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Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues
No. 242 December 31, 2018
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Marion A. Creach ([log in to unmask])
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Policymakers in developing countries increasingly realize that leveraging outward foreign direct investment (OFDI) helps advance development at home.[1] This Perspective proposes a framework to help policymakers tackle the new challenge of integrating OFDI into national development strategies.[2]
- Vision, strategy, restrictions. Policymakers should identify economic development objectives to be supported through OFDI. The objectives (e.g., upgrading, innovation, exports, revenue, diversification) should determine how governments support OFDI. While OFDI can further multiple objectives, tradeoffs can require prioritization. OFDI rules and regulations may then need to be adjusted. Policymakers should also identify OFDI restrictions, weigh their costs and benefits and ensure that any restrictions retained serve sound policy goals and accomplish these at the least cost to the home economy.
- Non-financial support. Market failures may inhibit OFDI. Many of them involve information asymmetries (e.g., a lack of domestic investors’ knowledge about foreign market investment regulations or investment opportunities) that governments can help overcome. Non-financial support for OFDI can, therefore, take the form of market intelligence, investment missions, matchmaking services, and opening government offices in host economies to provide direct support for firms. Operationally, there are increasing opportunities for win-win collaborations between government offices promoting OFDI and investment promotion agencies seeking to attract inward FDI.
- Financial support. Other forms of market failures relate to political risk and capital availability. For the former, policymakers in home economies should ensure that political risk insurance is available to mitigate non-commercial risk, whether provided by the private sector, the government or multilateral institutions, such as the World Bank Group’s Multilateral Investment Guarantee Agency. As to capital availability, policymakers can consider the whole gamut of financial and fiscal measures, including:
- Grants, e.g., for feasibility studies, setting up firms’ overseas offices and training, which are often critical for OFDI decisions;
- Loans, either concessional or non-concessional, to fill gaps left by commercial banks, either because target markets are too risky or because firms do not have collateral to secure loans;
- Guarantees, particularly important for SMEs’ access to finance;
- Equity investment, whereby governments take minority stakes in OFDI ventures, leave management in operational control and allow it to buy out the governments; and
- Fiscal measures, such as OFDI being exempted from the tax base, or lower tax rates on OFDI profits.
Importantly, financial and fiscal measures should be used where needed to support profitable and beneficial investments that would not otherwise take place, and not simply to subsidize OFDI. Leading economies have put in place clear guidelines to minimize this risk, such as paying only a portion of costs, not upfront but through reimbursements—to third parties—, and requiring risk-sharing through firms having “skin in the game.”
- Barriers to entry. Policymakers also have a role to play in opening markets that are closed. This can include negotiating treaties and improvements in market access. The current trade and investment dispute between the US and China could be partly seen as a negotiation over barriers to entry for OFDI from western economies into the Chinese market, given issues related to market-access reciprocity. Chambers of commerce and other business associations should bring to the attention of policymakers both de jure and de facto barriers to OFDI for government-to-government commercial diplomacy to take place, in a manner complementary to traditional business advocacy.
- Operational support. Even after creating an enabling environment for OFDI through information, finance and market access, policymakers need to provide operational support. This can include information on new market opportunities after overcoming entry barriers and troubleshooting when there are issues with investments. One example is implementing early-warning mechanisms in host countries to address foreign investor complaints before they escalate into formal legal disputes. Other examples include encouraging legal and accounting professionals in home countries to provide in situ support for OFDI deals, strengthening the legal infrastructure to provide greater protection for OFDI (such as joining the International Centre for Settlement of Investment Disputes, as Mexico just did) to arbitrate OFDI-related disputes, and supporting OFDI by groups of companies, something that some East Asian economies pioneered a few decades ago, and that policymakers in other countries are increasingly copying.
- Maximizing benefits. FDI can lead to significant benefits for home economies.[3] Some of these are direct, while some are indirect, or result from spillovers. Policymakers should boost the absorptive capacity of home economies to maximize OFDI’s benefits, especially by creating linkages between OFDI firms and other domestic firms, to diffuse capacities acquired abroad throughout home economies. Fostering such linkages includes encouraging consortium bidding for OFDI projects (as Poland and Singapore do), whereby the larger firms in the consortium bring along the smaller firms. In addition, policymakers should adopt monitoring and evaluation frameworks to ensure that home-country measures accomplish their intended effects and are cost effective.
Finally, inward FDI, OFDI and exports are often related,[4] suggesting that policymakers should consider leveraging them in unison, e.g., by ensuring overlap in target sectors. By so doing, along with the six steps outlined above, OFDI can increasingly serve as a complementary channel to help drive home-country development.
* The Columbia FDI Perspectives are a forum for public debate. The views expressed by the author(s) do not reflect the opinions of CCSI or Columbia University or our partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
** Matthew Stephenson ([log in to unmask]) is a researcher at the Graduate Institute of International and Development Studies, Geneva, and a consultant to the World Bank Group; Jose Ramon Perea ([log in to unmask]) is a senior economist with the World Bank Group’s Macroeconomics, Trade and Investment Global Practice. This Perspective is based on Matthew Stephenson, “OFDI and development: policy considerations to leverage a new pathway for growth,” in Syed Munir Khasru, ed., Towards Sustainable Development: Lessons from MDGs & Pathways for SDGs (Bangladesh: IPAG, 2017), pp. 367-386, and Jose Ramon Perea and Matthew Stephenson, “Outward FDI from developing countries,” in World Bank, Global Investment Competitiveness Report 2017/2018 (Washington, DC: World Bank, 2017), pp. 101-134. The authors are grateful to Thomas Biersteker, Klaus Meyer and Ravi Ramamurti for their helpful peer reviews.
[4] Shujie Yao et al. “Dynamic relationship between China's inward and outward foreign direct investments,” China Economic Review, vol. 40 (2016), pp. 54-70; Robert E. Lipsey, Eric Ramstetter and Magnus Blomström. “Outward FDI and parent exports and employment: Japan, the United States, and Sweden,” Global Economy Quarterly, vol. 1 (2000), pp. 285-302; Torfinn, Harding and Beata S. Javorcik, “Foreign direct investment and export upgrading,” Review of Economics and Statistics, vol. 94 (2012), pp. 964-980.
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The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Matthew Stephenson and Jose Ramon Perea, ‘How to leverage outward FDI for development? A six-step guide for policymakers,’ Columbia FDI Perspectives, No. 242, December 31, 2018. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
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For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Marion A. Creach, [log in to unmask].
Most recent Columbia FDI Perspectives
- No. 241, Robert W. Schwieder, “Lessons for a future advisory center on international investment law,” December 17, 2018
- No. 240, Felipe Hees, Henrique Choer Moraes, Pedro Mendonça Cavalcante, and Pedro Barreto da Rocha Paranhos, “Investment facilitation: leaving the past behind,” December 3, 2018
- No. 239, Joseph M. Wilde-Ramsing and Marian G. Ingrams, “High time for government action to make the OECD Guidelines a force for sustainable FDI,” November 19, 2018
All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.
Other relevant CCSI news and announcements
- We are accepting applications for our three upcoming executive trainings on: Extractive Industries and Sustainable Development (June 3–14, 2019), Sustainable Investments in Agriculture (June 11–21, 2019) and Investment Treaties and Arbitration for Government Officials (June 17–27, 2019). Each program is designed to equip participants with the necessary skills, analytical tools and frameworks to address relevant challenges and opportunities, and to encourage a rich dialogue about best practices from around the globe. More information about each training, including brochures and applications, is available at the links above. Applications are accepted on a rolling basis. Participants will receive a Statement of Attendance from Columbia University.
- On January 30, 2019, CCSI, the Columbia Masters in Development Policy Program, and the Institute for the Study of Human Rights will co-sponsor a discussion at Columbia Law School with Jeffrey Sachs, the Special Advisor to the UN Secretary-General on the SDGs, and Philip Alston, the UN’s Special Rapporteur on extreme poverty and human rights, on the relationship between finance, human rights, and the SDGs, including a focus on current trends toward privatization. For more information, and to register, please see our website here.
- On February 19, 2019, CCSI and the Institute for the Study of Human Rights will co-host "Is Liberalism Making the World Less Fair? Three Authors Discuss Their Recent Books on Investor vs. Human Rights in the Global Economy," at Columbia Law School. Please see our website here for more information.
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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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