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.
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.
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.
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.
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.
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.
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.
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.
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.
Investment decisions
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.
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.
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.
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.
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.
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.
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.
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.
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.
Developing economies
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Overall prospects
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.
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.
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.
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.
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.
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.
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.
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.
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.
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)
