Investment Climate

July 8, 2015


Improving the business climate and encouraging investment
  • A vibrant private sector is the main engine of sustainable economic growth and employment and an important pathway out of poverty. But governments establish the climate in which businesses operate. Business regulations that create a level playing field and provide strong property and investor protections are essential to a thriving private sector.
  • Productive private sector investment is an important component of competitiveness and growth strategies for developing countries. Attracting foreign direct investment, in particular, helps to link a country’s domestic economy to global value chains in key sectors.
  • The World Bank Group is a global expert in reforms to improve the business climate in developing countries and foster investment growth. The Bank Group’s work focuses on reforms to address factors underlying client performance in global benchmarking products like Doing Business and on improving overall regulatory quality and effectiveness.

Investment climate teams of the Bank Group’s Trade and Competitiveness Global Practice provide advice and technical assistance to governments seeking to generate private sector cost savings, investment, trade flows, and jobs. This work helps governments implement reforms to improve their business environments and encourage and retain investment, thus fostering competitive markets, growth, and job creation. An increasing focus of investment climate work is the imperative to connect local businesses to global markets and multinational enterprises where new technologies, innovation, and managerial practices are exchanged. The emerging importance of global value chains in explaining international trade and investment points to the need for an increased emphasis on sector-specific reforms to support greater outcomes in terms of investment and enterprise growth.

Five key objectives define the effort to help developing countries improve their investment climate:

·         Opening and promoting effective markets.

·         Improving government-to-business service delivery.

·         Reducing business costs and risks.

·         Enhancing regulatory transparency and implementation.

·         Fostering business growth and upgrading.

Expanding the Impact of Effective Regulatory Reform

All investment climate work includes cross-cutting elements that focus on economic integration, jobs, information and communications technology, inclusiveness and gender, and business growth and small and medium enterprises. Work with client governments is based on five key operating principles: benchmarks and analytics to spur reform; responsiveness; enabling and connecting integrated solutions; incubation and innovation of ideas; and making impact.

Business regulatory reform can have maximum impact when reform is undertaken in a coordinated manner. For example, encouraging new firm formation depends on business entry regulations and related factors, including land regulation, taxation, and labor regulations. Government regulations play a decisive role in creating a predictable, safe enabling framework for firms while efficiently protecting consumers, public health, and safety.

Good regulatory practice focuses on the systematic application of tools, institutions, and procedures which governments can mobilize to ensure that regulatory outcomes are effective, transparent, and inclusive. These can include ensuring that businesses and entrepreneurs can gain easy access to the provisions of those laws and regulations that are in force, and that they receive timely notification of new and proposed regulatory measures. A key aim of reforms is to reduce the burden of starting and licensing a business. Relevant tools may include:

·         Diagnostic assessments and development of reform recommendations, such as inventories of business regulations and procedures, stakeholder consultations, legal review, and mapping of business processes.

·         Institutional reform, for example, the establishment of clear and transparent legal mandates for regulatory agencies, and improved coordination across regulatory agencies.

·         Deployment of risk assessment and risk classification tools to focus regulatory oversight.

·         Provision of regulatory information that is accessible, reliable, and timely.

·         Promotion of regulatory compliance through incentives, guidance, and strategic communications campaigns.

·         Development of e-registries and transactional portals for regulatory service delivery.

Attracting Foreign Direct Investment and Maximizing Impact for Local Economies

FDI brings not only investment and jobs but also increased exports, supply chain spillovers, and new technologies and business practices. Realizing these benefits requires clear and effective implementation of investment strategies and policies that respond to the realities and aspirations of a particular country. As a critical part of this, countries need to define their value proposition as an attractive investment location and to proactively market investment opportunities to investors in sectors and subsectors, highlighting their comparative advantages relative to other locations. Clear strategies and effective marketing are particularly important for countries with little track record of attracting FDI, or a reputation as difficult places to invest.

Support to client governments focuses on improving their investment policy framework, and maximizing the effectiveness of investment promotion efforts. This includes setting priorities to design coherent and concrete investment policy and promotion reform agendas at both economy-wide and sector levels; helping attract, facilitate, retain, and maximize positive spillovers of FDI into the domestic economy. Investment climate teams work with client governments to improve the effectiveness of policies aimed at attracting FDI. This work includes streamlining investment procedures, reducing risk through measures to prohibit unlawful expropriation and arbitrary actions, and implementing nondiscriminatory treatment of foreign and domestic investors.

Recent Projects

Costa Rica was a top 10 reformer in Doing Business 2013, with reforms delivered through partnership with the Bank Group. Innovations have included the launch of an online one-stop shop for starting a business and an electronic platform for construction permitting. A new secured transactions law has been enacted to facilitate access to credit. Côte d’Ivoire has been ranked as a top 10 reformer in Doing Business for two consecutive years. Working with the Bank Group, the government has implemented 16 reforms in business start-up, registering property, enforcing contracts, and other areas. It also has adopted regulations to reduce explicit or implicit discrimination against female entrepreneurs.

Investment climate teams have worked with the state of Rajasthan, India, to streamline business regulations and simplify regulatory requirements for businesses in the region. On the basis of recommendations presented to the government, new regulations were adopted providing for self-certification for annual inspections, extending the expiration of business licenses from five to ten years, and eliminating mandatory annual license renewals. The Bank Group also helped define Rajasthan’s competitive proposition in the automotive, solar power manufacturing and IT-enabled services sectors, reforming the investment environment to make each sector more attractive, and undertaking targeted sector outreach. This helped create a pipeline of approximately $2 billion in investment in these sectors.

In Turkey, reform of FDI policy and legislation led to the removal of minimum investment requirements and elimination of screening for FDI approvals. A simple registration system was established instead. Three years after the reform FDI inflows increased by a factor of 10. In Mongolia, development of a new investment law entailed the elimination of screening for FDI approvals. The introduction of good practices in investor protection boosted investor confidence by protecting more than $10 billion of existing FDI stock from being subject to expropriation.

Regional projects can have a powerful leveraging effect on the benefits of reform. In the East African Community (EAC), a scorecard assessing compliance with regional obligations boosted national reform efforts. For example, in Tanzania the scorecard triggered the liberalization of regulations that had restricted the movement of capital.

By helping to bring together private sector investors with governments seeking to promote growth, the Bank Group has played a direct role in helping to generate investment and create jobs. In Brazil, the Bank Group helped build the capacity of APEX (Brazil’s investment promotion intermediary) and two state investment promotion intermediaries in Para and Pernambuco, northern frontier states, to undertake targeted investor outreach. This led to the attraction of over $1.3 billion of new investment, of which some 70 percent went to the two frontier states. 

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Christine Qiang

Practice Manager, Investment Climate