Beyond politics: The emerging role of business diplomacy in facilitating foreign direct investment (FDI)

Following more than six years of intense negotiation, 123 member countries of the World Trade Organization (WTO) marked the finalization of the Investment Facilitation for Development (IFD) Agreement and presented it at the 13^th WTO Ministerial Conference in February 2024. Once in force – the IFD is still to be integrated into the WTO rulebook – it will nurture a more transparent, efficient and investment-friendly business climate, making it easier for investors to invest, conduct their day-to-day business, and expand their existing investments.1 

The IFD calls for a whole-of-government approach, providing a key role for investment promotion agencies (IPAs), line ministries, and a wide range of public authorities that grant investment permits and licences. The IFD therefore also provides a new context for the diplomatic functions of the foreign affairs ministry and calls for new and more collaborative approaches.

This is where business diplomacy comes into play. Business diplomacy encompasses a range of activities pursued by personnel in diplomatic missions or embassies – such as commercial attachés and trade representatives – to strengthen private investment and trade relationships between the country of origin and the host country.

Sections II, III and VI of the IFD provide key recommendations for inward business diplomacy, in particular.

Transparency of investment measures

Section II calls for transparency of investment measures related to, inter alia, FDI regulations, entry requirements and FDI registration procedures. In this new framework, embassies can be a first point-of-contact and source of information (via websites, social or other media channels), even before potential investors approach other relevant authorities in the target country.

• Recommendation: Establish easy-to-navigate information portals on embassies’ websites providing an up-to-date overview of investment conditions for potential investors, saving time and effort.

Streamlining and Speeding up Administrative Procedures

An embassy can pro-actively intervene if responsible government authorities fail to handle investors’ applications within an acceptable time frame, or withhold information on the progress of the application. A country’s foreign affairs ministry is usually perceived as a “neutral heavyweight”, which endows it with an effective lever for investment facilitation. It is also directly in charge of handling visa matters in FDI applications. The visa application is often the first administrative process that potential investors face, even before visiting a country to assess its investment opportunities. Embassies therefore have a key role to play in making a good first impression.

• Recommendation: Nurture existing investment leads, streamline processes under the embassies’ direct control (especially granting of visas) and be ready to intervene if bottlenecks arise elsewhere in the registration process.

Sustainable Investment

Business diplomats can establish databases of potential investors in line with Section VI on “Sustainable Investment”, and hence also in line with SDG investment promotion targets.2 They can develop business intelligence on the potential investor’s propensity for responsible business conduct (RBC) beyond mandatory compliance with applicable sustainability legislation, such as the European Union’s Carbon Border Adjustment Mechanism (CBAM) or the recently adopted Corporate Sustainability Due Diligence (CS3D) in the country/region of incorporation. Business diplomats can establish simple classification systems of potential investors along RBC criteria.

• Recommendation: Develop selection criteria for potential investor engagement, prioritizing responsible and impact investors, and be ready to support due diligence assessments.

The recommendations above address inward FDI for the country they represent. Foreign embassies can, however, also play a critical role in facilitating outward FDI (OFDI). While inward FDI drives business diplomacy activities in developing and developed countries alike, 79% of developed countries facilitate OFDI, compared to only 14% of developing countries. United Nations Trade and Development (formerly UNCTAD) defines OFDI facilitation as “advisory assistance, support in participating in international events, coordination of economic missions abroad, connecting with partners in the host country, training, and preparing feasibility and country risk analyses”.3 All of these represent critical tasks of business diplomacy. Export promotion agencies, or internationalization departments of business associations, usually lack detailed country profiles or registers of OFDI opportunities. They should be able to rely on the knowledge of business diplomats stationed in these economies.

This two-way logic of business diplomacy will accordingly require different sets of expertise:

• For inward FDI promotion, the IPA functions of the country of origin should be complemented by in-depth expertise within an embassy’s staff about image-building, country branding, regulatory aspects, investment opportunities etc.
• For OFDI facilitation, knowledge of potential investment project portfolios, and advice on sector restrictions and other entry requirements, should complement IPA services in the host country, or fill the gap where no such services exist.

Capacity-building will be required to develop these skill sets in diplomats, particularly those representing developing countries. International organizations and partners are called upon to design and deliver digital and on-site training programmes covering the topics designed above.4 These should also include techniques for diplomats to identify and engage with often-overlooked types of potential investors, for instance diaspora investors.5

The recently finalized IFD provides numerous pivots for business diplomacy at a time when IPA budgets remain subject to government scrutiny, and are often still constrained by the austerity measures of the COVID-19 years. Financial resources for IPAs’ overseas presence country are therefore either non-existent or shrinking. Business diplomacy will have to fill some of these voids and assume direct responsibility for addressing the widening annual SDG investment gap. To do this, diplomats should be provided with the capacity-building support they need to enable more targeted and effective investor outreach, in both an inward and outward direction.