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									                                            Review Seminar
                             Investment for Development
                                9-10 May 2003, Geneva, Switzerland
                                           Event Report

A Review Seminar was held in Geneva, Switzerland on 9-10 May 2003 as part of the project
“Investment for Development” (IFD). The project is being implemented by CUTS with the support
of the Department for International development (DFID), UK and in collaboration with the
UNCTAD, and is now in its second year of its two-year duration. It is a seven-country project and
has two aspects: research and advocacy. The aim of the project is to generate awareness and
build capacity of civil society on investment issues. The aim of the present seminar was to review
the project findings and process so far and to discuss various investment issues.



I. Inaugural Session
        Speakers: Roderick Abbot, Deputy Director-General, WTO; Pradeep S. Mehta, Secretary
        General, CUTS; Karl Sauvant, Director, Division on Investment, Technology & Enterprise
        Development (DITE), UNCTAD; Roger Nellist, Team Leader, Investment, Competition
        and Business Development Services Team, Policy Division, Department for International
        Development (DFID), UK


1.1 At the WTO‟s last Ministerial Meeting in Doha in November 2001, the ministers gave the
    WTO a new and more ambitious mandate on this subject, and agreed that negotiations on
    an Investment Agreement would take place after their next Conference in Cancún, "on the
    basis of a decision to be taken, by explicit consensus, at that Session on the modalities of
    negotiations".
1.2 Over the past decade, many developing countries target attracting FDI as a priority - in large
    part through liberalising their trade and investment regimes.
1.3 For the investor, FDI represents not only a source of profit but also a source of risk. Policies
    that lower risks can help to attract FDI. International agreements that bind policies not only
    reduce investors' risk – they also help to narrow the gap between the actual risk of investing,
    and the perceived risk, helping the two to converge.
1.4 For its part, a host country will want to extract from FDI the greatest contribution to growth
    and development of its economy. For example, it may wish to attract FDI in certain
    industries, but not in others.
1.5 International investment agreements have to accommodate this essential balance between
    rules that create a more attractive business environment on the one hand, and flexibility for
    host countries to pursue economic and development policies on the other.
1.6 WTO Members need to decide in Cancún whether they prefer to continue negotiating these
    agreements bilaterally and regionally, or to consolidate a large part of their efforts in a single
    multilateral agreement administered under the WTO



            Consumer Unity & Trust Society- Centre for Competition, Investment and Economic Regulation   1
                                                     (CUTS-CCIER)
                                                      Jaipur, India
1.7 The DFID, UK is committed to the attainment of the MDGs, including the over-arching goal of
    reducing by half the proportion of people living in absolute poverty by 2015. In respect of
    achieving the MDGs the outlook for Sub-Saharan Africa remains worrying.
1.8 For poverty alleviation, securing more quality, productive investment is critical for developing
    countries. There remains much debate about the impact of FDI on poverty reduction in such
    countries, and the optimal conditions for attracting and absorbing FDI. DFID is helping to
    address these issues as well as supporting CUTS and its partners in the IFD project. It is
    also supporting UNCTAD‟s programme of work on investment and competition (including the
    preparation of this year‟s WIR), and for OECD research on FDI.



II. Policies, Performance and Perceptions
        Speakers: a) Atiqur Rahman, North South University, Bangladesh; b) Sanjib Pohit,
        National Council for Applied Economic Research, India; and c) Flora Musonda, Economic
        and Social Research Foundation, Tanzania.
        Chair: John Hancock, Counselor, WTO & Secretary of the Committee on the Relationship
        between Trade and Investment


Policies Adopted to Facilitate FDI
2.1 Foreign Direct Investment (FDI) in the developing and project countries is important mainly
    due to inadequate domestic investment and technological backwardness. However, these
    countries are finding it difficult to attract FDI because of the overall poor investment climate,
    small market size, and competition for FDI. In some of these countries, nationalists fear that
    FDI may erode sovereignty and local businesses may not be able to face the competitive
    advantages of a transnational corporation (TNC). Appropriate policies can, however, ensure
    benefits from FDI.
2.2 The policies are generally built around sound industrial and fiscal policies that encourage FDI
    inflows and minimising hassles in approvals, repatriation and national treatment. FDI is often
    targeted in export oriented and technology intensive sectors by facilitating joint ventures in
    Export Processing Zones (EPZs) with many facilities like one-stop services, special tax
    incentives, duty free import of machinery and providing land and building on rental basis.
2.3 Some countries have restrictions on employment of foreigners, local content and
    requirements in transfer of technology in specific sectors. The implementation of the policies
    is often not in consonance with the spirit with which they were designed and hence the
    overall investment regime assumes importance.
2.4 BITs have some importance in national investment policy as some degree of consistency has
    to be maintained between different kinds of policies.
2.5 Tax holidays are not considered as effective as investors misuse the provisions. Bangladesh
    wants to give up tax holidays and replace these by accelerated depreciation. Tax holidays
    require harmonisation of policies.




            Consumer Unity & Trust Society- Centre for Competition, Investment and Economic Regulation   2
                                                     (CUTS-CCIER)
                                                      Jaipur, India
Trends in FDI Flows
2.6 Comparability of FDI data to analyse performance in countries of the world is hampered by
   non-compliance of all components of internationally recommended guidelines and by
   differences in corporate accounting practices. Further, the data collection in most countries is
   done by the Central Bank and by the Board of Investment and national practices differ in
   treatment of FDI and is often incompatible with revision (2) of the United Nations International
   Standard Industrial Classification of all economic activities.
2.7 The inward FDI stock as a percentage of GDP for all developing countries has gone up from
   10.2 in 1980 to 30.9 in 2000. Amongst the project countries, only Brazil, Hungary and
   Tanzania are above the developing countries average of 30.9 percent in 2000.US is the only
   common top 5 countries as far as investments in all project countries is concerned.
2.8 Data situation in many countries is very poor. Many people think that UNCTAD
   underestimates FDI in developing countries. UNCTAD, as was pointed out in the seminar,
   uses international comparative figures. It often has to rationalise the government figures,
   which often overestimates the data. More important is to discuss development effects of FDI.


Perceptions of FDI
2.9 The civil society perceptions survey conducted in all the countries of the investment for
   development project shows that FDI contributes positively to economic development by
   making up for insufficient domestic investment, by bringing in new technologies and
   management techniques, by improving competition and access to world markets and by
   helping the balance of trade.
2.10   The perceptions study also throws up the concerns of the civil society relating to
   environmentally harmful FDI, retrenchment and downsizing and erosion of domestic
   entrepreneurship capacity.
2.11   Amongst the policy options recommended by the civil society, strengthening
   environmental, intellectual property and competition laws are the major ones. Support of local
   businesses in technology and finance and including FDI as a part of industrial strategy have
   also been suggested.



III. Issues that Concern Developing Countries
       Speakers: a) Mariano Laplane, Nucleo de Economia Industrial e da Technologia, Instituo
       de Economia (NEIT-IE) University of Campinas, Brazil; b) Miklos Szanyi, Budapest
       University of Economics and Public Administration, Hungary; c) Brendan Vickers,
       Institute for Global Dialogue, South Africa and d) Oliver Saasa, Institute of Economic and
       Social Research, University of Zambia.
       Chair: Manoj Pant, International Trade and Development Division, Jawaharlal Nehru
       University, India.




           Consumer Unity & Trust Society- Centre for Competition, Investment and Economic Regulation   3
                                                    (CUTS-CCIER)
                                                     Jaipur, India
Part A: Challenges Faced


Obstacles to FDI in Developing Countries
3.1 Though most developing countries have introduced significant changes in FDI regimes with a
    view to attract FDI, there exist FDI-specific and non-specific obstacles. Amongst the former
    are institutional and regulatory obstacles such as entry barriers, procedural restrictions,
    operational barriers and performance requirements. Also, the civil society perception in FDI
    contribution and FDI regime are contributory obstacles. The non-specific obstacles mainly
    comprise of overall economic conditions such as stability, growth performance and
    development strategy. Besides, business legislation and enforcement are also known to
    obstruct FDI flows. Investors consider the location advantage (resource base, market size,
    production systems and access to third country markets) in addition to incentives at the
    national and subnational levels.
3.2 Most obstacles faced by the developing countries are non-specific. It has been observed that
    location advantage and/or incentives often compensate the remaining obstacles. The
    developing countries have not been able to find instruments to maximise the developmental
    return of FDI.


FDI and Privatisation
3.3 The rationale behind privatisation lies in the belief that private firms display a superior
    business performance and the market economic institution building effect strengthens
    property rights regime. Privatisation through FDI provides immediate cash revenue for the
    central budget and affords superior technological and management background. The
    motivation for privatisation in countries like Hungary were market access, efficiency seeking
    and the cost, quality, skills, discipline and education of local labour along with the incentives
    and relative political and economic stability.
3.4 However, the impact of September 11 led to decrease in FDI and privatisation in Hungary.
    Real wages increased over the rate of productivity increase and the availability of skilled
    labour became difficult. In this scenario, it has become necessary to realign the FDI policy by
    targeting reform of health and education sectors, creating an improved EU-related
    bureaucratic institution system and invention of new types of incentives. It has also become
    necessary to control the rising cost of labour.


Part B: Sectoral Case Studies


FDI Growth in the Telecom Sector
3.5 Reviewing some sectors studied in the project countries, the telecom boom in the late 1990s
    in the wake of the technological revolution and globalisation brought out the changing role of
    national governments from direct player to policy-maker and regulator. In South Africa in
    1997, 30 percent of Telkom was sold to Thintana consortium and in Hungary 67.36 percent of
    Matav was sold to Deutsche Telekom-Ameritech consortium. In Brazil privatisation of
    Telebras was witnessed. Bangladesh and Tanzania also witnessed substantial FDI inflows in
    this sector. Number of countries permitting competition in basic telecoms world over

            Consumer Unity & Trust Society- Centre for Competition, Investment and Economic Regulation   4
                                                     (CUTS-CCIER)
                                                      Jaipur, India
    increased from a mere 3 in 1990 to 11 in 1995 and over 30 in 1998. According to a
    projection, the total number of mobile subscribers would have overtaken the total number of
    fixed line subscribers in 2002.
3.6 FDI in telecoms has delivered three economic gains: new and improved products and
    services; better resource allocation with lower costs and additional investments. After 1990,
    there has been a subdued growth in the sector with a debt overhang of about US$100bn in
    Europe alone. The main factors have been limited access to capital, excessive capacity and
    market consolidation. What is now needed is reduction in barriers to entry and facilitation of
    investment and divestment, encouraging transparency of market information and to
    strengthen the sector regulator by providing clear, predictable and transparent telecoms
    regulation.


Importance of the Mining Sector for Africa
3.7 Discussing the importance of the mining sector for Africa, it was pointed out that the sector is
    strategic for a number of African economies and the outputs are channeled mainly to markets
    outside, especially those of the OECD. This state of affairs confirm the high dependence of
    the region on the global marketplace which, in essence, entails that Africa can not be immune
    from the pressures of globalisation.
3.8 The mineral sector in Tanzania, a project country, promises to be an important contributor to
    GDP and export earnings. The mineral policy of Tanzania is seen as being one of the best of
    its kind in terms of providing a positive supportive environment. It is currently one of the
    fastest growing sectors in the country. However, the viability of Tanzanian gold production is
    closely tied to international gold prices that have shown continued volatility. In Zambia, the
    mining sector has been a prime mover of economic development for over 70 years and has
    developed comparative advantage in copper and cobalt. Trends in world prices for refined
    copper have accounted significantly in the country‟s declining revenue. In order to boost and
    make the mining sector viable, the government aimed at promoting a private sector led
    development. But FDI finds Zambia‟s mining sector unattractive and the withdrawal of AAC
    from the largest mining interest in Zambia has some lessons.
3.9 The viability of the copper mining is dependent on the conditions of the international market
    and therefore the timing to dispose copper would realise better and quicker results when it is
    effected at a time when there is no major economic crisis in the global market. Further, the
    continued fiscal incentives by the government need to be reassessed, as incentives alone do
    not do the trick. Moreover, the speed of privatisation where it involves complex mining
    ventures must be aligned to the capacity of the government to handle detailed negotiating
    processes.     Finally,    mining      being     a    capital-intensive       activity    requires   continuous
    recapitalisation and appropriate maintenance programmes if this business is to remain viable,
    and for the purpose of privatisation, attractive to FDI.



IV. Regional FDI Performance
        Speakers: a) Andres Lopez, Centro de Investigaciones para la Transformacion (CENIT),
        Argentina; b) Florian Alburo, University of Philippines and c) Zbigniew Zimny,

            Consumer Unity & Trust Society- Centre for Competition, Investment and Economic Regulation            5
                                                     (CUTS-CCIER)
                                                      Jaipur, India
        Development Issues and Policy Section, Investment Issues Analysis Branch, DITE,
        UNCTAD, Geneva.
        Chair: John Dunning, Emeritus Professor of International Business, Rutgers and Reading
        Universities, UK.


FDI and Economic Growth in Latin America
4.1 Reviewing FDI inflows in Latin America in the 1990s, the general policy framework evolved
    around trade liberalisation, regional integration agreements, privatisations, FDI deregulation
    and liberalisation and incentives but only a few cases of selective policies. These policies
    resulted in Latin America being the key host region for FDI in recent years. FDI inflows in the
    top 10 developing countries had Brazil, Mexico, Argentina and Chile between 1990 and 2001.
    Mergers and acquisitions (M&As) were the predominant mode of entry. The main destination
    sectors have been services (public utilities, banking, commerce etc.), manufacturing
    (automobiles, food and beverages, chemicals etc.), and mining and oil. The investments have
    been mainly market seeking including intra-regional exports.
4.2 A study of the impact of the inflows on balance of payments shows that they have been less
    volatile than portfolio inflows and in the short term there has been a positive impact due to
    increased capital inflows. However, in the medium term, negative impacts due to increased
    profit remittances and (in many countries) trade balance deficits have been observed. The
    FDI flows have resulted in efficiency and productivity gains, introduction of new product
    technologies and decreasing backward linkages by increasing import content.
4.3 In MERCOSUR, the TNCs have not contributed substantially to exports but in Mexico, they
    have made a major contribution though there is excessive concentration in the US market
    with few linkages with the local economy. Improved environmental management in the TNCs
    has been observed and there is little evidence of „pollution havens‟ with the exception of
    mining.
4.4 A sharp reduction in FDI inflows took place in 2002 in the region due to cyclical as well as
    structural factors such as global downturn, US recession, lower economic growth in Brazil
    and Chile and the Argentinean crisis. FDI has the potential to positively contribute to
    economic development, but so far its impact in the region has been below initial expectations.
    Pro-active policies where FDI is guided towards those activities and sectors that most benefit
    local development are needed. It needs to be borne in mind that pro-active policies work only
    if other conditions are met such as human capital availability, technological infrastructure and
    adequate institutional framework.
4.5 FDI probably would have a greater role in economic growth in the Latin American countries
    with better government policies. Policies should balance between interests of host countries
    and MNCs. Higher FDI to domestic investment ratios in LACs could mean there is a crowding
    out of domestic investment. One reason for this could be the fact that many domestic
    companies were sold out to the foreign ones.




              Consumer Unity & Trust Society- Centre for Competition, Investment and Economic Regulation   6
                                                       (CUTS-CCIER)
                                                        Jaipur, India
FDI Policies before and after the Asian Financial Crisis
4.6 Discussing FDI policies before and after the 1997 Asian crisis, it was mentioned that many
    countries in the region had become global players, hosted foreign investors, created
    institutions to support the growth process and achieved close to a double digit annual real
    growth rates. The crisis hit all the sectors but the recovery was fast. At the onset of the crisis,
    all types of capital flows suffered but FDI saw only a slight dip on account of the policy
    responses that ranged from economic redirection to pausing of globalisation to capital
    controls covering exchange rate adjustments, accommodating macroeconomic policies,
    liberalisation for FDI, prudential regulation, governance and banking reforms.
4.7 The policy response increased areas and sectors for FDI including sensitive ones that were
    previously closed. The FDI rules expanded in its scope with increased ceiling for foreign
    equity participation and integrated global production structure. Globalisation may have
    caused the crisis but it also triggered early and faster recovery as both trade and capital
    reflows were essential for recovery.
4.8 The failure of corporate governance was one of the factors behind the Asian Economic Crisis
    in the beginning. Reforms in this field were undertaken subsequently with „bail and jail‟.
    Policies in many of the SE Asian countries are still unsustainable. Short-term capital flows
    also had a role in the crisis. Firm macroeconomic policies subsequently helped in recovery.


Investment Climate in Transition Economies
4.9 Reviewing the regional FDI performance in Central and Eastern Europe (CEE), it was pointed
    out that these countries comprised of a diverse group of 19 countries with huge differences in
    the market size, population, GDP and share of the private sector. When the transition began,
    these countries changed their stance and liberalised FDI policies and implemented FDI
    promotion programmes. The economic impact was efficient and competitive enterprises and
    an increase in exports.
4.10    The concerns were mainly in the areas of abuse of market, distribution of gains from
    privatisation, low profitability and tax avoidance, closures and relocations.
4.11    It was pointed out that the share of FDI in Hungary was greater than that of the other
    transition economies and also that unless FDI has a greater role, there would not be much
    impact.
4.12    For transition economies the EU was important for greater intra-region trade.



V. FDI and Development
        Speakers: a) Peter Nunnenkamp, Kiel Institute for World Economics, Germany and b)
        Karoly Fazekas, Institute of Economics, Institute of Economics, Hungarian Academy of
        Sciences, Hungary.
        Chair: Farooq Sobhan, Bangladesh Enterprise Institute, Dhaka.




              Consumer Unity & Trust Society- Centre for Competition, Investment and Economic Regulation   7
                                                       (CUTS-CCIER)
                                                        Jaipur, India
Does FDI lead to growth or vice versa?


5.1 FDI has been considered a panacea in developing countries and superior to other forms of
    capital inflows. However, there is no simple and unambiguous confirmation of the same.
    Economic growth is considered an important driving force of FDI that is motivated by
    exploiting/serving the local markets of host countries. This importance may have declined in
    the context of globalisation, which may have introduced new types of FDI such as world-
    market-oriented. Further, some recent studies suggest that per capita income differences are
    more important than short-term growth spells associated with FDI.
5.2 An analysis of about 80 developing countries reveals that higher growth in 1990-1995 were
    followed by higher FDI inflows as a percentage of GDP. There are significant differences with
    regard to growth as a driving force of FDI between three major regions. Only for Asia, there is
    clear evidence that FDI followed growth. In African countries, FDI was motivated to exploit
    natural resources (more than growth considerations) and in Latin America FDI was attracted
    by the privatisation programmes. The analysis on whether FDI stimulates higher growth also
    leads to the conclusion that country conditions and experiences are too divergent to expect a
    clear pattern.
5.3 The study draws four main conclusions:
           lower-income countries, with some exceptions, have below-average FDI/GDP ratios;
           low FDI inflows appear to have little say on whether income growth is low or high.
            Low FDI inflows go along with low income growth in 17 lower-income countries, and
            with high income growth in 16 lower-income countries;
           the FDI-growth link appears stronger for higher-income countries; and
           even for higher-income countries, high FDI inflows were no guarantee for high
            growth. 8 out of 19 higher-income countries reported low growth even though FDI
            inflows were high.
5.4 Reviewing the impact of FDI on the local labour markets of the host countries, it was
    mentioned that job creation, demand for skilled labour, wage increases in the domestic sector
    and positive spillover effects on domestic firms were the positive aspects. Among the
    negative impacts were growing income disparities, increasing regional labour market
    disparities and unwillingness of investors to invest in training and human capital.
5.6 There is no relation of FDI and domestic investment with poverty reduction. The challenge in
    this case is to discuss all the factors of production. It is not certain what is driving economic
    growth whether factor accumulation in some sense or the other or institutions. It is also not
    clear what is meant by the quality of FDI. Absorptive capacity of countries is also important. It
    was pointed out that about 80 percent of the global investment is domestic investment, which
    should have a greater role anyway.
5.7 The issue before the countries is that they should attract useful FDI: it has to be made clear
    what type of FDI is required. The ambiguity regarding FDI is the same as that of aid.


FDI and Labour -some issues
5.8 The possible effects of FDI on labour markets in the host countries:


            Consumer Unity & Trust Society- Centre for Competition, Investment and Economic Regulation   8
                                                     (CUTS-CCIER)
                                                      Jaipur, India
Negative effects
              Growing income inequality
              “Footloose” nature of mobile capital
              Foreign investors may be less willing to invest in worker training and human capital
              Increasing regional labour market inequalities
Positive effects
              Job creation
              Increasing demand for skilled labour
              Improving the technological base of the local economy
              Positive spillover effects towards domestic firms
              Wage increases in the domestic sector


5.9 It is difficult to estimate the effects of FDI on labour market due to the problem of simultaneity
    in empirical works. One solution is to look into the countries with large and exogenous
    changes in policy. The policy changes associated with transition in Central and Eastern
    European (CEE) countries seem to give a good basis for such research.
5.10    Hungary is a suitable country for such study because it has received a large share of FDI
    among the CEE countries and FDI had a substantial impact on economic restructuring in the
    country.
5.11    In CEE countries there are sharp differences in local labour markets. This arose due to
    demand side factors. Due to low intensity of internal migration and commuting the differences
    could not be corrected by supply side adjustment mechanism. The regional differences are
    accentuated by faster integration of the CEE countries to the global economy.



VI. Investment for Development: Suggestions for Action and Policy
        Speaker: Sanchita Chatterjee, The Investment for Development Team, CUTS Centre for
        Investment Competition and Economic Regulation, Jaipur, India
        Chair: Pradeep S. Mehta


6.1 As part of the IFD project, the CUTS team handling the project prepared an “Advocacy
Document”, which contain recommendations for policy changes and actions by governments,
inter governmental organisations and civil society organisations.


6.2 The document had the following chapters: Introduction; National Experiences containing
country examples; Regional Experiences; Policy Recommendations. The purpose of the seminar
was to elicit comments/suggestions from the participants on the document.


6.3 It was pointed out that country examples should adequately reflect the country picture rather
than providing some examples. Examples could lead to incorrect conclusions. It also important to
distinguish the recommendations, which are based on perceptions from those ones that are
based on reality as civil society perceptions survey formed an important part of the project. It was
also cautioned that actions should not be taken on the basis of perceptions.

            Consumer Unity & Trust Society- Centre for Competition, Investment and Economic Regulation   9
                                                     (CUTS-CCIER)
                                                      Jaipur, India
6.4 Regarding the recommendations, it was felt that there should be generic recommendations
and that country specific recommendations should stand out very clearly.


6.5 There was a general feeling that civil society perceptions are important and that there is a
need to train civil society on these issues.


6.6 It was also felt that there should a be a discussion on the following issues in the document:
    a. How to enhance technology transfer
    b. The role of home country governments
    c.   There should be consolidation of laws as there are multiplicity of laws in many countries
    d. Is infrastructure an area of investment or a component of investment?



VII. The one-and half day long Review Seminar came to an end with some useful debate and
discussions on a wide range of topics addressing FDI issues from different levels. The
discussions ranged from specific project findings to general issues such as the impact of FDI on
development. The discussions captured both country findings as well as regional trends. Finally
the seminar threw up some useful recommendations, which could be incorporated in the IFD
project Advocacy Document.


Annex
List of Participants




            Consumer Unity & Trust Society- Centre for Competition, Investment and Economic Regulation   10
                                                     (CUTS-CCIER)
                                                      Jaipur, India

								
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