Strengthening policies on direct investment

Developing country policies and institutions for dealing with direct investment include:

2. Services and infrastructure provided for foreign investors.

3. A variety of restrictions on the way foreign companies can operate, which can discourage investment. Some countries reserve key industries for local (often state-owned) enterprises. Again, foreign investors may be allowed to hold only a minority stake in a company, unless the industry is defined as "high priority" or the production is mainly for export. Some countries require foreign companies to dilute ownership and control gradually through the sale of shares to residents. Many developing countries restrict remittance of interest and dividends - a major disincentive to foreign companies and one which encouraged practices such as the manipulation of transfer pricing. Developing countries may also stipulate performance requirements, such as the export of a minimum proportion of output or the use a fixed amount of local components or labour. Some countries limit the amount of local borrowing permitted to foreign investors. The IFC study showed that companies tend to take these requirements into consideration in choosing where to locate.

Specific incentives and regulations are less significant in attracting direct investment than a country's general economic and political climate and its financial and exchange rate policies. Countries in Africa and the Caribbean which have small domestic markets and limited natural resources have not attracted much direct investment despite offering substantial incentives to potential investors. However, several countries with the potential to obtain direct investment for import-substitution purposes have had only modest success because they impose restrictions and performance requirements on foreign companies. By contrast, the export-oriented development policies of some of the newly industrializing countries have attracted considerable inflows without offering significant incentives. Although the overall economic climate is of first importance, where an investment is actually made may depend on policies for a specific sector or industry.

With respect to the investing country, it is again the general economic policies of the industrial countries that most effect the amount of direct investment going abroad. Foreign investment is more attractive if there are low rates of economic growth and high production costs at home. Investment in developing countries is discouraged when the home country encourages and protects its production, when if provides direct or indirect subsidies to ailing industries which might otherwise have considered investing in developing countries or when it places restrictions on trade flows. Generous concessions offered by industrial countries to attract investment from abroad can compete directly with the incentives offered by developing countries, although most such concessions are directed toward specific, high-technology industries.

Policy initiatives in industrial countries can have a positive effect, for example when governments and trade bodies circulate information about investment opportunities, negotiate procedures for settling disputes over investment with governments of developing countries and ensure that tax laws make it attractive for individuals to work abroad in a multinational company. The most powerful stimulus of all is a liberal trade policy, since companies can then manufacture abroad to produce for industrial-country markets.

Long-term investment in plant and machinery exposes the investing company to political risk, whether expropriation, blocked currency, war, revolution or insurrection. Many developing countries have passed laws protecting investors against expropriation, some having embodied such protection in their constitution. In addition, governments in industrial and developing countries have concluded bilateral treaties on investment protection, which cover, among other things, transfer and expropriation risks; and a number of (mainly industrial) countries have set up investment guarantee schemes offering guarantees to companies and individuals from each guaranteeing country against political risks abroad. These measures are all intended to reassure actual or potential investors, although they differ appreciably in their terms and conditions, scope of coverage and administrative practices.

This strategy features in the framework of Agenda 21 as formulated at UNCED (Rio de Janeiro, 1992), now coordinated by the United Nations Commission on Sustainable Development and implemented through national and local authorities.