UPDATING THE POLICY

FRAMEWORK FOR INVESTMENT:

INVESTMENT PROMOTION & FACILITATION

IN SOUTHEAST ASIA

Mike PfisterInvestment Policy Review Unit, OECD

Global Task Force Meeting

Bali, 24 March 2014

• Investment promotion & facilitation in a PFI rationale

• Experience from SEA, OECD IPRs and seminars in SEA and elements from the OECD Southeast Asia Investment Policy Perspectives

• Updating and strengthening chapter 2 of the PFI – questions & discussion

Outline

• Private investment: can bring capital, jobs, technology, knowledge, new market outlets, additional domestic resources, help diversification, increase trade… development impact of investment

• Chapter 1 focuses on the hard framework conditions for investment

• Investment promotion & facilitation critical complement to attract investment: link between the policies and business activity

• Also means: promotion depends on policies = PFI rationale – holistic approach

Approach and rationale: why investment promotion & facilitation in the PFI?

• Investment promotion and facilitation measures, including incentives, can be effective instruments to attract investment provided they aim to correct for market failures and are developed in a way that can leverage the strong points of a country’s investment environment. The quality of investment promotion depends by and large on the quality of the investment related policies in place.

• Investment promotion and facilitation can take various forms. Many governments have established specialised investment promotion agencies (IPAs), either as independent bodies or under the tutelage of a Ministry.

• Effective investment promotion also goes beyond attracting new investors. An important element is after-care once investors have set up shop. This is particularly important to retain existing investment, and to motivate established investors to expand their investments.

• In terms of investment facilitation, the government should ensure that investors find it easy and convenient to get all the relevant information linked to their operations, from pre- to post-establishment. The institutional structure should be lean, thus avoiding bureaucratic layers.

• Investment promotion and facilitation also needs to be carefully co-ordinated nationally, as different ministries and institutions may do some promotional activities on their own.

• The domestic eco-system is critical for investment: suppliers, support institutions (including financial services, access to quality training, R&D, BDS) – cluster perspective

• The regional dimension is critical – where is the province, country or region positioned in the value chain?

• Strategy, importance of investment in national and regional development objectives, and the role of investment promotion & facilitation

• Investment promotion measures and mechanisms

• Facilitation measures• Strengthening the ecosystem for investment and

fostering the positive spill-overs• Institutional set-up and measures• Regional dimension

PFI Chapter 2: Investment Promotion & Facilitation

Specific measures

INVESTMENT STRATEGY

2.1 Does investment and the benefits it can bring to the economy feature in national development objectives? What role does investment promotion and facilitation have in this regard?• Link to National Development Plans, Industrial Masterplans,

PRSPs...• Identification of the right type of investment – the type that is needed

for economic development– While a level playing–field is necessary for all investors, specific investment can be

targeted: technology intensive, labour intensive, smaller investments, specific sectors– Importance to match with national priorities (privatisation, link to GVCs, regional

development…)

• Malaysia: was one of the first emerging economies to welcome foreign investment in export-oriented manufacturing sectors beginning in the late 1980s. Export-oriented clusters were developed, in particular in E&E.

• Philippines: liberalisation in 1990s resulted in increase in FDI, BOT Act

Strategy: importance of investment promotion

INVESTMENT PROMOTION MEASURES

• How are investors targeted?• Value-propositions? Have effective are they? How are

they reviewed/revised?• How is investment promotion undertaken – city level,

provincial, country level? Any regional approaches in ASEAN?

• Special Economic Zones• How is promotion co-ordinated?Philippines: 17 IPAs, but recent efforts to harmonise through BOIViet Nam: FIA, Northern, Central and South• Incentives

Investment Promotion measures

Investment Promotion measures: the role of incentives

Countries Surveyed Would have invested even if Incentives were not provided

Rwanda (2011) 98%Uganda (2011) 93%Guinea (2012) 92%Tanzania (2011) 91%Vietnam (2004) 85%Thailand (1999) 81%Mozambique (2009) 78%Burundi (2011) 77%Serbia (2009) 71%Jordan (2009) 70%Kenya (2012) 61%Tunisia (2012) 58%

Source: FIAS

In addition they are costly…

Source: OECD Tax & Development Programme

• Common: income tax holidays (ITH), preferential tax rates, import duty and VAT exemptions, tax credits and other taxable income deductions.

• Regulation: in most cases part of national investment laws (eg: Myanmar FIL)

• but differences in implementation: Cambodia’s incentives granted in SEZs aligned with the national legislation, where as in the Philippines, SEZ incentives governed by the 1995 SEZ Act.• Differences in the so-called trigger period: Thailand and Lao PDR, the tax holiday begin after the project has begun, but Viet Nam and Cambodia later.• Difficult to examine incentives at ASEAN level

SEA dimension of fiscal incentives

• ASEAN countries share a common interest in establishing a level playing field among themselves.

• Regional co-operation and agreements can help fight excessive incentives, protecting tax bases of the ASEAN member countries, and provide a comprehensive ASEAN-wide mechanism to address tax competition

• The ASEAN Economic Community (AEC) & strengthening the notion of an ASEAN investment destination supports fighting race-to-the bottom of AMS

• How? Framework to assist policy makers in tackling associated challenges: understanding the extent of divergences of tax incentives policies and practices across AMS; platform for dialogue on tax incentives-related policies; mechanisms to improve knowledge-sharing between AMS

ASEAN avenues

1. Public statement of all tax incentives and their objective2. Provide tax incentives through tax laws3. Consolidate all incentives under the authority of one

body where possible4. Ensure tax incentives ratified through law making body

or parliament5. Administer incentives in transparent manner6. Calculate forgone revenue and make it publicly

available, collect data systematically, monitor effects7. Enhance regional co-operation

PFI: principles for incentives

Source: OECD Checklist for incentives and OECD Tax & Development Programme

INVESTMENT FACILITATION MEASURES

Investment facilitation

• At times more important than expensive promotion!Myanmar: more important to have good facilitation and streamlined regulation than promotion at this stage• Private sector needs effective interface in government (link to

policy)• Private sector needs to be able to keep up with reforms and so does

government!

Current PFI questions 2.4 and 2.5 fall short of the depth required:• Streamlining of business regulation: what measures have reduced

the cost of doing business? What are the mechanisms?Malaysia: PEMUDAH Task Forces and MPC• One-stop-shops and single-point authority• Effective after-care (post-establishment) to retain investment• Policy advocacy – what are the mechanisms? Do they work?

INSTITUTIONAL SET-UP

Institutional structure of investment promotion

• Many agencies are actually undertaking investment promotionPhilippines: 17 agenciesMyanmar: Ministry of Hotels and Tourism• National and subnational agenciesMalaysia: city level IPAs (investPenang, investKL, various corridors)Viet Nam: 3 Provincial FIAs• How is co-ordination of various investment promotion efforts co-

ordinated?• How is the agency funded and is the performance of the agency

measured/benchmarked? Importance of statistics.• What about outward investment promotion and support?Some ASEAN countries are growing sources of investmentThailand, Malaysia, Singapore, Philippines, Viet Nam

In practice…

IMPACT AND STRENGTHENING THE INVESTMENT ECOSYSTEM

Linkages, Global Value Chains, Clusters

• What are the government’s efforts to promote clusters?– Vocational training, BDS, access to finance, dedicated

infrastructure:Malaysia: Triple helix approach seen in Penang (PSDC, local government, investor community, science council), airport

• How do SEZs benefit the overall economy (investment policy coherence)– links with domestic economy, – support for linkages, increase local value addition and links to

GVC (any statistics?)– Responsible Business ConductCSR unit in Clark Development Corporation, Philippines

Improving the eco-system for investment

Lead Company

1st tier supplier A

3rd tier supplier 1a

1st tier supplier B

2nd tier supplier 2

3rd tier supplier 2a

1st tier supplier C

Linkages and GVC perspective

Technology, know-how, management and product standards

Domestic market, Export, GVC

TECH

& K

NO

WLED

GE

TRA

NSFER

Role of policy:SME policy, financing, vocational training

Value chain governance has implications for supplier development

Source: Adapted from Gereffi (2011)

GVC: Value creation?

Source: http://data.wdr.de

• Again, little in current PFI (2.7)• Framework could be fine-tuned:

– Is the potential for linkages taken into consideration in investment promotion measures?

– What SME/supplier development programmes are geared to promote linkages (hence GVC integration, technology and knowledge transfer)?

– How are foreign investors involved in local skills development?

– Are IPAs involved in linkages creation (eg: match-making, making supplier data-base available to investors)

– Is local value creation measured in SEZs? Stats!

For the PFI?

REGIONAL DIMENSION

• Investors think regionally (larger markets, integrating production networks) – ASEAN well placed with AEC

Only 5.4% of respondents to a Baker McKinsey survey run the ASEAN Region from a base outside ASEAN!!• SEA is heterogeneous: important to map your country in the

regional (ASEAN) value chain (R&D, electronics, tourism, textile, natural resources…)

• Discuss regional investment promotion efforts at ASEAN level: to address intra and extra-regional investment

ASEAN Investment Forum • Brand and “sell” the ASEAN investment destination: ASEAN

Secretariat could play a role.

Regional dimension

• What investment promotion measures have proven most effective?

• Biggest challenge to promote investment?• How do you undertake policy advocacy?• How do you gather feedback from investors – aftercare?• How do you view the importance of the your supply base

for your investment climate competitiveness?• Does your IPA have a linkages programme?• Do you map yourself in the ASEAN value chain? How?• Any regional investment promotion initiatives? Any

suggestions?

Let’s discuss

Policy Framework for Investment (and User’s Toolkit)www.oecd.org/investment/pfi.htmwww.oecd.org/investment/toolkit/

FDI Indexwww.oecd.org/investment/fdiindex.htm

Investment Policy Reviewswww.oecd.org/investment/countryreviews.htm

ASEAN-OECD Investment Programmewww.oecd.org/investment/seasia.htm

ASEAN Investment websitewww.investasean.asean.org

For further information

NEW DIMENSIONS OF THE PFI

Investment policy

Investment promotion and facilitation

Trade

Competition

Tax

Corporate governance

Policies for promoting responsible business

conduct

Human resource development

Infrastructure and financial sector development

Public governance • Green investment• Gender considerations• Role of development

assistance• R&D, innovation• Statistics• GVC• Infrastructure (separate

chapter, PPPs)• SME dimension (incl.

microfinance, linkages, skills development)

• Technical annexes (sectoral: agriculture, clean energy)