Using Investment Policies to Stimulate Global Value Chain Participation
Investment policies aim to solve specific market or government failures aligned with these determinants (figure 4.1). To bring in FDI, policy makers may focus on regulatory reforms to reduce restrictions or procedural burdens for investors. They also may aim to provide public goods (such as high-quality infrastructure) to MNCs within a special economic zone (SEZ). In other cases, foreign investors may simply be made aware of a country’s endowments by the country’s investment promotion agencies (IPAs). A government can also use investment incentives to entice MNCs to resettle in a country by reducing the MNCs’ tax burdens. Government policies can also help domestic firms internationalize and upgrade by learning from their engagement with foreign firms. As shown in chapter 3, increased exposure to foreign firms (such as MNCs) can raise domestic firms’ productivity and help them obtain the production capabilities and foreign market knowledge needed to compete internationally. Governments are willing to invest their resources to stimulate such positive externalities. However, domestic firms’ efforts to internationalize may be held back by low exposure to MNCs and global markets and by the firms’ own limited production capacity (figure 4.1). Integrated support programs combining information provision (to increase exposure), matchmaking (to overcome coordination failures), and temporary subsidies (to compensate MNCs for the expected social benefits of these interactions) are tailored to promote learning from international firms by encouraging interaction.
Foreign direct investment policy and promotion Necessary conditions To attract FDI, governments need to meet a set of necessary minimum conditions. The 2019 World Bank Global Investment Competitiveness (GIC) Survey of the locational decision-making factors of 2,500 MNCs shows that political stability, macroeconomic stability, an enabling legal and regulatory environment, and local talent and skills are the top four considerations in foreign investors’ decision-making processes (figure 4.2). Physical infrastructure and the ability to export also rank highly. Basic technical capabilities for the GVC segments in the FDI host country are also important and are reflected in the availability of talent and skills, supply chain c oordination, and local input sourcing from capable suppliers. Without these necessary conditions, a country is unlikely to participate in GVCs. In all five qualitative case studies included in part II of this report (chapters 6 to 10), the factors mentioned were present and were deemed crucial for MNCs to include the studied countries in their long lists of potential locations. A large body of literature and survey results confirms that governments need to address these minimum conditions to be considered attractive investment destinations and to attract opportunities for local firms to enter GVCs (see Crescenzi, Harman, and Arnold [2019] for an overview of this literature). Meeting the necessary macroeconomic, infrastructure, and endowment conditions is often not sufficient to attract FDI. Depending on the type of GVC and the specific GVC segment a government seeks to enter, the government may discover that it needs to use more specific policy instruments to attract and leverage the intended FDI (Moran 2014).
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