citicorp, JPMorgan Chase & Co., Barclays PLC and The Royal Bank of Scotland PLC. A separate guilty plea by UBS – along with earlier fines against Bank of America and HSBC in separate settlements in related cases – has brought the total of fines against those once-trusted, now-tarnished firms to about $6 billion.

The corporate confessions of deliberate lawbreaking, pursued with systematic and sinister stealth – at the very center of the international financial system – vividly validate the recent exhortation of Christine Lagarde of the International Monetary Fund: that corporate governance must be strengthened and that a higher standard of individual ethics must prevail, especially in the financial sector.

Lagarde wisely linked skewed incentives and a short-term profit-maximization mindset to the risk of financial instability, in an eloquent recent address to the Institute for New Economic Thinking’s conference on “Finance and Society”: “There is still work to be done to address distorted incentives in the financial system. Indeed, actions that precipitated the [global financial] crisis were – mostly – not so much fraudulent as driven by short-term profit motivation. This suggests to me that we need to build a financial system that is both more ethical and oriented more to the needs of the real economy – a financial system that serves society, and not the other way round.”

Those who champion the creative potential of the private sector (including, I imagine, the regular readers of this blog) have a particular reason – one might even say, a special responsibility – to voice their anger about the foreign-exchange-rigging scandal and other acts of lawlessness.

Idealists who esteem the private sector’s ingenuity in delivering growth and jobs sans frontières know that business' creativity will be indispensable in achieving the vital development goals of eliminating extreme poverty and promoting shared prosperity. Society thus rightly expects that the full measure of corporate energies should be focused on companies’ central mission of generating wealth that benefits all of society. Whenever any of those energies are diverted – especially toward criminal schemes that put short-term personal plunder ahead of long-term economic growth – the lawbreakers undermine public confidence (or what little remains of it, in the wake of the global financial crisis) in the fairness of the economic system.

Moreover, lawbreakers provide ammunition to critics who allege that today’s economic system is irredeemably corrupt, through-and-through – thus making it even more difficult for law-abiding companies, holding true to the values of honest business behavior, to make the case for policies that liberate private-sector dynamism.