In the year 2017, the global flows of foreign direct investment (FDI) dropped by 23 percent, in spite of the growth recorded on the macroeconomic aspects and trade. On an overall basis, there is a substantial drop in the return on FDIs, over the last five years. There is a decrease in mergers and acquisitions and the said downturn was more experienced by the developed and transition economies.
The United Nations Conference on Trade and Development (UNCTAD) is paying great attention to promoting investment and enterprise for sustainable and inclusive development in the world. In view of the above, the UNCTAD does research and policy analysis and provide technical assistance to over 160 countries.
The global economic governance has different pillars such as multilateral monitory institutions such as the International Monetary Fund and multilateral trading institutions such as the World Trade Organisation (WTO) but there is no such institution for investments and the UNCTAD is bridging this gap through various policy-related research studies and the World Investment Forum conducted annually.
This year, the World Investment Forum is taking a diversified approach by including discussion topics such as sustainability, human rights, employment, health, woman empowerment and urban planning. International development agencies such as the WTO, World Bank, Food and Agriculture Organisation and International Labor Origination have significantly contributed to these diversified discussions.
In addition to the above, the World Bank has taken steps to initiate the Global Investment Report, which is more focused on FDI behaviours in developing countries, both as a source and a beneficiary. It is vital to understand that policy design and implementation is one of the key factors.
Creating a business-friendly environment can make investors reach their markets effectively and expand into local and global economies. Additionally, investors are more cautious about political stability, security and favourable macroeconomic conditions and a promising legal and regulatory atmosphere.
It is a known fact that in developing economies, FDIs are the largest form of external finance that reaches an economy, even going beyond the official development assistance they receive. Over 40 percent of global investments, amounting to US $ 1.75 trillion, reached (year 2016) the developing economies and provided the much-needed private capital.
Further, it brings in technical know-how, managerial skills and access to external markets, providing better job opportunities and enhanced productivity. Foreign investors could make a positive impact on economic growth by way of setting up global industry standards and better working conditions and address climate change and other Sustainable Development Goals.
The investment policies, local market size, favourable and steady exchange rate and policy, skilled labour force, physical infrastructure, macroeconomic conditions and political stability are considered key decision-making factors for FDIs.
Political stability is reflected through the following aspects: lack of transparency and predictability in dealing with public agencies, sudden change in the laws and regulations with a negative impact, delays in obtaining the necessary government permits, approvals to start or operate a business, restrictions in the ability to transfer and convert currency, breach of contract by the government and expropriation or taking of property and assets by the government.
The policymakers and authorities can make environment low risk conducive in order to attract investments. It is more challenging for a government to be competitive with other countries by providing such an enabling environment. Every economy offers lower tax, tax holidays and other investment incentives for preferred business sectors in order to attract prospective investors.
Not only by those factors, investor decisions may vary, based on other factors such as access to domestic markets, access to regional markets through preferential trade agreements and bilateral investment treaties and access to natural resources, access to land, availability of domestic financing sources, availability of local suppliers and high predictability in law and regulations.
On an overall basis, the ease of doing business has become a key decision-making criteria. Globally, there is high competition to attract IT/electronic-related productions, biomedical, machinery, automotive and pharmaceutical investments and developing countries are doing their level best in achieving their targets.
There are four types of investors who would be reacting differently for investment policies and administration aspects of a country: (1) Natural resource–seeking FDIs, (2) strategic asset–seeking FDIs, who would be bringing in technology, brands and competitive edge, (3) market–seeking FDIs, who are interested in local or regional market access and (4) efficiency–seeking FDIs, who are more interested in cost saving, getting connected with international production networks and or targeting export of production.
Behaviour of multinational corporations
Most of the multinational corporations through their efficiency–seeking FDIs expect to bring in expatriate staff and interested in work permits, owning all equity, capacity and skills of local suppliers, upgrading potential suppliers and being export-oriented, incentives to invest in supplier upgrading, importing production inputs, etc. It is a proven fact that more than one-third of investors invest their profits back in the entity, where the authorities should encourage them expanding the existing investments.
Global Investment Research revealed that multinational corporates have taken decisions to wind up operations in developing countries due to reasons such as change of their own business strategies, unstable macroeconomic conditions and unfavourable exchange rate conditions, policy and regulation uncertainty, arbitrary conduct of the government and sudden restrictions on profit transfers.
Many developing countries have ineffective administrations, unclear regulations, complex procedures and high transaction costs, making them productive and very low in competitiveness. As defined ease of doing business criteria, starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and employing workers are the key deciding factors in recognizing the efficiency of an economy.
Most of the developing countries are holding a considerably lower position in the above-mentioned aspects. Levels of bribery and corruption, which is not measured by the doing business index, is also seriously affecting the business environment. It is obvious that the investors expect investment promotions agencies to be of assistance to handle issues and problems and resolve grievances with the government, information and assistance in setting up the operation, efforts to improve the business environment in the country, also meetings with agency officers to discuss investment opportunities, exhibitions about the country at trade shows and other events and advertising investment opportunities.
Developing country tax incentives
Tax incentives offered in developing countries can be recognized as a standard corporate income tax rate, duration of tax holidays, sector-specific investment recognition and special low tax rates given for such sectors. Investment tax allowances, which allow investors to recover investment expenses, will make a country competitive among similar investment destinations.
It is a must to publish the list of incentives in a proper manner under relevant responsible agencies. Information such as incentives offered, eligibility criteria, legal basis and administration process would definitely increase not only through transparency but also assure a level playing opportunity. Such information is not expansively availed in developing countries.
Jordan, Pakistan, Costa Rica
As per the Investment Competitiveness Report, Jordan has made available the above-mentioned information through its Investment Commission website, where information is regularly updated by a dedicated team. It is noteworthy that Pakistan is also taking a great effort in publishing its relevant information through the Federal Board of Investment. Costa Rica, through the free trade zone law has very clearly identified the incentives offered for investments.
OFDIs – China
The outward foreign direct investments (OFDI) of China are at a very high level and it had doubled every year starting from the year 2000 until 2016 and it is second only to the US OFDI. Chinese investment policy has encouraged this situation and balance of payment, gross domestic product growth, willingness to move ahead in acquiring technology, innovation-backing policymakers are pushing local firms to think positive in this line.
Initially Chinese investments were natural resource seeking and later became market–seeking, efficiency–seeking and strategic asset–seeking, respectively. State-owned enterprises (SOEs) and privately-owned enterprises (POEs) were responsible for the said progress. The SOEs of China are keen investing in politically risky host economies acquiring nationally important assets and POEs are more focused on profits and avoiding risky economic environments.
The report is clearly outlining the possibilities of developing economies to promote OFDIs with the intension of acquiring technology and markets. A Turkey-based company ‘Arcelik’ case is positively described as a good example and a pharmaceutical firm in Jordan is also expanding into other countries on the same lines of OFDIs. Some economies are taking restrictive measures in OFDIs since it could affect the balance of payments and capital availability in the home economy.
As per World Investment Report 2018, many countries have taken critical decisions towards foreign investments raising concerns over security and foreign ownership of land and natural resources. Some countries are restricting foreign takeovers in strategic assets and technology firms.
By 2017, the FDI flow to the African region was down by 21 percent, reaching US $ 671 billion, where developing Asia secured US $ 476 billion and Latin America attracted US $ 151 billion, marking an increase of 8 percent from 2016 to 2017, boosted by steady regional economic growth. The global average return on FDIs is down to 6.7 percent. The said drop is well experienced in Africa, Latin America and the Caribbean, where it may affect the FDI flow in the long run.
As per World Investment Report 2018, 126 positive investment policy measures were taken by 65 countries, with the view of attracting more FDIs to their own economies through liberalizing entry conditions, streamlining administrative procedures mainly for transport, energy and manufacturing sectors.
Hundred and one economies around the globe contributing more than 90 percent of the global GDP have introduced FDI-friendly industrial development policies and strategies, in the recent past. These approaches are more focused on global value chain integration, knowledge economy development and sustainable development goals, etc.
FDIs reaching Africa is forecast to be increased to US $ 50 billion, which will be mainly boosted by African Continental Free Trade Agreement effects. FDIs flowing into Asia is expected no growth and would be around US $ 470 billion. FDIs coming to China will continue to grow through the newly declared liberalization plan. Latin America also will not have high hopes and remain around US $ 140 billion in an environment of macroeconomic uncertainties with spillover effects.
Regional trends in securing FDIs in 2017 could be briefly understood as economies in the region of Africa attracted FDIs with a downturn compared to the previous year’s performance. Egypt received US $ 7.4 billion, Nigeria US $ 3.5 billion, Morocco US $ 2.7 billion, Ethiopia 3.6 billion and Ghana received US $ 3.3 billion.
In Developing Asia, only China had a positive growth reaching US $ 136 billion, India had US $ 39 billion with 10 percent downturn; Hong Kong had US $ 104 billion with an 11 percent downturn compared to the year 2016. Singapore also experienced a downward trend of 19 percent but secured US $ 62 billion where Indonesia managed to secure US $ 23 billion with an upward trend compared with the 2016 figures.
Latin America and the Caribbean had a positive trend with Mexico, Colombia, Peru, Brazil and Argentina acquiring approximately US $ 125 billion. World Investment Report 2018 further discussed the FDI values secured by Leased Developed Nations such as Myanmar which secured US $, 4.3 billion, Cambodia US $ 2.3 billion, Bangladesh US $ 2.2 billion, Ethiopia US $ 3.6 billion and Mozambique US $ 2.6 billion in 2017.
The developed economies are more interested in attracting FDIs as priority order of information and communication, professional services, pharmaceuticals and automotive machinery. Developing and transition economies prefer to have the following priority sequence for FDIs: food and beverages, agriculture, information and communication, utilities, construction and pharmaceuticals.
Given the fact that half of the global FDI stock is either owned or located in the US, the tax reform bill implemented by the US government in December 2017 would bring in a change to the overall FDI atmosphere. Multinational enterprises would try to bring funds invested elsewhere back to the US, due to the recently introduced corporate tax regime.
(Reference: World Investment Report 2018 – UNCTAD, Global Investment Competitiveness Report 2017-2018)
(Bandula Dissanayake is Secretary General of the National Chamber of Commerce of Sri Lanka)