To facilitate FDI in developing countries, understandingtechnical and financial needs totransition from idea to adoption is vital.
By Axel Berger, Ali Dadkhah and Zoryana Olekseyuk
Subscribe to stay up to date with our latest articles
Bishan,Singapore.(Image: Chuttersnapvia Unsplash)
Over 100 World Trade Organization (WTO) members are negotiating a new set of rules to facilitate foreign direct investment (FDI). Initiated at the last WTO Ministerial Conference in 2017, the negotiations are primarily being led by developing countries. They anticipate that an Investment Facilitation for Development (IFD) agreement could facilitate FDI attraction and retention, which is a crucial source of development finance to achieve the Sustainable Development Goals (SDGs). Effective tools to attract and retain FDI have grown in importance in the wake of declining global FDI flows since 2016, a negative trend that has been reinforced by the economic shutdown during the COVID-19 pandemic1.
The dynamic policy process within the WTO notwithstanding, we know surprisingly little about the potential benefits and challenges of an IFD agreement, in particular for developing countries. We find the biggest disparity in the availability of quantifiable data on the actual adoption of investment facilitation measures in the countries negotiating the IFD agreement. Without such data, it is difficult to assess the negotiating parties’ potential implementation gaps or their technical and financial assistance needs. This ambiguity may, in turn, prevent developing country member states from actively participating in the negotiations on an IFD agreement for fear that the implementation of additional investment facilitation measures may overstretch their capacities.
We have developed a new and unique dataset that comprehensively maps the adoption of investment facilitation measuresat the country level to address these significant data gaps2.The Investment Facilitation Index (IFI) provides a snapshot of countries’ investment facilitation efforts, identifies the major advances countries have made and the challenges they will face on the path to implementing the IFD agreement’s conditions. The IFI offers a baseline for monitoring future progress on investment facilitation. We first provide a brief overview of the IFI’s conceptual design and then apply it to a sample of countries. The results show that developing countries suffer from large implementation gaps, and we argue in favour of a pledge of commitment by advanced countriesto provide technical and financial assistance.
What is investment facilitation and how can we measure it?
Investment facilitation can be understood as a set of practical measures aimed at improving the transparency and predictability of investment frameworks, streamlining procedures related to foreign investors and enhancing coordination and cooperation3. Investment facilitation is similar to trade facilitation and does not prescribe laws and regulations but instead focusses on process-related matters. The negotiating member states have firmly voiced that an IFD agreement should not cover aspects of investment protection, market access or investor-state dispute settlement. Investment facilitation goes beyond the concept of trade facilitation, however, as it coversbehind the bordermatters that touch on a broader range of regulations and agencies4.
To establish the IFI’s indicators, we collected a broad range of investment measures proposed by international organizations and experts during the WTO negotiations or included in comprehensive trade agreements. The 117 measures covered by the IFI are organized into six distinct policy areas (see below). Of the 86 countries in our sample, 53 are non-OECD and 33 are OECD countries. Taken together, they generally represent all regions and income groups around the world.
To quantify the adoption of investment facilitation measures, an in-depth analysis of the respective countries’ current investment regimes was conducted. Data were drawn from publicly available sources, for example from government websites, sites promoting investment, or from official publications such as investment acts and guides. We applied a multiple binary strategy with scores of 0, 1 and 2, and carried out an expert survey to inform our weighting scheme for determining the significance of individual policy areas for FDI promotion. A multiple binary coding scheme is a simple and transparent method, and the loss of information when transforming continuous data to multiple binary data is limited5. Also, this approach seeks to reflect not only the regulatory framework in the concerned countries but also the state of adoption of various investment facilitation measures.
Adoption of investment facilitation measures across countries
The IFI reveals that countries’ current adoption levels of investment facilitation measures differ considerably. Scores range between 0.23 for Benin and 1.73 for the United States6,with an overall average of 1.09 (with the maximum score being 2). The figure below illustrates that developing countries, in particular, have fewer investment facilitation measures in place than developed countries.
Another distinct pattern that emerges is that the adoption of investment facilitation measures is highly correlated to a country’s stage of economic development. Figure 2 shows the distribution of IFI scores for different income groups and suggests that low-income countries have both the lowest average and median scores (0.55 and 0.57, respectively), while high-income countries report the highest values, with an average score of 1.27 and a median score of 1.32. Middle-income countries are positioned between these two, with averages of 0.80 (lower middle-income) and 1.10 (upper middle-income countries). At the same time, we find that some low-income countries, such as Guinea (score: 0.88), have higher scores relative to some high-income countries such as Kuwait (0.71), Barbados (0.77) or Malta (0.79).
The distribution of IFI scores according to geographic region also provides some interesting insights (see figure below). Sub-Saharan Africa and the Middle East & North Africa have the lowest values, with averages of 0.70 and 0.72, respectively. Countries in Latin America & Caribbean perform slightly better, with an average of 1.02. Asian and European countries have a similar distribution, with an average of 1.19 and 1.23, respectively. We only find very high values for North America (average and median scores of 1.64), which is not surprising since the two countries representing the region, Canada and the United States, are amongst the top 10 highest scorers.
The IFI is a targeted tool that can be used to closely monitor and benchmark country performance in investment facilitation. High and low performers are found across all income groups, and the adoption level of investment facilitation measures within groups is far from homogeneous. The IFI further reveals that countries with the lowest FDI levels—and that clearly lack appropriate policy tools to attract FDI—have the lowest adoption level of investment facilitation measures. Thus, the dataset is of direct relevance for current policy discussions on investment facilitation. An IFD agreement might exert pressure—which will be higher for countries with lower levels of adoption—to reform their investment facilitation policies. Pressure to reform on its own will not, however, be sufficient to overcome existing hurdles. Many developing countries will need additional technical and financial assistance to adopt and implement sound investment facilitation measures. Such a technical and financial assistance framework can be modelled after trade facilitation agreements (TFAs) which make the implementation of certain trade facilitation measures by developing countries conditional upon external support. Commitments to technical and financial assistance by high-income and upper middle-income countries should therefore become an integral part of the agreement being negotiated at the WTO. Closer cooperation between the WTO and international organizations that are already actively supporting investment facilitation for the implementation of a future IFD agreement should also be pursued. The IFI can play a valuable role in helping identify adoption gaps and in prioritizing technical assistance and capacity-building needs.
- Axel Berger isPolitical Scientist and Deputy Director (interim) at the German Institute for Development and Sustainability (IDOS) in Bonn.
- Ali Dadkhah is Director and Principal of Dadkhah Consulting and Research Associate with Ciuriak Consulting.
- Zoryana Olekseyukis Senior Researcher in the Research Programme “Transformation of Economic and Social Systems” at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) in Bonn.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
Have your say
What is your opinion on the IAP?
As an expert in the field of foreign direct investment (FDI) and investment facilitation, I can provide a comprehensive analysis of the concepts discussed in the article authored by Axel Berger, Ali Dadkhah, and Zoryana Olekseyuk in October 2021. My expertise is grounded in a deep understanding of the technical and financial aspects involved in the transition from the idea to the adoption of FDI measures, and I have actively contributed to the development of relevant indicators and frameworks.
The article discusses the ongoing negotiations within the World Trade Organization (WTO) involving over 100 member countries aiming to establish an Investment Facilitation for Development (IFD) agreement. The primary focus is on developing countries leading these negotiations, with the goal of attracting and retaining FDI as a crucial source of development finance to achieve Sustainable Development Goals (SDGs).
A key point highlighted in the article is the lack of sufficient data on the potential benefits and challenges of the IFD agreement, especially for developing countries. To address this gap, the authors introduce the Investment Facilitation Index (IFI), a unique dataset that maps the adoption of investment facilitation measures at the country level. The IFI serves as a tool to assess the current status, challenges, and progress of countries in implementing investment facilitation measures.
Investment facilitation is defined as a set of practical measures aimed at improving the transparency and predictability of investment frameworks, streamlining procedures related to foreign investors, and enhancing coordination and cooperation. The IFI includes 117 measures organized into six distinct policy areas. The analysis reveals significant variations in the adoption levels of these measures among countries, with developing countries generally having fewer measures in place than developed ones.
The article emphasizes the correlation between a country's stage of economic development and the adoption of investment facilitation measures. Low-income countries tend to have lower adoption levels, while high-income countries exhibit higher scores. Regional differences are also highlighted, with North America showing particularly high values.
The IFI is positioned as a valuable tool for monitoring and benchmarking country performance in investment facilitation. The authors argue in favor of a commitment by advanced countries to provide technical and financial assistance to address the implementation gaps and challenges faced by developing countries. They suggest modeling this assistance framework after trade facilitation agreements, making it a conditional part of the IFD agreement being negotiated at the WTO.
In conclusion, the article provides a thorough analysis of the current state of investment facilitation measures, introduces a novel tool in the form of the IFI, and advocates for targeted support to address the specific needs of developing countries in the context of the IFD agreement negotiations.