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.
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.
LDCs have made efforts to attract more FDI. Important efforts have been made to improvement the investment climate, though more can be done to strengthen competitiveness. Many LDCs have established Investment Promotion Agencies. However, investment promotion agencies (IPAs) in LDCs are typically weak. They often do not have the capacity to target investors and follow-up with them once they have established themselves in a host country. After-investment services are particularly important: satisfied foreign affiliates in a host country are the country’s best ambassadors to encourage the reinvestment of earnings and bring in more FDI. Investment advisors who would work on a day-to-day basis with investors could be helpful. In short, IPAs need strengthening, and ODA could play a role here.
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Countries have also developed policies to promote investments in some SDG-related sectors, such as infrastructure development, health, education and climate change mitigation. From 2012 to October 2016, 41 countries took 66 investment policy measures in one or several of the above-mentioned sectors or activities (15 per cent of reported policy measures). Within the group of investment policies in SDG-sectors, over 80 per cent are related to investment liberalization or promotion/facilitation. By region, as shown in the figure, investment policy measures related to SDG-sectors were reported most commonly for countries in Asia, followed by Europe, but are nevertheless occurring in all regions.
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.
Some developed countries have specialised agencies to provide long-term financing for private sector development by providing loan and equity financing for FDI projects. For example, the United States’ OPIC provides medium to long-term financing and the provision of political risk insurance. However, in 2015 only 12 of the 140 projects were in LDCs. Likewise, other providers allocate relative small shares of their support to LDCs. Thus, a lot remains to be done towards adopting and implementing investment promotion regimes targeting LDCs.
A number of UN system organisations are providing support for FDI mainly through the provision of information and data, advisory services and capacity building. Most of these programmes are not specifically designed for LDCs but cover several LDCs.
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. In recent years, the value of investment guarantees has averaged about 3 per cent of total FDI flows, but about 30 per cent of FDI inflows to developing countries according to a study undertaken by OECD. As the World Bank Group's provider of investment insurance, MIGA secures investment flows against political and sovereign risks. The two types of guarantees MIGA provides include Political Risk Insurance (PRI) and Non-honoring (Credit Enhancement). PRI entails guarantees against Transfer restriction & currency inconvertibility, Expropriation, War & civil disturbance, and Breach of contract. Non-honoring (Credit Enhancement) includes Non-honoring of a financial obligation by a sovereign, sub-sovereign or state-owned enterprise. As shown in the above figure, the volume of new guarantees issued increase by over 1.5 times between the fiscal years of 2013 and 2017.
The Addis Agenda emphasizes the importance of mobilizing stable longer-term private finance, both domestic and international, in ways that further sustainable development. 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.