80253 INVESTMENT CLIMATE March 2011 I N P R AC T IC E INVESTMENT POLICY AND PROMOTION no. 16 Investment Regulation and Promotion: Can They Coexist in One Body? Robert Whyte The World Bank Group’s Global Investment Promotion Benchmarking Celia Ortega 2009 report found that nearly three-quarters of countries are missing Carlos Griffin out on much of the $1 trillion annual market for foreign direct investment by simply failing at the timely provision of high-quality Robert Whyte (rwhyte@ worldbank.org) is the Global business information to potential investors. A new study indicates Product Specialist for Invest- that weak investment promotion is correlated with whether the same ment Policy and Promotion. He has worked extensively in Asia government agency is also responsible for investment regulation. This for the past six years. Celia note argues that the two functions should be kept separate and offers Ortega (cortega@worldbank.org) is a Senior Private Sector Spe- policy advice for countries that have them combined. cialist, engaged in Investment Generation in Africa and the Caribbean. She leads the GIPB project. Carlos Griffin Nearly every country has an agency responsible procedures themselves so that they can help (cgriffin1@ifc.org) is a consult- for promoting foreign direct investment (FDI). investors better navigate them. This one- ant to the team on investor In a 2009 survey of 105 of these investment stop shop approach can simplify procedures facilitation and aftercare. promotion intermediaries (IPIs), almost 40 for investors, but it appears to make IPIs less percent said that, in addition to FDI promotion, effective at promoting FDI. Often attention their three main functions included some and resources are shifted toward regulation, The authors gratefully form of FDI regulation—such as approving leading to an organizational culture and staff acknowledge the insights investments, managing incentives, and issuing skills that serve regulatory functions well but are provided by Valeria Di Fiori, licenses and permits. But the operational needs poorly suited to the sales and marketing needs Greg Elms, Cecilia Sager, of promotion and regulation vary so widely that of promotion. and Damien Shiels. the two functions are nearly incompatible, and promotion almost always suffers when they are The Global Investment Promotion Bench- This note was developed by performed by the same agency. marking (GIPB) project evaluated 181 national the Investment Policy and IPIs for their ability to perform the critical Promotion team of the World In countries with weak investment climates, function of “investment facilitation.” Investment Bank Group’s Investment IPIs may persuade foreign investors to choose facilitation is the stage of investment promotion Climate Advisory Services. The their locations for new operations—only to have which seeks to convert investor interest into an team advises governments on the investors discouraged or even abandon the investment decision, as opposed to “investor investments because of cumbersome licensing, outreach,” which seeks to generate interest, attracting and retaining invest- permitting, or registration procedures. Some and “investor servicing,” which helps investors ment in order to create jobs IPIs may prefer to administer such regulatory implement investment decisions. Investment and foster economic growth. facilitation is the most basic and common promoter does not guarantee good performance, it IPI function, making it a strong proxy for IPI is a strong indicator of it (Figure 1). performance and the basis of GIPB scores. Best practice facilitation demands prompt The institutional needs of provision of high-quality business information to promotion and regulation investors during the site selection process. GIPB differ greatly scores were based on each IPI’s handling of two simulated site selection inquiries and a review of The pros and cons of having one agency handle the IPI’s Web site, which is often the first point any two separate functions depends on the of contact for interested investors. The resulting compatibility of the functions’ goals, practices, IPI scores determine their placement in the and needs. performance categories of best practice, good, average, weak, and very weak. Being a promoter-regulator is like being both cheerleader and referee Looking at the composition of these categories, Investment promotion aims to attract FDI, while there is an obvious and substantial performance investment regulation ensures that it complies gap between IPIs considered “dedicated promoters” with legal requirements. These requirements and those that are “promoter-regulators.” Best- typically involve steps to obtain licenses, permits, practice and good IPIs are almost exclusively incentives, or investment approval. As a result, dedicated promoters, while most lower-ranked IPIs investors contacted by promoter-regulators often are promoter-regulators. Though being a dedicated become suspicious or confused because they are Figure 1: Dedicated Promoters vs. Promoter-Regulators in GIPB Performance Categories (percent) IPIs that also regulate FDI rarely achieve best-practice or good performance in investment promotion according to the GIPB 2009 report. Source: Authors’ calculations based on World Bank Group 2009b. Investment Climate In Practice 2 Table 1: Divergent Needs between the Promotion and the Regulation of Foreign Direct Investment Institutional Dimension Investment Promotion Investment Regulation Organizational culture • Customer-oriented • Compliance-oriented • Private sector focus • Administrative focus • Concerned with priority industries • Concerned with all FDI Staff skills • Marketing and sales • Administration • Project and customer relationship • Legal and financial issues management • Precision and thoroughness • Communications Knowledge • Business practices • Laws, regulations, and procedures • Sector expertise and competitiveness • FDI data • Laws, regulations, and procedures • FDI data • Foreign languages and business cultures Enabling environment • Flexibility within set parameters • Fixed procedures and approval • Fast approvals and delegated authorities to mechanisms permit rapid responses to investor needs • Supervision and audit • Outcome-driven • Process-driven Internal systems • Tailored approaches (using defined • Standardized systems methodologies) • Investor requests are met at the speed • Quick, flexible responses to investor needs of the “system” • Follow-up until investor is satisfied • Follow-up with investor only as required uncertain whether the IPI is seeking to win their investment locations. Staff with the requisite sales, business or to impose what they consider controls marketing, and customer relationship skills are or obstacles. This ambiguity may put countries at a best recruited from the private sector, but their disadvantage when trying to promote investment. recruitment may be discouraged by the regulatory side of a promoter-regulator that views the skills as Good investment promoters are public sector irrelevant and perhaps even as a conflict of interest. officials with private sector mentalities Table 1 compares promotion and regulation across several dimensions and shows clearly that they have Dedicated promoters greatly different needs in terms of culture, skills, measurably outperform knowledge, enabling environments, and internal promoter-regulators in systems. This makes them difficult to successfully similar investment climates manage together. Promotion involves a customer- oriented approach, while regulation focuses on Dedicated promoters add clarity to hazy procedures. Successful promoters need to have investment climates deep knowledge of the private sector and mirror Analyzing the relationship between countries’ its culture and capabilities to successfully market Doing Business 2011 rankings and their IPIs’ scores Investment Climate In Practice 3 from the GIPB 2009 report makes it clear that IPIs history, culture, and regional norms have led to in countries with similar investment climates show the creation of strong investment regulators, as a significant performance gap if one is a promoter- with Asia’s boards of investment. As investment regulator and the other a dedicated promoter promotion has become a higher priority, some of (Figure 2). these countries have chosen to assign this task to existing investment-related agencies rather than In countries with weak investment climates, create separate IPIs with a more private sector effective IPIs may provide investors with their focus or add the new mandate to more suitable only measures of transparency and predictability. economic development bodies, such as trade Empirical studies have shown that investment promotion organizations. promotion has the greatest impact when it highlights advantages otherwise obscured by Promoter-regulators seem unable to advocate a red tape and lack of information (Javorcik and more welcoming investment climate Harding 2010). This makes it especially important One of the strongest rationales for combining that IPIs be set up as dedicated promoters. promotion and regulation is the opportunity for synergy in policy advocacy for regulatory reform. Still, many governments see regulatory bodies as natural homes for investment promotion efforts In other words, the promotional side can become a due to regulators’ experience and knowledge driver for regulatory reform by using its familiarity bases. This is often the case in countries where with investors to pinpoint critical improvements Figure 2: The Performance Gap between Dedicated Promoters and Promoter-Regulators in Similar Investment Climates A dedicated promoter typically scores about 10 percent higher in the GIPB 2009 report than a promoter-regulator in a similar investment climate. Source: Authors’ calculations based on World Bank Group 2009a and 2010a. Investment Climate In Practice 4 needed in the investment climate. However, of Korea, and Spain. Countries with promoter- in practice promoter-regulators have a weak regulators have an average ease of establishment track record on driving reform. This is evident index of 56, meaning it is about as easy to open a from an analysis of the relationship between foreign-owned subsidiary as in Ecuador, Liberia, an IPI’s score in the GIPB 2009 report and the and Morocco. country’s ease of establishment index for opening a foreign-owned subsidiary in Investing Across Borders 2010 (Figure 3). The latter report covers Implications for 87 countries, 65 of which were among the 105 policymakers covered by the survey for this note. Keep promotion and regulation apart: Nicaragua A stark difference is evident in Figure 3 between shows that even low-income countries can do it dedicated promoters and promoter-regulators. Of PRONicaragua, Nicaragua’s IPI, exemplifies the the 31 countries with the highest combined scores dedicated promoter model. The agency was created from the GIPB 2009 report and the Investing Across in 2002 as a public-private enterprise, independent Borders ease of establishment index, all but one rely of regulators, and reporting directly to the office on dedicated promoters. Countries with dedicated of the president, with a mandate to promote promoters have an average ease of establishment economic growth and job creation by providing index of 70, meaning it is about as easy to open a foreign investors with information, site visit foreign-owned subsidiary as in Ireland, the Republic assistance, and facilitation of government contacts. Figure 3: An Indication of Poor Performance by Promoter-Regulators in Advocating a More Welcoming Investment Climate In almost every country with both a good investment climate and a high-scoring IPI, that IPI is a dedicated promoter, which may indicate that promoter-regulators generally have little success in advocating investment climate reform. Source: Authors’ calculations based on World Bank Group 2009a and 2010b. Investment Climate In Practice 5 With an emphasis on achieving best practices to provided significant domestic benefits. This attract and retain FDI, by 2010 PRONicaragua focus on regulation continued until 1985, when had supported investment projects worth $700 increasing political openness to FDI led to a shift million that could create 49,000 jobs once fully in FDI-related goals. The regulatory agency was implemented. replaced by a promoter-regulator called Investment Canada. Although Investment Canada continued Nicaragua also has a separate one-stop shop—part to screen investments, it began promotional of the Ministry of Industry and Commerce—that functions as part of the ministry of industry handles FDI-related regulatory functions such dedicated to economic growth and international as company and tax registration. The benefits of competitiveness. keeping regulatory functions out of the IPI are reflected in PRONicaragua’s specialized staff and Finally, in 2003 the government split the closeness to both the private and public sectors. promotion and regulation functions by assigning The agency’s 25 staff members were hired for their a much stronger FDI promotion mandate to a language skills and experience with industries new unit, Invest in Canada, under the ministry for targeted for investment promotion. And while the foreign affairs and international trade, and leaving private sector representatives on PRONicaragua’s investment review under the ministry of industry. board help keep the agency attuned to the concerns and expectations of potential investors, As attitudes toward FDI regulation changed in the public sector board members and the direct Canada, its regulatory body adapted accordingly. channel to the presidency give PRONicaragua the Meanwhile, investment promotion, which started political backing it needs to support investors in under the watch of a promoter-regulator, became the country. increasingly valued and evolved into the more effective and separate Invest in Canada—which One might not expect strong IPI performance in today ranks fourth among 181 national IPIs a country with an investment climate ranking of assessed by the GIPB 2009 report. 117 (among 183 countries) in Doing Business 2011 and that falls in the 26th percentile of the Investing When weighing options for improving the Across Borders 2010 ease of establishment index. promotional effectiveness of promoter-regulators, But in terms of promoting investment, as ranked including separating them, it is important to by the GIPB 2009 report, PRONicaragua was 11th bear in mind that a lot can be done with a in the world and 2nd in Latin America. Moreover, little. Several IPIs maintain large promoter- between 2002 and 2009 Nicaragua moved from regulator bureaucracies—often with hundreds 112 to 12 among 233 countries in terms of FDI of employees—that have failed to improve their per capita (UNCTAD 2010). promotional effectiveness from the “weak” and “very weak” scores assigned by the GIPB 2009 If promotion and regulation are combined, report. Yet Invest in Austria, the report’s top-ranked separate them: Canada shows how IPI, has just 24 employees. This carefully selected In 1990 only about 50 countries had national IPIs small group of FDI promotion professionals (UNCTAD 2001), most of which were dedicated can provide expertise on 12 industries in seven promoters. Since then the number of IPIs has languages. Indeed, the 25 highest-ranked national skyrocketed as countries have recognized the IPIs have a median staff size of only about 40 and potential benefits of promoting FDI. But many include the Cyprus Investment Promotion Agency, countries have assigned investment promotion which has just 8 staff. efforts to existing regulatory bodies or created dedicated promoters only to later add regulatory How to make do with a promoter-regulator: functions. Mauritius offers a rare example Though it is preferable to separate FDI promotion In 1973, a surge of acquisitions of Canadian firms and regulation, it may be financially or politically by U.S. corporations prompted the Canadian impossible to do so. Still, the combined functions government to establish the Foreign Investment can be effective if certain steps are taken. Some of Review Agency, a purely regulatory agency, to the pitfalls of having the two functions controlled screen foreign investments to ensure that they by one agency can be avoided by placing them in Investment Climate In Practice 6 different units with their own managers, goals, them to different agencies. The experiences of rich Investment Climate budgets, and evaluation criteria. The promotion and poor countries alike can be used to guide such In Practice division should have the maximum freedom efforts, enabling countries at all income levels to possible to hire and train appropriately skilled staff. attract FDI and advance development. And if it is It should also have the information technology not possible to separate promotion and regulation, This note series is published systems needed for effective promotion, such countries can still take steps to improve efficiency by the Investment Climate as a promotional Web site and internal systems and effectiveness in courting foreign investors by Advisory Services of the World for information and relationship management. internally separating the two functions. Bank Group. It discusses practical Funding sources may see such investments as considerations and approaches duplicative and resist allocating the necessary resources, so this is a crucial area for lobbying by References for implementing reforms that IPI managers. A promotion unit can only succeed aim to improve the business with the full support of its chief executive and Javorcik, Beata, and Torfinn Harding. 2010. environment. The findings, board members. Roll Out the Red Carpet and They Will Come: interpretations, and conclusions Investment Promotion, Information Asymmetries in this note are those of The Board of Investment of Mauritius is one of and FDI Inflows. Oxford University and Centre the authors and do not necessarily just two promoter-regulators among the top 30 for Economic Policy Research, London. national IPIs for promotion worldwide, according reflect the views of the Executive to the GIPB 2009 report. (The other is in Fiji.) Ortega, Celia, and Carlos Griffin. 2009. Directors of the World Bank or the In addition to clearly separating promotion “Investment Promotion Essentials: What Sets the governments they represent. and regulation efforts internally, the Board of World’s Best Investment Facilitators Apart from Investment has worked with the government to the Rest.” Investment Climate IN PRACTICE streamline the regulatory procedures it oversees, note, No. 6. Investment Climate Advisory About the Investment creating an easier investment climate to promote. Services, World Bank Group, Washington, D.C. Climate Advisory In recent years it has moved from screening and Services approving investments to a system of “silent UNCTAD (United Nations Conference on Trade approval” under which only a few types of and Development). 2001. The World of Investment The Investment Climate Advisory investment projects are subject to approval and any Promotion at a Glance: A Survey of Investment Services of the World Bank Group project not receiving notice of disapproval within a Promotion Practices. Geneva. certain period is considered approved. helps governments implement ––––– . 2010. “UNCTADStat: Foreign Direct reforms to improve their business In addition, the Board of Investment issues Investment Stocks and Flows, 1980–2009.” environments and encourage and licenses for immovable property and free ports. In Database. http://unctadstat.unctad.org. retain investment, thus fostering May 2010 applications for these licenses were put competitive markets, growth, and online, providing investors with an exceptionally World Bank Group. 2009a. Global Investment job creation. Funding is provided convenient, transparent process while allowing the Promotion Benchmarking 2009: Summary Board of Investment to dedicate fewer resources to Report. Investment Climate Advisory Services, by the World Bank Group (IFC, regulation and more to promotion. Washington, D.C. MIGA, and the World Bank) and over 15 donor partners working ––––– . 2009b. “IPI Characteristics Survey: through the multidonor FIAS Conclusion Providing Information to Potential Investors.” platform. Unpublished survey. Investment Climate FDI fosters economic growth and creates jobs, Advisory Services, Washington, D.C. so investment promotion is crucial to national development. However, FDI promotion efforts ––––– . 2010a. Doing Business 2011: Making can be costly, and countries must take great a Difference for Entrepreneurs. Report. World care to ensure their success. Separating FDI Bank and International Finance Corporation, promotion and regulation clarifies staff roles and Washington, D.C. responsibilities and is now the standard for the world’s most successful IPIs. Though many of ––––– . 2010b. Investing Across Borders 2010. the countries that have created IPIs in the past Report. Investment Climate Advisory Services, two decades have combined these functions, it is Washington, D.C. possible and preferable to change course and assign Investment Climate In Practice 7 International IIIFC I Finance Corporation World Bank Group World Bank Group THE WORLD BANK Multilateral Investment Guarantee Agency WWW.WBGINVESTMENTCLIMATE.ORG