CAN FDI CONTRIBUTE TO INCLUSIVE GROWTH: ROLE OF INVESTMENT FACILITATION
FIFD Workshop on Investment Facilitation for Development
“What Investment can do for Trade Connectivity and Development – Investment Needs and Bottlenecks”
Geneva, 10 July 2017
Iza Lejarraga Head of Unit, Investment Policy Linkages OECD Investment Division
1. Firms establish global supply relationships through trade and FDI:
need policy frameworks that reflect the complexity of GVCs
2. Achieving the SDGs will require higher levels of FDI, particularly to
developing countries, but also type and composition of FDI.
3. Transparency commitments are associated with trade-boosting
effects: similar effects can be expected for investment, and may be
particularly important for more sophisticated forms of FDI.
Main points
FOREIGN DIRECT INVESTMENT
• Direct Subsidiary (>50%)
• Equity Investment (<50%)
STRATEGIC PARTNERSHIPS
• Joint Ventures
• Licensing & Franchising
• Research & Technology Partnerships
• Integrated Product Offering
TRADE
• Contract Manufacturer
• Independent Supplier
3
GVCs has been largely looked at through the trade angle: need to better understand links to investment and other economic relationships
Global supply chains in electronics: Firms combine trade, FDI, and other non-equity forms of control
Source: OECD, based on FactSet Supply Chain database – Results are preliminary, not for citation.
Firms combining several modes of internationalisation perform better
Firms that are majority foreign-owned and active traders create better jobs and add more value.
0
0.5
1
1.5
2
2.5
3
3.5
FDI-Export-Import FDI only Export-Import only
Wages relative to domestic firms not involved in GVCs cross-country average
0
1
2
3
4
5
6
7
FDI-Export-Import FDI only Export-Import only
Productivity relative to domestic firms nit in GVCs cross-country average
Source: OECD and WBG, based on calculations from World Bank Enterprise Surveys (2016) – Results are preliminary, not for citation.
Almost 70% of RTAs signed since 2001 cover investment; 9 out of 10 RTAs with investment involve non-OECD country
Source: OECD based on WTO RTAs Database and WB Database.
Countries with similar levels of FDI can have different effects
Vietnam (net FDI 11.8 B) Colombia (net FDI 11.7 B)
Source: OECD, based on data from MIT and Harvard (Observatory of Economic Complexity)
Higher complexity of FDI associated with higher productivity and lower inequality.
Kenya (FDI 2.3 % of GDP) China (FDI 2.3 % of GDP)
Source: OECD, based on data from MIT and Harvard (Observatory of Economic Complexity)
Lower inequality: Geographic dispersion of FDI
0.0
0.1
0.2
0.3
0.4
0.5
0.6U
SAD
EUC
HN
MEX
MYS
VN
MIN
DG
TM ITA
VEN TZ
AES
PM
OZ
IRQ
KO
RN
ZLD
ZALA
OP
HL
MA
RC
HL
OM
NZA
FC
OD
MD
VG
RC
AU
SG
EOB
RA
RU
SSA
UTU
NEC
UP
ERFR
AK
EN IDN
NA
MLK
ALB
YB
WA
CIV
CO
LYE
M ISR
SSD
PA
NIR
NTH
AEG
YG
BR
AR
GC
UB
KH
MU
RY
CA
NN
GA
PN
GA
RM
PR
YR
WA
BLZ HTI
TJK
HN
DG
HA
BG
DM
LIA
FG JPN
ZMB
SWZ
CR
ILB
NSE
N FJI
KG
ZJA
MG
INN
LDA
LB SLV
AU
TK
AZ
AN
D
Gre
en
fiel
d F
DI i
nto
To
p R
egio
n/T
ota
l
Lower concentration: Spread of FDI is greater across regions within country
Regional Concentration Index for FDI, 2009-2014, selected countries
Source: OECD and WBG, based on calculations from FDI Markets – Results are preliminary, not for citation.
Lower inequality: domestic linkages in FDI sectors
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
IRL
LU
X
HU
N
KO
R
TU
N
ML
T
CH
E
SV
K
SV
N
SA
U
BR
N
CZ
E
MY
S
ES
T
ISL
DN
K
BG
R
SW
E
LT
U
HK
G
FIN
AU
T
CY
P
TH
A
NO
R
KH
M
PO
L
DE
U
BE
L
GR
C
RO
U
ES
P
HR
V
GB
R
IND
VN
M
LV
A
NL
D
PH
L
FR
A
ITA
RU
S
ME
X
TU
R
CR
I
PR
T
CA
N
AR
G
US
A
CH
L
JP
N
BR
A
CO
L
IDN
AU
S
CH
N
Co
nc
en
tra
tio
n in
se
cto
rs t
ha
t s
ou
rce
lo
ca
lly
FDI Economy Average
Low linkages: Costa Rica
Source: OECD and WBG, calculations on International Trade Centre Investment Database (2016); OECD Input-Output Database (2014) – Results are preliminary, not for citation.
Higher linkages: FDI is concentrated in sectors that source more from the local economy
High linkages: Korea
Lower inequality: gender inclusiveness in foreign-owned firms
0.00
0.50
1.00
1.50
2.00
2.50
3.00
FD
I fem
ale
emp
loye
e/ D
om
esti
c f
emal
e em
plo
yee
FDI female top manager / Domestic female top manager
Foreign-owned firms female employees relative to domestic firms (ratio)
latest available year, selected countries
Share of women employed higher in foreign firms
Source: OECD and WBG, based on calculations from World Bank Enterprise Surveys (2016) – Results are preliminary, not for citation.
Female top manager
Economic complexity requires higher levels of transparency
Appropriation
Participation
Predictability
Information
• Adequate appropriation of returns by minimising expropriation risks (e.g, anti-corruption and anti-bribery measures)
• Reducing costs of uncertainty and contract enforcement (e.g., mechanisms for dispute prevention & resolution)
• Reducing market entry costs through information and simplification (publication, notification, enquiry points, single window)
•Improving rule-making by making regulatory processes open and participatory (e.g., public comment procedures)
Importance of institutional quality (transparency, enforceability) in products with high proportion of intermediates inputs that require external contracting and sourcing arrangements Levchenko 2007); relationship-specific investments (Nunn 2007); other trade and FDI (Rodrik).
Empirical evidence on the trade impact of transparency measures: Can countries stand to gain from similar efforts in investment?
RTAs with comprehensive mechanisms for transparency are more strongly trade-promoting than those with a limited set of transparency measures: Each additional transparency obligation negotiated in an RTA is associated with an
increase in bilateral trade flows of over 1 percent. Overall, the expected increase in intra-regional trade could be of about 15 percent.
Consistent with World Bank-APECD study estimating that improving transparency in APEC could raise intra-APEC trade by approximately US $148 billion or 7.5 per cent of baseline trade in the region (Helble, Shepherd, Wilson 2007).
The readiness of countries to embrace transparency commitments is associated with good governance conditions such as the maturity of democratic institutions, regulatory quality, and the rule of law.
Source: Lejarraga and Shepherd (2013), OECD Trade Policy Paper No.153, Trade and Agriculture Directorate.
• Improve information on what types and composition of FDI is flowing into a country: FDI comes in different forms
•Countries want to devise policies that don’t just maximise the amount of FDI, but maximise the benefits from FDI
1. Beyond volume of FDI: types and composition of FDI
•As more countries have access to global capital markets, thinking more of FDI in terms of additional benefits it can bring: new knowledge and opportunities for people. These dimensions need to be better captured in the metrics on FDI.
2. FDI as a source of capital: additional benefits
• FDI is—broadly speaking—considered positive for economic growth, albeit under specific conditions: the evidence reveal wide heterogeneity, suggesting that effects are not unifom and domestic conditions matter
•Policy design can improve if based on the specific context of the country
3. Transparency has trade-boosting effects
Main Points
Outcomes of FDI are Endogenously Determined
Value of FDI is endogenous. Differences in FDI outcomes depend on the interaction between the type of investment and the policies, institutions, and conditions of the host economy.
Value of FDI cannot be assessed by only looking at aggregates. Need more nuanced, disaggregated
and comparable metrics that capture differences in outcomes across countries.
FDI OUTCOMES
FDI TYPES & COMPOSITION
POLICIES & FRAMEWORK CONDITIONS
X =
•Natural resource-seeking
•Market-seeking
•Efficiency- seeking
• Strategic asset-seeking
Motive
•Greenfield
•M&A
Entry mode
•Equity or contractual
•100% or Joint venture
Ownership
•Sector distribution
•Services
Sectoral
•Productivity
•Wages
•R&D intensity
•Diversification
• Skills spill- overs
Growth
• Job creation
•Domestic linkages
•Gender inclusion
• Spatial dispersion
Inclusiveness
FDI TYPES COMPOSITION
POLICIES & FRAMEWORK CONDITIONS
FDI OUTCOMES
• Investment policies
•Complementary policies
Policies
•Human & physical capital
• Institutions
Conditions
•Market size
•Geography
Exogenous
•Diversification
• Sophistication
Complexity
Interaction of FDI with policies and country conditions
Outcomes-based FDI Indicators: comparable metrics across countries
GROWTH
Indicator on FDI productivity
Indicator on FDI diversification
Indicator on FDI sophistication
Indicator on FDI vertical integration
Indicator on FDI R&D intensity
Indicator of FDI wage premium
Others that should be considered?
INCLUSIVENESS
Indicator on FDI job creation
Indicator on FDI skills intensity
Indicator on FDI gender inclusion
Indicator on FDI linkages
Indicator of FDI geographic concentration
Indicators of FDI contribution to tax base
Others that should be considered?
Knowledge Gaps
Dearth of information
Growing but limited literature
Large body of evidence
Jobs
Wages
Skills
Gender
Domestic investment
SME Linkages
Geo-graphic dispersion
Vertical integration
Diversification
Sophistication
Productivity
Electronics
ICT
9 out of 10 RTAs with investment involve a non-OECD economy
28%
72%
Before Doha
RTAs with investment RTAs without investment
69%
31%
Since Doha
RTAs with investment RTAs without investment
10%
57%
34% South-South
North-South
North-North
Source: OECD based on WB RTAs database and other sources
Trends
