hamdani presentation

FDI Policy and UpgradingFDI Policy and Upgrading

ODI Conference on Making Openness WorkODI Conference on Making Openness Work16 March 2001, London16 March 2001, London

Policy TrendsPolicy Trends

An overall trend of An overall trend of adoption of national FDI adoption of national FDI

lawslaws

In 1960s & 1970s, only 7 countries In 1960s & 1970s, only 7 countries had enacted FDI legislation had enacted FDI legislation

In 1980s, there were 29In 1980s, there were 29 In 1990s, more than 77 countriesIn 1990s, more than 77 countries Today, almost all countries have Today, almost all countries have

investment laws or codes investment laws or codes organizing the investment organizing the investment framework for foreign investorsframework for foreign investors

A trend toward A trend toward liberalization of FDI lawsliberalization of FDI laws

Countries have also been making Countries have also been making changes to their lawschanges to their laws

Mostly in the direction of Mostly in the direction of liberalization or promotion of liberalization or promotion of investor rightsinvestor rights

A shift towards FDI A shift towards FDI promotionpromotion

1990-94: countries changed 1990-94: countries changed provisions and liberalized provisions and liberalized requirementsrequirements

1995-98: greater stability of FDI 1995-98: greater stability of FDI frameworkframework

A shift from control / liberalizing A shift from control / liberalizing measures to promotional measuresmeasures to promotional measures

Main areas of liberalizationMain areas of liberalization

Entry requirements relaxedEntry requirements relaxed Ownership requirements relaxed Ownership requirements relaxed Admission procedures not relaxed Admission procedures not relaxed

but streamlinedbut streamlined Investment agencies have shifted Investment agencies have shifted

focus away from FDI authorization focus away from FDI authorization and towards FDI facilitation and towards FDI facilitation

Main areas of promotionMain areas of promotion

PrivatizationPrivatization Debt-equity swapsDebt-equity swaps BOTs (build, operate, transfer)BOTs (build, operate, transfer) EPZs (export processing zones)EPZs (export processing zones) Establishment of capital marketsEstablishment of capital markets Offshore banking facilitiesOffshore banking facilities Incentives Incentives

Business operationsBusiness operations

Fewer provisions in FDI laws on Fewer provisions in FDI laws on technology transfer or other operating technology transfer or other operating requirementsrequirements

But other laws retain restrictions on But other laws retain restrictions on employment of foreign personnel and employment of foreign personnel and land ownershipland ownership

And on local content, access to stock And on local content, access to stock markets & participation in privatization markets & participation in privatization offeringsofferings

A trend towards standard A trend towards standard guarantees & protectionguarantees & protection

National treatment - foreign investors National treatment - foreign investors are to be treated no less favourably are to be treated no less favourably than local investorsthan local investors

Protection against nationalization and Protection against nationalization and expropriationexpropriation

Provision for settlement of disputesProvision for settlement of disputes Recourse to arbitrationRecourse to arbitration Repatriation of funds, capital, profits & Repatriation of funds, capital, profits &

dividends dividends

Incentives experienceIncentives experience

proliferation of incentives since the proliferation of incentives since the mid-1980smid-1980s

developed countries offer more developed countries offer more financial incentivesfinancial incentives

developing countries rely more on developing countries rely more on fiscal incentivesfiscal incentives

Incentives goalsIncentives goals

regional development (popular in regional development (popular in developed countries)developed countries)

exporting (most frequent objective exporting (most frequent objective in developing countries)in developing countries)

manufacturing sector a main focusmanufacturing sector a main focus jobs, training, R&D, environmental jobs, training, R&D, environmental

protection and infrastructure protection and infrastructure projectsprojects

Incentives experience of Incentives experience of developing countriesdeveloping countries

tax holidays (5 years; up to 25)tax holidays (5 years; up to 25) tariff concessions (5-10 years; 15-25 tariff concessions (5-10 years; 15-25

for major projects)for major projects) grants for worker traininggrants for worker training loan guaranteesloan guarantees rebates on electricity, water and rebates on electricity, water and

sewage services (up to 15 %)sewage services (up to 15 %) export-processing zones, science export-processing zones, science

parksparks

Do incentives work?Do incentives work?

incentives are minor in decisions of incentives are minor in decisions of investors relative to other factors (e.g., investors relative to other factors (e.g., market size, costs, skills, stability and market size, costs, skills, stability and regulatory framework)regulatory framework)

market-seeking investors value market-seeking investors value protection of the marketprotection of the market

export-oriented investors value fiscal export-oriented investors value fiscal incentives more highlyincentives more highly

In case of regional incentives, grants In case of regional incentives, grants have greater impact than fiscal benefitshave greater impact than fiscal benefits

UpgradingUpgrading

0.0

50.0

100.0

150.0

200.0

250.0

1970 19721974 1976 1978 19801982 1984 19861988 1990 1992 19941996

Developed countries

Developing countries

The surge in FDI

FDI inflows into developed and developing countries, 1970-1997 (billions of US dollars)

Private flows have taken off in developing Private flows have taken off in developing countries in 1990’scountries in 1990’s

0

50

100

150

200

250

300

350

1990 1991 1992 1993 1994 1995 1996 1997 1998

Long terms flows to developing countries, 1990-1998

FDI

International capital markets

Official flows

a

a. Preliminary

b. Bonds, loans, and portfolio equity flows

Private flows

Source: World Bank, 1999

FDI is a package of FDI is a package of resources and broader resources and broader

impactsimpacts capitalcapital technology and know-howtechnology and know-how managerial and technical skillsmanagerial and technical skills access to international markets through access to international markets through

intra-firm networksintra-firm networks industrial restructuring through industrial restructuring through

competitive pressures or bringing new competitive pressures or bringing new activities or industries to host countriesactivities or industries to host countries

linkages and spillovers linkages and spillovers

Types of FDITypes of FDI

Can be a source of Can be a source of worker experience, skill worker experience, skill training and technology training and technology diffusiondiffusion

Labour-seeking

FDI

Types of FDITypes of FDI

Market-seeking

FDI

Can lead to exports Can lead to exports if integrated in if integrated in

parent company’s parent company’s international international

production systemproduction system

Example: Japanese Electronic IndustryExample: Japanese Electronic Industry

0 Exports to home country

Sales in host

countries

Exports to other countries

500

billion

yen

Intrafirm exports

Other exports/sales

Affiliates export into TRIAD through intra-firm Affiliates export into TRIAD through intra-firm salessales

34.0%

Intra-firm exports by TNC

parent firms and by

foreign affiliates

33.3%

Exports by TNC parent firms and by foreign affiliates to unaffiliated firms

32.7%

Exports by all

other firms

A third of world trade consists entirely of intra-firm exchanges between parents and affiliates

FDI & tradeFDI & trade

Affiliates in developing Affiliates in developing Asia act as low-cost Asia act as low-cost supplierssuppliers

Over time, the more Over time, the more dynamic affiliates move dynamic affiliates move up the value chain, and up the value chain, and establish affiliates of their establish affiliates of their ownown

Upgrading via regional core networkUpgrading via regional core networkExample: Japanese Electronic IndustryExample: Japanese Electronic Industry

Strategies Asian countries used to upgradeStrategies Asian countries used to upgrade

Emphasis on HRD & Emphasis on HRD & EducationEducation

Focus on teacher Focus on teacher training and re-trainingtraining and re-training

Proactive measures Proactive measures (education reform, (education reform, supervisory and supervisory and management management education and science education and science & technology and & technology and R&D)R&D)

Creation of a cadre of Creation of a cadre of competent managerscompetent managers

Create competitive Create competitive markets (trade policy, markets (trade policy, domestic regulatory domestic regulatory regime)regime)

Support for SMEs and Support for SMEs and emerging emerging entrepreneursentrepreneurs

Use FDI to stimulate Use FDI to stimulate business linkages and business linkages and entrepreneurial activityentrepreneurial activity

FDI can act as a catalyst for upgrading only if the capacities of domestic producers are simultaneously expanded. Thus, there is a need to:

Promote the competitivness of domestic firms, particularly SMEs

Improve training, technical education and human resources development

Encourage closer link between firms and universities and research institutions

UpgradingUpgrading

Examples: EthiopiaExamples: Ethiopia

Investment and Innovation Investment and Innovation Policy Review of EthiopiaPolicy Review of Ethiopia

Investment and Policy FrameworkInvestment and Policy Framework

Investment Policy Investment Policy and Regulatory and Regulatory Framework has Framework has improved greatly improved greatly since 1992since 1992



Improvement of Improvement of Investment Investment FrameworkFramework

Opening of Opening of most sectors most sectors

to foreign to foreign investmentinvestment

Investment Investment guaranteesguarantees

Investment Investment incentivesincentives

Easy and fast Easy and fast entry procedure entry procedure facilitaed by the facilitaed by the

EIAEIA



Investment guarantees include:Investment guarantees include:– Repartriation of funds: capital, profits, dividends, intrest payments on Repartriation of funds: capital, profits, dividends, intrest payments on

foreign loansforeign loans– Against nationalization/expropriationsAgainst nationalization/expropriations

Investment incentives include:Investment incentives include:– 100 per cent exemption from customs duties and import taxes100 per cent exemption from customs duties and import taxes– Income tax exemptions up to five yearsIncome tax exemptions up to five years– No taxes on remittances of capitalNo taxes on remittances of capital

Investment and Innovation Policy Investment and Innovation Policy Review of EthiopiaReview of Ethiopia

FDI inflows into Ethiopia, Uganda and TanzaniaFDI inflows into Ethiopia, Uganda and Tanzania

0

50

100

150

200

250

300

1992/3 1994/5 1995/6 1996/7 1997/8

EthiopiaEthiopia

UgandaUganda

TanzaniaTanzania

millions of $millions of $

LivestockLivestockLeather Sector Leather Sector - - Value ChainValue Chain

TanneriesTanneries

ManufacturersManufacturers of Leather Productsof Leather Products

SlaughterhousesSlaughterhouses

Traders, Dealers, Traders, Dealers, AgentsAgents

Export MarketExport Market(semi-finished)(semi-finished)

Domestic Domestic MarketMarket

Export MarketExport Market(finished)(finished)

External External LinkagesLinkages• Foreign Foreign TannersTanners• Foreign Foreign ManufacturesManufactures• FDIFDI

Investment Investment Promotion Promotion

AgencyAgencyEnvironmental Environmental

AgencyAgency

Effluent Effluent TreatmentTreatment

Plants (ETPS)Plants (ETPS)

Ministry Ministry of Healthof Health

Examples: EgyptExamples: Egypt

FDI types in EgyptFDI types in Egypt

Economic benefits

•Employment Employment •ProductivityProductivity•ExportsExports•Technology Technology •InnovationInnovation•Linkages and spilloversLinkages and spillovers

• 50 50 per centper cent

DomesticDomesticmarket-orientedmarket-orientedmanufacturingmanufacturing

FDIFDI

Automobiles,Automobiles,Food, Food, PharmaceuticalPharmaceuticals, Consumer s, Consumer ElectronicsElectronics

ServicesServices FDIFDI

•15 15 per centper cent

Hotels,Hotels,Tour operators,Tour operators,Software Software development, development, financial servicesfinancial services

Labour-intensiveLabour-intensiveExport-orientedExport-oriented

FDIFDI

•20 20 per centper cent

Clothing,Clothing,Leather,Leather,PBC assembly,PBC assembly,Construction Construction materialmaterial

PartnershipsPartnerships

• 15 15 per centper cent

Metals,Metals,Software Software development,development,Food and Food and confectioneryconfectionery

Improving the contribution of FDIImproving the contribution of FDI

Domestic market-oriented FDIDomestic market-oriented FDI

Think regionallyThink regionally

Upgrade TNC affiliates operations with Upgrade TNC affiliates operations with increasing backward and forward linkagesincreasing backward and forward linkagesExpand the domestic market into the Expand the domestic market into the regional market (Arab States, Africa)regional market (Arab States, Africa)

Pharmaceuticals, food, resource based Pharmaceuticals, food, resource based manufacturing (e.g., ceramics) manufacturing (e.g., ceramics)


Domestic market-oriented FDIDomestic market-oriented FDI

After-care servicesAfter-care services Investment in physical, Investment in physical,

technological and educational technological and educational infrastructureinfrastructure

Cluster generation strategiesCluster generation strategies Support for Egyptian SMEsSupport for Egyptian SMEs

Policy actionsPolicy actions


Labour-intensive Export-oriented Labour-intensive Export-oriented FDIFDI

Tap niches in world Tap niches in world marketsmarkets

Upgrade production based on Upgrade production based on traditional advantages traditional advantages Expand production in high tech Expand production in high tech manufacturing/upgrade the value manufacturing/upgrade the value scope (e.g. marketing, R&D)scope (e.g. marketing, R&D)

Garments, jewellery manufacturing, Garments, jewellery manufacturing, electronics components, processed oil and electronics components, processed oil and minerals minerals


Services FDIServices FDI

Development of Development of backward and backward and forward linkagesforward linkages

TourismTourism

Construction, manufacturing for Construction, manufacturing for souvenirs, trade in services, souvenirs, trade in services, software development, software software development, software applicationsapplications

Harness the fast growing Harness the fast growing services for domestic services for domestic industriesindustries

R&D R&D developmentdevelopment

SoftwareSoftware

Improving the economic Improving the economic contribution of FDI projectscontribution of FDI projects

PartnershipsPartnerships

Getting the missing assets Getting the missing assets (technology,marketing, R&D, training)(technology,marketing, R&D, training)

Expand outward FDI within the MENA Expand outward FDI within the MENA region region

Subcontracting, licensing, franchising, Subcontracting, licensing, franchising, management contracts, joint ventures management contracts, joint ventures

Pursue Technological Pursue Technological upgradingupgrading

Examples: MauritiusExamples: Mauritius

FDI Flows to MauritiusFDI Flows to MauritiusMillions of DollarsMillions of Dollars

00

1010

2020

3030

4040

5050

6060

19801980 19851985 19901990 19951995 19991999

EPZ attracts2/3 of FDI

FDI Flows to NeighborsFDI Flows to Neighbors1994 - 19991994 - 1999

00

100100

200200

300300

400400

19941994 19951995 19961996 19971997 19981998 19991999

TanzaniaTanzania

MozambiqueMozambique

KenyaKenya

MauritiusMauritius

Millions Millions ofof dollars dollars

Challenge of a Middle Income Challenge of a Middle Income EconomyEconomy

Rising wages Productivity lags behind wages Need to upgrade production Need to bring down costs of goods and services for business, to international competitive level

ChallengesChallenges

To sustain high growth, Mauritius has to:

Upgrade production in established industries due to relatively high wages

Shift into higher value sectors, including financial services, business services and information technology

ChallengesChallengesTo Sustain High Growth, Mauritius Has To:To Sustain High Growth, Mauritius Has To:

Enhance outward investments Enhance outward investments from Mauritius to the regional from Mauritius to the regional market to be able to move to market to be able to move to more value added activitiesmore value added activities

ChallengesChallengesTo Sustain High Growth, Mauritius Has To:To Sustain High Growth, Mauritius Has To:

Undertake a fast track privatization Undertake a fast track privatization program and program and

Bring world-class standards and name Bring world-class standards and name investorsinvestors