Putting it to Work in Developing Countries - Nathan Associates

and domestic investors is particularly important,
as is loosening the regulations in FDI
regimes.
Taken together, these factors create the competitive
markets that give firms incentives and signals
to perform efficiently.
Finally, reliable, cost-effective infrastructure is
critical to a favorable investment climate.
Foreign investors repeatedly identify physical
infrastructure—power, transport, water—as the
most important determinant of a decision to
invest, with cost of utilities running a close second.
10 For example, in a recent analysis of FDI
impacts in 14 manufacturing and services industries
in Brazil, China, India, and Mexico, multinational
executives rated “high quality infrastructure”
as the factor most affecting their
choice of offshore location, ahead of availability
of trained workers, the regulatory environment,
and other variables. 11 Technological infrastructure,
especially information and communications
technology, is also a determinant. 12
Moreover, widespread basic education and public
health systems, both essential to workforce
development and health, are fundamental to a
good investment climate. 13 Together, these elements
create a “virtuous circle” in which
improvements in infrastructure lead to efficiencies
that attract investment, thus expanding the
service base that makes infrastructure even more
cost-effective for business.
ASSESSING THE CLIMATE
Governments seeking to attract FDI can begin
improving the investment climate by assessing
conditions. A number of tools are available for
the purpose, beginning with the Policy
Business Environment and FDI: Boom or Backlash
A recent forecast of worldwide and emerg- used by companies to formulate their global
ing market FDI flows highlights the impor- business strategies.” After running its model
tance of the “business environment” as a to project FDI flows, EIU noted that its
determinant of FDI activity. Drawing on results were particularly sensitive to variadata
from 82 economies, the Economist tions in the business environment. This
Intelligence Unit (EIU) prepared a medi- variable was then used to construct alternaum-term
forecast (2006-2010) of FDI for tive FDI “boom” and “backlash” scenarios
developed economies and emerging mar- around the baseline forecast. The boom scekets.
In the EIU’s forecasting model, FDI nario, which assumes that all countries’
flows are related to a number of variables: quality of business environment scores are
market size, GDP growth, natural resource 10 percent higher than the values actually
endowments, distance between countries, forecast, produces a 45 percent increase in
labor costs, and the business environment. FDI flows for emerging markets. In the
The latter is an index of values of 91 indica- backlash scenario, values for an array of
tors organized into 10 categories represent- business environment indicators are lowered
ing various aspects of the “policy, institu- to represent more restrictive FDI polices
tional and operating environment.” It is and rising protectionism. The result A 19
designed to represent the “main criteria percent drop in FDI in emerging markets.
SOURCE: EIU, World Investment Prospects to 2010: Boom or Backlash (New York: EIU,
2006) p. 44 and 63.
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