Crafting inward investment policies for competitive advantage

By Samuel Tetteh TEI

As the world grapples with economic uncertainties, geopolitical tensions and shifting market dynamics, the imperative for countries to meticulously craft and execute strategic inward investment policies has never been more pressing. Inward investment policies and measures serve as the cornerstone of a country’s efforts to attract and retain foreign investment.

For instance, in a bid to bolster its economic growth, China initiated a 24-point strategy aimed at attracting foreign investment in 2023. The measures include improving access to green energy, ensuring equal participation in government procurement, ensuring participation in standard-setting and equal policy treatment, strengthening intellectual property rights, optimizing visa and residence procedures for foreign employees, improving cross-border data transfer procedures, Optimizing tax policies for FIEs, R&D and technological development.

Generally, inward investment policies and measures fall into three broad categories: (1) regulatory measures, (2) restrictions and (3) promotion and facilitation measures.

Regulatory measures

Regulatory measures include local content requirements, technology-sharing requirements, regulation of foreign personnel entry and other sector-specific regulations (including for example minimum capital requirements or mandatory licensing).

1. Local content requirements

Local content requirements (LCR) are a type of protection mechanism that aims to prevent the local industry from the negative outcomes of international trade. LCR may mandate that a certain percentage of a product or service must be sourced locally. These requirements usually aim to stimulate domestic industry, create local jobs, and foster economic development. However, LCR may also discourage inward investments by increasing costs, distorting market dynamics, and potentially violating international trade agreements. Balancing these factors is crucial for policymakers to effectively leverage local content requirements as a tool for economic development while minimizing adverse effects on foreign investment and trade relations.

1. Technology-sharing requirements

Technology-sharing requirements compel foreign investors to share their proprietary technologies or know-how with domestic partners or entities. This is aimed at fostering technological development within the host country and enhancing the capabilities of local industries. Governments may impose this as a condition for market entry, especially in sectors where advanced technology is vital, such as telecommunications or pharmaceuticals. For example, the agreement signed between the Rwandan government and the Africa Pharmaceutical Technology Foundation (APTF) in 2023 had a clear and coherent focus on technology transfer and knowledge sharing for capacity building and diversification within the pharmaceutical value chain.

• Regulation of foreign personnel entry

Governments regulate the entry of foreign personnel by imposing restrictions on work visas, permits, or qualifications. Stringent regulations may deter investors due to administrative burdens and delays in obtaining necessary permits. Conversely, streamlined processes for foreign personnel entry can attract investors seeking a business-friendly environment. Therefore, finding a balance between regulatory controls and openness to foreign talent is crucial for maximizing inward investment and economic growth.

• Other sector-specific regulations

Sector-specific regulations encompass a diverse array of rules and requirements tailored to specific industries or sectors of the economy. Examples include minimum capital requirements, mandatory licensing, safety standards, environmental regulations, and quality control measures. These regulations aim to promote sectoral development, ensure compliance with industry standards, protect public health and safety, and mitigate potential risks associated with certain economic activities.

Restrictions

Restrictions on ownership are typically meant to protect the domestic industry. Investment restrictions include total foreign ownership restrictions, partial ownership restrictions or joint-venture requirements, and screening procedures.

• Total foreign ownership restrictions

This refers to regulations that limit or prohibit foreign entities from owning a certain percentage or entirety of companies operating within specific industries or sectors. By limiting foreign ownership, governments aim to promote the growth and competitiveness of local businesses, retain control over critical infrastructure, and ensure that profits generated from economic activities benefit the domestic economy. While these measures aim to protect local businesses and preserve national sovereignty, they often result in limited foreign direct investment, restricted market access, and inhibited innovation and technology transfer. Ultimately, the effectiveness of total foreign ownership restrictions hinges on striking a balance between protecting domestic interests and fostering a conducive environment for international investment, innovation, and sustainable economic development.

• Joint-venture requirements

More common are requirements to set up joint ventures with local companies. Generally, JV require foreign companies to partner with local entities to establish a business operation or undertake specific projects. These requirements often stipulate that the local partner must hold a certain percentage of ownership in the joint venture, thereby facilitating technology transfer, knowledge sharing, and skills development. Joint ventures can also enhance market access for foreign firms by leveraging the local partner’s networks, expertise, and understanding of the regulatory environment.

• Screening procedures

Screening procedures involve the assessment and approval of foreign investments by regulatory authorities or government agencies to determine their compatibility with national interests, strategic priorities, and regulatory requirements. These procedures typically involve a review of various factors such as the nature of the investment, potential impacts on national security, economic benefits, and compliance with relevant laws and regulations.

Screening can either enhance or hinder a country’s attractiveness to foreign investors. Rigorous screening can boost investor confidence by providing transparency and safeguarding national interests, while selective promotion of strategic investments can drive long-term economic growth. However, complex and lengthy screening processes may create delays and uncertainty, potentially deterring investors and diverting capital to more investor-friendly destinations.

Investment facilitation and promotion measures

According to UNCTAD, investment facilitation and promotion measures represent more than half of the policies implemented to attract inward investment. Investment promotion policies include financial incentives in the form of tax incentives, loans and grants that can be (i) discretionary or subject to negotiation by firms with governments, (ii) conditional on certain criteria or (iii) not conditional (for example, for a specific industry or underdeveloped region).

Investment facilitation tools range from expanding information provided to investors, facilitating, and streamlining administrative procedures and requirements, and providing matchmaking services and aftercare services. The most important investment promotion tools, as highlighted in the 2022 annual IPA survey conducted by UNCTAD, are support for information and search, help to access direct tax incentives and support for value chain activities. Measures related to the regulatory framework, access to financing, support in interaction with governments and MNEs, ease of doing business, support in marketing campaigns and high-tech investment were highlighted by only a handful of respondents.

Samuel is a Trade Policy Analyst| Market Entry | Business Development [email protected]

 

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