Attracting foreign direct investment

FAHEEM BELHARVI

THERE is keen competition among developed and developing countries to attract foreign direct investment (FDI). This drive to lure investment often extends to the subnational level, with different regional authorities pursuing their own strategies and assembling their own baskets of incentives to attract new investments. Various reforms and strategies have been implemented, with mixed results. Some are critical of the high costs of many of these initiatives, arguing that it would be more rewarding to improve a country’s general business environment.

The many different methods used by policymakers to attract FDI and their effectiveness are as follows:

Providing targeted fiscal incentives, such as tax concessions, cash grants, and specific subsidies; improving domestic infrastructure; promoting local skills development to meet investor needs and expectations; establishing broad-reaching FDI promotion agencies; improving the regulatory environment and decreasing red tape; and engaging in international governing arrangements.

Promotional efforts to attract foreign direct investment have become the important point of competition among developed and developing countries. This competition is also maintained when countries are adopting economic integration at another level.
While some countries lower standards to attract FDI in a ‘race to the bottom,’ others praise FDI for raising standards and welfare in recipient countries.

Sound investment climate is crucial for economic growth. Microeconomic reforms aimed at simplifying business regulations, strengthening property rights, improving labour market flexibility, and increasing firms’ access to finance are necessary for raising living standards and reducing poverty in a country.

The government claims to have brought foreign investment to the billion dollars mark this year. But that is a fallacious claim since the money has come on account of privatisation of government-owned entities. There has only been a transfer of assets from the public sector into private hands; no new generation of activity in the retail or production sector, which is badly wanted to address the twin problems of poverty and unemployment.

The situation underscores the need not only to remove administrative hurdles but also to create ease of operations vis-à-vis law and order and the socially restrictive atmosphere.

Governments that emphasise flexible demand-driven strategies, target in high value-added areas, and coordinate education and training policies are more likely to lead the country into a virtuous circle.