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Making foreign direct investment work for all

By Supachai Panitchpakdi, secretary general, United Nations Conference on Trade and Development

More private investment is needed to help sustainable development. Stimulous packages and state aid alone are not enough

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“Narrowing the development gap and reducing poverty are integral
to our broader objective of achieving strong, sustainable and
balanced growth and ensuring a more robust
and resilient global economy for all”
G20 Leaders’ Declaration, Toronto

In the immediate aftermath of the economic crisis there has been a new, more interventionist role for the state in several economies. Large-scale public investment by several governments has so far rescued the global economy from a prolonged depression, and is stimulating the recovery in many areas. However, as stimulus packages and state aid are exhausted or removed, private investment must step in to avoid a double dip recession and to ensure a return to sustainable growth and development. The public sector alone cannot indefinitely shoulder this burden.

The many problems left by the crisis, such as high unemployment, large public debts and jobless growth, could be alleviated by a renewed commitment to investment by private business. Additionally, raising the level of private investment can also set countries on a path toward sustainable development and orient the economy toward a low-carbon future. This holds especially true for developing countries.

Foreign direct investment (FDI) in particular can offer a valuable contribution to the long-term sustainable growth of developing countries. FDI as a share of total private capital flows to developing countries rose from 60 per cent in the 1990s to 83 per cent in 2008. Similarly, FDI as a share of total capital flows, including official development assistance (ODA), to developing countries has risen from 46 per cent to 72 per cent in the same period.

Between 2006 and 2008, in the poorest countries (known as the least developed countries, or LDCs) FDI was on average equivalent to 28 per cent of gross domestic capital formation. However, much of this investment was concentrated in a few countries only, mainly those with rich endowments of natural resources. To ensure that development is sustainable and that it benefits a greater number of people, it is imperative that foreign private investment be channelled to a broader range of LDCs and industrial sectors. As G20 countries are the source of two-thirds of global FDI outflows, they could play a more active role in facilitating private investment flows to developing and least developed countries.

How can FDI foster strong, sustainable and balanced growth?

FDI can help build an economy’s productive capacities in industry and agriculture, as well as contribute to infrastructure upgrading. Better infrastructure in energy, transport and telecommunication networks will facilitate production and trade. In turn it can attract further FDI. Moreover, FDI in the services sector, for example, can help improve access to water, education and health care — especially for the poor and marginalised. FDI can also generate spill-over effects by increasing domestic demand and encouraging domestic enterprises to supply FDI-receiving industries. This again can lead to a virtuous cycle of more domestic employment, which generates even more domestic demand. This is the start of a sustainable growth path that can contribute to poverty reduction.

There are many ways to address the interface between investment and poverty. Among others, there is a need to steer investment, via effective promotion and facilitation policies, towards the ‘bottom of the pyramid’. This could be done by creating jobs and opportunities for the poor and marginalised or by encouraging foreign investors to develop sustainable and beneficial business models for LDC economies. The eighth meeting of the International Investment Advisory Council of the United Nations Conference on Trade and Development, in September 2010, advised that foreign investors need to be encouraged to invest in the poor (viable and sustainable investment in poverty alleviation), for the poor (accessible and affordable products and services) and with the poor (fostering business linkages with domestic small and medium-sized enterprises). More broadly, investment needs to be directed to those areas and industries where it can generate maximum development benefits, such as enhancing food security, improving energy efficiency or upgrading infrastructure.

In an era of rapid climate change, the issue of investment in a low carbon economy is particularly urgent. UNCTAD’s 2010 World Investment Report estimated that in 2009 FDI flows into renewable energy, recycling and low-carbon technology manufacturing alone amounted to $90 billion. Transnational corporations that invest abroad can contribute to global efforts to combat climate change by improving production processes, by supplying cleaner goods and services and by providing much-needed capital and cutting-edge technology. To support global efforts to combat climate change, UNCTAD has recommended the creation of a global partnership focusing on establishing clean-investment promotion strategies, enabling the dissemination of clean technology, maximising the contribution of international investment agreements to climate change mitigation, harmonising the corporate disclosure of greenhouse gas emissions and setting up an international low-carbon technical assistance centre (L-TAC) for developing countries.

What conditions and controls does FDI need to enhance its benefits for all?

Improving the legal and regulatory frameworks for investment in host countries plays an instrumental role in attracting private investment — including foreign investment — and simultaneously ensuring development benefits for the host country. In many countries, especially the LDCs, improvements are still required in their regulatory, institutional and absorptive capacities. Technical assistance can help investment promotion agencies in LDCs develop their capacity to target relevant technologies and attract those investors that contribute best toward the transition to a low-carbon economy. Assistance can also help LDCs become competitive in the emerging low-carbon world economy. Developing human resources, promoting entrepreneurship and enabling linkages between domestic enterprises and foreign companies are all important in this regard.

Improving coherence among global, regional and national investment policies, as well as between investment and other public policies (such as those related to financial system reform and climate change), would further help to create an overall enabling framework for harnessing investment for today’s development challenges. Despite some progress in recent years, the world is still in need of a sound international investment regime that effectively promotes sustainable development for all.

How can the G20 galvanise a proper international FDI regime?

The G20’s commitment not to engage in protectionism remains a critical element in ensuring that FDI continues to foster growth and development in developing countries. Yet more could be done to fully exploit the development potential of FDI. G20 members, as well as other economies with potential for outward investment, could contribute by strengthening existing mechanisms (such as incentives, risk insurance and guarantees) and by developing innovative mechanisms that could help generate investment for development. In this context, cutting-edge research needs to devise policies that successfully encourage and attract outward investment, as well as related technical assistance and capacity building. Policies must also be strengthened to effectively link transnational corporations and domestic companies in host countries, connecting LDC companies to global value chains and thereby strengthening LDCs’ productive capacities and international competitiveness. Sharing relevant experiences, best practices and collective learning can also play an important role. UNCTAD has made several such proposals to the G20.

However, there remains the broader question of whether the current international investment regime is suitable for future growth and development. The global system of economic governance lacks strong and coherent international investment rules. Whereas international trade is governed by the World Trade Organization and financial flows are largely overseen by the International Monetary Fund, no comparable institution or international set of rules exists in the area of investment. Instead, international investment relations are governed by myriad overlapping rules in almost 6,000 different agreements. This brings the problem of a lack of consistency between the rules and the challenge of addressing and settling disputes arising from them.

In the post-crisis era, the world can no longer afford such a fragmented and inefficient approach to investment for development. At the UNCTAD World Investment Forum 2010, in Xiamen, China, heads of state, ministers and business leaders called for coordinated international action to ensure that the international investment regime works for sustainable development. This means, first and foremost, a commitment to ensure responsible investment, which is being explored by the joint initiative of UNCTAD, the World Bank, the Food and Agriculture Organization and the International Fund for Agriculture and Development for responsible agricultural investment. The issue of development responsibility must figure prominently in any efforts to tackle the fragmented international investment regime. G20 members play a crucial role in supporting such efforts.

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