A BETTER INVESTMENT CLIMATE

by

Dr. Chee Kim Loy

Assoc Professor, UBD.

GOOD INVESTMENT CLIMATE:THE ROLE OF GOVERNMENT

Market-Friendly Development Approach

( Ref: World Development Report, 2005)

INVESTMENT CLIMATE

“The location-specific factors that shape the opportunities and incentives for firms to invest productively, create jobs and expand.”

Rural Micro-entrepreneurs

Local manufacturingfirms

Multi-national enterprises

EconomicGrowth

PovertyReduction

ProductiveInvestment

Create

Job Creation

BusinessExpansion

Business Development Actors Actions Impacts

Favourable Investment Climate

GOVERNMENT-BUSINESS PARTNERSHIP IN DEVELOPMENT

Investment in people and

EmpowermentGGovernment’s Roles

Investment Opportunities

Government Policies/ Behaviours

Property rightsRegulations

TaxesFinance

InfrastructureCorruption

Etc..

Short and long termfactors

A Package of CriteriaFor Investment

Government Roles: CredibilityProfitability and Social outcomesSecurity

Decision toInvest

Business Actors

THE CONTEXT IN THE DECISION TO INVEST

GOVERNMENT POLICIES

Cost of doingbusiness Risks

Barriers tocompetition &

entry

TaxesPublic goodsInfrastructureMarket failures

Uncertain response by customers/competitors

Stable and secure environmentSecuring property rightsPolicy uncertaintyMacroeconomics uncertaintyArbitrary regulations

Deny opportunities and raise costs

Lack of innovation and productivity

Barriers to entry

GOVERNMENT POLICIES AND INVESTMENT CLIMATE

A GOOD INVESTMENT CLIMATE

• The government should balance the following tensions– Change in laws and policies– Reduce gaps in formal policies and practices– Private profits vs societal benefits– Less regulation (firms) vs more regulation

(public)

Investment Climate Indicators (WB)

Indonesia Philipines Mallaysia PolicyMajor ConstraintsInterpretation of regulationCorruption Major ConstraintsBribery

CourtsMajor ConstraintsConfidence

CrimesMajor ConstraintsReport Loss

LabourSkillsRegulations

Investment Climate Indicators

Cambodia Laos Malaysia Singapore Vietnam

Starting a BusinessDays 94 198 30 8 63Procedures 11 9 9 7 12

Enforcing a contractDays 585 443 300 69 404Procedures 58 53 31 23 37

Registering PropertyDays 56 135 143 9 78Procedures 7 9 4 3 5

Transparency of Govt Policy 2.8 5 6.2 4.3

FOUR CHALLENGES OF INVESTMENT CLIMATE POLICY

• Restraining rent seeking behaviours by firms, officials and other groups

• Establishing credibility by firms on government policy

• Fostering public trust and legitimacy (demonstrated public support)

• Ensuring policy responses to fit local conditions

REFORM PROCESS IN INVESTMENT CLIMATE POLICY

• Setting priorities

• Managing individual reforms

• Maintaining momentum

• Strengthening capabilities

THE BASICS OF A GOOD INVESTMENT CLIMATE

• Stability and Security

• Regulations and Taxations

• Finance and Infrastructure

• Workers and Labour Markets

BEYOND THE BASICS

• Selective interventions – approach with care (State Inc.!!)– Sequencing of reforms– Special policy privileges to targeted groups

• International rules and standards- many tradeoffs– Bilateral and multilateral investment treaties– Enhancing credibility, harmonising rules and

standards, and addressing international spillovers

THE ROLE OF INTERNATIONAL COMMUNITY

• Removing distortions in developed countries

• Provide more, and more effective assistance – Development assistance for investment

climate improvement– Support provided directly to firms and

transactions

• Tackling the substantial knowledge agenda