Investment Aftercare Explained

A Guide for FDI Practitioners and Policymakers on How to Grow and Retain Investors

Carolina Arriagada Peters, David Coble, Toby X. Li, Brendan Lewis

• Éditeur: Routledge
• Année: 2021
• ISBN:
  9781000469974
• Édition: 1
• Sujet: Política y relaciones internacionales
• Sous-sujet: Política

This book is the first to systematically map the last step of the foreign investor's journey, usually referred to as post-investment, aftercare or business retention and expansion. It provides a wide range of approaches and strategies for host economies to better retain foreign investors, encourage follow-on expansions and achieve greater local economic embeddedness through a multi-stakeholder dialogue, leading to improvement of the overall business climate.

Global foreign direct investments reached US$1.5 trillion in 2019, but this figure reduced by over 42% in 2020, due to the pandemic. Against this backdrop, retaining established investors became even more important. Numerous organisations all over the world are dedicated to attracting foreign companies to invest in their markets. Facilitating this effort is a dynamic and competitive industry that involves international organisations supporting capacity building, think tanks, academia and consultants. However, once foreign companies decide to invest, a critical question arises: how can host economies grow and retain these foreign investments? Many host governments could do much better, as there is very little post-investment support for these foreign companies to help them grow their businesses throughout different stages of investment, business and economic cycles. This is where aftercare comes in. In this book, the authors include diverse examples from around the world to demonstrate aftercare best practices in action.

This book is an essential read for all public administration staff related to FDI attraction and promotion, practitioners in the private sector and FDI consultants. It will also be of great interest to multilateral organisations seeking to organise seminars and training courses for capacity building. The book will also benefit researchers, academics and postgraduate students of international relations, foreign trade and internationalisation.

For further information, see www.aftercareexplained.com.

Part I The why

DOI: 10.4324/9781003174950-1

1Understanding post-investment

DOI: 10.4324/9781003174950-3

Chapter highlights

• FDI is an important economic driver for developing a host country’s economy, both locally and nationally.
• Different to new investment, that is unidirectional, growing and retaining foreign investments requires an eco-systemic approach, which has its own challenges and opportunities.
• Host governments have an inconsistent record when it comes to providing post-investment support to foreign companies.
• There are important economic benefits for a location from providing post-investment services to foreign companies.

1.1 Introduction

If a project was worth securing as an inward investor,

it must be worth supporting as an established investor.

(Central government policy maker)

To better understand the relevance of foreign investment attraction, it is necessary to start with a basic definition of foreign direct investment (FDI). The United Nations Conference on Trade and Development (UNCTAD) defines FDI as “an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate).”¹ The most common form of FDI, and the one that is the focus of this book, involves an investor either establishing new operations overseas or acquiring business assets in another country. FDI is associated with a productive-type investment, where the investor is an active owner/manager, unlike a portfolio investment where an investor passively holds stocks of foreign-based companies. Thus, FDI is typically a long-term investment for the investor, which may involve them expanding further in the future.

The benefits that FDI bring to a host country’s economy, either by a foreign company or its local subsidiary,² are well established. In particular, FDI has a positive impact on the host economy in the form of positive externalities, which include more and better employment opportunities, new technology, innovative practices, additional capital investment and more international trade. As a consequence, the local economy benefits from income growth and, most importantly, economic development.

According to UNCTAD, “for each foreign investment dollar attracted, the local economy generates another one, and exports [an]other two dollars.”³ For every job directly created by FDI, UNCTAD estimates that between one and two more jobs are created locally.⁴ Meanwhile the international economists Stehrer and Woerz (2009) have found evidence that a 10% increase in FDI translates into a 1.2% increase in economic growth.⁵ This is especially beneficial when foreign investment complements host country investment – particularly in technologically less developed countries – as it increases the development effect of FDI (De Mello, 1999).⁶ Consequently, countries around the world have prioritised attracting FDI and have devoted considerable resources to it.

When knowledge is transferable, it becomes a public good. In other words, when a foreign firm invests in a country, the expertise it brings with it creates returns that are recognised beyond the firm as other parties benefit from its operation at no cost to themselves. A good example of this is the impact on labour markets. There are at least four ways FDI helps increase skill levels and job creation in the host country. First, foreign investment brings new processes and new ways of working. Over time, employees will leave the foreign subsidiary and take their newly acquired knowledge and skills to local firms, from where this knowledge spreads further into the local economy. Second, local suppliers will acquire the knowledge required to meet the needs and standards of their foreign customer. Third, to attract more and better FDI, countries invest in their labour force to ensure they have the latest skills and knowledge. Many of these new skills would not otherwise be acquired by the local workforce, and hence this is a clear positive benefit of foreign investment. Furthermore, foreign companies often bring with them new technology and innovative processes, which are key drivers of economic growth. Indeed, foreign investment enhances capital formation within an economy and enables output to increase. For example, research shows that technological spillovers from FDI to intra-country firms are a major driver of productivity growth in China.⁷ Technology transfers from foreign companies also enable an economy to become more robust, stronger and more diversified.

Fourth, FDI increases exports from recipient countries as foreign investors typically seek to export to neighbouring markets. This not only increases the market for local firms, but also increases local companies’ awareness of global market opportunities. As the Organization for Economic Cooperation and Development (OECD) says, FDI is “an integral part of an open and effective international economic system and a major catalyst to development.”⁸

Given these benefits, attracting FDI is an economic policy priority in many developed and developing countries. To support public and private sector efforts to attract foreign investors, governments around the world have created investment promotion agencies (IPAs) or allocated the function to a local economic development organisation (EDOs). Their objectives include: promoting the country, region or city as a suitable destination for investment; raising awareness of available investment opportunities; attracting investors that can foster job creation and productivity growth; improving the investment climate; and then once an investor has arrived, facilitating their landing in the host country. Governments also work closely with international organisations to identify best practices to attract foreign investors. Such inter-organisational endeavours include the World Bank’s efforts to share knowledge of investment promotion through the publication of reports such as “Institutions for FDI Investment”, “Establishing a High-Performing Institutional Framework for Foreign Direct investment”, “Strengthening Service Delivery of Investment Promotion Agencies”, “The Comprehensive Investor Services Framework”, “State of Investment Promotion Agencies”, “Evidence from WAIPA-WBG’s Joint Global Survey” and a recent initiative by the UN Enhanced Integrated Framework to increase capacity in “least developed countries – LDCs”.⁹

1.2 Considerations about the benefits of FDI

While foreign direct investment brings benefits to the host country, the extent of these benefits is dependent on many factors, including the governance of FDI programs, the range and quality of local institutions, the political status of the host country, the level of market concentration of competition, international market conditions for the industry’s attracted, etc. For example, if a foreign company enters a country with the intention of competing with existing local businesses, then these local businesses may reduce in size or even disappear. Alternatively, if a foreign company repatriates all the profits it makes, rather than reinvesting some of them locally, the benefits of FDI are likely to be reduced. Meanwhile, there are export and trade agencies, such as Australia’s Austrade, offering incentives to retain high value jobs in Australia, policies that look to ringfence valuable companies from foreign FDI efforts. Many of these issues may lead to foreign firms having excessive market power, which in turn may impact local employment and wages, disadvantage local enterprises and result in lower tax revenues for the host countries. Further, focussing excessively on economic growth risks attracting companies that undertake environmentally risky activities, or that have lower environmental standards, which could have an undesirable impact on social welfare.

Several assumptions about the benefits of FDI have been disproved by recent research published by the London School of Economics (LSE).¹⁰ For example, there is a belief that the most desirable investors are the big tech firms, such as Amazon, Google or Microsoft. However, the LSE found that the big tech firms are less likely to hire local workers and that innovations are kept in-house and aggressively protected by confidentiality agreements. Moreover, due to limited, if any, collaboration with local firms, there is less spillover. In contrast, small and medium-sized tech firms have been found to have a greater impact on local economies in terms of creating innovation hubs. These firms tend to leverage the local workforce more, create more linkages with local enterprises and more actively promote the exchange of ideas.

A second misconception is that FDI is an optimal way to recover from recessions. In other words, that foreign investment should be a substitute for domestic investment. At first glance this sounds reasonable, but the reality is that it depends on which industry the foreign investment is allocated to. Economists Crescenzi and Ganau (2020) have shown that European countries that received more FDI recovered faster from the 2008 Great Recession, but only when these new investments went to mature and robust industries, while service industries have been shown to have a greater impact on driving recovery than manufacturing, which is what EU policies are currently focussed on.¹¹

A third misconception is that greenfield investment is always better than brownfield investment. An idea based on the premise that a new investment, such as the construction of a brand-new factory, is better than buying an existing firm or installation. Economist Alexander Jaax indicated that this is not always the case. He found that while in Brazil and Mexico greenfield investment improved local innovation, in Colombia multinational companies acquiring local firms actually improved local innovation, noting that Colombia’s level of technological development a...

Table des matières

• Cover
• Half-Title Page
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Figures
• Foreword
• List of Abbreviations
• Glossary
• Acknowledgements
• Author photos
• Part I The why
• Part II The what
• Part III The how
• Index