Good Governance and Best Practices for Investment Policy and Promotion

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Foreign direct investment (FDI) is widely recognised as a powerful engine, and major catalyst, for development, poverty-reducing growth and the global integration process. At a time when FDI levels show signs of slow-down and the competition among nations, particularly in the developing world, to attract more and "quality" FDI becomes stiffer, promoting foreign investment effectively and linking it strongly to local economies have become a matter of great importance to governments all over the world. Governments recognise the need to be innovative and efficient in responding to the concerns and expectations of investors, while striving at the same time to optimise the benefits of FDI for their national economies.

This is indeed the raison d'être for such Investment Promotion Agencies (IPAs) as the "Scottish Enterprise", the "Zimbabwe Investment Centre", the "Investment Board of Thailand", the "Foreign Investment Promotion Agency of Bosnia-Herzegovina", the "Foreign Investment Committee of Chile", the "CzechInvest", the "Ghana Investment Promotion Centre", the "Saudi Arabian General Investment Authority", and likes. The number of IPAs worldwide increased substantially in the 1990s. There are presently 164 national and well over 250 sub-national IPAs.

Worldwide inflows of FDI rose from $330 billion in 1995 to $ 1,270 billion in 2000. Although this upward trend was interrupted last year by a significant decline to $760 billion according to UNCTAD, it still grows faster than other economic aggregates like world production, capital formation and trade. However, FDI is not evenly distributed among nations and the decline in 2001 has not affected developed and developing countries to the same degree.

Developed countries remain the prime destination of FDI, accounting for more than three-quarters of global inflows and more than 90 percent of outflows. The US, Britain and Germany are expected to maintain their positions as the top three locations for FDI over the coming years. Business surveys suggest investment decisions have not been radically revised following September 11, and the fundamental forces driving FDI are intact, though the geopolitical considerations have re-emerged as a factor in investment locational decisions, with investors preferring to focus on less exotic, more familiar, investment destinations.

Developing countries have not been able to participate as developed and certain emerging countries in the vast increase of FDI flows that has occurred in the past decade. Today, only a small portion of global foreign investment reaches them. While FDI to these countries as a whole did rise during 2000 to $240bn, their share in world FDI flows declined for the second year in a row to 19 percent compared to the peak of 41 percent in 1994. This situation highlights the need for developing host countries to have a broader set of policies and institutions in order to attract, absorb and maximise the benefits of FDI. In this task, not only host countries but also home countries, multinational enterprises (MNEs), international organisations and civil society groups all share a responsibility.

Investment Promotion Practices: The Case of LDCs
Geneva, 6-7 June 2002


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