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Summary of the Global Investment Competitiveness Report 2017/2018: Foreign Investor Perspectives and Policy Implications

Core Content

The Global Investment Competitiveness Report 2017/2018 examines the role of foreign direct investment (FDI) in developing countries, emphasizing its importance in driving economic transformation and development. The report highlights the perspectives of foreign investors and offers policy recommendations to enhance the competitiveness of developing economies in attracting and integrating FDI.

Main Findings

1. FDI as a Major Contributor to Development

• FDI has become the largest source of external finance for many developing countries, surpassing ODA, remittances, and portfolio investment.
• In 2016, over 40% of global FDI flows went to developing countries, totaling nearly $1.75 trillion.
• Despite its importance, FDI inflows remain insufficient to meet the financial needs of achieving the Sustainable Development Goals (SDGs), especially in fragile and conflict-affected situations (FCS).
• FDI contributes to development by providing not only capital but also technical know-how, managerial skills, and access to foreign markets.
• It has the potential to enhance productivity, create better-paying jobs, and improve labor conditions, particularly in sectors attracting FDI and supporting industries.

2. Investor Motivations and Policy Implications

• The Global Investment Competitiveness Survey of 754 MNC executives reveals that political stability, security, and macroeconomic conditions are key factors influencing FDI decisions.
• A business-friendly legal and regulatory environment is also a critical driver of investment.
• Efficiency-seeking investors (those seeking cost reductions) are more selective and value incentives, trade agreements, and ease of entry more than other investors.
• The most attractive investment incentives include duty-free imports, tax holidays, and VAT exemptions.
• Investment Promotion Agencies (IPAs) are seen as more valuable in resolving problems and setting up operations than in promoting FDI.

3. FDI and High-Growth Firms

• High-growth firms (defined as those with the highest job creation rates) benefit the most from FDI.
• These firms are more able to internalize FDI spillovers through linkages and demonstration effects.
• An increase of 1 percentage point in the share of inputs sourced domestically by foreign firms is correlated with a 0.6 unit rise in output growth of high-growth domestic firms.
• Similarly, a 1 percentage point increase in the share of foreign output in a sector leads to a 0.1 unit gain in output growth for high-growth firms, or a 12% increase in sales over two years.
• High-growth firms are disproportionately important for job creation and productivity gains, despite accounting for a small share of the private sector.
• Policies that encourage FDI linkages can enhance knowledge transfer and deliver strong development outcomes.

4. Outward FDI (OFDI) from Developing Countries

• OFDI from developing countries is increasing, with East Asia and Pacific leading the region.
• OFDI allows MNCs from developing countries to boost innovation and exports, and to access foreign technology.
• Absorptive capacity at both firm and economy levels is crucial for the effectiveness of OFDI.
• Many developing countries have mixed records on OFDI restrictions, with some implementing policies to promote outward investment.

5. FDI in Fragile and Conflict-Affected Situations (FCS)

• FCS are highly heterogeneous in terms of investment risks and opportunities.
• FDI tends to concentrate in natural resources and capital-intensive activities, with foreign investors being cautious in other sectors.
• FDI in FCS can contribute to postconflict economic growth, particularly in construction.
• Economic reforms are essential to improve the investment climate in FCS.
• FDI inflows to FCS remain below potential, highlighting the need for improved policy and institutional frameworks.

Key Information

• The report is based on empirical data, surveys, and analysis of global investment trends.
• It introduces a new concept of investment competitiveness, defined as the ability of a country to attract, retain, and integrate private investment.
• Policy recommendations include:
  • Enhancing the business environment to support both domestic and foreign firms.
  • Focusing on targeted policies to support high-growth firms.
  • Improving transparency and efficiency in tax incentives.
  • Promoting economic reforms in fragile and conflict-affected situations.
  • Strengthening investment promotion agencies and linkages between MNCs and local firms.

Supporting Data and Analysis

• The report includes detailed data on FDI flows and stocks by region and sector.
• It provides country-level cost-benefit analysis of tax incentives and highlights the effectiveness of transparency-enhancing reforms.
• Case studies on South-South and South-North FDI are presented, with examples from Chile, Kenya, and BRICS countries.
• Maps and figures illustrate the geographic distribution of FDI, the impact of FDI on high-growth firms, and the current state of FDI inflows in FCS.

Conclusion

The Global Investment Competitiveness Report 2017/2018 underscores the critical role of FDI in development and provides actionable insights for policymakers. It highlights the need for business-friendly environments, effective tax policies, and targeted support for high-growth firms, especially in fragile and conflict-affected contexts. The report also emphasizes the importance of OFDI in enhancing innovation and competitiveness for developing country MNCs.