APEC Investment Facilitation Action Plan
By Roy Nixon 1
2009 will throw down some serious challenges to APEC's continuing commitmentsto create a more prosperous region based on freer and more open trade andinvestment.This article aims to place the importance of APEC's InvestmentFacilitation Action Plan (IFAP) in the broader context of the global financialcrisis.
Investment flows trending down as economic growth contracts
Investment has been the major driving force for developing country growthover the past five years contributing almost half of the increase in domesticdemand. With economic growth contracting sharply, forecasters of globalinvestment flows not surprisingly are in unison about the basic downwardsdirection in 2008 and 2009 - variations only exist about how big the drop willbe, the impact on different types of investment activity and how protracted thedownturn.. Early forecasts by UNCTAD were 'optimistic' -it estimated 2008foreign direct investment (FDI) flows to be about $1,600 billion, down 10percent on 2007 - still the second highest on record. This fall reflects a 29percent decline in merger and acquisition activity - a major component of FDI -in the first half of 2008. 2
Other observers such as the Paris-based Organisation for EconomicCo-operation and Development (OECD) are more pessimistic: predicting a declinein FDI of 13 percent in 2008, and an even more grim outlook for 2009. The OECDargues that the composition of international capital flows to developingcountries changed dramatically between 1999 and 2007, with the share of FDIfalling while portfolio flows and private debt increased. In 1999, FDI comprised87 percent of the $US204 billion in total capital inflows to developingcountries. By 2007 total capital inflows to developing countries were $US1,025billion, with FDI comprising 46 percent .
"This diversification has been a positive development, and reflects a number of factors, including strong growth in developing countries, accompanied by high rates of return on investment, as well as the sound investment frameworks that developing country governments have been putting in place. However, under the current circumstances,this increased reliance on portfolio flows and private debt could result in a sharpcontraction of international capital flows for many developing countries." 3
Other determinants of FDI flows
In his forecasts of FDI flows, Karl P. Sauvant, Executive Director of theVale Columbia Center on Sustainable International Investment, adds two furtherdeterminants - the regulatory framework and investment promotion.4Sauvant argues that the expected decline in FDI flows can be softened if Asianeconomies and China in particular can stimulate domestic demand, therebyattracting more foreign investment.
"This possibility depends on the continuous openness of the regulatory framework forFDI, especially in developed countries."
Sauvant further argues that persuading governments to maintain a welcominginvestment climate will be an important function of investment promotionagencies (IPA). This 'policy advocacy' role has been highlighted and discussedin APEC, most recently in a seminar hosted by the Peruvian IPA, ProInversion, inLima in May 2008. This Seminar also discussed other important elements of goodgovernance in investment promotion including investor aftercare services, therole of public-private dialogues and promoting corporate social responsibilitypractices.
Role of policymakers
The World Bank in its briefing to the G20 Finance Ministers' Meeting inBrazil in November 2008 notes that if investment does indeed bear much of thedirect impact of the global financial crisis, then:
"The challenge for policymakers is not just to prevent the escalation of the crisis and to mitigate the downturn, but also to ensure a good starting position once the rebound sets in."5
The response of policymakers will be varied and needs to adapt to theparticular economic circumstances of their economy. As far as investment isconcerned, the World Bank says:
"This means responding rapidly and forcefully to signs of weakness in theirfinancial sectors... [it also means pursuing] infrastructure investments thataddress bottlenecks that have become binding constraints on long-termsustainable growth... It also means continuing to improve the investment climatefor private investment [and] to increase the flexibility of the private sectorto adjust to changing market conditions (business entry and exit)."
The World Bank goes on to argue that multilateral cooperation is essential toaddress major global challenges, and to prevent sudden and disorderly marketreactions from creating pressure for protectionist and inward-looking policies.
What is the IFAP and how can it help facilitate investment?
Investment facilitation refers to actions taken by governments designed toattract foreign investment and to maximise the effectiveness and efficiency ofadministration through all stages of the investment cycle (including fordomestic investment).
To reinforce APEC's work in this area, APEC Economy Leaders meeting in Sydneyin 2007 agreed to the development of an Investment Facilitation Action Planaimed at the further promotion of investment in APEC member economies.6
The main objectives of the IFAP are to:
- strengthen regional economic integration;
- strengthen the competitiveness of, and sustainability of economic growth in, APEC's member economies;
- expand prosperity and employment opportunities in the APEC region; and
- make further progress toward achievement of the Bogor Goals.
The IFAP comprises eight principles that are intended to provide APEC membereconomies with a working framework for the kinds of provisions that constitutebest practice in investment facilitation.
Investment Facilitation Action Plan Principles
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Ultimately, the purpose of investment facilitation is to allow investment toflow efficiently and for the greatest benefit. Transparency, simplicity andpredictability are among its most important principles. The costs of opacity faroutweigh the costs of enhancing transparency. Investors look for an investmentenvironment that is stable, and that offers international best practicestandards of protection, including the swift and equitable resolution ofinvestment disputes.
A sound investment facilitation strategy ensures that all investmentapplications are dealt with expeditiously, fairly and equitably. Investmentfacilitation also requires creating and maintaining transparent and soundadministrative procedures that apply for the lifetime of the investment,including effective deterrents to corrupt practices.Finally, investmentfacilitation is enhanced by the availability of quality physical infrastructure,high-standard business services, talented and flexible labour forces, and thesound protection of property rights.
To assist APEC member economies develop better investment facilitationstrategies the IFAP includes a menu of collective actions under each of theeight investment facilitation principles.
An example of this menu for one of the eight principles - Principle#4: Improve the efficiency and effectiveness of investment procedures - ispresented below.
| Principle #4: Improve the efficiency and effectiveness of investment procedure Specific Actions
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Over the three year period 2008-2010, APEC's aim is to work constructively onas many specific actions as possible, with an emphasis on three main areas:e-transparency,reducing investor risk and simplifying business regulation. Projects emphasisingcapacity building to address some of the collective actions in these three areasare already being put forward by APEC member economies and more will follow.
An important partner in this work is the APEC Business Advisory Council (ABAC).Forsome time, the APEC business community has been urging APEC Leaders andMinisters to step up work on investment facilitation to the same level ofintensity as APEC's work on trade facilitation.
The IFAP represents an important building block in this new approach andongoing consultation with the business community will be a feature of the IFAP.
Some final thoughts
APEC's investment facilitation work cannot be considered in isolation fromAPEC's broader business facilitation activities and its increasing focus onstructural economic reform, so-called behind-the-border initiatives, to bolstertrade and investment in the region. This includes areas such as domesticregulatory reform, corporate and public governance, critical infrastructure andcapacity building.
The IFAP has the potential to deliver some important improvements to theinvestment climates in APEC member economies but policymakers must be ready toaddress the challenges posed by deteriorating global economic conditions.Policymakers will need assistance from APEC in explaining to best effect thebenefits of expedient IFAP collective action. In the spirit of the well-knownmaxim "what gets measured, gets done", an important contribution in the comingsix months will be the development of a reporting and monitoring framework forthe IFAP, including key performance indicators.
At this juncture, it is critical that economies remain open, that markets bewell-regulated and that all efforts are pursued to promote trade and investmentliberalisation. The IFAP has a role to play in achieving these ends:
- by promoting continuous openness of the regulatory framework for FDI, especially in developed economies;
- by reinforcing the important function that investment promotion agencies need to play in persuading governments to maintain a welcoming investment climate;
- by pursuing infrastructure investments that address bottlenecks; and
- by continuing to improve the investment climate for private investment to increase the flexibility of the private sector to adjust to changing market conditions so as to ensure a good starting position once the global economy rebounds.
1 The author is the Convenor of the APEC Investment Experts Group andan official of the Australian Treasury. The views in this article are those ofthe author and not necessarily those of the Australian Treasury.
2 UNCTAD (2008), World Investment Report 2008: TransnationalCorporations and the Infrastructure Challenge. Available at http://www.unctad.org/en/docs/wir2008_en.pdf
3 OECD (2008), OECD Investment News: Results of the Work of theOECD Investment Committee, Issue 8, November 2008. Available at http://www.oecd.org/dataoecd/56/43/41671320.pdf
4 Sauvant, K.P. (2008), "Columbia FDI Perspectives: The FDIRecession Has Begun", Vale Columbia Center on Sustainable InternationalInvestment, No. 1, November 22, 2008. Available at http://vcc.columbia.edu/pubs/documents/KPSPerspective-FDIrecessionhasbegun_000.pdf
5 World Bank (2008), "Global Financial Crisis and the Implicationsfor Developing Countries," Submission to the G20 Finance Ministers' Meeting, SaoPaolo Brazil, 8 November, 2008. Available at http://www.worldbank.org/html/extdr/financialcrisis/pdf/G20FinBackgroundpaper.pdf
6 The full text of the IFAP is available at: http://www.apec.org/apec/apec_groups/committee_on_trade/investment_experts.html