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Encouraging quality direct investments

Foreign direct investment (FDI) has exhibited the largest trend increase over the last decade. FDI flows remain the least volatile of all external private capital flows to developing country, such as foreign portfolio investment and bank lending. Nonetheless, there are significant differences in the quantity and quality of FDI inflows accruing to different regions and countries, as well as concerns regarding the concentration and development impact of FDI, with non-commodity FDI flows largely bypassing many LDCs.

To enhance the development impact of FDI and direct investment in general, countries have developed policies to promote investments in some SDG-related sectors, such as infrastructure development, health, education and climate change mitigation. Blended finance mechanisms (including Public Private Partnerships, equity investments, guarantees and insurance) have also become increasingly looked to as a method of using official resources to leverage private financing into key SDG-promoting sectors such as infrastructure. However, such mechanisms have not always been successful and should be assessed and adopted on a case-by-case basis. Careful consideration needs to be given to the structure and use of blended finance mechanisms in order to ensure that, among other things, risks and rewards are shared fairly between public and private partners and that projects have clear accountability mechanisms and meet social and environmental standards. Overall, quality direct investments need to incorporate consideration of important social, environmental and cross-cutting issues such as labour child rights and gender equality.

FDI trends and policy development

FDI has been on a weak trajectory globally since peaking in 2015 at $1.9 trillion. By 2018, it had fallen to $1.2 trillion, back to the low point reached after the global financial crisis. The drop in 2018 was concentrated in developed countries where FDI inflows fell by 40 per cent, mainly due to repatriation of profits held overseas by US companies following the 2017 corporate tax reform.

Total FDI to developing countries remained stable, at an estimated $653 billion, 2 per cent more than the previous year. Flows rose marginally in developing Asia and Latin America and the Caribbean, and remained flat in Africa. Developing Asia regained its position as the largest FDI recipient region in the world, followed by the European Union and North America.

Investment promotion (including in LDCs)

FDI flows to LDCs have traditionally been concentrated in extractives industries, where their development impact is more limited. LDCs have made efforts to attract more FDI and many have established Investment Promotion Agencies. However, they often do not have the capacity to target investors and follow-up with them once they have established themselves in a host country. ODA could play a role in supporting IPA strenghtening.

Many developed and some developing countries also have policies, programmes and measures in place to encourage outward FDI flows, including information services on the business environment and opportunities in host countries; financial support for pre-investment activities, fiscal measures and political risk insurance. In general, these measures aim to advance strategic interests of the home country and enhance the international competitiveness of its firms, but may also result in promoting FDI flows to developing countries.

This figure highlights that, in 2018 (up to October), about 70 per cent of all investment-related policies were favourable to FDI.

Insurance, investment guarantees and new financial instruments

Over the last decade, blended finance mechanisms (including Public Private Partnerships, equity investments, guarantees and insurance) have become increasingly looked to as a method of using official resources to leverage private financing into sectors such as infrastructure. Risk mitigation and related tools for facilitating private investment into developing countries have been developed by both bilateral donors and multilateral agencies, such as MIGA, whose mandate is to facilitate FDI into developing countries. The two types of guarantees MIGA provides include Political Risk Insurance (PRI) and Non-honoring (Credit Enhancement).

Quality issues: labour and child rights

While welcoming private sector corporate responsibility initiatives, the Addis Agenda also explores policy and regulatory frameworks to better align business and finance with sustainable development, in accordance with relevant international standards and agreements, such as the Guiding Principles on Business and Human Rights and the labour standards of ILO, the Convention on the Rights of the Child and key multilateral environmental agreements. Enterprises, governments and employers’ and workers’ organizations are important in ensuring that commitments pertaining to employment, environmental and health standards, are met in line with relevant international standards and agreements.

International labour standards lay down the basic minimum social standards agreed upon by all players in the global economy. They are either conventions, which are legally binding international treaties that may be ratified by Member States and translated into national legislation, or recommendations, which serve as non-binding guidelines. Whilst not directly binding on enterprises if not integrated in national legislation, the principles derived from the conventions and recommendations adopted by the ILO act as a guide for enterprises’ behaviour worldwide.

The Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (MNE Declaration) is of particular relevance in the context of the SDGs. It seeks to encourage the positive contribution that enterprises can make to economic and social progress and to minimize and resolve the difficulties to which their various operations may give raise. As the only ILO instrument directly addressed to enterprises, it translates the principles derived from international labour standards into guidance for company operations.