Wednesday, June 19, 2019 11:00 AM

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Developing World is now a bigger source of global FD I flow as South-South investment picks up, World Bank says

Foreign direct investment from developing countries has increased 20-fold in the last 20 years, accounting for nearly 20 percent of the global FDI flows by 2015, according to the Global Investment Competitive Report published by World Bank.

For many developing countries, foreign direct investment (FDI) has become the largest source of external finance, surpassing official development assistance (ODA), remittances, or portfolio investment flows. In 2016, more than 40 percent of the nearly $1.75 trillion of global FDI flows was directed to developing countries, providing much-needed private capital, the report said..

While larger developing countries, especially the BRICS, are driving this phenomenon, about 90 percent of developing countries of all sizes and income levels are now undertaking outward foreign direct investment (OFDI). Both domestic policy choices in developing countries and global economic conditions have shaped changes in the investment landscape.

“Yet the financing required to achieve the Sustainable Development Goals (SDGs) remains prohibitively large and largely unmet by current FDI inflows — especially in fragile and conflict-affected situations (FCS). To maximise the development impact of FDI and thus help meet the SDGs, private investment will have to expand into areas where it has not yet ventured, notwithstanding the associated risks. The benefits of FDI extend well beyond attracting needed capital,” the report said.

Peter Kusek, Senior Economist, Macroeconomics, Trade and Investment, World Bank Group and a co-author of the report, said, “Governments must de-risk investment climate by ensuring proper business-friendly environment firmly backed by legal protection from political risk and by creating an effective predictable environment where foreign investors could feel safe.

“China’s outward FDI stock jumped from 12 percent 20 years ago to a third of the global outward FDI stock in recent years. Multi-national companies in the developing countries are more willing to target higher risks compared to their counterparts in the developing world.

“De-risking business environment to reduce uncertainty and unpredictability goes a long way in accelerating the flow of FDI in a country, the report finds.”

Jamal Al Jarwan, Secretary-General of the UAE International Investors Council (UAEIIC), said, political stability and regulatory environment are very crucial for all the investors.

“I have been on the board of several companies in Africa and other markets where we invested and for us political stability, government’s vision, growth potential in that market as well as regulatory environment are very crucial in making investment decisions,” he said.

“Another major factor is corruption level in an economy and as an investor, we raise caution to our fellow investors of the downside risks in investing in a country that ranks very high in corruption perception indices.”

Paulo Portas Deputy Chairman of Portuguese Chamber of Commerce and a former Minister of State for Foreign Affairs, Portugal, said, “We are in the same market for the same pool of investors. So, we need to be competitive in our investment regulation and ease in doing business.”

Foreign investment also confers technical know-how, managerial and organisational skills, and access to foreign markets. Furthermore, FDI has a significant potential to transform economies through innovation, enhancing productivity, and creating better-paying and more stable jobs in host countries, in sectors attracting FDI as well as in the supportive industries. Importantly, foreign investors are becoming increasingly prominent players in delivering global public goods, addressing climate change, improving labour conditions, setting global industry standards, and delivering infrastructure to local communities.

FDI can accelerate productivity gains in host countries. It brings foreign technology and frontier knowledge that, if successfully absorbed by local firms, can improve their productivity directly. FDI can also increase competition among firms in the local market by leading to a reallocation of resources away from less productive to more productive firms, thereby increasing aggregate productivity over the long run.

Peter Kusek says, incentivising investment works in certain cases. “However, de-risking political environment is more crucial than incentives,” he says. “For investors, security of their investment is more crucial than incentives.”

The three-day Annual Investment Meeting (AIM) congregation of high-profile officials that include 25 federal ministers, 19 mayors, eight organisation heads, one head of parliament and investors will see the signing of a number of agreements and announcements that will help countries boost the flow of Foreign Direct Investment (FDI).