INVESTMENT FOR DEVELOPMENT (IFD)

FINAL MEETING:

• Reports
  
  Panel Discussion: Civil Society Perceptions of FDI
  28 January 2004, Geneva, Switzerland 
  
  International Seminar on: FDI Policies and Regulation
  30 January 2004, Geneva, Switzerland
   

• List of Participants
   

• Presentations
  
  # James Zhan
  # John Gara
  # Miklos Szanyi
  # Peter Nunnenkamp
  # Rajeev Mathur
  # Sanchita Chatterjee
  # Werner Corrales

 FINAL MEETING REPORT

Panel Discussion
Civil Society Perceptions of FDI
28 January 2004, Geneva, Switzerland 

Moderator: Jean-Pierre Lehmann, Director, Evian Group; Professor of International Political Economy, IMD, Lausanne, Switzerland

Panelists: Pradeep S. Mehta, Secretary-General, Consumer Unity & Trust Society, Jaipur, India

Karl Sauvant, Director, Division in Investment, Technology and Enterprise Development (DITE), UNCTAD

Freddy Bob-Jones, Economist, Investment Climate and Competition Team, DFID 

The moderator introduced the panel to the audience. Mehta spoke about the survey on civil society perception conducted under the “Investment for Development” (IFD) project, which was implemented by CUTS with the support of the Department of International Development (DFID), UK, and in collaboration with United Nations Conference on Trade and Development (UNCTAD). The survey was one of the salient features of the project. The survey results are as follows:

1. There is high awareness among civil society respondents about their own country experiences with FDI
2. Respondents from countries with more positive experiences with FDI had greater agreement on its positive aspects
3. The respondents consider the contribution of FDI to be in terms of technology and management etc.
4. Countries such as SA have high awareness of FDI than the other project countries

He thanked DFID and UNCTAD for their support for the seminar and the project.   

Sauvant congratulated CUTS on the IFD project and spoke about UNCTAD’s association with the project. It is the first project where the UNCTAD secretariat worked with a civil society organisation. He also spoke about corporate social responsibility and that it is one of the topics they wish to examine at UNCTAD. He said that quality of FDI is an important issue.  

Bob-Jones congratulated CUTS on the successful culmination of the project. The rationale for the DFID for supporting the project is that a need for careful analysis of investment climates was felt. Regarding civil society (CS) perceptions, DFID jointly with CUTS has prepared a paper on CS perceptions survey of the IFD project for the World Bank-World Development Report 2005.  

Lehmann remarked that recently he was in a conference in Dhaka where Korean and Japanese delegations spoke about benefits of FDI. These were the countries, which were opposed to FDI. He also commented that there is too much focus on FDI and not on the broader economic picture.  

In the floor discussion doubts were raised whether FDI brings in any benefits. It was commented upon that 70 percent of FDI takes place between developed countries and most of the workers employed by foreign investors in developing countries were young women who do not have basic rights. Attention was drawn to Aguas Argentina, owned by SUEZ, which did not upgrade infrastructure and the utility prices were not just. The trend is that most businesses are in favour of FDI and most foreign investors are in areas, in which they have to compete with local companies.  

There was a discussion on the survey that negative perceptions of the respondents were not strong. It was commented that in the last 5/6 years there has been a change in civil society perceptions. It was also said that earlier governments were ill-advised on the basis of negative civil society perceptions. In that respect the results of this survey are striking.  

Two main project publications “Stategising Investment for Development” and Synergising Investment with Development” were released by Sauvant. The two reports highlight main project finding: developing countries in 1990s have liberalised their investment regimes to attract foreign direct investment (FDI) with mixed degrees of success. Further in some cases, high FDI has not contributed to economic growth and development. The policy prescription is that countries need to reorient their national economic development strategies and integrate FDI with these strategies. The aim of the countries should be to attract “quality” FDI: foreign investment, which would contribute positively to economic development.

International Seminar on
FDI Policies and Regulation
30 January 2004, Geneva, Switzerland 

Inauguration: Pradeep S. Mehta, Karl Sauvant, Freddy Bob-Jones 

Welcoming the participants, Mehta informed that the seminar is being held as part of the final meeting of the “Investment for Development” (IFD) project. The project was conducted in collaboration with UNCTAD with support from DFID, UK. IFD aimed to study policies and practices in seven developing and transition economies: Bangladesh, Brazil, Hungary, India, South Africa, Tanzania and Zambia. CUTS has been working on investment issues for quite some time. In 2003, a project entitled “International Working Group on Doha Agenda” (IWOGDA) was concluded, which looked into the issues of investment as detailed by the Doha Development Agenda.  

The seminar was being held at the Palais des Nations in collaboration with UNCTAD in conjunction with the Commission on Investment on 26-30 January 2004.  

The basic learning from the IFD project is that though the countries have adopted liberal investment policies to facilitate higher FDI in 1990s, not all of them have been successful in doing so. Further, higher FDI inflows do not ensure higher economic growth and development. Given the situation, developing countries should rethink their national development strategies and re-orient or restructure FDI strategies to facilitate “quality” FDI. 

The way ahead from the project is in terms of a deeper survey on civil society perceptions; studies on the sectoral strategies of FDI, corporate social responsibility, south-south investment cooperation and agreements; and similar comparative country-level studies.  

Other future area of work include technology transfer, coherence between policies, factors affecting capital absorption capacity, the role of incentives structure, causes of non-successful investments, links between official development assistance and FDI, and the role of labour mobility in international economic specialisation. 

Sauvant spoke about UNCTAD’s involvement in IFD project: it is the first project where UNCTAD worked with an NGO. The advocacy document of the project “Strategising Investment for Development”, prepared by CUTS, is useful as it is based on the research of the project and responses from the civil society survey.  

He said more work should also be done on quality of FDI, the role of companies in promoting corporate social responsibility, International Investment Agreements and outward FDI from developing countries.  

Bob-Jones said the project was undertaken with a view to formulate measures to generate/promote investment in developing countries. It is very important to disseminate the project results and output effectively.  

Session I- FDI and Economic Development

Chair: Oliver Saasa, Institute of Economic & Social Research, University of Zambia

Speakers: Yao Su Hu, Academic Vice-President, Hong Kong Shue Yan College, Hong Kong China

Werner Corrales-Leal, UNCTAD & International Centre for Trade & Sustainable Development, ICTSD, Switzerland

Peter Nunnenkamp, Kiel Institute for World Economics, Germany 

In his opening remarks Saasa said that policies are important in bringing about macroeconomic stability and facilitating capital flows. These provide requisite environment for FDI. In this regard, civil society also has an important role to play. There should be legislation to enhance competition.   

Yao Su Hu – Using FDI to Foster Development: The policy instruments used to extract benefits from FDI are incentives abd performance requirements. The World Trade Organisation (WTO) has reduced countries’ abilities to use these. In the pre-WTO era there was a wide flexibility to use subsidies. There were three categories: prohibited (Red Box), actionable and non-actionable subsidies (includes green box, which are regional development, research and development, and environment related subsides as well as non-specific subsidies). The prohibited subsidies were applied to FDI too. The WTO introduced great deal of uncertainty and complexity. It is not clear what is an export subsidy or, specific and non-specific subsidies. There was a chilling effect, which referred to a government’s ability to use the Agreement on Subsidies and Countervailing Measures.  

For Special Economic Zones (SEZs)/Export Processing Zones (EPZs), theoretically dispute settlement mechanism can be availed of. However, it is not clear what conditionality is attached to subsidies. The Korean Republic had to reduce the types of subsidies from 26 to 1. In Singapore-Australia FTA, subsidies are carved out, under reservation. In US-Singapore FTA national and most favoured nations treatments do not apply to subsidies. 

Policy space is required with respect to SCMs and PRs, government-state trading enterprises, TRIPs, services, sub-contracting/outsourcing. Without policy space liberalisation would not be effective.  

Warner Corrales-Leal – Experiences of Developing Countries: Impact of liberalisation on developing economies has been in terms of net positive creation of trade flows, most of which occur within transnational corporation (TNC) chains and networks. There have also been more inequalities in terms of marginalisation of least developed countries (LDCs), more external shocks etc. There was reduced dependency on trade in commodities, promotion of learning and innovation, increase in internal multipliers and modification of dynamics of investment in extreme resource-based cases. International trade may influence the capacity for policy interventions by setting rules in the space for development policies and market access and fair trade rules. The first one includes enterprise development, productivity & investment policies, policies for innovation and technological upgrading, and socially and environmentally focused policies for competitiveness. The second one includes national policies for international trade and integration.   

The approach of a trade-supported development strategy should concentrate on policies for managing trade integration, have a pro-active stance in international negotiations and policy governance and conflict management. Active trade integration policies to further development goals are enterprise development and clustering, productivity and investment policies, policies for innovation and technological upgrading, and policies and rules making in international trade and integration. Some examples of market-consistent trade policy instruments are conditioned access to FDI as benefit in sectors reserved for national treatment, focalized FDI promotion; incentives to terms of trade (ToT), research and development (R&D), clustering and small and medium enterprises (SME) development, government and state trading enterprises (STEs) procurement promoting technological capacity building, and coordinated implementation of intellectual property rights (IPR), competition rules and R&D programmes. 

Peter Nunnenkamp – Agenda for Action for Policy Changes: Literature on FDI is ambiguous on how to promote development-friendly FDI and fixed policy policy agenda is not possible. In literature, different forms of FDI are lumped together. It is more difficult to benefit from FDI than to attract it. It is said that more emphasis should be on quality of FDI. However quality is again an ambiguous term. Most performance requirements are forbidden under the agreement on trade related investment measures (TRIMs). Further, if there is no fundamental local base, subsidies do not work. Policy makers ought not to focus on narrowly defines policies but on the broad ones to build local entrepreneurial capacity. In that sense the FDI agenda should be turned upside down.  

In his remarks Saasa summarised the presentation: do policy instruments and subsidies matter? Does the local environment matter? Can you offer discriminatory incentives? There are certain grey areas in World Trade Organisation (WTO) agreements e.g. General Agreement on Trade in Services (GATS) rules are not clear.       

In the floor discussion questions were raised about the risks involved in FDI, also whether the north dictates development and it was said that more emphasis should be put on basic services. In response it was said that benefits depends but these can accrue. However is the capacity of absorbing it is low then much should not be expected from FDI. There are huge gaps between different forms of economies. Further, FDI may crowd out domestic investment. It was pointed out by a commentator that emphasis should be put on hybrid investment for example investment in their own countries by non-residents. It was said that 15 years ago UNCTAD said FDI was bad but now the opinion is that FDI helps to reduce poverty.    

Session II: FDI in Least Developed Countries

Chair: Farooq Sobhan, President, Bangladesh Enterprise Institute 

Speakers: John Gara, Commercial Justice Adviser, Commercial Justice Reform Programme, Uganda Sanchita Chatterjee, Researher, CUTS Centre for Competition, Investment & Economic Regulation, India 

In his opening remarks Sobhan said that measuring FDI is a big task in LDCs. It is a big issue in Bangladesh: there is a large discrepancy between government and UNCTAD figures on FDI. The discrepancy is between US$ 100 to 600mn. He also informed that his institute is studying investment climate in 500 companies. Investment climate in a country will not be conducive for companies, if there is corruption, law & order problems and weak infrastructure.    

John Gara – Global FDI Race-LDCs Left Behind: There is a large diversity in the group of LDCs. FDI to these countries is on the decline and it is less than 1 percent of the world FDI. Standards for treatment and protection of foreign investment are no longer contentious issues in these countries. Most LDCs are keen to attract FDI in manufacturing and other non-traditional areas including services. Good labour regulation is lacking in many of these countries. Further, LDCs need to conform to a number of EU regulations and standards. Lack of information and poor perceptions in these countries tend to hold back FDI. Very few believe that FDI is helping in development. LDCs are also disadvantaged in the global trading system and areas such as agro processing, power and water are not attracting much FDI in these countries.  

Sanchita Chatterjee – Zambia, Tanzania and Bangladesh-More Needs to be done: Chatterjee spoke on investment policies, trends and practices in the three LDCs under the IFD project. The three countries experienced increasing but fluctuating FDI trends in 1990s. Proper official data on the three LDCs is lacking especially the data on sectoral distribution of FDI is scanty. All the three countries undertook policy liberalisation in 1990s to facilitate higher FDI. However, for Zambia it appears that the country lacks proper investment policies. Investment policies and trends in a few sectors were also studied in the project. Two sectors: telecom and mining were discussed. In the telcommunication sector the latest technology has brought about changes e.g. for consumers which has resulted in better quality of services and greater accessibility. Mining is an important sector for Africa, Tanzania and Zambia provided incentives to this sector though they were not affective.  

In his remarks, Sobhan said that the positive responses as reflected in the survey are remarkable. Also it would be interesting to know what people in the government believe.  

In the floor discussion, it was asked whether any concerns regarding the behaviour of companies have been reflected in the survey. The survey results showed that while civil society respondents believe that foreign investors do not care about their impact on local communities, there is no strong belief that foreign investment has any adverse impact on environment etc. Some of the reasons of LDCs not receiving sufficient FDI because of small market size and high transaction costs in these countries. The international investment environment for LDCs is such that there is no level playing field. It is important for these countries to undertake investment promotion and differentiation. It also remarked that some factors are outside the control of policymakers. Some participants wondered whether even after implementation of the recommendations, FDI would be attracted.    

Session III: FDI in Large Emerging Economies

Chair: Gloria O. Pasadilla, Fellow, Philippine Institute for Development Studies (PIDS)

Speakers: Rajeev. D. Mathur, Director, CUTS, India

James Zhan, Chief, International Investment Arrangement Section, DITE, UNCTAD; Senior Advisor, China Investment Promotion Agencies

Miklos Szanyi, Budapest University of Economics and Public Administration, Hungary  

Rajeev D. Mathur – India, South Africa and Brazil-Different Continents, Different Experiences: Mathur presented a paper on the three large emerging economies of the project: Brazil, India and South Africa. All the three countries experienced growth in foreign investment in 1990s mainly due the privatization of power, water, transport, telecommunications, manufacturing etc. However they had varying degrees of success due to policy ineffectiveness, external factors such as global slowdown, and regulatory regimes. There is a growing loss of attraction of the manufacturing sector compared to services in Brazil and India. The common sector studied in all the three sectors is automobile. This industry was the object of various incentive policies throughout 1990s in the three countries. Recommendations to facilitate higher FDI include improved regulatory framework for FDI, facilitation of business and improved economic determinants.  

Miklos Szanyi – Hungary-Time to Change the Incentives Structure: In Hungary between 1990-98, FDI was attracted by political/economic stability, privatisation, fiscal/regulatory incentives, cheap labour, market access (geographic location). Benefits from FDI as received by Hungary have been sectoral and corporate restructuring, cash revenue, global integration, technology and knowledge transfers and spillover effects. Risks that FDI brought to the country in this period are footless industries, crowding out, concentration and profit transfers. The investment climate in the country has undergone changes in the following terms: absorption capacity of the country at following investment patterns and conditions has been exhausted – geographical concentration, increased labour costs and saturation; the privatization process is completed; and incentives had to be withdrawn as it was not conforming to the EU standards. There is a need for policy review in terms of new targets e.g. research and development, regional development, infrastructure, and new and skill intensive activities. Also new incentives structure has to be developed and national development plan has to be formulated to reduce bottlenecks. 

James Zhan – The Secret Behind China’s Success: The share of FDI stock in gross domestic product (GDP) in China is 36 percent, there are at present 220,000 foreign affiliates, 400 out of 500 multinational enterprises (MNEs) are in China. The share of FDI employment in total employment in China is 11 percent and share of exports is 52 percent. China has benefited from FDI as its world market share has increased. It is a winner in high-tech manufacturing. FDI inflows have been a stimulus for China’s development. FDI policy and development strategy has been very important in this phenomenon. There are proactive FDI policies at central/provincial levels. There are export processing, technology and economic zones. There is a however a note of caution: there are risks for host countries e.g. MNEs can exploit static comparative advantage of host countries, export oriented MNEs are sensitive to market access and therefore they may leave quickly which could have large impact on employment and economy.  

In her remarks Pasadilla summed up the discussions by saying that large FDI in these countries have been influenced by privatisation, generally policies have been successful and FDI has had a positive impact. However, changing conditions require a change in policies.  

In the floor discussion it was commented that China had depressed its exchange rate to facilitate high FDI. How long can this be sustained? In response it was said that the effect of exchange rate depends on kinds of FDI and what type of TNCs have already entered the country and in what type of operations. Questions were also raised on whether there is a strong linkage between local and national economy in China, and whether crowding-in or out effects have been strong in the country. It was said in response that previously to attract US$1 local investment worth US$2 was crowded out. In many sectors such as electronic goods now the Chinese companies are beginning to dominate the sector. TNCs can feel the intense competition. It was also pointed out in Namibia like in Brazil states may compete among themselves for FDI. Costs of FDI may outweigh benefits. It was also said that foreign affiliates had large imports and a big chunk of the imports are capital goods.  

Regarding round tripping of FDI in China, it was said that this phenomenon cannot be proved but it may exist. A lot of investment from foreign affiliates in Hong Kong enters China as investment from Hong Kong companies. World Investment Report 1995/96 contains a box on round tripping.   

Closing: Pradeep S. Mehta, Farooq Sobhan, James Zhan, Khalil Hamdani (UNCTAD), Joerg Weber (UNCTAD), Freddy Bob-Jones 

The role of UNCTAD, DFID, partner research organisations and CUTS in the project was appreciated and acknowledged. Sobhan said that vast area is still need to be covered. He said that such meetings give an opportunity to meet multilateral protagonists such as UNCTAD. Zhan acknowledged the role of NGOs in international trade and economics. He also said that a tripartite dialogue between NGOs, business and governments are required. Hamdani pointed out that the challenge is now to take the project results and feed into inter governmental process. UNCTAD XI will be held in June 2004 in Sao Paulo can give the civil society programme a push forward. He said that a quadrilateral dialogue is in fact required among civil society, IGOs, governments and businesses. Mehta thanked all the people who have been involved in the project. Bob-Jones congratulated CUTS and stressed the importance of dissemination of project results. He aid that CUTS is a leading southern NGO. He said that earlier DFID had also supported the 7-up project (Similar comparative project on Competition Policy) and it hopes to continue working with CUTS in future as well.

Investment for Development
Final Meeting
28-30 January 2004, Geneva, Switzerland
List of Participants