Foreign Direct Investment

World Services Group 2008 Annual Meeting

Karin C. Millett, Head FIAS Investment Generation-ViennaWorld Bank Group

Munich, September 13, 2008

World Bank Group—Who we are

• World Bank (IBRD/IDA), IFC, MIGA• World Bank—lending to governments for

development priorities• IFC – advisory services, investment in private

sector, both equity participation and loans• MIGA – providing guarantees (insurance) to

private sector against: breach of contract by government, expropriation, war and civil disturbance, currency transfer restrictions

• FIAS – the Investment Climate Advisory Service (joint facility of WB, IFC, MIGA)

FIAS: 20 years of experience in investment climate

FIAS total program spending

• Multi-donor advisory service on investment climate• 105 staff in 8 locations • Mission: increase private investments in developing countries• Business model: require client requests and 50% co-funding • 219 projects in 82 countries (last 3 years)

WBG - Stimulating Reform through Benchmarking

• Doing Business - annual review of around 180 countries - and selected cities - to assess objective measures of business regulations and their enforcement – Doing Businees in SEE - covers 22 cities in seven

economies: Albania, Bosnia and Herzegovina, Croatia, Kosovo, FYROM, Montenegro, and Serbia

• FDI Indicators - new FIAS instrument to review specific conditions for cross-border investment

DB and FDI Indicators: what they measure

Starting a businessDealing with licensesEmploying workers

Registering propertyGetting credit

Protecting investorsPaying taxes

Trading across bordersEnforcing contractsClosing a business

Foreign ownership restrictions

Investment promotion

Pre-establishment procedures

Access to land

Currency convertibility and repatriation

Expropriation and int’l arbitration

DB vs. FDI INDICATORS

- - - - - - - - - - - - - - - - - - - - - - - - -

Top 30 on the Ease of Doing Business —

1. Singapore 16. Switzerland

2. New Zealand 17. Estonia

3. United States 18. Georgia

4. Hong Kong, China 19. Belgium

5. Denmark 20. Germany

6. United Kingdom 21. Netherlands

7. Canada 22. Latvia

8. Ireland 23. Saudi Arabia

9. Australia 24. Malaysia

10. Iceland 25. Austria

11. Norway 26. Lithuania

12. Japan 27. Mauritius

13. Finland 28. Puerto Rico

14. Sweden 29. Israel

15. Thailand 30. Korea

Doing Business Report 2008

www.doingbusiness.org

FDI Indicators: Benchmarking Investment Climate for FDI

• Objectives - Extend thematic coverage of DB indicators to areas of FDI regulation in order to:– Stimulate appetite for investment climate reforms (as effectively

demonstrated by DB)– Respond to needs of public policy makers, business,TA

providers, and academics• Coverage - Six topical indicators measuring FDI

regulation and administrative processes. • Methodology consistent with DB and anchored in

standardized surveys administered primarily to investment lawyers, accountants and consultants.

• Timing - 22 pilot countries tested in 4 successive phases (Nov ’07 – Oct ’08). Rollout in 80 countries, planned for Jan’09.

How are the FDI Indicators constructed

…We follow the Doing Business approach and methodology

• Focus on objective and verifiable data, rather than opinion and perception based information

• Survey of laws/regulations and their application in practice

• Respondents are private sector intermediaries (i.e. Investment lawyers, consultants, accountants, etc.)

• Survey filled out by governments for validation/cross-checking purposes

FDI Indicators: Examples of preliminary results from pilot tests

Types of land occupancy rights available for a foreign firm:

Right to Buy (Freehold)

Right to Lease (Leasehold)

Private State Private State

Cameroon

Ethiopia

Ghana

Mozambique

Nigeria

(1) Many countries continue to have sector- specific restrictions on FDI:

(2) Several countries in Sub-Saharan Africa require an additional approval for foreign investors:

(3) The quality of land rights for foreign investors varies considerably across the world:

(4) Sub-Saharan African countries vary significantly in the type of land occupancy rights they offer:

Can a foreign company establish a subsidiary without an investment approval?

Yes/No Median # Days(if ‘No’)

Cameroon 14

Ethiopia 10

Ghana N/A

Mozambique 60

Nigeria N/A

- Yes

- No

23

35

38

38

50

61

65

67

71

81

85

90

Mozambique

Ethiopia

Ghana

China

Nigeria

Nicaragua

Cameroon

Russia

Peru

Argentina

Colombia

Chile

strongweak

sectoral openness index (0-100)

quality of land use rights index (0-100)

60

62

72

88

88

89

90

95

97

100

100

100

Ethiopia

Russia

China

Argentina

Nicaragua

Cameroon

Chile

Peru

Ghana

Colombia

Nigeria

Mozambique

openclosedsectoral openness index (0-100)

Why has FIAS Developed Indicators to benchmark ease of cross-border investment?

• FDI important to developing countries –they benefit from productive cross-border investment, bringing new technology, management know-how and, of course, jobs.

• Benchmarking countries against each other creates awareness of deficiencies in investment climate and stimulates appetite for reform.

• Together with DB indicators, provide a robust view of business conditions for entry, operation and exit by both domestic and non-national firms.

Factors influencing location decision

Factors attracting investment by region(per cent of total number of responses for all factors in the region)

 North

America EU15NewEU12 SEE and CIS

South, East and South-East Asia

World average

Follow the leader 2 3 3 6 6 4

Skilled labor 11 11 12 4 4 9

Low-cost labor -  - 12 8 8 9

Size of local market 24 20 12 25 25 21

Access to capital market 7 6 2 1 1 2

Access to natural resources 6 4 8 5 5 6

Access to regional market 10 11 13 12 12 10

Growth of local market 12 12 19 31 31 20

Government effectiveness, incentives 7 11 6 1 1 5

Stable investment environment 20 19 12 4 3 10

Source: UNCTAD, WIPS 2007-2009

Location criteria by sector

Primary sector Manufacturing sector Services sector

Access to natural resources Size of local market Size of local market

Stable investment environment Growth of local market Growth of local market

Government effectiveness,

incentivesGovernment effectiveness,

incentivesStable investment

environment

Access to international/regional markets Cheap labor

Access to international/regional markets

UNCTAD World Investment Prospects Survey 2007-09

Growth in overall FDI flow has accelerated

0

50

100

150

200

250

300

350

400

450

500

1991 1993 1995 1997 1999 2001 2003 2005 2007p

0

0.5

1

1.5

2

2.5

3

3.5

Middle Income Countries

Low-Income Countries

$ billions percent

Forecast was $456 billion (3.2 percent of GDP) in 2007

Percent of GDP

FDI is highly concentrated

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006 2007p

China

Russia

TurkeyMexico Brazil

FDI inflows to developing countries

$ billions

* 2007 data World Bank staff projection

Services have been an important driver of growth

0

10

20

30

40

50

60

70

DevelopingCountries

AFRICA LAC ECA EAP

Share in FDI Stock in 2005

Primary

Manufacturing

Services

percent

Trends are expected to continue…

• Total FDI in 2007 (including reinvested earnings) estimated at $1.34 trillion

• Cross-border mergers and acquisition (vs. Greenfield investments) are the major drivers of global FDI

• US and the EU15 continue to dominate as recipients of world FDI

• Among emerging markets, China remains by far the main recipient of FDI

• Liberalization of trade and investment policies expected to continue

• Developing countries increasingly outward investors

*Source: World Investment Prospects to 2011; The Economist Intelligence Unit

However…

• Survey of investors about intentions up to 2011 by EIU and UNCTAD indicates investors concerned about:– More threatening Geopolitical climate – Signs of emerging protectionism against

FDI, particularly among developed countries

– Apparent weakening of appetite for globalization

– Financial market woes making financing tighter

ImprovedInvestmentclimate

ImprovedInvestor

Servicing

FDI friendly policies

Incr

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Investment

Jobs

FeedbackLoop

FIAS Investment Generation Goals

Potential Involvement of WSG Members

As noted, for the FDI Indicators we seek input within the target country from lawyers, accountants, and providers of other services to businesses. Targeting 80 countries this year, starting November. Profile of WSG members makes them potentially good sources of input.

THANK YOU!

Karin Millett

kmillett@worldbank.org

www.fias.net