The evolving international regulatory framework for FDI, new developments and implications for frontier and emerging markets
Speech by Ms. Aranch González, Executive Director, International Trade Centre
Delivered on 08 April 2014 at the Annual Investment Meeting 2014 (AIM) plenary session I in Dubai, United Arab Emirates
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Sultan Al Mansouri, Minister of Economy of the United Arab Emirates
Secretary General of UNCTAD, Mukhisa Kituyi
Distinguished Members of the Panel
Ladies and Gentlemen
I am pleased to deliver the key note address today on a topic which is inextricably linked to the focus, mandate and trade-related capacity building of the International Trade Centre (ITC) - identifying and securing the tools which developing countries can use to deepen and strengthen their development.
Foreign capital inflows are a critical input into a country’s economic progress. Attracting foreign direct investment (FDI) is associated with macroeconomic, political and social stability and effective investment policies can increase spending in infrastructures, productive industries, added-value services and innovative activities. UNCTAD’s World Investment Report 2013 recognised the positive correlation between a country’s participation in Global Value Chains (GVC) and its GDP-per-capita growth rate. For this reason alone, FDI is a critical instrument in achieving sustainable development and should be factored into the discussions on the post-2015 development agenda.
During the last 15 years in particular, emerging economies and middle income countries have played a major role in shaping FDI flows. The current FDI reality sees the growing importance of developing countries both as host countries of FDI and as a significant source of FDI. Developing and emerging economies accounted for around 60% of total inward FDI flows in 2013 and around 30% of outward FDI flows are coming from developing countries, mainly the emerging economies.
This new scenario illustrates that 21st century competition is not only on attracting FDI, but also on ensuring a presence of national enterprises in other economies. In fact, governments are today providing support not only to foreign investors to establish affiliates in their countries, but also to national enterprises to go abroad. Government investment agencies also serve national enterprises and assist them to internationalise. The objective here is twofold: to strengthen the competitiveness of national firms and to facilitate access to foreign markets, resources, technology and know-how.
Despite FDI being the centrepiece of development strategies in many economies, post the 2008 financial crisis, inward FDI flows have never again reached the over US$2 trillion peak of 2007.
What can be done today to implement an international regulatory framework that reassures economic operators that the world is still full of investment opportunities? The answer is, in my view, a straightforward one. Build a legal framework favourable towards those operators offering the biggest growth potential. And here I speak about the ITC’s biggest client base- the small and medium-sized enterprises (SMEs).
SMEs form the backbone of economic life in developing countries – as well as in developed economies I would add. Promoting cross-border investments and creating a facilitative environment to make trade and investment easier, is a sustainable way to encourage and provide strong incentives for SMEs in the developing world and emerging economies to optimize their productive processes and operate efficiently. ITC focuses on the “competitiveness” of SMEs and better anchoring this competitiveness to sustainable development practices. The key is to enhance the ability of countries to positively exploit the inter-connectedness of economic operators.
In order to maximize direct benefits of FDI for both home and host countries, it is important to support policies and regulations aimed at making a country attractive for investors. Stability, transparency, predictability are key principles. Finding the right balance between protecting investment and regulating investments at home is also crucial. This is where in my view there is a growing convergence of opinions between developed and emerging economies.
The great convergence lies in the inherent complementarity between trade and investment and the necessary coordination in policies and regulatory frameworks required at the international, regional and national levels.
The merge of trade and investment promotion organisations, for example, is symptomatic of this and is increasingly occurring in both developed and developing economies, such as in Liberia, Sweden and, more recently, France. Trade and investment regulatory frameworks are increasingly being seen as two sides of the same coin and to address these policies in concert is to better facilitate the internationalization of companies. If in the past, investment decisions were led by trade trends, today, trade dynamics are shaped by investment decisions, as companies are scattering their production and distribution lines across countries, in search for optimal business environments and production factors.
Although there is a clear tendency to review and reshape the international regulatory framework for FDI, there is no clear understanding of which form it should take. This has implications at a number of levels: the way that developing countries approach Bilateral Investment Treaties and International Investment Agreements; the possible impact of the new mega-deals being negotiated, in areas such as state owned enterprises, for example, and the role of private standards in framing investment and connecting with GVCs.
Allow me to elaborate on one of these areas: the role of private standards
The negotiation of the investment liberalization and protection clauses in mega-deals currently being negotiated has re-launched the discussion on the development impact of foreign investments.
A general framework of private and international standards to address this issue does exist, for example through the UN Global Compact and the OECD guidelines for Multi-National Enterprises (MNE). However, these principles are voluntary. One important consideration is the careful attention being paid by financial institutions to the social and environmental impact of their portfolio. Think of the environmental and social risk management tools of the Equator Principles or of the IFC Performance Standards.
At ITC we take the spirit of this work to the enterprise level and we have found that Corporate Social Responsibility (CSR) is increasingly becoming a standard feature in the ethos of these enterprises; particularly for large and consumer-oriented firms. And CSR provisions are even finding a place in International Investment Agreements. Yet, there is limited understanding of how to operationalize CSR and how to manage it for desirable results at the ground level. This gap is particularly salient in the buying relationships with producers in developing countries.
Voluntary sustainability standards, such as Organic and Fair Trade, present an important step in this process. Among the major global food firms in terms of consumer brands, there has been a remarkable consensus on the commitment to certified products. As an example, in 2011, 28% of the tea purchased for all Unilever brands was sourced from Rainforest Alliance certified farms, and Unilever plans to have 100% of its tea certified by 2020. There are several other examples that show the growing importance of private standards in setting a framework for international trade and investment transactions. See the example of Ethiopia, which developed its rose-export industry thanks to foreign investments. Today Ethiopia ranks 3rd in the world for exports of fresh cut roses and sustainable rose-farming practices are ensured through private standard certifications.
The world of private voluntary standards is large and diverse and at ITC we strive to improve transparency in this area. We believe that building the capacity of firms and SMEs to recognise and meet private standards provide opportunities for enterprises to connect with regional and global value chains and diversify their markets. A short commercial here for ITC’s recent launch of the new Standards Map which is a market intelligence tool that allows for a comparison of voluntary standards and the production of bespoke reports to help SMEs make better decisions on standards, certification and incorporating sustainable production into their business.
Within all of this there is the matter of competitiveness. Companies need assistance to recognise, address and meet requirements imposed by the web of trade and investment regulations, increasingly in the area of non-tariff barriers such as in the facilitation of trade (the recently agreed WTO Agreement on Trade Facilitation will go some way to addressing this). Tackling competitiveness also means helping governments nurture a business environment conducive to local value addition.
Growing international economic and business integration is not and does not have to be exclusive to large transnational corporations. As development actors, we should strive to make sure that stable institutional and business links can improve the competitiveness of local companies. An effective regulatory framework is one that facilitates the participation of SMEs in international production chains.
I look forward to a robust debate on these are other issues today.
Thank you for your attention.