Unlocking FDI development gains through facilitation
The World Trade Organization’s (WTO) Trade Facilitation Agreement (TFA) holds enormous promise to gear up trade flows. WTO estimates suggest successful implementation of the TFA could reduce trade costs by 14%, which in turn could raise global goods exports by US$ 1 trillion a year – potentially boosting the world economy at a time of flagging growth. What is more, the body’s World Trade Report found that developing countries stand to capture more than half those gains, a ramification with significant implications for international development efforts.
Still, trade facilitation cannot be the only lens through which we seek to unlock development gains. Fundamental structural changes in the global economy over the past 20 years have led to investment and trade becoming enmeshed. The rise of multinational firms created intricate international production networks, which now account for more than a quarter of the world’s economic output and 80% of global trade. This shows trade and investment are inextricably linked. Efforts invested to reap greater gains through the one need to be matched by similar efforts to grease the other. Trade facilitation without a concomitant push to smooth the way for increased investment will not unlock economic growth in a sustained manner.
At the same time, development imperatives as enumerated under the Sustainable Development Goals (SDGs) have amplified the central role investment must play if we hope to meaningfully deliver on the 2030 Development Agenda. SDG-related investment needs run as high as US$ 4.5 trillion per year in developing countries alone, data from the United Nations Conference on Trade and Development (UNCTAD) show. Yet current investment levels leave a gaping shortfall of some US$ 2.5 trillion, an amount far outstripping the combined mettle of public investment, aid flows and remittances. Private sector investment can meaningfully bridge that gap. The collective US$ 6 trillion of cash holdings on the balance sheets of multinationals and several hundred trillion dollars of financial assets show the private sector is amply up to the task. It is simply a matter of mobilizing those funds and channeling them to the SDGs sectors and unlock development benefits.
The development potential investment holds is well acknowledged by governments. However, investment facilitation measures are far from sufficient in most national policy suites. Governments show a strong inclination to offer incentives to lure investment; to address grassroots-level obstacles, not so much.
An UNCTAD survey of foreign direct investment policies shows more than 1,000 new investment policies were set up over the past decade. Yet, for the 323 investment promotion and facilitation measures the overwhelming majority related to investment incentives or special economic zones-type benefits, while only 24% constituted concrete investment facilitation measures. This means a range of inexpensive, potentially valuable policy fixes go unheeded while opaque legal or administrative requirements, cumbersome operating environments and costly business requirements prevail. Rather than handing out incentives, eliminating such constraints would be a far more compelling key to unlock investment flows and create a business environment that keeps investors invested.
The same issue marks investment policies at the international level. Concrete investment promotion and facilitation actions are either weak or absent in most of the existing 3,300 international investment agreements (IIAs). UNCTAD examined 1,200 IIAs and found that only 22% contain some sort of investment facilitation provisions. Even those agreements explicitly dealing with investment facilitation issues command few, if any, effective measures. Far more work than this would be needed to win over wary investors.THE ACTION MENU
UNCTAD crafted an Investment Facilitation Action Menu* that systematically signposts policy options which can be adopted and adapted by countries at the national and international level to create a better operating environment for investment. The overarching rationale is to unlock investment flows, particularly in productive sectors, while contributing towards sustainable development. In brief, the action areas propose to:
- Promote accessibility and transparency in the formulation of policies, regulations and procedures relevant to investors. This can include a centralized registry of laws and regulations and a mechanism to provide timely notice of changes in procedures, standards, technical regulations and conformation requirements.
- Enhance predictability and consistency in the application of investment policies through, for instance, systematizing and institutionalizing the application of investment regulations.
- Improve the efficiency and effectiveness of investment administration procedures. This can be done through shortening and simplifying licensing, registration and taxrelated procedures; establishing online one-stop approval authorities; and clarifying the roles and accountabilities between levels of government.
- Build constructive stakeholder relations. This can be accomplished through establishing and maintaining mechanisms for regular consultations and dialogue with investment stakeholders through the lifecycle of investments; and mechanisms to engage interested parties in lawmaking and policy-review processes.
- Designate a lead agency or facilitator with a mandate to address investor complaints and suggestions; track and manage disputes; manage smooth information flow; and liaise with relevant government institutions on recurrent problems.
- Establish monitoring and review mechanisms for investment facilitation, such as diagnostic tools and indicators on the effectiveness of administrative procedures and measuring and benchmarking the performance of institutions involved in facilitating investment.
- Enhance international cooperation for investment facilitation. This can be done through consultation between relevant authorities; collaboration on anti-corruption efforts in investment processes; and institutional expertise exchanges.
- Strengthen investment facilitation efforts in developing-country partners through technical assistance and support in a range of areas, including bolstering transparent and effective administrative procedures; building capacity for preparation of regulatory feasibility studies; and building actual institutional capacity, including those of investment promotion agencies (IPAs) and other relevant authorities.
- Enhance investment policy and promotion in developing-country partners, including through policy reviews and the design of effective investment promotion strategies and building capacity to provide post-investment or aftercare services.
- Enhance international cooperation on investment promotion and facilitation for development through provisions in IIAs. This can include advocating for high corporate governance standards and responsible business conduct by outward investors; encouraging home countries to provide outward investment support, such as political risk coverage, investment insurance or facilitation services; and establishing regular consultations between relevant authorities or formal collaboration between outward investment agencies and IPAs.
As is clear from the above, the areas for action are framed along two axes. The first set of proposals can be deployed by countries in their own interest. The second set of action lines is aimed to smooth the investment environment of developing country partners and stimulate global collaboration in the area of investment facilitation. In the absence of a formal governance mechanism for global investment, the spark to kindle formal collective collaboration is absent. Still, organizations such as UNCTAD and the World Bank work unceasingly in the area to develop expertise and collate best practice. The ultimate aim is to incrementally pave the way for greater international cooperation in an area sorely in need of such aid.