INVESTMENT POLICY AND PROMOTION (IPP): DEVELOPING A COHERENT STRATEGY TO GROW AND RETAIN INVESTMENT

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1 INVESTMENT POLICY AND PROMOTION (IPP): DEVELOPING A COHERENT STRATEGY TO GROW AND RETAIN INVESTMENT EDA Annual Professional Conference: April 7, 2016 Hania Kronfol Investment Policy Officer Investment Climate

2 The Global Context Today, more goods and services reach consumers through sales by foreign affiliates than by trade alone There are roughly 100,000 MNEs worldwide, each with an average of 9 foreign affiliates. In 2014, MNE foreign affiliates accounted for: 1/3 of global exports Employment of 75 million Sales of approximately US$36 trillion worth of goods and services, with an added value of more than US$7 trillion The interaction of domestic and foreign investment has also facilitated: technology and know-how transfer upgraded local skills and competitiveness new management practices and better organizational arrangements They key question facing countries is how to insert themselves into the international economy in a way that maximizes the benefits 1

3 Setting an IPP Strategy: Three Key Principles Investment policy is not about choosing between foreign and domestic investment It is about connecting them through global value chains. Trade and investment are two sides of the same coin. Both domestic and foreign investment must be regulated. Foreign investment is not a transaction; it is a relationship An investment policy strategy should not only pursue attraction, but also retention and linkages with the domestic productive sector, thereby maximizing benefits from investment. Not all types of investment are the same Different types of investment have different effects on socioeconomic development and thus require different policies. Countries should align the type of investment with different policies. Different competitive drivers in different sectors. 2

4 Different Types of FDI Natural Resource Seeking Strategic Asset Seeking Market Seeking Efficiency Seeking 3

5 Natural Resource Seeking FDI Driving Factors Location, quantity and quality of natural resources Political Economy and Challenges Social issues: Fair distribution of gains derived from exploitation of resources Environmental concerns Limited diversification Enclave economics: resource-seeking FDI does not always generate strong in-country spillovers; Need to promote forward linkages, diversification and use of surpluses to develop other sectors Relationship with Trade Often export oriented; value added tends to be limited Examples Australia, Canada, New Zealand 4

6 Market Seeking FDI Driving Factors Market dimensions, market growth and income per capita Consumers specific preferences Kind of goods and services to be provided Political Economy and Challenges Policy implications based on effect on domestic production: competing interests likely to resist new entry Success occurs if there is strong competition; need to prevent protectionist policies and private practices Often does not generate exports--until the domestic market is internationally competitive and saturated to push investors abroad Useful to diversify domestic economy, but is rarely single engine of sustained growth Relationship with Trade May be import-substituting, but in smaller economies generates need for imported inputs Examples China, EU, India 5

7 Efficiency Seeking FDI Driving Factors Export-oriented efficiencies Variables that increase global competitiveness, including o Low cost skills o Proximity to markets o Low relocation costs Political Economy and Challenges Due to its potential impact to transform exports, create jobs and generate new GVCs, most countries in the world are seeking to attract this type of FDI Investment climate and competitive features of host country considered crucial; required to enable firms to compete globally Countries must have means to ensure predictability and stability regarding export market Long term sustainability of model requires fostering linkages between leading firms and domestic suppliers Relationship with Trade Export-oriented; leverages GVCs Examples Dubai, Hong Kong, Malaysia, Singapore, Thailand 6

8 Strategic Asset Seeking FDI Driving Factors Internationalization of firms Increasingly globalized markets and competition o Historically North-to-North, but now more North-South, South-South and South- North dynamics Political Economy and Challenges Tends to be focused on M&A; may be politically sensitive depending on the size and type of assets acquired Relationship with Trade May be trade generating by way of GVCs Firm specific assets Branding Know how Human Capital Distribution networks Tourism Location Country specific assets Natural beauty Cultural heritage Historical interests Strategic locational assets Country Assets 7

9 Different Types of Investment and Implications on Job Creation WORK TYPE Knowledgeintensive, highskilled High-skilled, technology intensive work Moderate skilled, varied labor intensities work Agriculture Apparel Automotive IT Hardware Business and IT Services Low-skilled, labor-intensive work Small-scale household based work Source: Gereffi, Luo, April 1, 2014, World Bank Policy Research Working Paper No ECONOMIC UPGRADING 8

10 Translating IPP Concepts to Impact-Driven Reforms Stability & Predictability Effective investment laws, regulation and institutions foster investor predictability to enable longer term planning Jobs Increasing flows of FDI can lead to a quantitative increase and to qualitative diversification of sources of employment Strategic Goals Inclusion Greater economic activity, and FDI linkages and spillovers with the local economy can lead to better living standards However, to maximize the potential of FDI, sound investment policies are required. Increase integration of the private sector into global value chains by: (i) (ii) IPP Vision Removing legal, regulatory and institutional impediments to attracting and retaining FDI Maximizing its integration and spillovers in the domestic economy 9

11 The Investment Life Cycle Economy-wide Sector-specific Vision and Strategy Linkages & Spillovers Promotion and Incentives Protection Investment Attraction Entry Investment Retention Investment Establishment Concrete Reform Activities Sub-national level National level Measurable Development Impact Regional Integration 10

12 Investment Reform Map (IRM): A Framework to Organize Reform Priorities and Empower Reform Champions STRATEGY Step 1: Preliminary Analysis Step 2: Stakeholder Discussion Step 3: Investment Reform Agenda Introduction of investment lifecycle and investment typology as frameworks to help organize reform priorities Regulatory review and initial data collection Identification of areas of potential growth/benefits Proposal of options for enhancing FDI through reform Discussion between WBG and Government to identify: What type of FDI does the country and/or region have now? What kind of FDI does the country and/or region want in the future? What reforms are needed to make that happen? Based on the inputs of the preliminary discussion, exploration to jointly develop an action plan identifying: Priority areas for reform Action to be taken by different agencies Implementation roadmap 11

13 Investment Reform Map (IRM): Applying the Investment Life Cycle STRATEGY Investment Attraction - Investment Promotion - Improve effectiveness of locational incentives Investment Entry - Address discriminatory practices - Reduce/ Eliminate de jure and de facto barriers Investment Retention - Investor Aftercare - Upgrade protection guarantees - Mechanism to track and prevent escalation of Investor-State conflicts Linkages - Foster linkage development policies - Incentives and matchmaking - Attract world class suppliers and new technologies 12

14 Subnational IPP: Punjab, Pakistan Strategy Punjab Investment Policy Statement Attraction Investment promotion in priority sectors; provincial investment incentives inventory/analysis; review and reform of provincial investment promotion agency Vision and Strategy Establishment Investment Reform Map (IRM) identifying priority areas for reform/ business process streamlining Retention Investment grievance tracking tool to identify issues facing investors and prevent escalation Linkages Policies to connect domestic and foreign investors Linkages & Spillovers Investment Retention Investment Attraction Investment Establishment Institutional Coordination Set-up of Investment Climate Reform Unit to help coordinate the implementation of proposed investment policy reforms / feedback to federal government 13

15 Investment Promotion Activities ATTRACTION Investment promotion policy and institutional development Key Entry Points Targeted sector promotion 14

16 The Influence of Investment Incentives ATTRACTION To what extent, and under which circumstances, can incentives influence investors Locational Incentives On where to locate? Behavioral Incentives To engage in certain activities/behaviors? Marginal Investors Infra-Marginal Investors Those investors who consider the incentives critical to their decision to invest. They would not have invested in the same location or engaged in the incentivized activity without the incentives. In other words, these are investors whose decision changed because of the incentive. Those investors whose investment decision was not ultimately influenced by the incentives package. These are investors who would have invested in the same location or engaged in the incentivized activity even without the incentives they received. 15

17 Incentives: Technical Assistance ATTRACTION Improving effectiveness of incentives in attracting investment and achieving various policy objectives (e.g. applying cost-benefit analysis) Analyzing motivations for investment Benchmarking against international practices Improving effectiveness of incentives Fostering transparency and better governance Promoting accessibility to information by building Incentives inventory Reducing discretion in awarding and administering incentives Implementing incentives software solution to share data Promoting good practices to minimize the distortive effects on competition Promoting compliance with international obligations Minimizing distortions to competition Streamlining processes Improving and procedures associated administrative with granting and receiving efficiency incentives Analyzing data on procedures, time and costs of incentives to recommend improvements 16

18 Evaluating Cost-Effectiveness of Behavioral Incentives: Benchmarking Across Regions ATTRACTION Conduct an econometric study at the firm level to assess the effectiveness of behavioral incentives in terms of changes in targeted firm behavior per amount spent on the incentive program o Depending on data availability, techniques such as propensity score matching, difference-in-differences, and/or regression discontinuity design can be used to attribute observed changes in firm behavior to incentives C1 Generate empirical results on effectiveness of support by region and instruments / programs Generate empirical results on impact of circumstantial variables on effectiveness C2 Develop benchmarking report comparing regions in terms of effectiveness coefficients from C1 Present data on instrument use by region and circumstantial variables to illustrate interregional differences explicable by the model from C1 C3 Evaluate program design and implementation determinants of observed effectiveness differences that are not explicable within the modeling framework from C1 17

19 Addressing Barriers to Investment Entry ENTRY Despite longer-term trends in liberalization, protectionism has gained some momentum in recent years. Technical Assistance Transparency Identification of regulatory barriers (de jure and de facto) Assessment of level of discretion by regulatory authorities Investment entry tracking mechanism: identification of investment lost during investment establishment process (from commitment of investment to actual initiation of economic activity) Streamlining of entry procedures Reduction in cost/time Reduction/elimination of substantive barriers 18

20 Typology of Entry Barriers ENTRY Typology Types of barriers Examples De Jure Barriers Barriers in the legal framework Legal and Regulatory barriers Policy decisions Procedural barriers Red tape De Facto Barriers Barriers on the ground Prohibition of foreign investment in certain sectors Restrictions on top managerial personnel Discriminatory licensing requirements Obtaining investment approval Registration or notification of investment Obtaining a work permit or visa Opening a bank account in a foreign currency Having documents recognised A country may prohibit FDI in the retail sector by regulating that only companies owned and controlled by nationals can own supermarkets or department stores A country may restrict the appointment of foreigners to the board of directors and/or to executive-level positions A foreign investor may be required to meet additional conditions in order to get a license to operate (in comparison to a domestic investor) A country may require several different agencies to sign off on investment approval, causing increased time and costs Registration or notification requirements may require detailed, forward-looking information that is time-consuming to prepare Work permits applications may be onerous and lengthy, and may impose restrictions on staff mobility Documentation required to open a bank account may be costly to collect and slow to process A country may require that certain foreign documents be certified or notarised before they can be recognised for establishment Lack of Transparency Substantive laws and regulations of the country may be complex and difficult to access, and decision-making processes may be opaque. Excessive Discretion Decision-makers may have significant discretion, allowing informal practices to creep into the system. 19

21 The Important Role of Reinvestment RETENTION Expansion of existing investments plays an important role in FDI growth o Witnessing a growing prevalence, in particular, of reinvested earnings originating from developed economies However, countries tend to focus efforts on attraction of new investors Investment retention is important not only to expand FDI, but also key for generating confidence in new investors` 20

22 Investment Retention: Technical Assistance RETENTION Focus on key investment policy guarantees: protection against expropriation and breach of contract, freedom to convert and transfer currency, and protection from arbitrary state action Technical Assistance 1. Issue Mapping 2. Tracking and Monitoring Description Use formal and informal survey tools to analyze and identify key Investment Policy issues related to investor retention Establish a formal tracking system to take stock of existing issues (e.g. grievance cases) in a set of topic areas (i.e. related to abovementioned investment policy guarantees), measure the progress achieved over time, and diagnose remaining retention policy barriers 3. Reform Implementation 4. Access to International Risk Mitigation Focus on a) Investment Policy Grievance Management (i.e. enhance implementation of investment guarantees), b) De jure reform (i.e. legal reform) and c) Administrative Procedural Streamlining and De facto enforcement Specific interventions to remove legal, policy and capacity constraints that impede access to international risk sharing mechanisms 21

23 Fostering Linkages with the Local Economy LINKAGES Challenge: Countries struggle to promote linkages from FDI Good Practice Linkages Policies How To: Integrate FDI with local suppliers? Increase the value added of production taking place in the host country? MNE-SME linkage development policies Sustainable SDP policies Remove LCRs Incentives to encourage SME upgrading and local sourcing by MNEs Introduce incentives for SME upgrading Address adverse impact of locational incentives Systematic MNE-SME matchmaking Develop high quality supplier DB Conduct quick win matchmaking Attracting foreign technology Policy framework for licensing, outsourcing and franchising arrangements Ease of entry of skilled expatriates Attracting world-class suppliers Removing legal and administrative barriers to supplier entry Promoting supplier development and domestic value addition through FDI 22

24 Growing IPP Presence: Project Interventions in 40+ Countries 23

25 Contact Information Website Hania Kronfol Investment Policy Officer Xavier Forneris Senior Investment Policy Officer Roberto Echandi Global Lead, Investment Policy 24