Removing barriers to FDI

As the effects of the global economic downturn subside and investment and growth pick up, countries around the world are competing to attract more FDI. Companies are looking for new deals and new markets to increase their presence and lower their costs – yet vast differences exist in the treatment foreign companies receive in countries around the world. Pierre Guislain, Kusisami Hornberger and Peter Kusek report


One would expect that this global marketplace has encouraged all countries to make their markets more attractive destinations for investment. In Canada, Georgia and Rwanda, efficient bureaucracy allows a foreign company to establish a subsidiary in less than a week. In Angola, this same process can take half a year.

Leasing industrial land in Nicaragua and Sierra Leone typically requires half a year as opposed to less than two weeks in Armenia or South Korea. In Pakistan and Sri Lanka it can take up to two years to enforce a commercial arbitration award; in the United Kingdom and Kazakhstan, less than two months.

Investment opportunities in 2011 and beyond
After a year of stagnation, FDI is expected to rebound by 15-30 percent in 2011, according to UNCTAD, the UN body dealing with trade and investment. The growth in FDI is likely to continue to come primarily from Asia and Latin America. In fact, last year marked the first time developing and transition countries worldwide attracted more FDI than high-income countries. However, despite an optimistic outlook for 2011, investors are worried about the civil unrest in the Arab world, increasing commodity prices, sluggish economic growth in many economies, high unemployment and the associated depressed consumer demand, and risks related to currency volatility and national debt.

Increased investment is a priority for many countries and companies alike. For countries it provides access to new sources of capital and new markets, generates jobs, allows for the transfer of technology and for associated diversification of economic activities. It also provides access to competitively priced goods and services. For companies, investment creates opportunities to access resources, expand markets, enhance strategies and increase efficiency. Consider Aspen Pharmacare, a South African pharmaceutical manufacturer.

Its 2008 decision to enter the East African market resulted in a major upgrading of a pharmaceutical manufacturing center in Dar es Salaam, Tanzania, creating jobs and providing access to affordable generic drugs for a much larger group of customers. Another example is General Electric’s recent decision to build a research and development facility in Brazil. Brazil will gain from high-skill jobs and the transfer of new technologies, while GE will gain access to the Latin American market and its talent pool while cutting production costs.

Countries need to be proactive about improving their attractiveness to FDI. However, many drivers of foreign investment—such as a country’s location, market size, and availability of natural resources—cannot be influenced by decisions and actions of policymakers. Furthermore, other policy-related drivers of FDI—such as macroeconomic performance, infrastructure quality, and human capital—can only be influenced in the medium- to long-run. In contrast, there are factors related to laws and institutions that countries can address and improve in the short-term.

Indeed, the factors driving investment decisions are changing, making many new markets more attractive to foreign investors. Research by the McKinsey Global Institute suggests that there are more high-return investment opportunities in Africa than any other developing region. To capitalise on this opportunity, countries in Africa and elsewhere can follow the examples of Colombia, Georgia, and Rwanda, which have dramatically reformed their business environments. In fact, a World Bank Group study finds that among the 10 economies that have improved their business environments the most over the last five years, four are from Sub-Saharan Africa – Rwanda, Burkina Faso, Mali and Ghana.

How to attract more FDI
What actions can governments take in the short-run to boost their international FDI competitiveness? A new global benchmarking report of the World Bank Group ( surveyed more than 2,000 attorneys and investment consultants in 87 countries to identify specific legal and administrative barriers that foreign companies faced in each of the countries. The study finds that countries with well-designed laws, efficient administrations and strong institutions have higher FDI stock and lower political risk.

In contrast, the report finds that regulatory restrictions continue to impede FDI in many countries. Almost 90 percent of the countries surveyed limit foreign companies’ ability to participate in some sectors of their economies. The differences are significant even among economies at similar levels of development. In Africa, for example, some countries have opened up all major economic sectors to FDI (for example Rwanda, Senegal or Zambia), while others still do not allow foreign investment in key industries such as electricity distribution and transmission (Cameroon), rail transport (Morocco) or banking and insurance (Ethiopia). In general, while light manufacturing, construction and tourism sectors are open to FDI in all economies, many countries impose foreign ownership limits in services sectors such as media, transportation, electricity and telecommunications.
Some countries require the directors or managers of foreign-owned companies to be nationals or permanent residents of the country of incorporation. For example, executive officers of Brazilian companies must be either Brazilian citizens or foreigners who hold a permanent resident visa. In Zambia and the Philippines, majority of the directors must be residents. In Canada, at least 25 percent of the directors must be resident Canadians. In Greece, Madagascar and Mauritius at least one of the directors must be a resident. Such requirements limit the foreign companies’ freedom to appoint any executives that the parent company feels would be most competent in managing the local subsidiary’s operation.

Foreign companies need foreign exchange to conduct business with overseas partners. Yet some countries prohibit foreign companies from holding bank accounts in foreign currencies, including Colombia, Morocco and Venezuela. Other countries first require an approval from the central bank or another public authority, as is the case in Pakistan, Burkina Faso or Papua New Guinea.

When it comes to resolving commercial disputes, all countries allow the use of arbitration, and many have modernised their laws and set-up effective arbitration centers. In other countries specific barriers still impede foreign companies’ ability and interest to use arbitration. In Russia, Bosnia and Herzegovina and Azerbaijan, arbitrators must be locally licensed attorneys. In Argentina and Costa Rica laws prohibit foreign lawyers from representing their clients in arbitration. In Chile and Ecuador, arbitration proceedings must be conducted in Spanish. In contrast, in most other countries around the world such restrictions do not exist.

Some basic principles should guide the design of countries’ laws and regulations for attracting foreign investment. First, all investors should be treated fairly. For example, the process for opening a local subsidiary should be governed by the same rules for all companies, regardless of their home country. Any difference in treatment should be due to a company’s size, legal form, or commercial activity—not the nationality of its shareholders. Next, countries should have clear, transparent laws and regulations allowing for efficient commercial transactions. A country’s legal regime should provide investors sufficient security to make them feel comfortable operating and expanding their businesses. In addition, the authorities should adopt effective regulations that both ensure fair protections for the greater public good, and eliminate unnecessary and burdensome bureaucracy. Finally, countries can enhance their competitiveness by creating supportive public institutions. The shapes these institutions take will depend on the country and context in which they are created. Yet in all cases supportive institutions are those that provide public officials with incentives to supply the public with useful services at least cost in terms of corruption and rent seeking.

It is an ambitious agenda that is relevant to all countries. As the world’s economic power continues to shift, more and more investors are looking globally for the best, most lucrative and most stable opportunities. With the heightened political and business risk worldwide, countries must act now to create predictable and transparent conditions attractive for FDI.  

Pierre Guislain, Kusisami Hornberger and Peter Kusek are, respectively, director, investment policy officer and senior investment policy officer at the Investment Climate Department, World Bank Group