Wednesday
January 19
2011

Oscar Abello

Investing Without Borders: Impact Investing and the New Indicators for FDI

Imagine you’re a policymaker in a low-income country seeking to attract more foreign direct investment (FDI).

You might seek out impact investors looking for pro-poor business models with explicit social goals as well as economic. Or you might be courting a major international IT firm or a manufacturing conglomerate looking to access the bottom of the pyramid for new customers or new suppliers. Or perhaps you’ll target run-of-the-mill investment bankers looking for some emerging markets action to boost their performance for the year and get that bonus they’ve been craving.

No matter what kind of investor you want to attract, there are many institutional factors that affect all FDI just the same, and many of these factors are captured in the World Bank’s new Investing Across Borders (IAB) indicators.

The IAB indicators cover 87 countries, incorporating survey data from more than 2,350 lawyers, accountants, consultants, chambers of commerce staff, law professors and other experts with practical knowledge of FDI deals in their countries. IAB staff sought out respondents who represent some of the local expertise that foreign investors seek in order to gather information and make the necessary steps to complete any given FDI transaction. Similar to the World Bank’s Doing Business reports, subsequent IAB reports will give savvy policymakers an internationally-recognized platform to court new investors.

To make sense of over 1,200 data points per country, the indicators are divided into four thematic areas based on four common questions facing foreign investors, be they impact investors or otherwise:

  • Which sectors are more or less open to foreign investment;

  • How easy is it for foreigners to establish a new firm or subsidiary;

  • How easy is it for foreigners to acquire property to build manufacturing or office space;

  • How easy is it to settle commercial disputes which inevitably arise in the course of business.

Do any NextBillion readers have stories of such institutional factors stifling or preventing impact investment deals? If so, please leave a comment below.

Bureaucrats administering FDI transactions typically have much discretion when it comes to the time it takes to process paperwork. Imagine the difficulty facing Angola’s 263 days to register a business as a foreign owner. Or imagine having to wait an extra 27 days – the global average – for government approval of a foreign investment. Opaque and corrupt land and property administration can present obstacles to scaling up when the time comes to physically expand a business. Ineffective out-of-court commercial arbitration can be an unforeseen pitfall for microfranchise operations that carry fraud and brand-theft risks as more microfranchisees emerge who aren’t socially tied to the original owner.

These risks aren’t anything new to impact investors or BoP marketeers. The IAB indicators are simply a snapshot of what foreign investors can expect from different countries and sectors where they looking to initiate new business. For policymakers interested in developing their BoP markets, these expectations are pivotal – particularly with growing mainstream attention on impact investing over the next few years. Policymakers way want to tout their strengths and improve their weaknesses in pursuit of a growing economy and more equitable opportunity.

Of course, not every policymaker or government is equally welcome to new investment. As the IAB report notes in its introduction, “Foreign investment has also helped break up cozy local oligopolies and cartels.” While it’s not true of all FDI deals, many deals help to create new firms and industries that disperse economic power beyond the powerful and politically-connected. Throughout the history of political progress, new firms and industries have repeatedly helped to advance political and social goals by economically empowering wider groups of people. Some policymakers may come to resist “invasions of foreign capital” or use other labels to deny opportunities to their citizens.

Though only partial measures of the topics they cover, and not without other limitations, the IAB indicators provide a useful glimpse into the discussions between foreign investors and local experts in target countries. As competition for impact investment heats up, and such discussions become more frequent and more detailed, policymakers’ reputations will be put to the test. Nobody is in the impact investing or BoP field because it’s easy, but given the choice between policymakers that are working to reduce barriers to foreign investment and policymakers that aren’t, which is more preferable?

Categories
Entrepreneurship
Tags
Base of the Pyramid, impact investing