Putting it to Work in Developing Countries - Nathan Associates

services in this phase involve one-stop shops.
Services in the operational phase involve
monitoring to ensure minimal red-tape in
renewing licenses and permits, and that the
FDI project has a positive experience under
host-country policies and conditions. Such
“after-care” servicing is now especially important
in retaining or expanding FDI projects,
and is a cost-effective form of promotion: in
some countries more than 50 percent of FDI
is generated from existing investors. 36
• Policy advocacy/business environment
improvement. Policy advocacy is fast becoming
a very important function for IPAs. IPAs
frequently join business environment task
forces and survey investment climates, then
communicate the concerns of investors,
foreign and local, to government. IPAs are
increasingly viewed as informed and effective
advocates for getting the investment climate
right, and for spurring public–private dialogue
on policy matters.
These functions are not exhaustive. In fact,
some IPAs grant incentives, promote privatization,
or even supervise EPZs. Reflecting the shift
in approaches to FDI, IPAs function much differently
than they did 15 years ago. Their regulatory
function was once prominent and policy
advocacy absent. Now, the reverse is true. IPAs
are increasingly focused on customers and
investors, not regulation.
IPA EFFECTIVENESS
Are IPAs effective Responses vary by country
and agency, but for IPAs as a group, the answer
may be yes. Recent surveys of 58 agencies yielded
interesting insights. 37 First, IPAs appear to be
positively correlated with FDI inflows, along
with market size and GDP per capita. If causality
is assumed to run from IPA promotion to
FDI inflows, a 10 percent increase in expenditure
on promotion seems to yield a 2.5 percent
increase in investment. Second, investment promotion
seems to be more effective in countries
with a good investment climate and a relatively
advanced development. In countries with a poor
investment climate, promotion may be counterproductive.
Third, the most fruitful IPA function
seems to be policy advocacy, followed by
image building and investment facilitation and
servicing. Investment generation may be the
least cost-effective, at least for the countries surveyed.
Finally, the success of an IPA depends
very much on (1) a strong, visible relationship
to the highest offices of government (president
or prime minister), and (2) the participation of
the private sector in IPA activities through the
board of directors. IPAs may also draw upon a
“toolbox” of approaches and procedures, many
defined by the Multilateral Investment
Guarantee Agency (MIGA).
BEST PRACTICE ISSUES
Given such encouraging research and continuing
stiff competition for FDI, IPA programs will
continue to expand throughout the developing
world. As they do, they face four issues, one
organizational and three functional, as follows.
Integrating trade promotion and investment
promotion. Many governments are moving to
unite previously segregated trade and investment
promotion functions in one agency. The reasons
for doing so are strategic and practical. First,
trade and investment are closely related, as
noted in Chapter 2. The export capabilities of a
developing country often depend heavily on
improving productivity through investment, and
efficiency-seeking FDI has proven effective in
linking local firms in a host country economy
into global production networks. And when
upstream supply linkages are created between
FDI-based foreign affiliates and domestic firms,
the latter often progress to become independent
exporters. Hence, promoting trade and investment
in tandem promises to make the most of
inherent synergies. Further, for small countries,
size, institutional limitations, human resources,
68