CAN FDI CONTRIBUTE TO INCLUSIVE GROWTH: ROLE OF INVESTMENT FACILITATION Iza Lejarraga Head of Unit, Investment Policy Linkages OECD Investment Division FIFD Workshop on Investment Facilitation for Development What Investment can do for Trade Connectivity and Development Investment Needs and Bottlenecks Geneva, 10 July 2017
Main points 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.
GVCs has been largely looked at through the trade angle: need to better understand links to investment and other economic relationships FOREIGN DIRECT INVESTMENT TRADE Direct Subsidiary (>50%) Equity Investment (<50%) Contract Manufacturer Independent Supplier STRATEGIC PARTNERSHIPS Joint Ventures Licensing & Franchising Research & Technology Partnerships Integrated Product Offering 3
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and other non-equity forms of control Source: OECD, based on FactSet Supply Chain database Results are preliminary, not for citation.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. 3.5 Wages relative to domestic firms not involved in GVCs cross-country average 7 Productivity relative to domestic firms nit in GVCs cross-country average 3 6 2.5 5 2 4 1.5 3 1 2 0.5 1 0 FDI-Export-Import FDI only Export-Import only 0 FDI-Export-Import FDI only Export-Import only Source: OECD and WBG, based on calculations from World Bank Enterprise Surveys (2016) Results are preliminary, not for citation.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. China (FDI 2.3 % of GDP) Kenya (FDI 2.3 % of GDP) Source: OECD, based on data from MIT and Harvard (Observatory of Economic Complexity)
USA DEU CHN MEX MYS VNM IND GTM ITA VEN TZA ESP MOZ IRQ KOR NZL DZA LAO PHL MAR CHL OMN ZAF COD MDV GRC AUS GEO BRA RUS SAU TUN ECU PER FRA KEN IDN NAM LKA LBY BWA CIV COL YEM ISR SSD PAN IRN THA EGY GBR ARG CUB KHM URY CAN NGA PNG ARM PRY RWA BLZ HTI TJK HND GHA BGD MLI AFG JPN ZMB SWZ CRI LBN SEN FJI KGZ JAM GIN NLD ALB SLV AUT KAZ AND Greenfield FDI into Top Region/Total Lower inequality: Geographic dispersion of FDI 0.6 Regional Concentration Index for FDI, 2009-2014, selected countries 0.5 0.4 Lower concentration: Spread of FDI is greater across regions within country 0.3 0.2 0.1 0.0 Source: OECD and WBG, based on calculations from FDI Markets Results are preliminary, not for citation.
IRL LUX HUN KOR TUN MLT CHE SVK SVN SAU BRN CZE MYS EST ISL DNK BGR SWE LTU HKG FIN AUT CYP THA NOR KHM POL DEU BEL GRC ROU ESP HRV GBR IND VNM LVA NLD PHL FRA ITA RUS MEX TUR CRI PRT CAN ARG USA CHL JPN BRA COL IDN AUS CHN Concentration in sectors that source locally Lower inequality: domestic linkages in FDI sectors 1 0.9 High linkages: Korea 0.8 0.7 0.6 0.5 0.4 0.3 Higher linkages: FDI is concentrated in sectors that source more from the local economy Low linkages: Costa Rica FDI Economy Average Source: OECD and WBG, calculations on International Trade Centre Investment Database (2016); OECD Input-Output Database (2014) Results are preliminary, not for citation.
FDI female employee/ Domestic female employee Lower inequality: gender inclusiveness in foreign-owned firms 3.00 2.50 Female top manager Foreign-owned firms female employees relative to domestic firms (ratio) latest available year, selected countries 2.00 Share of women employed higher in foreign firms 1.50 1.00 0.50 0.00 FDI female top manager / Domestic female top manager Source: OECD and WBG, based on calculations from World Bank Enterprise Surveys (2016) Results are preliminary, not for citation.
Economic complexity requires higher levels of transparency 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). Appropriation Participation Predictability Information Adequate appropriation of returns by minimising expropriation risks (e.g, anticorruption and anti-bribery measures) Improving rule-making by making regulatory processes open and participatory (e.g., public comment procedures) 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)
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.
Thank you for your attention Contact: Iza Lejarraga (Iza.LEJARRAGA@oecd.org) OECD Investment Divsison
Main Points 1. Beyond volume of FDI: types and composition of FDI 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 2. FDI as a source of capital: additional benefits 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. 3. Transparency has trade-boosting effects 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
Outcomes of FDI are Endogenously Determined POLICIES & FRAMEWORK CONDITIONS FDI TYPES & COMPOSITION X = FDI OUTCOMES 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.
Interaction of FDI with policies and country conditions POLICIES & FRAMEWORK CONDITIONS FDI TYPES COMPOSITION FDI OUTCOMES Policies Investment policies Complementary policies Conditions Human & physical capital Institutions Exogenous Market size Geography Complexity Diversification Sophistication Motive Natural resource-seeking Market-seeking Efficiency- seeking Strategic asset-seeking Entry mode Greenfield M&A Ownership Equity or contractual 100% or Joint venture Sectoral Sector distribution Services Growth Productivity Wages R&D intensity Diversification Skills spill- overs Inclusiveness Job creation Domestic linkages Gender inclusion Spatial dispersion
Outcomes-based FDI Indicators: comparable metrics across countries GROWTH Indicator on FDI productivity INCLUSIVENESS Indicator on FDI job creation Indicator on FDI diversification Indicator on FDI skills intensity Indicator on FDI sophistication Indicator on FDI gender inclusion Indicator on FDI vertical integration Indicator on FDI R&D intensity Indicator of FDI wage premium Others that should be considered? 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 Gender Diversification Sophistication Growing but limited literature Vertical integration Skills Jobs Domestic investment SME Linkages Geo-graphic dispersion Large body of evidence Productivity Wages
Electronics
ICT
9 out of 10 RTAs with investment involve a non-oecd economy Trends Before Doha Since Doha RTAs with investment RTAs without investment RTAs with investment RTAs without investment 72% 28% 31% 69% 34% 57% South-South North-South North-North 10% Source: OECD based on WB RTAs database and other sources