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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.

The lessons our Singaporean counterparts provided were instructive. Many of us regard Singapore as a master planner with a long-term outlook, and with long-term masterplans to accompany its vision. While the Singaporean government indeed carefully considers the decades ahead, the "secret sauce" of the city-state's success is flexibility. Anticipate what may be around the corner, and adapt accordingly.

This adaptability is clear in Singapore’s history. Charlotte Lim, formerly with Singapore’s Economic Development Board and now Vice President of Strategy and Operations of the privately owned Economic Development Innovations Singapore (EDIS), recounts the early stages of nation-building and efforts to use FDI in starting the country’s foray into industrialization. As industries developed, the strategy shifted, toward encouraging FDI into more knowledge-driven and capital-intensive industries. Today, Singapore’s value-added manufacturing sector is established, and the strategy has shifted again: toward encouraging foreign companies to set up or expand their regional headquarters, innovative research facilities and leadership-development centers here in the island nation.

The constant adaptation of EDB’s strategy to attract and retain investment proved crucial in maintaining Singapore’s competitive edge and in paving the way for Singapore’s economic transformation through the decades.

Adaptability also requires consistent vigilance.  That is, success should not lead to complacency. On the contrary, Singaporean agencies work hard to ensure that implementation evolves along with strategy. Tan Hui Khim, who leads the Supplier Development Division at the EDB, explains the importance of "matchmaking": Multinational corporations across various industries are linked and "matched" with the local supplier base. To make these "matches" work, the EDB and other agencies help local suppliers and their workforce to upgrade their skills, including through partnerships with the multinationals. The shepherding of these partnerships is vital. As a result, the knowledge and technology transfers enhance Singapore’s added value and strengthens the access of local suppliers into regional and global value chains.

Ultimately, FDI is about building human and institutional capacities to compete globally in the long term.

Indeed, investment policy and promotion reforms are not static, one-off changes. Instead, they require a continuous process of learning and adapting. Both the recent forum and Singapore’s experience served as important reminders that policymakers should not just determine what to reform, but also how to reform.