Investment Facilitation for Sustainable Development: Index maps adoption at domestic level

Axel Berger, German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

Investment Facilitation for Sustainable Development: Index maps adoption at domestic level

Investment Facilitation for Sustainable Development: Index maps adoption at domestic level

Axel Berger, German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
8. Oktober 2019

Global investment needs are enormous in order to bolster the implementation of the 2030 Agenda for Sustainable Development, in particular in developing countries. Foreign direct investment (FDI) flows not only bring capital to developing countries, but also employment, export opportunities, advanced technologies and managerial know-how. To harness the benefits of FDI, it is crucial that governments have policies, regulations and measures in place that help to attract and retain FDI and enhance its contribution to sustainable development.

Against this background, international discussions on better ways to facilitate the flow of investment have intensified. While international investment agreements are criticised due to their one-sided focus on the legal protection of foreign investors who can challenge host country laws and regulations by means of investor-state dispute settlement (ISDS), investment facilitation is being discussed as a new policy tool to promote FDI.

Investment Facilitation is not about the protection or liberalisation of foreign direct investments. It is about implementing practical measures to improve the transparency and the predictability of domestic investor-related systems.

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Briefing Paper: Investment facilitation for development: a new route to global investment governanceIn 2015, Brazil started to negotiate an innovative type of international investment treaty that focused on investment facilitation and cooperation. Furthermore, cooperation on investment facilitation has been on the agenda of global and regional fora such as the G20 and APEC and is promoted by international organisations such as the OECD and UNCTAD. A group of 69 WTO members signed a Joint Ministerial Statement on Investment Facilitation for Development Statement during the 11th Ministerial Conference in Buenos Aires in December 2017 calling for the start of “structured discussions with the aim of developing a multilateral framework on investment facilitation”. The WTO Structured Discussions started in March 2018 to identify possible elements of a potential international Investment Facilitation Framework ahead of the 12th Ministerial Conference in Kazakhstan in June 2020.

In light of this dynamic policy process: What do decision makers, in particular in developing countries, need to make informed decisions about the negotiations of multilateral disciplines on investment facilitation? We believe more evidence is needed on the landscape of investment facilitation measures, challenges of developing countries as well as on possible scenarios of a multilateral agreement. We therefore:

The German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) conducts this research and policy advice in close collaboration with international partners including the Iowa State University, Graduate Institute, Dadkhah Consulting and Deutsche Gesellschaft für internationale Zusammenarbeit (GIZ). Funding by the German Federal Ministry for Economic Cooperation and Development (BMZ) is gratefully acknowledged.

What is the Investment Facilitation Index?

To help governments improve their investment procedures, reduce investment costs, boost FDI and reap greater benefits from international trade, we have developed the Investment Facilitation Index that identifies areas for action and enables the potential impact of reforms to be assessed.

The Investment Facilitation Index helps to conceptualise the scope of investment facilitation along 6 policy areas and includes 117 individual measures.

The index covers the full spectrum of investment procedures for 69 WTO members which have signed the Joint Ministerial Statement on investment facilitation representing different income levels, geographical regions, and levels of development. Each indicator is composed of several specific, precise and fact-based variables related to existing investment-related policies and regulations and their implementation in practice.

The index maps the adoption of the current investment facilitation measures at the domestic level. In order to validate the domestic adoption of investment facilitation measures, a review of the current investment regime for the economies covered in the index has been performed. Data are drawn from publicly available information, for example from governmental or investment promotion websites or official publications such as investment acts and guides as well as existing databases. The index maps the adoption of investment facilitation measures at country level. In order to validate the domestic adoption of investment facilitation measures, a review of the current investment regime for the countries covered in the index has been performed. Data are drawn from publicly available information, for example from governmental or investment promotion websites or official publications such as investment acts and guides as well as existing databases.

The Investment Facilitation Index is the basis for analyses of the economic impacts of a potential multilateral investment facilitation agreement and allows to measure the costs associated with the implementation of investment facilitation measures.

Furthermore, the index allows to identify reform gaps of the economies participating in the WTO Structured Discussions and can be used to tailor capacity-building initiatives in developing countries. The index is a valuable tool for investors to navigate the investment regime of a variety of countries.

 

Method

In order to enable the measurement of qualitative information about regulatory processes, the index uses a multiple binary strategy that reflects the state of implementation of investment facilitation measures:

Variables are broken down on thresholds of 0/1/2 where variables depend on numerical answers. The measures included in the Investment Facilitation Index are weighted according to their importance for the promotion of FDI. The weighting scheme relies on the judgment of more than 125 experts from international organization, academia, private sector and government. The experts have been asked to allocate 100 points among the six policy areas mentioned above. These are translated into weights by assigning the points the experts allocated to the policy area to each measure that falls under it. Furthermore, the weight assigned to each policy areas is corrected for differences in the number of measures under each policy area.

 

 

The index's scores and main findings

The Investment Facilitation Index makes clear that particular developing countries have fewer investment facilitation measures in place compared to developed countries. The boxplot below shows the distribution of Investment Facilitation Index scores for different country groups. In principle, the Investment Facilitation Index can range from a minimum score of 0 to a maximum of 2. What becomes apparent is that for low income countries the median score is below 0,4 while in developed countries it is above 1,3. At the same time, the spread indicates that there are some low-income countries such as Guinea (score: 0,81) that have higher scores compared to some high-income countries such as Kuwait (0,66) or Malta (0,78).

 

Boxplot: Investment Facilitation Income score per income group

 

Scenarios of an international Investment Facilitation Framework

As an important prerequisite to measure the benfits and costs of a future international framework for investment facilitation it is necessary to consider possible scenarios of such a framework. Drawing on the investment facilitation proposals tabled by different WTO members it is possible to define a middle-range and a comprehensive scenario for an international Investment Facilitation Framework. The middle-range scenario is based on Brazil’s illustrative example for a potential future agreement. The comprehensive scenario, in addition, includes measures included in the other proposals submitted by Russia (30 March 2017), MIKTA (4 April 2017), China (21 April 2017), Friends for Investment Facilitation (FIFD) (21 April 2017), Argentina and Brazil (April 24 2017) and Brazil (13 December 2017). The combination of measures from these proposals reflects a deeper reform potential of a international Investment Facilitation Framework.

The graph makes clear that:

While a middle-range or comprehensive scenario has only a marginal impact on many developed countries, developing countries face much more extensive policy reforms after entering into an international investment facilitation agreement.

Economies such as Korea, Germany or Australia will have the least changes in their investment facilitation rules and regulations since they have already adopted most of the commitments sought in the Structured Discussion. Compared to their current policy framework, they would have to implement 2.5% (4.4%), 3.0% (5.0%) and 4.5% (7.5%) additional measures respectively under the middle range (or comprehensive) scenario. On the other hand, developing countries such as Liberia, Benin or Togo would have to undergo significant changes to their investment facilitation laws and regulations as a result of implementing the middle range or comprehensive scenario. For Togo and Liberia the implementation would lead to 91% (133%) and 234% (332%) additional measures while Benin would have to cope with 282% (409%) in additional measures compared to currently implemented laws and regulations.

The analysis of the Investment Facilitation Index scores underline two points:

  1. developing countries can use the membership in an international framework for investment facilitation to substantially reform their investment-related framework and thus potentially increase their attractiveness for foreign investment, and therefore the potential for development impact from FDI. Such reform efforts would be beneficial to domestic investors as well as most investment facilitation measures apply to foreign and domestic investors.
  2. to undertake a substantial reform effort that necessitates the implementation of a broad range of investment facilitation measures, they need external support.

An international Investment Facilitation Framework should, therefore, follow the capacity building commitments precedent of the Trade Facilitation Agreement and make the implementation of groups of investment facilitation measures by developing countries conditional on support by other economies and organisations.

Investment Facilitation for Sustainable Development

Investment facilitation covers a wide range of areas, all with a focus on encouraging investment to flow efficiently.

In the light of the 2030 Agenda, a focus on the attraction of more FDI is necessary but not sufficient; it is also important to focus on the qualitative contribution of FDI to sustainable economic growth in host countries that is socially just as well as environmentally friendly, and enhances governance capacities of host countries.

Briefing Paper: How can an international framework for investment facilitation contribute to sustainable development?While the investment facilitation discussions are driven by a group of developing countries, a number of developing countries at the moment do not participate in the Structured Discussions at the WTO. Often they fear a loss of policy space to pursue domestic sustainable developmental strategies. As discussed above, our research shows that developing countries have implemented fewer investment facilitation measures than have developed countries. While such an international framework on investment facilitation could help to promote FDI, it would at the same time result in high implementation costs for implementing the disciplines of such a framework. In a recent Briefing Paper, we make six key recommendations how an international Investment Facilitation Framework can contribute to sustainable development in developing countries:

  1. Poor countries are in need of support and capacity building by the international community to enable them to meet the challenge of improving their domestic institutions and thereby enhancing the contribution of foreign investments to sustainable development.
  2. In order to effectively participate in the negotiation of an international Investment Facilitation Framework, developing countries need additional support by the international community in the form of negotiation training and support to enhance negotiation capacity.
  3. An international framework on investment facilitation should respect the policy space of developing countries that is needed to support sustainable development.
  4. Special and differential treatment provisions should focus on longer implementation periods, coupled with implementation support by the international community.
  5. An international Investment Facilitation Framework should entail commitments by home countries to encourage their investors to act in accordance with international guidelines for responsible business conduct.
  6. Commitments to intensified international cooperation should be a cornerstone of an Investment Facilitation Framework as a means to share best practices on investment facilitation measures that are particularly helpful in promoting sustainable development.

 

Axel Berger is Senior Researcher at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE). Follow him on Twitter.


Policy recommendations for the G20:

In order to provide overall guidance for policy discussion at the multilateral, regional and national levels, the G20 can play a crucial role to achieve effective, coherent, and development-oriented outcomes. Within the context of the Think20 process during the Japanese G20 presidency we have teamed up with a number of internationally recognised scholars to propose a set of 10 non-binding Guiding Principles on Investment Facilitation for Sustainable Development.

 


Header photo: WTO/Flickr (altered) https://www.flickr.com/photos/world_trade_organization/38338987184/in/album-72157690815449785/

 

 

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