Hamdani Presentation


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Hamdani Presentation

  1. 1. FDI Policy and Upgrading ODI Conference on Making Openness Work 16 March 2001, London
  2. 2. Policy Trends
  3. 3. An overall trend of adoption of national FDI laws <ul><li>In 1960s & 1970s, only 7 countries had enacted FDI legislation </li></ul><ul><li>In 1980s, there were 29 </li></ul><ul><li>In 1990s, more than 77 countries </li></ul><ul><li>Today, almost all countries have investment laws or codes organizing the investment framework for foreign investors </li></ul>
  4. 4. A trend toward liberalization of FDI laws <ul><li>Countries have also been making changes to their laws </li></ul><ul><li>Mostly in the direction of liberalization or promotion of investor rights </li></ul>
  5. 5. A shift towards FDI promotion <ul><li>1990-94: countries changed provisions and liberalized requirements </li></ul><ul><li>1995-98: greater stability of FDI framework </li></ul><ul><li>A shift from control / liberalizing measures to promotional measures </li></ul>
  6. 6. Main areas of liberalization <ul><li>Entry requirements relaxed </li></ul><ul><li>Ownership requirements relaxed </li></ul><ul><li>Admission procedures not relaxed but streamlined </li></ul><ul><li>Investment agencies have shifted focus away from FDI authorization and towards FDI facilitation </li></ul>
  7. 7. Main areas of promotion <ul><li>Privatization </li></ul><ul><li>Debt-equity swaps </li></ul><ul><li>BOTs (build, operate, transfer) </li></ul><ul><li>EPZs (export processing zones) </li></ul><ul><li>Establishment of capital markets </li></ul><ul><li>Offshore banking facilities </li></ul><ul><li>Incentives </li></ul>
  8. 8. Business operations <ul><li>Fewer provisions in FDI laws on technology transfer or other operating requirements </li></ul><ul><li>But other laws retain restrictions on employment of foreign personnel and land ownership </li></ul><ul><li>And on local content, access to stock markets & participation in privatization offerings </li></ul>
  9. 9. A trend towards standard guarantees & protection <ul><li>National treatment - foreign investors are to be treated no less favourably than local investors </li></ul><ul><li>Protection against nationalization and expropriation </li></ul><ul><li>Provision for settlement of disputes </li></ul><ul><li>Recourse to arbitration </li></ul><ul><li>Repatriation of funds, capital, profits & dividends </li></ul>
  10. 10. Incentives experience <ul><li>proliferation of incentives since the mid-1980s </li></ul><ul><li>developed countries offer more financial incentives </li></ul><ul><li>developing countries rely more on fiscal incentives </li></ul>
  11. 11. Incentives goals <ul><li>regional development (popular in developed countries) </li></ul><ul><li>exporting (most frequent objective in developing countries) </li></ul><ul><li>manufacturing sector a main focus </li></ul><ul><li>jobs, training, R&D, environmental protection and infrastructure projects </li></ul>
  12. 12. Incentives experience of developing countries <ul><li>tax holidays (5 years; up to 25) </li></ul><ul><li>tariff concessions (5-10 years; 15-25 for major projects) </li></ul><ul><li>grants for worker training </li></ul><ul><li>loan guarantees </li></ul><ul><li>rebates on electricity, water and sewage services (up to 15 %) </li></ul><ul><li>export-processing zones, science parks </li></ul>
  13. 13. Do incentives work? <ul><li>incentives are minor in decisions of investors relative to other factors (e.g., market size, costs, skills, stability and regulatory framework) </li></ul><ul><li>market-seeking investors value protection of the market </li></ul><ul><li>export-oriented investors value fiscal incentives more highly </li></ul><ul><li>In case of regional incentives, grants have greater impact than fiscal benefits </li></ul>
  14. 14. Upgrading
  15. 15. 0.0 50.0 100.0 150.0 200.0 250.0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 The surge in FDI FDI inflows into developed and developing countries, 1970-1997 (billions of US dollars) Developed countries Developing countries
  16. 16. Private flows have taken off in developing countries in 1990’s Source: World Bank, 1999
  17. 17. FDI is a package of resources and broader impacts <ul><li>capital </li></ul><ul><li>technology and know-how </li></ul><ul><li>managerial and technical skills </li></ul><ul><li>access to international markets through intra-firm networks </li></ul><ul><li>industrial restructuring through competitive pressures or bringing new activities or industries to host countries </li></ul><ul><li>linkages and spillovers </li></ul>
  18. 18. Types of FDI Can be a source of worker experience, skill training and technology diffusion Labour- seeking FDI
  19. 19. <ul><li>Can lead to exports if integrated in parent company’s international production system </li></ul>Types of FDI Market-seeking FDI
  20. 20. <ul><li>Affiliates export into TRIAD through intra-firm sales </li></ul>Example: Japanese Electronic Industry 0 Exports to home country Sales in host countries Exports to other countries 500 billion yen Intrafirm exports Other exports /sales
  21. 21. <ul><li>A third of world trade consists entirely of intra-firm exchanges between parents and affiliates </li></ul>FDI & trade 34.0% Intra-firm exports by TNC parent firms and by foreign affiliates 33.3% Exports by TNC parent firms and by foreign affiliates to unaffiliated firms 32.7% Exports by all other firms
  22. 22. <ul><li>Affiliates in developing Asia act as low-cost suppliers </li></ul><ul><li>Over time, the more dynamic affiliates move up the value chain, and establish affiliates of their own </li></ul>Upgrading via regional core network Example: Japanese Electronic Industry
  23. 23. Strategies Asian countries used to upgrade <ul><li>Emphasis on HRD & Education </li></ul><ul><li>Focus on teacher training and re-training </li></ul><ul><li>Proactive measures (education reform, supervisory and management education and science & technology and R&D) </li></ul><ul><li>Creation of a cadre of competent managers </li></ul><ul><li>Create competitive markets (trade policy, domestic regulatory regime) </li></ul><ul><li>Support for SMEs and emerging entrepreneurs </li></ul><ul><li>Use FDI to stimulate business linkages and entrepreneurial activity </li></ul>
  24. 24. FDI can act as a catalyst for upgrading only if the capacities of domestic producers are simultaneously expanded. Thus, there is a need to: Upgrading Promote the competitivness of domestic firms, particularly SMEs Improve training, technical education and human resources development Encourage closer link between firms and universities and research institutions
  25. 25. Examples: Ethiopia
  26. 26. Investment and Innovation Policy Review of Ethiopia Investment and Policy Framework <ul><li>Investment Policy and Regulatory Framework has improved greatly since 1992 </li></ul>1992
  27. 27. Investment and Innovation Policy Review of Ethiopia Investment and Policy Framework <ul><li>Improvement of Investment Framework </li></ul>Opening of most sectors to foreign investment Investment guarantees Investment incentives Easy and fast entry procedure facilitaed by the EIA
  28. 28. Investment and Innovation Policy Review of Ethiopia Investment and Policy Framework <ul><li>Investment guarantees include: </li></ul><ul><ul><li>Repartriation of funds: capital, profits, dividends, intrest payments on foreign loans </li></ul></ul><ul><ul><li>Against nationalization/expropriations </li></ul></ul><ul><li>Investment incentives include: </li></ul><ul><ul><li>100 per cent exemption from customs duties and import taxes </li></ul></ul><ul><ul><li>Income tax exemptions up to five years </li></ul></ul><ul><ul><li>No taxes on remittances of capital </li></ul></ul>
  29. 29. Investment and Innovation Policy Review of Ethiopia FDI inflows into Ethiopia, Uganda and Tanzania 0 50 100 150 200 250 300 1992/3 1994/5 1995/6 1996/7 1997/8 millions of $ Ethiopia Uganda Tanzania
  30. 30. Livestock Leather Sector - Value Chain Tanneries Manufacturers of Leather Products Slaughterhouses Traders, Dealers, Agents Export Market (semi-finished) Domestic Market Export Market (finished) <ul><li>External Linkages </li></ul><ul><li>Foreign Tanners </li></ul><ul><li>Foreign Manufactures </li></ul><ul><li>FDI </li></ul>Investment Promotion Agency Environmental Agency Effluent Treatment Plants (ETPS) Ministry of Health
  31. 31. Examples: Egypt
  32. 32. FDI types in Egypt Economic benefits <ul><li>Employment </li></ul><ul><li>Productivity </li></ul><ul><li>Exports </li></ul><ul><li>Technology </li></ul><ul><li>Innovation </li></ul><ul><li>Linkages and spillovers </li></ul>Examples: <ul><li>50 per cent </li></ul>Domestic market-oriented manufacturing FDI Automobiles, Food, Pharmaceuticals, Consumer Electronics Examples: Services FDI <ul><li>15 per cent </li></ul>Hotels, Tour operators, Software development, financial services Labour-intensive Export-oriented FDI <ul><li>20 per cent </li></ul>Clothing, Leather, PBC assembly, Construction material Examples: Partnerships <ul><li>15 per cent </li></ul>Metals, Software development, Food and confectionery Examples:
  33. 33. Improving the contribution of FDI <ul><li>Think regionally </li></ul><ul><li>Upgrade TNC affiliates operations with increasing backward and forward linkages </li></ul><ul><li>Expand the domestic market into the regional market (Arab States, Africa) </li></ul>Examples: <ul><li>Pharmaceuticals, food, resource based manufacturing (e.g., ceramics) </li></ul>Domestic market-oriented FDI
  34. 34. Improving the contribution of FDI <ul><li>After-care services </li></ul><ul><li>Investment in physical, technological and educational infrastructure </li></ul><ul><li>Cluster generation strategies </li></ul><ul><li>Support for Egyptian SMEs </li></ul>Policy actions Domestic market-oriented FDI
  35. 35. Improving the contribution of FDI <ul><li>Tap niches in world markets </li></ul><ul><li>Upgrade production based on traditional advantages </li></ul><ul><li>Expand production in high tech manufacturing/upgrade the value scope (e.g. marketing, R&D) </li></ul>Examples: <ul><li>Garments, jewellery manufacturing, electronics components, processed oil and minerals </li></ul>Labour-intensive Export-oriented FDI
  36. 36. Improving the contribution of FDI Examples: <ul><li>Construction, manufacturing for souvenirs, trade in services, </li></ul><ul><li>software development, software applications </li></ul>Harness the fast growing services for domestic industries Services FDI Development of backward and forward linkages Tourism R&D development Software
  37. 37. Improving the economic contribution of FDI projects <ul><li>Getting the missing assets (technology,marketing, R&D, training) </li></ul><ul><li>Expand outward FDI within the MENA region </li></ul>Examples: <ul><li>Subcontracting, licensing, franchising, management contracts, joint ventures </li></ul>Pursue Technological upgrading Partnerships
  38. 38. Examples: Mauritius
  39. 39. FDI Flows to Mauritius Millions of Dollars 0 10 20 30 40 50 60 1980 1985 1990 1995 1999 EPZ attracts 2/3 of FDI
  40. 40. FDI Flows to Neighbors 1994 - 1999 0 100 200 300 400 1994 1995 1996 1997 1998 1999 Millions of dollars Tanzania Mozambique Kenya Mauritius
  41. 41. Challenge of a Middle Income Economy <ul><li>Rising wages </li></ul><ul><li>Productivity lags behind wages </li></ul><ul><li>Need to upgrade production </li></ul><ul><li>Need to bring down costs of goods and services for business, to international competitive level </li></ul>
  42. 42. Challenges <ul><li>To sustain high growth, Mauritius has to: </li></ul><ul><li>Upgrade production in established industries due to relatively high wages </li></ul><ul><li>Shift into higher value sectors, </li></ul><ul><li>including financial services, </li></ul><ul><li>business services and </li></ul><ul><li>information technology </li></ul>
  43. 43. Challenges To Sustain High Growth, Mauritius Has To: <ul><li>Enhance outward investments from Mauritius to the regional market to be able to move to more value added activities </li></ul>
  44. 44. Challenges To Sustain High Growth, Mauritius Has To: <ul><li>Undertake a fast track privatization program and </li></ul><ul><li>Bring world-class standards and name investors </li></ul>