FDI & Development: Policy Challenges

Transcription

1 2008/SOM1/CTI/TPD/002 FDI & Development: Policy Challenges Submitted by: UNCTAD

2 Trade Policy Dialogue on Aspects of the Relationship Between Investment, Trade in Services and Trade in Goods Lima, Peru 25 February 2008

3 FDI & development: policy challenges APEC Committee on Trade and Investment Trade Policy Dialogue Lima, Peru 25 February 2008 Anna Joubin-Bret Senior Legal Advisor DITE, UNCTAD 1 Overview Introduction: the significance of TNCs in the global economy Competition for FDI Policy challenge 1: maximizing the benefits of FDI Policy challenge 2: international investment system Policy challenge 3: corporate responsibilities and governance Policy challenge 4: extractive industries and infrastructure Policy challenge 5: policy coherence 2 1

4 TNCs and the global economy: facts and figures Global FDI No. of TNCs worldwide No. of foreign affiliates FDI inflows (bn $) FDI stock (bn $) Significance in world economy FDI flows/gfcf ratio FDI stock/gdp ratio Sales of FAs (bn $) Gross product of FA (bn$) Assets of FA (bn$) Exports by FA (bn$) Employment of FA (million) Added-value of FA/world GDP End , ,000 1, [9.4 %] [22.7 %] 25,177 4,862 51,187 4, [10%] , , , % (1992) 8.5 % 6,045 1,489 5,956 1, % 3 Competition for FDI Competition for FDI Race to the top (incentives) Chase to the bottom (standards) Does it make economic sense? Locational determinants of FDI Motivation of TNCs Effective policies: Balancing private and public interests Effective use of policies (incentives, others ), impact on decision making 4 2

5 Policy Challenge 1: Maximizing benefits for development Requires 3 things (themselves policy challenges): Attracting FDI Benefiting more from FDI Addressing concerns related to FDI, reducing costs. 5 FDI and host economies - advantages FDI and host economies - advantages Capital and investment Technology transfer Skills upgrading Employment Linkages Exports Access to markets or supplies Higher productivity Environmental objectives Restructuring of existing firms or industries Increased competition 6 3

6 FDI and host economies - disadvantages FDI and host economies - disadvantages Profits can be repatriated Transfer-pricing and tax avoidance Crowding out of local firms Anti-competitive behaviour by TNCs Foreign influence on economic affairs Impact on balance of payments Environmental damage / pollution Non-economic concerns (culture, traditions) 7 Outward FDI and impact on home economies Outward FDI and impact on home economies Advantages Competitiveness of firms (access to foreign resources, technology and markets; and efficiency gains) Competitiveness of economies (linkages and spillover effects) Disadvantages Capital outflows (balance of payment impact) Job losses Displacement of trade (exports) Deindustrialization Key challenge is structural adjustment and upgrading, and policy support 8 4

7 Remember, maximizing benefits requires Remember, maximizing benefits requires Neither FDI nor the benefits from FDI are automatic, however, this is where policies come in: to attracting FDI enhance its benefits, and address possible negative effects. 9 General policies vs. core FDI policies General policies vs. core FDI policies General policies Monetary/fiscal policies Trade policies Exchange rate policies Technology policies Education policies Labour market policies Privatization policies Environmental policies SME policies Etc. Core FDI policies Investment liberalisation/ restrictions Investment promotion Performance requirements Incentives Linkage promotion Focus of today 10 5

8 Attracting FDI Attracting FDI Liberalisation: necessary step Removal of restrictions on admission and establishment operations Improving standards of treatment of foreign investors Investor protection compensation in case of expropriation dispute settlement provisions transfer of funds guarantees Active promotion e.g. using Investment Promotion Agencies, incentives, etc. 11 Enhance benefit - consider other policy measures Enhance benefit - consider other policy measures Mandatory requirements on foreign affiliates performance requirements (PRs) Encouraging foreign affiliates to act in desired ways Incentives (sometimes tied to PRs) Upgrading local capabilities absorptive capacity, SME capabilities, infrastructure, education and skills Ensuring proper functioning of markets Linkage promotion policies. 12 6

9 Performance requirements main types Performance requirements main types Local content Exports Domestic equity and joint ventures Technology transfer Employment of nationals Mandatory or voluntary. 13 Performance requirements rationale Performance requirements rationale Market imperfections Information Lack of competition Counterbalance anti-competitive practices by TNCs Counterbalance anti-export bias in import-substitution regimes To secure rents (e.g. in natural resources). 14 7

10 Performance requirements trends Performance requirements trends Declining incidence in both developed and developing economies due to: Increased competition (from sticks to carrots) International commitments (esp. WTO) Doubts about effectiveness Use of other strategic measures Voluntary more common More common in industries and economies with stronger bargaining power. 15 Performance requirements are they effective? Performance requirements are they effective? Studies give mixed evidence Can be effective, if applied in the right environment Competitive, efforts to upgrade local capabilities Can also lead to inefficiencies and impose costs If used behind protective barriers, lack of inducement to upgrading Risk of deterring FDI 16 8

11 Incentives - types Incentives - types Financial: outright grants or loans at concessional rates Fiscal: tax holidays or reduced tax rates Regulatory: exemptions from e.g. labour or environmental laws Locational: to attract new FDI to a site Behavioural: to induce training, R&D, exports, etc. 17 Incentives - rationale Incentives - rationale Market failure Increase benefits from FDI, such as diffusion of knwoledge and upgrading of skills Compensate for deficiencies in business climate Because others use them (risk for a race) To attract flagship firms To compensate for cost related to PRs. 18 9

12 Incentives - costs Incentives - costs Offered to TNCs that would have invested anyway Drain on government budgets opportunity cost Can encourages investors to be footloose Risk of bidding war Reduce net benefit from inward FDI. 19 Incentives are they effective? Incentives are they effective? Not the main determinant of FDI But may tilt the balance when all else is equal More likely to benefit if complemented by other measures aimed at enhancing local skills, technology and quality of infrastructure Export subsidies generally not permitted, but there are exceptions International cooperation only way to address risk for a race to the bottom 20 10

13 Addressing negative concerns Addressing negative concerns BoP problems (PRs, trade restrictions, safeguards) Anticompetitive practices (competition laws) Transfer pricing (double taxation treaties, low taxes, targeted laws) Crowding out (restrictions, small and medium enterprise development) Environmental degradation (impact assessments, taxes, incentives, environmental regulations) Socio-cultural effects (restrictions, PRs) Limited ToT (PRs, linkage promotion, skills development) Excessive use of incentives/race to the top (int l cooperation) 21 Policy challenge 2: international investment system International system? (atomized, multilayered, multifaceted) IIA universe (5,500 treaties) Bilateral vs. Multilateral approach Challenges systemic issues development dimension capacity constraints 22 11

14 Policy challenge 3: corporate governance Policy challenge 3: corporate governance Governance issues TNC accountability to shareholders Operate within rule of law Corporate ethics in weak governance zones Corporate responsibility issue TNC accountability to society (human rights, labour rights, environment and corruption) TNC accountability to the host economy (economic dimension of CSR) Policy challenges Voluntary guidelines / self-regulation Codes of conduct Legally binding regulations International policies / IIAs 23 Policy challenge 4: extractive industries and infrastructure FDI stock for developing economies at record highs ($518 bn in 2007, up from $180 bn in 2002) Commodity price boom has meant significant increase in FDI to economies rich in natural resources Challenge for TNC participation in extractive industries is to: use increased government revenues to promote development and avoid the resource curse and to manage the environmental, political and social risks associated with extractive industries This requires an enabling business environment, strengthening institutions, and enhancing transparency

15 Policy challenge 4: extractive industries and infrastructure Improving infrastructure and providing better public services Challenge in terms of regulation and governance Requires establishing clear objectives for involving TNCs. 25 Policy challenge 5: policy coherence Policy challenge 5: policy coherence Starting point: clear vision and strategy Know strengths and weaknesses Importance of local capabilities FDI no panacea Integrated investment policy interact with trade, labour, taxation, macro-economic, immigration and land policies Take international developments into account 26 13

16 Conclusion TNCs are engines of growth and drivers of globalization FDI can contribute to economic development of both home and host economies, but can also have negative effects Key is the correct policy mix Overall challenge is how to set-up effective policies to maximize benefits and minimize negative effects in line with development objectives 27 Thank You Thank You 28 14