15.12.2007 - Investment Promotion and Business Linkages (Special Session to train Angolan delegates)

Investment Promotion & Business Linkages
Special session: Promotion strategies for Angola

(1st speaker: Prof. Mike Pfister)

According to the professor, the main way for foreign direct investment (FDI) to benefit developing countries is through linkages between foreign firms and local firms. These “linkages” can be divided into different stages:

Stage I (weakest): Ex. Angola: foreign presence of the company BASF – few and only basic linkages at a local level because goods produced abroad

Stage II: Some domestic production, more linkages…

Stage III: Regional hub (Ex. Nestlé Nigeria is not only supplying Nigeria, but also the rest of the region, concentrating production in Nigeria, thus offering increased possibilities of linkages…)

Stage IV (strongest): World Product Mandate (Ex. Daimler Chrysler in Brazil is integrated in the global value chain: these are the most strategic and competitive type of linkages) è this stage can lead to the highest benefits for a country and thus to the strongest type of linkage!


What are linkages? Transnational Companies invest in “host countries”, building up their own business there while working with secondary suppliers, all the way down to 3rd level (local manufacturers) è the linkages refer to the production interdependences between the foreign company and local suppliers.

Example: In the textile industry (garments “supply chain”), the highest level of added value is in the final level, so it is strategically important to retain this part of production in a country… Linkages can also incur in low-income countries and/or low-productivity sectors of the workforce…

Public policies matter very much! Optimally, their goal is strengthening SME’s and strengthening FDI attraction. One must attract the RIGHT sort of investment however, and target SME investment. For example, a small company working with a large company can learn a lot (if it can absorb the knowledge brought in by the large company).

A successful example of linkage policies: exemption from corporate income taxes for 5 years if a foreign company promotes technological investment (Malaysia).

One can also use a sub-national approach (South Africa: Durban, Malaysia: Penang, Mexico: Monterrey – IT sector)

Usually, public-private partnerships help enforce linkages

Project in Brazil: UNCTAD – GTZ – Instituto Ethos – Fundação Dom Cabral - SEBRAE è “Projeto Vínculos” (“Linkages project”)

Multinationals will work with and TRAIN suppliers… However, they will not go into management issues. So, small suppliers must be able to adhere to contracts in order for linkages to be able to be built up successfully.

Implementation of the project: Organize the demand of large companies for local suppliers, facilitate communication,…

There 3 levels of government intervention that can encourage linkages: 1) (Public) policy level, 2) institutional level (Brazil: SEBRAE, SENAI, SESI,…), 3) Micro level: Companies (Individual transnational corporations and SMEs)

In Brazil, the steering committee of the linkages project consists of: UNCTAD, GTZ, SEBRAE, FDC, ETHOS

Examples of linkages projects developed in Brazil:
Project 1 (Bahia): Bosch, Veracel, Lyondell with 30 SMEs // The steering committee has helped in upgrading in process management

Project 2 (São Bernardo do Campo): BASF, 10 SMEs… Upgrading in safety, health & environment…

Linkages / Investment Promotion:
Often, investment promotion agencies (IPAs) can be crucial!! The IPA needs to have a database of suppliers, organize matchmaking meetings between multinational corporations (MNCs) and SMEs and host the linkages center.


2nd speaker: Joachim Karl (Sectional Investment agreements, UNCTAD)

The sectional investment agreements (SIA) has 3 pillars of work:
- Information Provision through International Investment Agreement (IIA) databases è See Internet database concerning which investment agreements which countries have concluded, dispute settlement system…
- Policy Research and analysis (Ex. Study to be published on the past 60 years of investment agreements)
- Technical assistance

Core elements in international investment agreements (IIAAS)
- Objective: The promotion & protection of foreign investment
- Investment promotion through protection
- Core protection provisions
o Principle of fair and equitable treatment
o Principle of non-discrimination – national and “most-favored-nation” treatment (NT/MFN)
o Expropriation (definition of conditions, compensation rules…)
o Transfer of funds
o Dispute settlement

The network of IIAS:
- Bilateral investment treaties (BITs)
- Free trade agreements with investment provisions (FTAs)
- Multilateral agreements dealing with investment (GATS, TRIMS, TRIPS)
- Regional integration agreements (examples: EU, MERCOSUR, CARICOM, COMESA, ASEAN,…)
è Today, a total of ~2500 investment treaties exist, and about 70 agreements made per year.

Top 10 signatories of BITs, end of 2006: 1. Germany, 2. China, 3. Switzerland, 4. UK, 5. Egypt, 6. Italy, 7. France, 8. Netherlands, 9. Belgium + Luxemburg, 10. South Korea

(USA not in list because huge country with lots of internal investment; also, it started later than European countries – spent much time developing NAFTA and leaving behind BITs)

Types of BITs: 40% developed with developing countries, 27% developing – developing countries (“South-South” agreements) è Enormous increase in South-South agreements since the beginning of the 1990s

Proliferation of FTAs with investment provisions since the beginning of the 1990s

Participation of LDCs in the IIA network
- Over 400 BITs
- Regional integration groups (ASEAN, COMESA, ECOWAS, SADC)
- The involvement of LDCs in bilateral FTAs remains limited

Top 10 LDC’s, BITs concluded:
Yemen, 2. Sudan, 3. Bangladesh, 4. Ethiopia…

BITs concluded by Angola with Cape Verde, Germany,… (5 signed, only 2 ratified)

Number of investor – state dispute cases (end 2006): huge rise in dispute cases (slowdown in 2006)

“Spaghetti-Ball” of international investment agreements, involving whole world… Timor Leste doesn’t appear to be involved in barely any of the IIAs.


Some characteristics of the existing IIA universe:
- universal (every country is involved in it)
- atomisation (very different from the trade field with the WTO and multilateral rules to which everyone adheres; all treaties are still negotiated bilaterally, making them difficult to understand, sometimes even contradictory to each other
- multilayered and multifaceted (Countries sign bilateral as well as regional agreements; there are more and more integrated approaches to economic cooperation)
- Investment PROMOTION is pursued indirectly through investment PROTECTION.
è The atomisation leads to isolation of countries because the network is so complicated..

Coping with the complexity of this system is a major challenge for all countries, particularly developing countries!
There are concerns that IIAs do not do enough to promote FDI.
However, IIA treaty making also offers opportunities for countries to become innovative and to seek specific approaches in furthering their development goals, for instance as far as investment promotion is concerned.

Investment Promotion in IIAs:
Some challenges that countries face today:
- There has been increase in investment disputes; some think protection goes too far while not achieving the desired result of higher investment flows è ex: “expropriation” originally conceived as formal claiming of ownership through a government, but often construed as a government simply regulating an investment, for example through environmental standards.. and firms interpret this as “expropriation” because they argue that their investment no longer makes sense due to the new rules!

All IIAs include:
- non-discrimination principle (National Treatment, Most Favored Nation Clause…)
- Fair and Equitable treatment
- Performance requirements (for example, investor only gets tax relief in certain conditions)
è These provisions give reassurance to foreign investors about their treatment, but also limit the discretion of host countries in designing investment promotion measures.

- Most IIAs do not contain any specific investment promotion provisions
- However, the minority that does include such provisions shows a great variety of approaches.

Some elements of investment promotion measures in IIAs:
- encouraging the organization of investment seminars, fairs, exhibitions,…
- Linkages between foreign investors and local firms
- fiscal or financial incentives (this can occur either through home or host countries!)
- Easing informal obstacles to investment (“red tape”)
- Big question: Are these legally binding provisions or not?

2 Main policy options for states:
- Improve GENERAL framework for foreign investments, or focus on INDIVIDUAL investments?

2 approaches to attracting investment:
- laissez-faire (just try to have a favourable general framework and hope that it will attract FDI)
- strategic investment policy: sector- or activity-specific promotion measures

Goals:
- gain competitive advantage in attracting FDI
- target specific sectors for FDI
- increase transparency (formalize existing measures, increase assurance for investment

Costs:
- may be expensive in financial or fiscal incentives (è capacity restraints for developing countries!)
- may result in “windfall gains” for foreign investors who would have come anyway, but will now have huge profits due to incentives, at the cost of their host country…
- Investment promotion provisions in IIAs are no guarantee that investment flows will actually increase

Investment promotion is not yet strongly developed in IIAs
However, even investment promotion makes no sense without sound domestic policies.

www.unctad.org/iia (IIA Databases, IIA Issues series “Pink Series”, IIA Monitor – 4 times a year, talks about recent developments)

In practise, there are often 2 levels.. an “umbrella” IIA, but then specific investment contracts between a company (ex. oil company) and a government, for big investments (“direct umbrella”


The Integrated Framework (IF)

3rd speaker: Céline Maccro

Trade as a catalyst of growth:
è The IF is open to all the LDC’s meeting certain criteria, it has 6 core agencies (IMF, ITC, UNCTAD, UNDP, World Bank, WTO) and about 20 donors that contribute…

Commerce is seen as an important factor of development.

$200-400 million over 5 years would be required (task force estimate)

What is needed at the Geneva level?
Steering Committee to provide overall policy direction, review progress and provide a platform for the exchange of experience
Board to provide oversight and policy direction

The IF in Angola
- Angola member since 2004
- Preliminary mission held in 2004
- DTIS started in October 2005
- DTIS National Validation workshop held in Luanda, 11-12 July 2007 in presence of the minister of trade, M. Muafumba and IF Focal Point, M. Lusevikueno (commerce minister); ANIP staff and private sector representatives were also there.

Tomorrow: action plans for Angola, strengths an weaknesses of Angola as an FDI location è opportunities arising from these strengths, companies in discussion for investments, opportunities for linkages & skill / know-how transfers,… //
Threats facing Angola coming from the weaknesses of Angola and competing FDI locations, what can be done to keep these threats from keeping FDI away…

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Workshop:

Angola’s opportunities in the global market for FDI:
Development of basic infrastructures (roads, highways, railways, hospitals and schools)
Specialization of human resources based on sectors
Tourism economy + agro-industry
Development of the integrated and supranational networks of telecommunications
Insertion of high-tech into the key sectors of the national economy

Angola’s main threats in the global for FDI:
Political instability / Dependence on the oil sector
Bad governance: excessive bureaucracy and corruption / natural and environmental threats due to the bad use of resources
Macroeconomic instability
Bad management of national assets & “brain drain” / Insufficient investment in the education sector
Absence of policies directed toward the domestic private sector / Lack of having established a stable regional market.


Interesting information for Timor-Leste:
Possibility of Distance Learning (in the “Train for Trade” program to help LDC’s increase their trade)
Train for Trade website (“Formação Portuária”, in Portuguese): è “A gestão moderna dos Portos” (how trade works, rules, how to run a port, customs rules & regulations,…)

Links to some of the material presented:
http://learn.unctad.org/course ….
http://learn.unctad.org/mod/resource/view.php?id=1936
http://learn.unctad.org/course/view.php?id=21

Objectives for Angola:
Develop training courses (“e-learning” courses!)
Educate people that can form Angolans
Organize national seminars to promote investment

- Nathan J. Wooden