Geneva, October 16, 2014
“While the financial meltdown caused the immediate slump for the reduction of world FDI inflows since 2007, it brought with itself a heightened sense of distrust, insecurity and uncertainty. This increased the worldwide interest in the relationship between uncertainty and investment“, said Pradeep S Mehta today in Geneva.
Mehta, the Secretary-General of the India-based think-tank CUTS International was speaking at a side event to the UNCTAD World Investment Forum organised by CUTS and IEA Kenya on the theme “Policy Uncertainty Impedes Investment”.
Evidence points to inverse relationship between policy uncertainty and the level of investment. While political and regional milieu play their part, policy and regulatory prescriptions at domestic and international levels substantially influence uncertainty, thus impacting investment.
“Overall, forging a political consensus on core economic policy issues at the domestic level, in every country, is very important if policy uncertainty is to be tackled and sustainable development to happen”, said noted investment expert Prabhash Ranjan, Assistant Professor at the South Asian University.
The positive example of Mauritius provided insights on ways low and middle-income countries could tackle policy uncertainty and attract investment. In 2006, Mauritius adopted the Business Facilitation Act with a view to provide an enabling and rules based regulatory framework.
This has led to ambitious economic reforms for improving the investment climate and the ease of doing business, contributing in speeding up the pace of diversification of the economy.
“As a result, the influx of FDI which averaged US$33mn annually for several years up to 2005, rose significantly thereafter until reaching a peak of US$679mn in 2012”, said Ken Poonoosamy, President of the Mauritius Board of Investment.
Rajneesh Narula, Director, John H. Dunning Centre for International Business, Henley Business School, remarked that foreign investors, and in particular TNCs, are able to mitigate high risks and to exploit market imperfections created by uncertainty much better than domestic investors.
More than uncertainty (e.g. lack of information), it is instability and unpredictability that deter investors when regulations and their enforcement changes rapidly. In this regard, he noted that political instability is often a factor of unpredictability.
“Some of the countries which attract most FDI, like Korea and China, are successful not because their investment policies are the best but because they are stable”, he said. This was echoed by Anca Radu of the European Commission, who agreed that “many investors may find themselves able to cope with a less friendly investment climate, if they can have a certain visibility over the changes that they should expect”.
“While it is obvious that the instability of the domestic framework can damage FDI, it may be interesting to assess if and how the ambiguities in investment agreements can impact on the level of FDI”, she said in responding to comments from the audience.
CUTS International and the Institute of Economic Affairs (IEA) Kenya organised this side event at the UNCTAD World Investment Forum on the subject of uncertainty and investment, with the objective to develop a programme agenda aimed at identifying specific causes of policy and regulatory uncertainty, measures to address these same, and developing a roadmap for working with relevant stakeholders to put the prescriptions into practice.
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