Key Learnings from the World Bank’s Inaugural Global Investment Competitiveness Report

Friday, November 24, 2017

Low tax isn’t the critical factor. Companies are more likely to invest in developing countries when they understand the political risks and where there is a fair legal and regulatory environment – including transparency and the will to fight corruption.

On Monday, 31 October 2017, the UK Foreign & Commonwealth Office hosted a roundtable to discuss the outcomes of the World Bank’s inaugural Global Investment Competitiveness Report. The meeting was attended by multinational corporates, UK government departments including the Cabinet Office and related non-governmental organisations.

Background

In 2016, global foreign direct investment (FDI) reached USD 1.6 trillion – more than the GDP of Spain during the same period. For many developing countries, FDI has also become the largest external source of potential economic growth and prosperity, significantly surpassing official development assistance (ODA).

To understand why investors chose certain developing countries (and not others), including the factors affecting different sectors, the World Bank surveyed 754 international business executives involved in multinational corporates in such countries between February and June 2017. The survey aimed to provide insight into the relative importance of risks and opportunities that weigh on investment decisions.

Key Findings

Using the survey as a basis, the report’s key findings include:

  • ‘Political stability’ and the ‘legal & regulatory environment’ were the most significant factors in foreign investment decisions
    87% of respondents thought that ‘political stability and security’ were either ‘critically important’ or ‘important’. This was closely followed by 86% of respondents who thought that the ‘legal and regulatory environment’ (including transparency and corruption) was wither ‘critically important’ or ‘important’. 
  • By contrast, low tax rates, often thought of as the key enticement for investment, was not ranked as highly
    Only 58% of respondents considered low tax rates ‘critically important’ or ‘important’. Interestingly, within manufacturing, 42% thought low tax rates were only ‘somewhat important’ or ‘not important at all’. Further investigation by the World Economic Forum indicated that local tax rates are primarily an issue in investment decisions where more than one developing country is being considered for the investment opportunity – typically at a late stage in the investment decision.

Outcomes

The report should assist host countries target the areas of development that really make a difference to inward investment and trade. This could include prioritising a fairer legal system and removing corruption from key business needs – for example in: licensing, customs, access to local services and the acquiring of visas. At the same time, the report may also help businesses across all sectors who are re-considering investing in countries they may have overlooked.

Key Learnings for Compliance

What are the key learnings that corporate compliance officers should take from this?

  1. Take a broader approach to due diligence
    Pre-investment due diligence should consider risks in the wider business environment, including the legal and regulatory framework – as well as researching the integrity of specific third parties.

  2. Shape discussions with host countries appropriately
    When discussing potential investments with the inward investment agencies of host countries, be sure your organisation looks beyond tax incentives to the state of the wider business environment. If a lack of transparency purveys, then an investment may struggle in even the most tax-lean environment. 

Exiger can help your company make better-informed investment decisions with a combination of AI-based automated due diligence technology, discreet source inquiries (SmartSource) and expert anti-bribery and corruption advice.

 
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