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18th of July 2018

Sri Lanka



FDIs – Global Tendencies and Issues

By Bandula Dissanayake

In the Year 2017, global flows of Foreign Direct Investment (FDI) dropped by 23%, in spite of the growth recorded on macro-economic aspects and trade. On an overall basis, there is substantial drop of return on FDIs over the last five years. There is a decrease in mergers and acquisitions, and the said down turn was more experienced by developed and transition economies.

United Nations Conference on Trade and Development (UNCTAD) is paying great attention in promoting investment and enterprise for sustainable and inclusive development in the globe. In view of the above, UNCTAD does research and policy analysis and providing technical assistance to over 160 countries. The global economic governance has different pillars such as multilateral monitory institutions such as IMF, Multilateral trading institutions such as WTO (World Trade Organization), but there is no such institution for Investments and UNCTAD is bridging this gap through various policy related research studies and 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 WTO, World Bank, FAO (Food and Agriculture Organization) and ILO (International Labor Origination) have significantly contributed to these diversified discussions.

In addition to the above, World Bank has taken steps to initiate Global Investment Report which is more focused on Foreign Direct Investment behaviors 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 in to local and global economies. Additionally, investors are more cautious about political stability, security, and favorable macro-economic 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 is reaching an economy even going beyond the official development assistance they receive. Over 40 per cent of global investments amounting to USD 1.75 trillion reached (year 2016) the developing economies provided 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.

The Investment Decisions

The investment policies, local market size, favorable and steady exchange rate and policy, skilled labor force, physical infrastructure, macro-economic conditions and political stability are considered key decision making factors for FDIs. Political stability reflects through 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 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 policy makers and authorities can make environment low risks conducive, in order to attract investments. It is more challenging for government to be competitive with other countries by providing such enabling environment. Every economy is offering 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 & Bilateral Investment Treaties and access to natural resources, access to land, availability of domestic financing sources, availability of local suppliers, high predictability in law and regulations. On overall basis, 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.

There are four types of investors who would be reacting differently for investment policies and administration aspects of a country. Natural resource–seeking FDIs, Strategic asset–seeking FDIs who would be bringing in technology, brands and competitive edge, Market Seeking FDIs who are interested in local or regional market access and Efficiency seeking FDIs who are more interested in cost saving, getting connected with International production networks and or targeting export of production.

Behavior of Multi-National Corporations

Most of the Multinational Corporations through their efficiency seeking FDIs are expecting 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 authorities should encourage them expand 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 unfavorable exchange rate conditions, policy and regulation uncertainty, arbitrary conduct of the government, sudden restrictions on profit transfers.

Developing Economies

Many developing countries are having ineffective administrations, unclear regulations, complex procedures and high transaction costs making them un 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 efficiency of an economy. Most of the developing countries are holding a considerably lower position in above mentioned aspects Levels of bribery and corruption which is not measured by doing business index is also seriously affecting the business environment. It is obvious that 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. 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, administration process would definitely increase not only through transparency, but also assure a level playing opportunity. Such information is not expansively, not availed in developing countries.

Jordan, Pakistan, Costa Rica

As per the Investment Competitiveness Report, Jordan has made available above mentioned information through their 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 their relevant information through Federal Board of Investment.  Costa Rica, through the free trade zone law has very clearly identified the incentives offered for Investments.

OFDIs – China

Outward Foreign Direct Investments (OFDI) of China is at a very high level and it had doubled every year starting from year 2000 until 2016, and it is second only to US OFDI. Chinese investment policy has encouraged this situation and balance of payment, GDP growth, willingness to move ahead in acquiring technology, innovation backing policy makers 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. SOEs of China is 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 in to other countries on the same lines of OFDIs. Some economies are taking restrictive measures in OFDIs since it could affect the balance of payment and the capital availability in the home economy.

As per the 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.

Overall Prospects

By 2017, FDI flow to African region was down by 21 percent reaching USD 671 billion, where developing Asia secured USD 476 Billion and Latin America attracted USD 151 Billion marking an increase of 8 per cent from 2016 to 2017, boosted by steady regional economic growth. Global Average Return on FDIs is down to 6.7 per cent. The said drop is well experienced in Africa, Latin America and Caribbean where it may affect the FDI flow in the long run.

As per the World Investment Report 2018, 126 positive investment policy measures were taken by 65 countries, with the view of attracting more FDIs to the their own economies through liberalizing entry conditions, streamlining administrative procedures mainly for transport, energy and manufacturing sectors. 101 economies around the globe contributing more than 90 per cent 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 USD 50 billion, which will be mainly boosted by African Continental Free Trade Agreement effects. FDIs flowing in to Asia is expected no growth and would be around USD 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 USD140 billion, in an environment macro-economic 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 down turn compared to previous year performance. Egypt received USD 7.4 billion, Nigeria USD 3.5 billion, Morocco USD 2.7 billion, Ethiopia 3.6 billion and Ghana receiving USD 3.3 billion.

In Developing Asia, only China had a positive growth reaching USD 136 billion, India having USD 39 billion with 10% down turn, Hong Kong having USD 104 billion with a 11% down turn compared to year 2016. Singapore also experienced a downward trend of 19% but secured USD 62 billion where Indonesia managed to secure USD 23 billion with upward trend compared with 2016 figures.

Latin America and Caribbean had a positive trend with Mexico, Colombia, Peru, Brazil and Argentina acquiring approximately USD 125 billion. The World Investment Report 2018 further discussing the FDI values secured by Leased Developed Nations such as Myanmar securing 4.3 billion USD, Cambodia having USD 2.3 billion, Bangladesh USD 2.2 billion, Ethiopia USD 3.6 billion, Mozambique securing USD 2.6 billion in 2017.

Developed economies are more interested in attracting FDIs as priority order of;  Information and communication Professional services Pharmaceuticals Automotive Machinery. Developing and transition economies prefer to have the following priority sequence for FDIs; Food and beverages, Agriculture Information and communication Utilities Construction Pharmaceuticals.

Given the fact that half of the global FDI stock is either owned or located in US, the tax reform bill implemented by US government, in December 2017 would bring in a change to the overall FDI atmosphere. Multi National Enterprises would try to bring funds invested elsewhere back to US, due to recently introduced corporate tax regime.

Bandula Dissanayake is Secretary General of The National Chamber of Commerce of Sri Lanka.

Reference: World Investment Report 2018 – UNCTAD, Global Investment Competitiveness Report 2017-2018.   

 

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