Institutions for Investment IN FOCUS Establishing a High-Performing FINANCE, COMPETITIVENESS & Institutional Framework for INNOVATION Foreign Direct Investment (FDI) INVESTMENT CLIMATE Armando Heilbron and Robert Whyte © 2019 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non- commercial purposes. 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Armando Heilbron (aheilbron@ifc.org) is the Investment Promotion (IP) Workstream Leader in the Investment Climate Unit of the Finance, Competitiveness and Innovation (FCI) Global Practice of the World Bank Group (WBG). Robert Whyte is a global Investment Promotion expert and former WBG Investment Promotion Workstream Leader. The authors would like to thank David Bridgman, Akhtar Mahmood, Karl Sauvant, Ivan Nimac, and Peter Kusek for peer reviewing the note, and particularly appreciate the important contributions of Carlos Griffin and GriffInvest in developing this note. Lastly, thanks to Aichin Lim Jones for design and production services. Photo Credits: World Bank Photo Library and Shutterstock.com Table of Contents WHY FOCUS ON FDI? 2 WHY DO INSTITUTIONAL ARRANGEMENTS MATTER? 2 WHAT KEY GOVERNMENT FUNCTIONS STIMULATE PRIVATE SECTOR INVESTMENT? 2 WHAT KEY PRINCIPLES SHOULD GOVERNMENTS CONSIDER WHEN ESTABLISHING THE INSTITUTIONAL FRAMEWORK FOR FDI? 5 WHAT TYPICAL DILEMMAS DO POLICY MAKERS FACE WHEN CREATING AN INSTITUTIONAL FRAMEWORK FOR FDI? 7 CONCLUSION 10 REFERENCES 11 INSTITUTIONS FOR INVESTMENT | I II | SUPPORTING ENTREPRENEURS AT THE LOCAL LEVEL: THE EFFECT OF ACCELERATORS AND MENTORS ON EARLY-STAGE FIRMS G lobal experience shows that the right institutional arrangements can result in higher levels of foreign direct investment (FDI). A well-functioning institutional framework requires (a) a shared, strategic vision for FDI across government that includes private sector input; (b) technically capable institutions with clearly defined mandates; (c) institutional stability and sustainability through political cycles; (d) appropriate incentives for institutional cooperation with strong results measurement and communications tools; and (e) political and financial support to establish and staff institutions according to best practices. Not many investment promotion agencies (IPAs) in the developing world can claim to have all these elements; however, working toward these best practices will lead to a more effective institutional framework. The purpose of this note is to suggest a process for functions for investment and provides examples creating optimal institutional structures to deliver of institutions that specialize in delivering each a country or economy’s investment vision and function. Fourth, it outlines key principles for the goals. Specifically, it examines the role of an IPA— establishment of an institutional framework to the agency usually tasked with operationalizing successfully deliver FDI. Fifth, the note discusses government FDI goals—in the context of the wider typical dilemmas that governments face, particularly government policy and institutional framework in the context of institutional specialization versus within which it must operate. function consolidation. This note is not designed to be exhaustive of every issue but seeks to provide a First, the note provides the reason for focusing on summary of the most important relevant issues. It is FDI. Second, it outlines why institutional structures the first of several planned notes that cover how to matter in the context of attracting, retaining, and position and strengthen IPAs and that identify which expanding FDI. Third, it describes key government services IPAs might offer investors. Figure 1. Structure of In Focus Note Applying Universal Principles Setting National Prioritizing Setting Up Investment Investment Institutional Vision and Goals Functions Arrangements Resolving Dilemmas INSTITUTIONS FOR INVESTMENT | 1 Why Focus on FDI? Efficient institutional arrangements are highly idiosyncratic and must be tailored to work Trade and investment are major components of the efficiently within a country or economy’s specific national development objectives for almost every circumstances (Rodrik 2004; Bauerle Danzman and country and economy. The attraction, integration, Gertz, forthcoming). Nevertheless, some important and expansion of FDI play very important roles principles, which are discussed below, appear in most countries. FDI is a source of economic generally valid and should underpin any decisions development and modernization, income growth, and around optimal institutional setup. employment, and it is a key mechanism with which to connect a country or economy to global value chains. FDI is also a key source of external finance What Key Government Functions for most developing countries, and often exceeds Stimulate Private Sector official development assistance. FDI can contribute Investment? to the achievement of Sustainable Development Successful private sector investment requires Goals—for example, by attracting environmentally governments to consider and deliver a variety of friendly industries and technologies. Echandi, related functions (see table 1). Most governments Krajcovicova, and Qiang (2015) set out the benefits will deliver all or most of these functions to foster a of FDI attraction. vibrant private sector. The attraction of FDI is a function of a country The following provides a brief description of each or economy’s having both strong economic function. characteristics compared to other locations—for example, market access, infrastructure, necessary • Policies and laws for private sector development skills, ease and cost of doing business, and access could include domestic investment or FDI, trade, to suppliers—and sound policies and a strong legal development of small and medium enterprises and regulatory framework for FDI. One without the (SMEs), innovation, special economic zones other is seldom successful. (SEZs), public-private partnerships, and privatization, among other things. Legislation Why Do Institutional should be consistent with and aimed at achieving Arrangements Matter? national development objectives, which are perhaps set out in a national development plan. Evidence shows a positive correlation between the quality of a country or economy’s public institutions • Streamlined government procedures for and the attraction of FDI. The World Bank found investment should be established and a positive correlation between the quality score effectively administered. Such procedures for public institutions from the World Economic include registering companies, paying taxes, Forum’s 2018 Global Competitiveness Report (Pillar applying for incentives, and others. Having 1) and the number of FDI projects attracted.1 Other too many separate procedures can discourage research confirms that institutional quality affects investors. Business-friendly governments FDI positively (Kurul and Yalta 2017) and that when need to look for ways to simplify procedures institutions are underdeveloped, the benefits of FDI and reduce the time and cost required for cannot be effectively captured (Nelson 2009). investment projects. More governments are World Bank analysis of the relationship between the World Economic Forum’s 2018 Global Competitiveness Report data 1 on the adequacy of public institutions (Pillar 1) and FDI markets data showed that a 1-point score increase in institutional adequacy is associated with a 23 percent increase in the number of FDI projects. Data from 2007 to 2017 and covering 150 countries were used. The relationship was tested for robustness for the most important confounding factors such as gross domestic product, gross domestic product per capita, average differences between countries and global time trends. 2 | INSTITUTIONS FOR INVESTMENT consolidating their procedures into a single offices are usually a specialized unit within the “window,” sometimes called a one-stop shop ministry of trade or foreign affairs. (OSS). Increasingly, OSSs offer online portals that reduce corruption, eliminate the need for • Services for FDI are often collectively labeled physical presence, and cut cost and time. “investment promotion.” Such services are designed to persuade foreign investors to (a) select • International legal requirements are complex one location over others and then (b) successfully and have varied effects on trade negotiations; establish, operate and expand in that location. because of this, negotiation and implementation Provision of high-quality services to a globally of international investment agreements (IIAs) mobile audience with high expectations requires require specialized skills and resources. The a clear strategy and strong, service-oriented and number of IIAs has grown rapidly for the past well-coordinated institutions. 20 years and now exceeds 3,000 worldwide. IIAs aim to provide foreign investors entry, fair The implementation of an FDI strategy usually treatment, and protection, and they also outline involves several functions and institutions investor obligations to the host state. In many acting in concert—namely, investment policies, countries, IIAs tend to be handled by government which are the responsibility of the lead ministry; offices that are regularly engaged in economic IPAs; SEZs; OSSs; and private sector and other negotiations with other governments. Such stakeholders. Table 1. Government Functions for the Generation and Administration of Private Sector Investment Critical Area Functions Examples of Specialized Institutions Policies, laws, and Making policies and laws for private sector Ministerial council, office of the president or office regulations development of the prime minister, responsible ministries Administering government procedures for Relevant ministerial authorities, OSSs investment, including incentives Negotiating and implementing IIAs Ministries of economy, investment, trade, foreign affairs Services to address Providing services to foreign direct investors, IPAs, SEZs, OSSs market failures including marketing, information, assistance, and advocacy across the investment cycle Providing services, including financial assistance, SME agencies, trade and export promotion to domestic investors, including start-up, micro, agencies, development agencies, incubators, and SME support; export promotion; linkages; and specialized development finance institutions outward FDI promotion Investor grievances Handling investor grievances and resolving IPAs, investment ombudsman, prime minister’s and dispute resolution investor disputes office, ministry of economy, courts, ADR mechanisms (such as arbitration centers) Other relevant private Administering economic zones and public SEZs (and similar industrial and business parks), sector investment lands; designing, negotiating, and administering government PPP and privatization units, individual functions PPPs and public concessions; administering asset-owning ministries, SOE units privatization and SOEs Note: This list contains the main functions necessary for a successful private sector investment program. It may not be exhaustive. IIA = international investment agreement; FDI = foreign direct investment; SME = small and medium enterprise; PPP = public-private partnership; ADR = alternative dispute resolution; SOE = state-owned enterprise. INSTITUTIONS FOR INVESTMENT | 3 Many countries identify the IPA as the main agency As firms grow, they may wish to move into export that coordinates these wider FDI implementation markets. Support for such a move is usually efforts—but not FDI policy—and that directs the provided by the second institutional type, which country or economy’s marketing efforts for new are known as trade promotion organizations or foreign investment. For example, Invest Hong export promotion agencies (EPAs). For example, Kong, Invest India, and Invest in Turkey all lead Costa Rica’s PROCOMER delivers programs their respective country or economy’s FDI efforts. to help SMEs diversify their exports, while the International Trade Board of Madagascar provides • Services for domestic investors usually include export support to traditional handicraft SMEs. financial and other support for start-up, micro, and SME businesses, as well as export promotion, Finally, once a company has successfully linkages, and outward FDI promotion. These moved into export markets, it might consider services can be seen as a continuum to help domestic establishing production or distribution overseas. companies progressively grow and, for those with The third type of institution, such as Apex- the objective, to internationalize (see figure 2). Brasil, the Korean Trade-Investment Promotion Agency (KOTRA), or the Japanese External Development financing often involves SME grants Trade Organization (JETRO), provides support and lending, trade finance, or outward FDI finance. to potential outward investors. For example, India’s Export-Import Bank provides financial assistance to exporters and importers, • Handling investor grievance and resolving while South Africa’s Industrial Development investor disputes in an efficient and timely Corporation provides financial assistance to manner is important. However, investors often support firms seeking to invest abroad. find it challenging to have their grievances addressed in a timely and effective manner. The delivery of such services usually falls to three Resulting frustration can translate into FDI types of institutions. The first type is SME support withdrawals and expansion cancellations or, in agencies. For example, South Africa’s Seda (Small some cases, escalation to investor-state disputes. Enterprise Development Agency) and Brazil’s Governments should identify and manage SEBRAE (Serviço Brasileiro de Apoio às Micro grievances between investors and public agencies e Pequenas Empresas, or Brazilian Micro and as early as possible. A lead agency should react Small Business Support Service) are mandated in a timely and coordinated manner to resolve to implement the government’s small business grievances well before the investor opts to divest strategy through a range of SME programs. or to take the country or economy to court. Access Figure 2: The Internationalization of Domestic Firms Domestic Domestic Firms Seek Micro Domestic Domestic Domestic International Firms and Firms Firms Enter Firms Production & SMEs Build Overseas Build Distribution Service Capacity Markets Export Presence to Purely to Export (Exports) Markets Service Domestic Growing Markets Export Markets Source: WBG presentation of main stages of domestic firm growth. Note: SME = small and medium enterprise. 4 | INSTITUTIONS FOR INVESTMENT to fair and efficient court systems and alternative What Key Principles Should dispute resolution mechanisms are necessary to Governments Consider When enforce investor rights. Establishing the Institutional • Other relevant private sector investment Framework for FDI? functions include leveraging public assets to Ideally, having identified the functions necessary to support private sector investment. First, the deliver agreed-on FDI goals, governments should administration of public land and real estate is decide how to best structure and organize the usually managed by authorities such as SEZs, institutions that will deliver the selected functions. industrial parks, or export-processing zones. In practice, however, this sequencing is often not For example, in the state of Pernambuco, Brazil, followed. Countries must therefore adjust and Suape operates a large SEZ that hosts domestic reform both functions and institutions to achieve the and foreign investors in several strategic best results. clusters. The Couga SEZ successfully does the same for a province in South Africa. Evidence indicates that institutional structures and governance arrangements significantly affect the Second, PPPs, public concessions to private effectiveness of FDI promotion efforts (ECORYS investors and privatization, and SOE programs 2013; Lim 2018; Wells and Wint 2000). If poorly are also important mechanisms for investment. designed, FDI-related institutional clusters can be These functions directly seek private investors— constrained by incompatible functions housed in domestic or foreign—to support government- the same institution, inadequate resource allocation, conceived projects and are often carried out by conflicts of interest, duplication or gaps in service specialized units within the institution that owns delivery, and poor coordination, all of which can the relevant asset. Sometimes, a centralized lead to weak FDI performance. government unit will administer the overall program. Teams that concentrate skills on PPPs The following principles are based on a review are often called PPP units. Their functions vary of relevant academic literature, new empirical widely, as do their structures and location within research, and more than 30 years of World Bank government, which reflects different priorities Group operational experience. The summarized across government. However, PPP units often conclusions of these sources suggest that institutions deliver (a) policy guidance and capacity in developing countries are most effective when the building; (b) PPP promotion both within and seven principles listed in box 1 are applied. beyond government; (c) technical support in • Nelson (2009) shows that a strong institutional implementing PPP projects; and (d) gatekeeping framework requires a shared, strategic vision for or overseeing the approval and management of FDI across government that also includes private PPP projects. sector input, thus ensuring that all relevant policies Many countries establish central PPP units and institutions are aligned and coordinated. For within the ministry of finance, including the example, the United Nations Conference on Trade United Kingdom, France, South Africa, and and Development’s World Investment Report 2018 India, whilst other countries have established says that, to be effective, “investment policies need PPP units within the ministry of planning to revolve around a clearly articulated vision but, or elsewhere. In Chile, for example, the at the same time, they have to contain ... a clear ... Concessions Unit reports to the Ministry of division of responsibilities among the public and Public Works, while the Philippines’ Public- private sectors” (UNCTAD 2018, v). Without a Private Partnership Center reports to the shared vision, a country or economy runs a high National Economic and Development Authority. risk of contradictory and conflicting policies and actions that will weaken FDI results. INSTITUTIONS FOR INVESTMENT | 5 Box 1: The Key Principles for Effective FDI Institutional Arrangements • A strong alignment across government that stems from a clear national development plan or objective, vision, or strategy—including FDI—with clear priorities and sequencing; • Government support for FDI promotion from the highest level (for example, the president or prime minister) that directly or indirectly champions the needed policy, legal, regulatory, and institutional reforms; • Systematic and reform-oriented consultation with the private sector; • A strong, clear, and uncontested mandate for each institution that also stems from the national development objectives and avoids any possible conflicts of interest; • Sufficient and sustained financial and human resources to properly deliver the mandate of each agency; • A clear focus on results management; and • Strong partnerships and coordination mechanisms with both public and private sectors at both national and subnational levels to ensure consistency between institutions. • High-level political support is essential in of government than it does with the institution aligning and implementing often-difficult receiving high-level government support when multistakeholder reforms for investment. For it is needed. For example, Invest India reports to example, IPAs tend to be more successful with the Ministry of Commerce and Industry but has more political support. Lim (2018) and Ecorys strong direct support from India’s prime minister. (2013) conclude that investment agencies with operational independence (often referred to as • Best practice requires systematic consultation quasi-autonomous agencies2) and with high-level with the private sector in the development of government support tend to have a better effect trade and investment policies if government on FDI attraction.3 This is sometimes reflected in expects serious uptake by domestic and foreign the level of government to which the institutions investors.4 Government can leverage the private report. For example, the Ethiopian Investment sector’s experience to enhance the content Commission reports to the Ethiopian Investment and prioritization of policy reforms and the Board, which is chaired by the prime minister. effectiveness of public service delivery. Public- But often this positive effect has less to do with an private dialogue mechanisms provide a systematic institution’s direct reporting lines to a high level way to identify key reforms. 2 They are referred to as quasi-autonomous because IPAs are, of course, typically funded by government resources. Therefore, they cannot be wholly autonomous. What the research means by “autonomy” is a high level of decision making on how best to operationalize the FDI strategy. 3 Bauerle, Danzman and Gertz (2020) identify trade-offs between autonomous agencies (which can set their own priorities and are often viewed as more legitimate in the eyes of investors and more integrated agencies (which can help facilitate coherence in strategy and confer high level political support, but can be susceptible to bureaucratic inefficiencies and interest group lobbying. 4 The European Bank for Reconstruction and Development has been working to help governments establish investment councils as public-private consultation mechanisms since 2007. For example, in the Kyrgyz Republic, the council has contributed to the adoption and amendment of more than 100 critical laws and regulations since 2007. See https://www.ebrd.com/what-we-do/ sectors-and-topics/investment-councils.html. 6 | INSTITUTIONS FOR INVESTMENT • Each institution should have a clear mandate that agreed-on strategic goals and to avoid disjointed does not overlap or contradict others. Evidence efforts from year to year, struggles over funds shows a negative correlation between the number every year, or having to charge fees. Nelson of mandates of an IPA and FDI inflows (World Bank (2009) points out that institutional stability and forthcoming). World Bank operational experience5 sustainability through political cycles are best indicates that development of institutions with practice. An IPA’s performance can be enhanced too many mandates typically takes much longer by having key management and promotion staff to deliver substantial results. Lim (2018) finds members with strong private sector experience, that FDI performance is negatively affected when international exposure, and language skills and promotion of inward investment functions is who are not affected by political transitions. combined with export promotion or the promotion of outward investment. • An IPA’s performance can be enhanced by a clear focus on results management. IPAs need to have For example, in one Asian country a single in place a mechanism to collect data on results, agency is tasked with promoting investments, as well as the ability to analyse these data and implementing public investment programs and to take corrective actions where necessary if the sustainable development goals, implementing desired results are not being achieved. PPPs, and negotiating IIAs with very limited resources to deliver any of these goals. In an • Institutional collaboration and communications African country, a single agency is tasked with also affect FDI impact (Miškinis and Byrka formulating trade and investment policies, 2014). Results from a 2017 World Bank survey promoting investments and exports, administering of IPAs shows that IPAs in high-FDI countries SEZs and incentives, and developing SMEs, all coordinate more, with 95 percent of them with only about 20 staff members and scarce maintaining close or regular contact with other financial resources. Both agencies are struggling institutions, as opposed to only 68 percent of to deliver against the many investment-related IPAs in low-FDI countries. functions given to them. These countries need to reconsider their institutional framework and the These principles should shed light when policy resources required if they are to attract FDI and makers face the typical dilemmas discussed in the achieve national development goals. next section. An important aspect of the institutional mandate is that there should be a clear distinction between What Typical Dilemmas Do Policy policy making and implementation. Best practice Makers Face When Creating an sees policy making as an upstream function Institutional Framework for FDI? that is undertaken by a relevant ministry, while On the one hand, the need for coherence might be implementation is a downstream function that seen as a good rationale for consolidating functions involves more direct interaction with companies in as few institutions as possible. On the other hand, and is usually the responsibility of operational policy makers should consider that each function agencies such as IPAs. requires a unique set of characteristics for success, • Given the longer-term nature of investment, which might argue more for specialized agencies investment institutions need sufficient and implementing each function. The right balance sustained financial and human resources over at depends on the country or economy’s circumstances. least a three-year period to deliver the agency’s Suitable coordination mechanisms between the Survey in 2019 of senior World Bank experts in investment policy and promotion. 5 INSTITUTIONS FOR INVESTMENT | 7 specialized institutions play an important role in demanding role of FDI promotion. If functions are ensuring consistency and coherence. combined, strong division of functions is essential. When considering the allocation of functions to In most countries and economies that have individual institutions, governments often lean succeeded in attracting significant FDI, IPAs do not more heavily toward consolidation of functions than typically have regulatory functions. Successful IPAs toward specialization. However, these decisions are such as Invest Hong Kong, ABA–Invest in Austria, not as clear cut as they might seem and can often lead and CINDE carry no regulatory functions. to unintended consequences. The following sections review the functions most commonly combined One specific dimension of the division of functions within an IPA and assess their appropriateness. relates to investment incentives. In some countries, IPAs have been charged with managing incentive Most countries have a national IPA that must work programs on behalf of government. Unfortunately, in coordination with subnational IPAs and with other this arrangement again puts the IPA in the difficult relevant agencies to ensure that incoming investors situation of acting as persuader, supporter, and are served well. Essentially, IPAs are specialized rewarder (of incentives) for the investor while also marketing and service-providing agencies; their having to assess and monitor those incentives. This focus is on (a) identifying potential investors through represents a conflict of interest. In other words, it is articulating a convincing case for locating in their in the IPA’s interest to incentivize the investors it is country or economy and (b) providing quality, trying to persuade to locate in its country or economy, on-time services to prospective and established rather than to consider incentive awards objectively. investors. One must recognize that, in FDI promotion, It is, however, not in the IPA’s interest to then become it is more often quality than quantity that matters. the government’s “police officer” who monitors and Quality services require dedicated budgets and potentially punishes the investor if there is a breach specialized staff members capable of understanding in compliance with incentive conditions. These investors. This, an IPA’s technical capacity is far latter tasks are better carried out by an independent more important than its staff headcount. government entity—for example, a unit within the ministries of finance, industry, or economy. Nevertheless, there is often a temptation to combine investment promotion functions with wider What about amalgamating the IPA with the EPA? investment and trade functions, but such decisions IPAs and EPAs essentially have quite different are fraught with difficulties. operational roles (see table 2). IPAs deal with medium to large foreign firms that seek to locate Should IPAs carry regulatory functions, such as in the host economy. while EPAs deal with small- investment approvals, incentives, and investment to medium-sized domestic firms that seek to sell monitoring? In some countries, IPAs are part of an their goods and services overseas. These are very authority with a broader mandate to regulate FDI different audiences and markets that require different and, sometimes, domestic investment. However, programs, as well as different staff skill sets. Lim investors are often confused when dealing with (2018) finds that FDI performance is negatively agencies that both support and regulate FDI. Investors affected when inward FDI and export promotion are prefer clarity of roles. World Bank experience combined within the same organization. shows that in agencies with both promotional and regulatory functions, the promotional functions World Bank experience shows clearly that tend to underperform. Priority is always given to combining the different functions of investment and the regulatory side. Studies such as that by Whyte, trade in a single organization is far from simple. Ortega, and Griffin (2011) argue that assigning Combining functions does not automatically result regulatory functions to IPAs in fact will prevent in synergies and even tends to leave one of the two the IPA from focusing on its already complex and functions behind—invariably investment—unless 8 | INSTITUTIONS FOR INVESTMENT institutional and staff objectives, resource allocation, • OSSs are increasingly regarded as a tool to and internal processes are structured to reflect the help investors navigate through regulations and differences between the two functions. procedures. OSS responsibilities are often given to IPAs because of poor investment climate, Nevertheless, certain cost savings may stem from mission creep, budget constraints, or political sharing corporate services, particularly finance, considerations. legal, information technology, and human resources. Some operational synergies may also exist, as, for Global experience suggests, however, that example, when incoming FDI firms are also exporters OSSs should be independent of IPAs but that and IPA and EPA staff members are required to work the two entities should have a strong working closely together to maximize such opportunities relationship. This is because OSSs should (UNCTAD 2013). Some agencies with combined provide services to both domestic and foreign functions have been successful on both export and investors. The operational needs of an OSS investment counts, such as the United Kingdom’s differ from the IPA’s promotional needs and can Department for International Trade. However, such cause significant conflicts of interest. Promotion agencies have structured internally to ensure that the usually suffers when OSS and IPA functions are two functions essentially operate as separate units performed by the same agency. Most successful and report to a chief executive officer and board that IPAs around the world do not host the country covers both functions. Operationally, the agencies or economy’s OSS—for example, those in the have separate budgets and enabling environments, United Kingdom, Ireland, Austria, Hong Kong, as well as dedicated, highly trained staff members, and Costa Rica. These IPAs provide guidance and while still working together when necessary. information to investors on how to contact and This note advises that care should be taken to keep work with the OSS. these two functions separate, either in separate • SEZs and industrial parks interest potential agencies or in distinct units within a single agency. investors. However, IPAs should not be in What about other linked operational functions? The charge of SEZs because of the potential conflict final section addresses three functions with which of interest. If the IPA is given responsibility to the IPA must work closely. make economic zones successful, there will be considerable pressure on the IPA to push Table 2: Contrasting EPAs with IPAs Export Promotion Inward FDI Promotion Mandate Support domestic firms seeking to sell goods Target foreign investors to attract, retain, and and services in international markets expand FDI into host country or economy Clientele Domestic producers (typically small and Foreign investors (typically medium and large firms) medium firms) Decision makers Buyer agents in the importing firms Top-level executives responsible for investment decisions Staff skills Sales and marketing officers with sector Political economy, public relations, marketing knowledge in overseas markets, international and sector-level knowledge of business in source exposure, languages and host countries, international experience, languages Performance Export value and volume, number of new markets, FDI inflows, number of investment projects, number indicators number of new exporters of jobs created Note: EPA = export promotion agency; IPA = investment promotion agency; FDI = foreign direct investment. INSTITUTIONS FOR INVESTMENT | 9 investors toward a zone’s location in an effort to Conclusion fill it. However, in many instances, zones may not be the best choice for an investor who may prefer How governments structure their institutional a different location or, indeed, a private sector framework for investment is important to achieve property solution. development goals. Given that institutional arrangements need to be tailored for different Outward investment promotion is very different national circumstances, it is important that the from inward investment promotion, among other institutional structure is driven by national priorities things targeting different types of firms. Inward and closely follows the principles set out in box 1. investment deals with experienced medium and These principles suggest that a shared, strategic large foreign companies that often consider many vision for investment that includes private sector overseas locations, whereas outward investment inputs; high-level government support for FDI typically deals with large domestic firms that are promotion; clear institutional arrangements with taking the first steps to locate overseas. Combining well-defined, non-overlapping mandates; adequate inward and outward investment in the same resources to deliver agreed-on goals; strong focus organization is unlikely to be the best institutional on results management; and strong collaboration structure because it diminishes the FDI impact (Lim and communications across government, with the 2018). Outward FDI sits better within specialized private sector, and with other stakeholders are all development and trade promotion organizations critical to a well-functioning institutional structure. implementing an “internationalization of domestic firms” strategy. There are clear dangers in mission creep in terms of distracting an IPA from its core mandate. Nevertheless, one exception to this can be where IPAs have proved to be ideal places for government to incubate new investment-related functions before transferring such functions— once a concept is proven—to a more appropriate institutional home. 10 | INSTITUTIONS FOR INVESTMENT References Bauerle Danzman, Sarah, and Geoffrey Gertz. Forthcoming. “Facilitating Sustainable Investment: The Role and Limits of Investment Promotion Agencies.” In World Trade Forum 2018: Trade, Development, and Sustainability, edited by Cosimo Beverelli, Jürgen Kurtz, and Damian Raess. Cambridge, U.K.: Cambridge University Press. 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University Park, PA: Penn State University Press. Rodrik, Dani. 2004. “Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development.”Journal of Economic Growth 9 (2): 131–65. UNCTAD (United Nations Conference on Trade and Development). 2013. “Optimizing Government Services: A Case for Joint Investment and Trade Promotion?” IPA Observer 1, UNCTAD, Geneva. ———. 2018. World Investment Report 2018: Investment and New Industrial Policies. Geneva: UNCTAD. Wells, Louis T. Jr., and Alvin G. Wint. 2000. “Marketing a Country: Promotion as a Tool for Attracting Foreign Investment.” Foreign Investment Advisory Service Occasional Paper 13, World Bank, Washington, DC. Whyte, Robert, Celia Ortega, Carlos Griffin. 2011. “Investment Regulation and Promotion: Can They Coexist in One Body?” World Bank Investment Climate in Practice Note, World Bank, Washington, DC. World Bank. Forthcoming. Global Investment Competitiveness Report 2019–2020. Washington, DC: World Bank. INSTITUTIONS FOR INVESTMENT | 11