POLICY FRAMEWORK 2015_WEB_1

Furthermore, the role of foreign investors and multinational firms in an economy is not limited to FDI. They can also contribute to economic development through non-equity modes of international production (NEMs), such as contract manufacturing, services outsourcing, licensing, franchising, contract farming or other economic activities within global value chains. Because this form of involvement is based on a contractual relation between the foreign company and domestic business partners, it requires that the host country has sufficiently qualified local entrepreneurs, which calls for coordinated policies on investment, enterprise development and human resource development (WIR11, WIR13).

A key aspect in defining the role of investment in economic growth and development strategies is the need for calibrated policies to stimulate job creation and to maximize the job content of investment, both quantitatively and qualitatively. This has become especially urgent in light of the cumulative employment losses during the global financial crisis, and the relatively low job content of economic growth since, leading to a global employment deficit estimated at over 200 million workers.6

Harnessing investment for productive capacity building and enhancing international competitiveness

The potential contribution of foreign investment to building or reinforcing local productive capacities should guide investment policy and targeting efforts. This is particularly important where investment is intended to play a central role in industrial upgrading and structural transformation in developing economies. The most crucial aspects of productive capacity building include human resources and skills development, technology and know-how, infrastructure development, and enterprise development.

Human resources and skills. Human resources development is a crucial determinant of a country’s long-term economic prospects. In addition, the availability of skilled, trainable and productive labour at competitive costs is a major magnet for efficiency-seeking foreign investors. As such, education and human resource development policy should be considered a key complement to investment policy. Particular care should be given to matching skills needs and skills development, including in terms of vocational and technical training. Vocational training that prepares trainees for jobs involving manual or practical activities related to a specific trade or occupation is a key policy tool, for instance, to enhance the capacity of local suppliers.

Foreign investment can reinforce local productive capacities through human resources and

skills development, technology and knowhow dissemination, infrastructure and enterprise development

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As economies develop, skills needs and job opportunities evolve, making a constant adaptation and upgrading of education and human development policies a necessity. The latter are essential not just to provide the necessary skills to investors, but more crucially to ensure that the population can gain access to decent work opportunities.

FDI – as well as NEMs – are particularly sensitive to the availability of local skills, which can frequently be a “make or break” factor in investment location decisions. Where local skills are partially lacking, foreign and national investors may wish to rely on expatriate workers to fill the gaps. Although particular care should be paid to promoting employment by nationals and to protecting national security, countries have a lot to gain from enabling investors to tap foreign skills readily and easily where needed. Well-crafted immigration and labour policies have had demonstrated benefits in countries that have allowed foreign skills to complement and fertilize those created locally. Knowledge spillovers also occur through international employees. An adequate degree of openness in granting work permits to skilled foreign workers is therefore important not only to facilitate investments that may otherwise not materialize for lack of skills, but also to support and complement the national human resource development policy through education.

Technology and know-how. An important policy task is to encourage the dissemination of technology. For example, governments can promote technology clusters that promote R&D in a particular industry and that can help upgrading industrial activities by bringing together technology firms, suppliers and research institutes. Disseminating and facilitating the acquisition of technology can also improve the involvement of domestic producers in GVCs (e.g. call centers, business processing operations or contract farming).

Appropriate protection of intellectual property rights is an important policy tool because it is often a precondition for international investors to disclose technology to licensees in developing countries, especially in areas involving easily imitable technologies (e.g. software, pharmaceuticals), and hence can affect chances of attracting equity investments (e.g. joint ventures) or non-equity modes of involvement (e.g. licensing). At the same time the level of protection should be commensurate with the level of a country’s development and conducive to the development of its technological capacities. It can be a means of encouraging independent research activities by local companies, because businesses are more likely to invest resources in R&D and technological upgrading if their innovations are protected.

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Infrastructure. The development of domestic infrastructure may necessitate investments of such magnitude that it is impossible for domestic companies to undertake them alone. Infrastructure development may also require certain technological skills and know-how, which domestic firms do not have (e.g. telecommunication, energy, exploration of natural resources in remote areas). Likewise, the move to a low-carbon economy will often necessitate bringing in the technological capacities of foreign investors.

Most developing countries, especially LDCs, continue to suffer from vast deficiencies in infrastructure, in particular electricity, water and transport, and to a lesser extent telecommunications. Following technological progress and changes in regulatory attitudes, many countries have succeeded in introducing private (foreign) investment and competition in what used to be public sector monopolies, e.g. mobile telecommunications or power generation.

Given the potential contribution of FDI to building high-quality infrastructure, countries should consider the extent to which certain sectors or sub-sectors could be opened to (foreign) private investment, and under what conditions – balancing considerations of public service provision, affordability and accessibility. National security-related concerns with regard to the liberalization of critical infrastructure can be taken care of by screening procedures. A clear vision of what is doable and desirable socially, technically and from a business perspective is essential given the dependence of economic growth on infrastructure development.

All too many developing countries have attempted to privatize infrastructure or public services only to fail or achieve less than optimal outcomes.7 Governments need to develop not only a clear assessment of what can be achieved and at what costs, but also a comprehensive understanding of the complex technicalities involved in infrastructure investments and their long-term implications in terms of cost, quality, availability and affordability of services. A sound legal framework to guide concessions, management contracts and all forms of public-private partnerships is a key piece in the infrastructure development and investment strategies (WIR08).

Enterprise development. Domestic enterprise development is a key transfer mechanism for the development benefits of investment to materialize. At the same time, especially for foreign investors, the presence of viable local enterprise is a crucial determinant for further investment and for partnerships in NEMs. A comprehensive discussion of policy options to foster domestic entrepreneurial development – including

FDI can make a significant contribution to building highquality infrastructure

– a priority area for investment in sustainable development

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in areas such as the regulatory environment, access to finance, education and training, and technological development – can be found in UNCTAD’s Entrepreneurship Policy Framework (box 5).

Enterprise development policies aimed at enhancing the benefits from investment focus on building capacity to absorb and adapt technology and know-how, to cooperate with multinational firms, and to compete internationally.

Another important policy task is the promotion of linkages and spillover effects between foreign investment and domestic enterprises (WIR01). Policy coordination is needed to ensure that investment promotion is targeted to those industries that could have the biggest impact in terms of creating backward and forward linkages and contribute not just to direct, but also to indirect employment creation. At the same time, policymakers in developing countries need to address the risk of foreign investment impeding domestic enterprise development by crowding out local firms, especially SMEs. Industrial policies may play a role in protecting infant industries or other sensitive industries with respect to which host countries see a need to limit foreign access.

In the long run, enterprise development is essential for host countries to improve international competitiveness. Promotion efforts should therefore not be limited to low value-added activities within global value chains, but gradually seek to move to higher-value added segments. This is crucial for remaining competitive once developing countries lose their low labour cost advantage. However, switching from labour-intensive low-value activities to more capital-intensive higher value production methods may raise unemployment in the transition phase and thus calls for vigilant labour market and social policies. This confirms the important dynamic dimension of investment and enterprise development strategies, calling for regular reviews and adaptation of policy instruments (WIR13).

Ensuring coherence between investment policies and other policy areas geared towards overall development objectives

The interaction between investment policy and other elements of a country’s overall economic development and growth strategy – including human resource development, infrastructure, technology, enterprise development, and others – is complex. It is critical that government authorities work coherently towards the common national objective of sustainable development and inclusive growth, and seek to create synergies. This requires coordination at the earliest stages of policy design, as well as the involvement of relevant stakeholders, including the investor community and civil society.

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2. DESIGNING POLICIES FOR RESPONSIBLE INVESTMENT AND SUSTAINABLE DEVELOPMENT

From a development perspective, FDI is more than a flow of capital that can stimulate economic growth. It comprises a package of assets that includes long-term capital, technology, market access, skills and know-how (WIR99). As such, it can contribute to sustainable development by providing financial resources where such resources are often scarce; generating employment (WIR94); strengthening export capacities (WIR02); transferring skills and disseminating technology; adding to GDP through investment and value added, both directly and indirectly; and generating fiscal revenues (WIR15). In addition, FDI can support industrial diversification and upgrading, or the upgrading of agricultural productivity (WIR09) and the build up of productive capacity, including infrastructure (WIR08). Importantly, it can contribute to local enterprise development through linkages with suppliers (WIR01) and by providing access to GVCs (WIR13) – the growing importance of GVCs can have an important pro-poor dynamic to the extent that marginalized communities and small suppliers can integrate into global or regional value chains as producers, suppliers or providers of goods and services.

These positive development impacts of FDI do not always materialize automatically. And the effect of FDI can also be negative in each of the impact areas listed above. For example, it can lead to outflows of financial resources in the form of repatriated earnings or fees; it can, under certain circumstances, crowd out domestic investment and domestic enterprise (WIR97); it can at times reduce employment by introducing more efficient work practices or through restructurings (WIR94, WIR00), or jobs created may be unstable due to the footloose nature of some investment types; it can increase imports more than exports (or yield limited net export gains), e.g. in case of investment operations requiring intermediate inputs or for market-seeking investments (WIR02, WIR11); technology dissemination might not take place, or only at high cost (e.g. through licensing fees) (WIR11), and local technological development may be slowed down; skills transfers may be limited by the nature of jobs created; fiscal gains may be limited by tax avoidance schemes available to international investors, including transfer pricing; and so forth.

Fostering sustainable development through FDI requires a balance between investment promotion and regulation

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The balance of potential positive and negative development contributions of FDI is proof that investment policy matters in order to maximize the positive and minimize the negative impacts. Reaping the development benefits from investment requires not only an enabling policy framework that combines elements of investment promotion and regulation and that provides clear, unequivocal and transparent rules for the entry and operation of foreign investors (see box 6), it also requires adequate regulation to minimize any risks associated with investment.

The host of different impact types listed above indicates that such regulations need to cover a broad range of policy areas beyond investment policies per se, such as trade, taxation, intellectual property, competition, labour market regulation, environmental policies, social issues and access to land. The coverage of such a multitude of different policy areas confirms the need for consistency and coherence in policymaking across government.

Fostering sustainable development and inclusive growth through investment requires a balance of promotion and regulation. On the promotion side, attracting low-carbon investment, for example, may imply the need to set up new policy frameworks for a nascent renewable energy sector, which may also require government assistance in the start-up phase, be it through tax incentives or measures aimed at creating a market (WIR10). Encouraging investment in sectors that are crucial for the poor may imply building sound regulatory frameworks and facilitation of responsible investment in agriculture (including contract farming), as agriculture continues to be the main source of income in many developing countries (WIR09).

At the same time, on the regulatory side, sustainability should be a key consideration when deciding on the granting of investment incentives. The short-term advantages of an investment need to be weighed against the potential long-term environmental effects. The sensitive issue of access to land requires careful balancing of the rights and obligation of agricultural investors. And there is a need to ensure the accessibility and affordability of infrastructure services (e.g. access to energy) when such services are opened for private investment. For many developing countries, it is a key challenge to strengthen such environmental and social protection while maintaining an attractive investment climate.

Sustainability issues should also be a main consideration in invest­ ment contracts between the host country and individual investors. Such contracts can be a means to commit investors to environmental or social standards beyond the level established by the host country’s general legislation, taking into account international standards and best practices.

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While laws and regulations are the basis of investor responsibility, voluntary CSR initiatives and standards have proliferated in recent years, and they are increasingly influencing corporate practices, behaviour and investment decisions. Governments can build on them to complement the regulatory framework and maximize the development benefits of investment (WIR11).

Because CSR initiatives and voluntary standards are a relatively new area that is developing quickly and in many directions, the management of their policy implications is a challenge for many developing countries. In particular, the potential interactions between soft law and hard law can be complex, and the value of standards difficult to extract for lack of monitoring capacity and limited comparability. A number of areas can benefit from the encouragement of CSR initiatives and the voluntary dissemination of standards; for example, they can be used to promote responsible investment and business behaviour (including the avoidance of corrupt business practices), and they can play an important role in promoting low-carbon and environmentally sound investment. Care needs to be taken to avoid these standards becoming undue barriers to trade and investment flows.

Impact measurement and reporting by private investors on their social and environmental performance promotes corporate responsibility on the ground and supports mobilization and channeling of investment. High quality sustainability reporting involves the generation of internal company data on sustainability related activities and control systems, facilitating proactive management, target setting and benchmarking. Publicly reported data can play an important role in enabling governments to monitor the effectiveness of policies and incentive structures, and often serve as a prerequisite for resource mobilization for investment in priority sectors for sustainable development.

The importance of sustainability reporting has been recognized throughout the process leading up the formation of the Sustainable Development Goals. In 2013, the High-Level Panel of Eminent Persons on the Post2015 Development Agenda proposed that “in future – at latest by 2030

– all large businesses should be reporting on their environmental and social impact – or explain why if they are not doing so.” (United Nations, 2013:24).8 In 2014, the European Parliament adopted a directive which will require the disclosure of environmental and social information by large public-interest companies (500+ employees). Individual UN member States around the world have also taken steps to promote sustainability reporting.9 Apart from regulatory initiatives, some stock exchanges have implemented mandatory listing requirements in the area of sustainability reporting.10

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