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FDI

Boon or bane: Trade agreements in Malaysia

Smita Kuriakose's picture

In the past several decades Malaysia has witnessed strong economic growth and has become one of Asia’s newly industrialized countries. In one generation it transitioned successfully from low to upper-middle-income status, due in large part to outward looking policies, trade, and foreign direct investments (FDI) — which contributed to the successful diversification of the economy. Today, Malaysia faces the challenge of escaping the middle-income trap as its productivity slows and it becomes less competitive.
 
Free trade agreements (FTAs) such as the Trans-Pacific Partnership (TPP) and Malaysia EU-FTA bring the potential for greater market access for Malaysia. This new generation of free trade agreements offers opportunities for Malaysia to strengthen reforms beyond tariff reduction, covering commitments such as competition and investment policies, non-tariff measures, intellectual property rights, labour standards, and opening up government procurement for competition.  With a market-friendly government and a strong track record of reforms, there are new opportunities for reinvigorating structural reforms to support private sector-led economic growth. Accelerating productivity growth is a key element of the 11th Malaysia Plan, which aims to bring Malaysia to high income status by 2020.
 

Three Key Ideas for Creating Effective Investment Policies

Roberto Echandi's picture
Attracting, promoting and retaining foreign investment is a complicated matter – especially for a developing economy. Evidence shows a compelling case for foreign direct investment (FDI): foreign investors can create jobs, bring capital and technologies, create knowledge spillovers, help local companies integrate with global value chains, and drive economic growth in general.

The false debate: choosing between promoting FDI and domestic investment

Cecile Fruman's picture

Should we focus our efforts on foreign investment or domestic investment?” Policymakers in developing economies often ask this question when the World Bank Group advises them on how to improve their countries’ investment climate or investment promotion efforts. Our answer is: They do not need to choose one over the other. In order to grow and diversify, an economy needs both domestic investment and foreign direct investment (FDI).  The two forms of private investments can be strong complements.
 
Recognizing the Potential Benefits of FDI
 
The economic benefits of FDI were identified a long time ago. A Harvard Business School paper published 30 years ago summarized the benefits of FDI based on an extensive review of economic literature (Wint, 1986). In short: Benefits traditionally attributed to FDI include job creation, transfer of technology and know-how (including modern managerial and business practices), access to international markets, and access to international financing.

Granted, some of these benefits also occur thanks to domestic investment. For instance, domestic investments create jobs in a host economy – usually many more than FDI. However: What FDI does well is enhance or maximize some of the benefits already generated by domestic investments in a developing economy.
 
To stay with the example of job creation: Foreign firms might not create as many jobs as the domestic private sector, but they often create better-paid jobs that require higher skills. That helps elevate the skills level in host economies. The same can be said for other FDI benefits. For instance, more advanced technologies and managerial or marketing practices can be introduced in a developing economy through foreign investment, and at a much faster rate than would be the case if only domestic investment were allowed. Moreover, through partnerships with foreign investors who have existing distribution channels and commercial arrangements around the world, developing countries’ firms can benefit from increased market access.



In China, millions of rural residents each year migrate to cities to seek work. As they find jobs in modernizing industries, they gain the skills they need to earn higher incomes. In this photo, an employe in Chongqing is learning higher-level computer skills. Photo: Li Wenyong / The World Bank
 

Reaping the blessing of migration in MENA: Mobilizing diaspora resources for private sector development

Sherif Maher Hassan's picture

MENA has always had low private investment both domestic and foreign. However, the political and economic unrests post the ‘Arab Spring’ raised the necessity of a dynamic and growing private sector than ever before. The dominant economic role of the public sector in MENA cannot endure, especially with the escalating unemployment rates, budget deficits, heavy dependence on food and manufactured imports, vulnerability to oil and foreign currency swings besides the challenging social and political environments.

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.

Does political risk deter FDI from emerging markets?

Laura Gómez-Mera's picture

Investors touring a factory in Canada. Source - Province of British Columbia“Ask anyone you meet on the street whether political risk has risen in the last few years, and you’d likely get a convincing yes,” a high official from Canada’s Export Development Center recently wrote.
 
Investors have always worried about the political landscape in host markets. But it’s true. Concerns over political risk are on the rise.
 
The most recent EIU’s Global Business Barometer shows that the proportion of executives that identified political risk as one of their main concerns increased from 36 percent in 2013 to 42 percent in 2014. MIGA’s Political Risk Survey tells a similar story: 20 percent of investors identified political risk as the most important constraint on Foreign Direct Investment (FDI) in developing economies. Indeed, according to risk management firm AON, political risk is now tenth on the list of main risks facing organizations today and is likely to rise in the ranking in the next few years.
 
With FDI from emerging markets also on the rise, are the concerns of these investors any different?

New Voices in Investment: How Emerging Market Multinationals Decide Where, Why, and Why Not to Invest

Gonzalo Varela's picture

Emerging market multinationals (EMMs) have become increasingly salient players in global markets. In 2013, one out of every three dollars invested abroad originated from multinationals in emerging economies.

Up until now, we have had a limited understanding of the characteristics, motivations, and strategies of these firms. Why do EMMs decide to invest abroad? In which markets do they concentrate their investments and why? And how do their strategies and needs compare to those of traditional multinationals from developed countries?

In a book we will launch tomorrow at the World Bank, “New Voices in Investment,” we address these questions using a World Bank and UNIDO-funded survey of 713 firms from four emerging economies: Brazil, India, Korea, and South Africa.

Growing after the Crisis: Boosting Productivity in Developing Countries

Otaviano Canuto's picture

Spring in DC draws more than just tourists. Last week, government officials, policy makers, civil society representatives and other thought leaders converged to take stock of the global economy during the IMF-World Bank spring meetings. The tone in the hallways was optimistic, but cautious. Growth in advanced economies still remains tepid, weighed down by lingering effects of the global financial crisis, demographic challenges, as well as weakening innovation and productivity growth.  At the same time, there are encouraging signs that developing countries are in good shape, thanks to fiscal buffers that helped them to weather the storm.

Nevertheless, we must be mindful of the work ahead: the IMF warned of a ‘3-speed recovery’, where emerging markets are growing rapidly, the United States is recovering faster than most other advanced industrial countries, but Europe continues to struggle. Where does this leave developing countries? At a meeting with the G24 – a group of developing countries - I had the privilege of discussing the prospects for growth, and policies needed to achieve productivity growth essential for eliminating extreme poverty and for creating shared prosperity.

Study: Liberalizing Foreign Investment in Services Boosts Manufacturing in Indonesia

Gonzalo Varela's picture

Rice sacks on a truck in Indonesia. Source: http://www.flickr.com/photos/ricephotos/6025129068/Sometimes trade policy works through unexpected channels. In the case of Indonesia, opening the services sector to foreign investment appears to be a way to significantly boost the productivity of domestic manufacturing firms, according to recent joint research from the World Bank’s Office in Indonesia and the International Trade Department. This finding has implications for governments around the world that have restricted foreign investment in services – such as transport, electricity and communications – that are vital to other productive sectors in the economy.


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