Foreign Direct Investment (FDI) for Efficiency and Growth –

Policies and Incentives

Cecile Fruman

Director - Trade & Competitiveness Global Practice

Dhaka, Bangladesh, January 25, 2016

Why Are Some Countries More Prosperous than others?

Countries grow because:

� they produce new and improved goods and

services

� they find better ways to produce those goods

and services

� they find new markets for their products

� and they retain more of the value added

FDI plays an important role in helping developing

countries grow

Natural resource-seeking

Market-seeking

Efficiency-seeking

Strategic-asset

seeking

Not All FDI is the Same… Nor Has the Same Impact on Development

What is efficiency-seeking FDI?

Characteristics

�Export-oriented

�Key to diversify composition of exports

�Generator of jobs and foreign exchange

�More difficult to attract as host countries have to actively compete for it

Factors

�Determined by the level of competitiveness of the host country vis-à-vis other potential hosts (labor cost, skills, infrastructure, etc)

�Vicinity and connectivity with greater markets

FDI is More than a Source of Capital

� Creates new and more diversified jobs, with greater productivity and value addition

� Expertise transfer, research and development

� Process and technology transfer

Source: Gereffi & Luo, WBG Policy Research Working Paper 6847

Types of Jobs Created by Different Sectors

Examples of Efficiency-seeking FDI:Honduras Developing Light Manufacturing

Over the last decade, Honduras has started to

diversify its exports in light manufacturing sectors, in

particular in insulated wire (used for the car industry).

In 1995, Honduras exported only US$6 million in

insulated wires, representing 0.3% of the country’s

total exports.

By 2014, it multiplied exports by a factor of 100,

reaching US$624 million, representing 8% of the

country’s total exports.

Key Success Factors:

A. Low labor cost

B. Role of international agreements in enabling

Honduras to join the car production GVC (95% of

exports go to NAFTA countries)

C. Promotion though retention and good

reputation: stability of conditions has enabled

the expansion of the sector in the long term

Source: MIT/HARVARD Observatory Atlas

Insulated Wire: Exports of Honduras1995-2014

Mexico

Canada

USA

Examples of Efficiency-seeking FDI:Mexico Developing an Aerospace Industry

In 2000, Mexico’s exports of aerospace

products were very limited. In 2015, the sector

represents a $5 billion export industry

employing some 31,000 people, with 20%

annual growth projecting $12 billion exports by

2020.

Exports are generated by a cluster of foreign

firms which are linking with domestic ones

Key success factors:

A. Role of international agreements

B. Pragmatic public-private partnership in

building human capital and skills

development

C. Exploration of various niches

D. Promotion of investment linkages

E. Promotion though retention and good

reputation

Turbo jets, and other gas turbines: Exports of

Mexico 1995-2014

Source: MIT/HARVARD Observatory Atlas

Asia

Europe

USA

How can Bangladesh better harness efficiency-seeking FDI…

FDI Performance Can Improve Further

Telecom

Power

Gas / petroleum

Banking

�In relative terms vis-à-vis regional

competitors, Bangladesh could

receive more FDI

(Bangladesh $.1.5 billion vs. Vietnam $90 billion)

�Efficiency-seeking FDI is

concentrated in textiles, need to

diversify and increase value addition

(Electronics, light manufacturing and services)

Source: UNCTAD

FDI Bangladesh in 2013

Most relevant factors for investment diversification

Although Bangladesh has an important

market size & competitive labor cost,

Investors also look for:

� Compliance with international production

standards

� Confidence in regulatory enforcement

� Skilled labor

� Easy cross-border movement of goods,

labor, capital and ideas

� Easy access to critical inputs: power,

transportation and industrial land

� Efficient reaction by authorities

(institutional capacity)

10

Source: WBG

Value your existing investors: the importance of retention

One out of four corporate investors either withdrew from an existing investment

or canceled planned investments over the past twelve months…

0 5 10 15 20 25 30

Transfer and convertibility restrictions

Breach of contract

Non-honoring of gov't guarantees

Expropriation/nationalization

Adverse regulatory changes

War

Terrorism

Civil disturbance

Withdraw existing investment Cancel planned investments

Source: WIPR 2012

Government actions

Five fronts to Attract More Efficiency-Seeking Investment

� Further facilitate the establishment

of investment

� Streamline approvals

� Access to industrial land

� Facilitate movement of capital

� Promote more competition in input

markets

� Promoting greater coherence

between trade and investment

policy

� Need for certainty regarding conditions of

access to international markets

� Does Bangladesh have the Preferential

Trade and Investment Agreements it

needs? (Prevent unilateral measures and

erosion of preferences)

“Incentives are not among the top three factors driving

location decisions.” (Mc Kinsey)

� Fine tune investment incentives:

� Are they tackling what investors need?

� What about skills?

� Design a focused investment

promotion and retention strategy

� Demonstration effect of reforms

� Support nascent exporting industries

� Domestic Linkages

� Prevent enclaves

�Maximize spillovers and social benefits