Hans Beck, World Bank Country Economist, Timor-Leste

ATTRACTING FDI - INTERNATIONAL

EXPERIENCE P R E S E N TATI O N AT P R E S I DE N T ’ S S E M I N A R S E R I E S , D I L I , 7 M A RC H 2 01 3

What is FDI? What are the global trends in FDI? Who has done well in attracting FDI? Why have they done well?- what do

investors look for? Role for Government?

OUTLINE

1)FDI is an excellent way to finance development. But it is not a silver bullet.

• Diversified financing strategy. • Not all FDI is good

2)There are a many motivations for FDI 3)A good investment climate is a necessary, but

not sufficient condition for attracting FDI.

TAKEAWAYS

Foreign direct investment: The net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. Distinct from Portfolio Investment. (SNA 2008)

WHAT IS FDI?

Global FDI in 2011 at $1 .5 t r i l l ion

FDI inflows rose 16%, but remained 23% below their 2007 peak

Developing and transition economies respectively accounted for 45% and 6% of global FDI

4

GLOBAL TRENDS IN FDI - 2011

Source: World Investment Report 2012, United Nations Conference on Trade and Development

FDI inflows, global and by groups of economies, 1995-2011 (Billions of dollars)

The Balance of Payments (BoP)

TIMOR-LESTE NOW MEASURES FDI

Countries that have done well in attracting FDI

Examples are Singapore, the UK, US, and Ireland.

But many other factors including market size, political stability, quality, level of economic development, are likely to better explain the relationship

SOME RELATIONSHIP BETWEEN GOOD POLICIES AND FDI.

1. Global Image and Reputation 2. Good investment Climate 3. Effective National Investment Framework 4. Government institutions pulling together in

a coordinated fashion 5. Effective investment institutions that

investors can trust 6. Proactive Sector-Focused Investment

Promotion Efforts

WHAT DO THEY HAVE IN COMMON?

WORLD BANK “INVESTING ACROSS BORDERS” SUGGEST HOW COUNTRIES CAN IMPROVE THEIR FDI COMPETITIVENESS. (HTTP://IAB.WORLDBANK.ORG)

ATTRACTIVE DESTINATIONS SEEK TO DELIVER WHAT MOTIVATES INVESTORS

WHAT GENERALLY MOTIVATES INVESTORS?

WHAT GENERALLY MOTIVATES INVESTORS?

Deloitte & Touche

INVESTOR DECISION DRIVERS VARY BY SECTOR, COMPANY AND CONDITIONS

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AND ATTRACTIVE DESTINATIONS ARE PROACTIVE, AND STRATEGIC – The Investment Promotion Cycle

Policy Input

Investment Climate

Systematic Feedback

Aftercare / Investor Development

Investor Servicing

Formulating Development Package

Lead / Investment Generation

& branding

Image Building

Strategic investment promotion is the

process of attracting new foreign and mobile

domestic investment through improvements

in the investment climate and by

marketing a location’s potential to private

investors

• Targeting competitive sectors/ opportunities

• Proactive promotion and facilitation

Effective promotion requires commitment and proactive effort Investment will not “just come”

A FRAMEWORK FOR EFFECTIVE INVESTMENT PROMOTION

Improved Investment climate

Improved Investor Services

FDI friendly policies

Investment

Jobs

Feedback Loop

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Government

Sets in place policies to create a positive

investment climate

Sets an economic development strategy

and develops underlying competitiveness

Conducts investment promotion and engages

stakeholders

Stimulating Private

investment

The Government & Strategic Investment Promotion

FDI Strategy

Investment Promotion

Plan

Target sectors

Institutional Arrangements

Infrastructure

Labor Force Skills

Investment Regulation

Investor facilitation

Investor Aftercare

Policy Advocacy

Investment Generation

Admin. Efficiency

Government

Lead Investment Promotion

Intermediary

Investment Promotion Strategy

Investment Law and

Regulations

LINKING FDI & INVESTMENT PROMOTION STRATEGIES

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Is Investment Promotion important? Yes, studies have shown that

there are positive correlations between Investment Promotion

activities and net investment. (Wells and Wint, 1990; Austrade 1996;

Wells, 1999; Morisset, 2004; Jovorcik and Harding – Oxford

University 2011))

Servicing investors’ information needs

Strengthening a location’s image

Targeting and generating investment

Advocating for policy reform for a better business enabling environment

Role of Investment Promotion

A recent University of Oxford study has shown that : • $1 spent on investment

promotion increases FDI inflows by $189

• $78 dollars spent on investment promotion creates one additional job by a foreign affiliate.

Torfinn Harding and Beata S. Javorcik, “Roll out the Red Carpet and They Will Come: Investment Promotion and FDI Inflows,” The Economic Journal, vol. 121, issue 557 (December 2011).

ADDITIONAL SLIDES

FOREIGN OWNERSHIP RESTRICTIONS

THE COSTA RICA INTEL CASE STUDY

COSTA RICA - 1990S - FDI FALLING AS APPAREL SECTOR LOST STEAM

FDI to Costa Rica was falling as Apparel lost

steam due to increased number of competitors

Potential success LOW

Impact Electric Compo-nents

Medical Devices ?

HIGH

HIGH

Agro-industry

Apparel

Source: Ansoff, Porter, Infinitum

COSTA RICA - CHOOSING FDI SECTORS

Target Sector & Segments

Congruent with country’s SWOT

PRO-ACTIVE REACTIVE

“High” technology Electronic Compo-nents

COSTA RICA – INVESTMENT PROPOSITION

Costa Rica Educated Labor Force

Reasonable Costs Incipient base in

electronic industry

CINDE Focused promotion

an facilitation Good practices

Overseas office in New York

Competitiveness

Lower costs Proximity to big

markets Not proven, emergent

Electronic Components

CINDE NY

Ministry of Foreign Trade

Pres

iden

t Jo

se M

aria

Fig

uere

s

ITCR National Learning

Institute

I.C.E. Power and

Telecommunications

Ministry of Public Works And Transport.

Ministry of Education

Ministry of Finance

Ministry of Science and Technology

Ministry of Environment And Energy

Dire

ct In

volv

emen

t

Source: “Attracting High Technology Investment” Debora Spar-Harvard Business School-IFC-World Bank

CINDE CR

COSTA RICA’S TEAM TO LAND INTEL

WHY DIDN’T INTEL DROP COSTA RICA IN THE PROCESS?

Making INTEL know they were wanted Impressing INTEL at every step of the decision making process Responding to INTEL’s requirements in a fast, highly

professional manner Being transparent – from the very first contact Maintaining confidentiality of the project, only shared with those

who needed to know in the government. The press was fooled, then alerted NOT to disclose the news before INTEL made it of ficial.

Knowing their customer - Researching INTEL and transferring this knowledge to all involved

Consistency of approach and partnering at all levels of government

Commitment at the highest level possible - The President Coordinating across multiple institutions to deliver against very

aggressive deadlines and high standards

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FDI INFLOWS TO COSTA RICA 1980-2005

Intel: catalyzer for FDI in Costa Rica

Source: Infinitum, BCCR, Intel

Intel construction started

In 1996, Intel announced decision to construct a $300 million semiconductor

assembly and test plant in Costa Rica.

2,500 direct jobs Doubled Costa Rica’s Exports

***** By 2005 Intel had invested $770 million

in Costa Rica