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The investment climate

The Monterrey Consensus and Doha Declaration tasked Member States with building transparent, stable and predictable investment climates, and many countries have made great strides in this area, though gaps still remain. In the Addis Agenda, countries resolved to continue this work, with the aim of attracting long-term sustainable private investment. 

Elements of the investment climate

Many factors influence the quality of a country’s investment climate and overall competitiveness. While the appropriate set of policies are country specific, a number of global surveys and studies have been undertaken that can be helpful in understanding trends in the business and investment climates in countries, particularly with regard to competitiveness, business constraints, risk and policy uncertainty, and cost of business operations. While the initiatives (such as the Doing Business project of the World Bank) generally compile individual indicators into an index, for follow-up on FfDO outcomes it is more useful to examine the elements individually. In addition, the elements need to be viewed within the broader context of sustainable development and the integrated nature of the SDGs, including social and environmental sustainability. For example, environmental rules, which may be aligned with the SDGs can also be viewed as impeding business.

 

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The Doing Business project of the World Bank Group uses questionnaires, administered primarily to legal professionals, to measure business regulations and their enforcement across 190 economies. Improvements in strengthening the enabling environment for private sector business and investment are reflected in the cost of starting a business, which has declined in all developing country groupings since 2004, with the greatest declines in LDCs. The cost of doing business includes official fees, as well as additional private fees, such as for legal or professional services if such services are required by law or commonly used in practice. Fees for purchasing and legalizing company books are included if these transactions are required by law.

Strengthening the enabling environment entails a range of actions, such as reforms to the legal framework, promoting transparency, reducing red tape, and, importantly, promoting access to finance. This underscores that an enabling environment must incorporate inclusive finance as a core component of financial and private sector development. Regionally, access to finance remains the biggest obstacle in Sub-Saharan Africa. In East Asia and Pacific, practices of the informal sector was cited as the largest obstacle while in the Middle East and North Africa, political instability proved to be the most important constraint for enterprises. For most countries, an Enterprise Survey is conducted every 3-4 years.

Among the top five obstacles identified by enterprises, access to finance is consistently ranked in the top 3 biggest obstacles over the period 2006-2017. The other four top obstacles are tax rates, practices of the informal sector, political instability and electricity. Access to finance was only ranked fourth in terms of largest impediments to investment in developing countries at the turn of the century. The issue is particularly acute in LDCs and LLDCs, where the percentage of firms identifying access to finance as a major constraint is higher than in the rest of developing countries. Electricity improved over time from a peak of 29 per cent in 2007, while practices of the informal sector appears to have increased as an impediment to investment.

Creating an enabling environment

While the initiatives, such as the Doing Business project of the World Bank, generally compile individual indicators into an index, for follow-up on FfDO outcomes it is more useful to examine the elements individually. In addition, the elements need to be viewed within the broader context of sustainable development and the integrated nature of the SDGs, including social and environmental sustainability. For example, in some countries, despite respect for property rights and free and fair competition, permits for construction can be subject to environmental rules and regulations (which may then be seen as an impediment to business). Over 2,800 reforms in the listed areas have been implemented in measured countries since 2006. Most reforms have been undertaken in the areas of easing restrictions on starting a business, paying taxes, and getting credit.

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LLDCs and developed economies, on average per country, undertake more reforms than the other country groupings. In SIDS, the number of reforms is lowest. It should be noted that data on the number of reforms need to be treated with caution since the quality of reforms and implementation are also critical. More detailed data can be found at the Doing Business project, at Reforms Count.

Before 2015, there were downward longer-term trends for all country groupings with regards to financial market development, most likely due to troubles faced by the financial sector in the wake of the world economic and financial crisis. However, the trends reversed in 2015. The gap between developed economies and the other country groupings has been decreasing over time but remains large. The World Economic Forum (WEF) measures financial market development through their Global Competitiveness survey, a dataset that combines executive opinion survey results and quantitative data. Financial market development is measured by 8 indicators, namely: availability of financial services, affordability of financial services, financing through local equity market, ease of access to loans, venture capital availability, soundness of banks, regulation of securities exchanges, legal rights index. The WEF’s database covers 152 economies.

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