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Bishan, Singapore. (Image: Chuttersnap via Unsplash)

Adoption of investment facilitation measures for development

To facilitate FDI in developing countries, understanding technical and financial needs to transition from idea to adoption is vital.

 

By Axel Berger, Ali Dadkhah and Zoryana Olekseyuk

Over 100 World Trade Organization (WTO) members are negotiating a new set of rules to facilitate foreign direct investment (FDI). Initiated at the last WTO Ministerial Conference in 2017, the negotiations are primarily being led by developing countries. They anticipate that an Investment Facilitation for Development (IFD) agreement could facilitate FDI attraction and retention, which is a crucial source of development finance to achieve the Sustainable Development Goals (SDGs). Effective tools to attract and retain FDI have grown in importance in the wake of declining global FDI flows since 2016, a negative trend that has been reinforced by the economic shutdown during the COVID-19 pandemic1.

The dynamic policy process within the WTO notwithstanding, we know surprisingly little about the potential benefits and challenges of an IFD agreement, in particular for developing countries. We find the biggest disparity in the availability of quantifiable data on the actual adoption of investment facilitation measures in the countries negotiating the IFD agreement. Without such data, it is difficult to assess the negotiating parties’ potential implementation gaps or their technical and financial assistance needs. This ambiguity may, in turn, prevent developing country member states from actively participating in the negotiations on an IFD agreement for fear that the implementation of additional investment facilitation measures may overstretch their capacities.

We have developed a new and unique dataset that comprehensively maps the adoption of investment facilitation measures at the country level to address these significant data gaps2The Investment Facilitation Index (IFI) provides a snapshot of countries’ investment facilitation efforts, identifies the major advances countries have made and the challenges they will face on the path to implementing the IFD agreement’s conditions. The IFI offers a baseline for monitoring future progress on investment facilitation. We first provide a brief overview of the IFI’s conceptual design and then apply it to a sample of countries. The results show that developing countries suffer from large implementation gaps, and we argue in favour of a pledge of commitment by advanced countries to provide technical and financial assistance.

What is investment facilitation and how can we measure it?

Investment facilitation can be understood as a set of practical measures aimed at improving the transparency and predictability of investment frameworks, streamlining procedures related to foreign investors and enhancing coordination and cooperation3. Investment facilitation is similar to trade facilitation and does not prescribe laws and regulations but instead focusses on process-related matters. The negotiating member states have firmly voiced that an IFD agreement should not cover aspects of investment protection, market access or investor-state dispute settlement. Investment facilitation goes beyond the concept of trade facilitation, however, as it covers behind the border matters that touch on a broader range of regulations and agencies4.

To establish the IFI’s indicators, we collected a broad range of investment measures proposed by international organizations and experts during the WTO negotiations or included in comprehensive trade agreements. The 117 measures covered by the IFI are organized into six distinct policy areas (see below). Of the 86 countries in our sample, 53 are non-OECD and 33 are OECD countries. Taken together, they generally represent all regions and income groups around the world.

berger graphic 1.1-update2
Source: Berger et al. (2021)

To quantify the adoption of investment facilitation measures, an in-depth analysis of the respective countries’ current investment regimes was conducted. Data were drawn from publicly available sources, for example from government websites, sites promoting investment, or from official publications such as investment acts and guides. We applied a multiple binary strategy with scores of 0, 1 and 2, and carried out an expert survey to inform our weighting scheme for determining the significance of individual policy areas for FDI promotion. A multiple binary coding scheme is a simple and transparent method, and the loss of information when transforming continuous data to multiple binary data is limited5. Also, this approach seeks to reflect not only the regulatory framework in the concerned countries but also the state of adoption of various investment facilitation measures.

Adoption of investment facilitation measures across countries

The IFI reveals that countries’ current adoption levels of investment facilitation measures differ considerably. Scores range between 0.23 for Benin and 1.73 for the United States6with an overall average of 1.09 (with the maximum score being 2). The figure below illustrates that developing countries, in particular, have fewer investment facilitation measures in place than developed countries.

IFI score per country

Source: Berger et al. (2021)

Another distinct pattern that emerges is that the adoption of investment facilitation measures is highly correlated to a country’s stage of economic development. Figure 2 shows the distribution of IFI scores for different income groups and suggests that low-income countries have both the lowest average and median scores (0.55 and 0.57, respectively), while high-income countries report the highest values, with an average score of 1.27 and a median score of 1.32. Middle-income countries are positioned between these two, with averages of 0.80 (lower middle-income) and 1.10 (upper middle-income countries). At the same time, we find that some low-income countries, such as Guinea (score: 0.88), have higher scores relative to some high-income countries such as Kuwait (0.71), Barbados (0.77) or Malta (0.79).

Distribution of IFI scores by income level

Source: Berger et al. (2021)

The distribution of IFI scores according to geographic region also provides some interesting insights (see figure below). Sub-Saharan Africa and the Middle East & North Africa have the lowest values, with averages of 0.70 and 0.72, respectively. Countries in Latin America & Caribbean perform slightly better, with an average of 1.02. Asian and European countries have a similar distribution, with an average of 1.19 and 1.23, respectively. We only find very high values for North America (average and median scores of 1.64), which is not surprising since the two countries representing the region, Canada and the United States, are amongst the top 10 highest scorers.

Distribution of IFI scores by region

Source: Berger et al. (2021)

Policy conclusions

The IFI is a targeted tool that can be used to closely monitor and benchmark country performance in investment facilitation. High and low performers are found across all income groups, and the adoption level of investment facilitation measures within groups is far from homogeneous. The IFI further reveals that countries with the lowest FDI levels—and that clearly lack appropriate policy tools to attract FDI—have the lowest adoption level of investment facilitation measures. Thus, the dataset is of direct relevance for current policy discussions on investment facilitation. An IFD agreement might exert pressure—which will be higher for countries with lower levels of adoption—to reform their investment facilitation policies. Pressure to reform on its own will not, however, be sufficient to overcome existing hurdles. Many developing countries will need additional technical and financial assistance to adopt and implement sound investment facilitation measures. Such a technical and financial assistance framework can be modelled after trade facilitation agreements (TFAs) which make the implementation of certain trade facilitation measures by developing countries conditional upon external support. Commitments to technical and financial assistance by high-income and upper middle-income countries should therefore become an integral part of the agreement being negotiated at the WTO. Closer cooperation between the WTO and international organizations that are already actively supporting investment facilitation for the implementation of a future IFD agreement should also be pursued. The IFI can play a valuable role in helping identify adoption gaps and in prioritizing technical assistance and capacity-building needs.

  • Axel Berger is Political Scientist and Senior Researcher in the Research Programme "Transformation of Economic and Social Systems" at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) in Bonn.
  • Ali Dadkhah is Director and Principal of Dadkhah Consulting and Research Associate with Ciuriak Consulting.
  • Zoryana Olekseyuk is Senior Researcher in the Research Programme “Transformation of Economic and Social Systems” at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) in Bonn.

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

References

  1. UNCTAD (2021) World Investment Report 2021. Investing in Sustainable Recovery. Geneva: United Nations Conference on Trade and Development.   
  2. Berger, A., Dadkhah, A., & Olekseyuk, Z. (2021) Quantifying investment facilitation at country level: introducing a new index. (Discussion Paper 23/2021). Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE). 
  3. Berger, A., & Gsell, S. (2019)  How can an international framework for investment facilitation contribute to sustainable development? (Briefing Paper 15/2019). Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE).  
  4. Novik, A., & de Crombrugghe, A. (2018) Towards an international framework for investment facilitation. OECD, Investment Insights.  
  5. OECD (2009) Methodology for deriving the STRI. Tech. rep., OECD, OECD Expert meeting on the Services Trade Restrictiveness Index (STRI) Paris, 2-3 July 2009. 
  6. It is worth noting that the United States has remained outside the IFD negotiations at the WTO. It has been included in the IFI as it is a key FDI source and destination country.

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