Policy Instruments Government Uses to Promote Foreign Direct Investment

Policy Instruments Government Uses to Promote Foreign Direct Investment

There is no question that foreign direct investment (FDI) is a major requirement to achieve economic growth that is sustainable. It goes further than financing because FDI is an instrument for rapid, efficient best practices adoption and cross border transfers. Though this is the case, foreign direct investment comes with preconditions and host countries don’t reap all FDI benefits automatically.

Just as is the case with other businesses, foreign investors have the goal of making profits. Hence they go to places where they can enjoy the highest level of profitability and they apply their best practices only when it is advantageous to them not necessarily for the best of the country. Consequently, the governments have to come up with policy instruments that are effective.

The three key instruments used by governments are discussed below:

Investment promotion agencies

The question on the degree of resources to be directed to investment is a legit one. Countries such as Russia, Brazil as well as China have not only done well at attracting FDI but they continue to attract investment without promotion. This is true in countries that have large natural resources or domestic markets. However, for small countries and those suffering from perception require promotion to boost inward foreign direct investment. Policy makers therefore have to take two important factors into consideration and these include:

  • The proper investment mix to use on the basis of the fitting promotion strategy for investment
  • The fitting organizational structure to use for promotion investment

The most suitable strategy is one that addresses what will be promoted as well as how it will be promoted and a framework needs to be used to outline each aspect.

Investment codes

In the twentieth century, majority of countries, especially transition and developing economies turned to use of investment codes for purposes of governing FDI treatment. Such laws just don’t cover foreign investment but domestic as well. Therefore, they can only be as good or awful as their policies. There was a time when governments’ exercised caution about FDI as such they applied restrictive codes which subjected investors to stringent restrictions. Most countries have recognized the benefits of foreign direct investment as such they improve regulations for purposes of attracting additional investment. Investment codes, at the very minimum guarantee investors:

  • Will not suffer any form of discrimination by host country
  • Will be in a position to transfer, dividends, profits as well as funds easily and freely
  • Will not get expropriated without acquiring proper compensation
  • Can resort to use of international arbitration for purposes of settling disputes with the host country or local firms.

Tax incentives

The world has become more competitive as such FDI needs to be carried out competitively. Therefore, governments use fiscal incentives to attract multinational companies.

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