Foreign direct investment and incentives: How to avoid wasteful strategies?

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World Free Zones Convention International Conference | Izmir

Date

21-22 April 2005

Category
OECD

17aprilInvestment_incentives_and_promotionWorld Free Zones Convention International Conference

Izmir, 21-22 April 2005

Mehmet Ögütçü[1]

Head, OECD Global Forum on International Investment and Regional Programmes

 

This paper looks into how countries are competing to attract investment, the relative role of incentives in making certain destinations more attractive than others, and whether the costs of incentives can be minimised. It will examine the particular examples of ASEAN and Turkey where discussions are still inconclusive as to whether incentives offered to relatively less developed regions and specific sectors would distort competition or boost competitiveness. The paper concludes with an assessment on the basis of OECD’s Checklist for FDI Incentive Policies.

 

 

  1. Overview

Today all countries are racing with each other to attract as much foreign direct investment (FDI) as possible in an increasingly competitive environment, where they recognize the global coalitions cannot be joined without FDI and trade. A few countries—essentially Japan and South Korea—have been able to grow rapidly with minimal reliance on FDI. Many countries have attempted to imitate the Japanese or South Korean model, but with limited success. Indeed, Korea too has since changed its pre-Asian crisis policy and is now actively “seducing” FDI. De facto, most other fast-growing countries have relied heavily on FDI (for example Chile, China, Malaysia, Singapore, and Thailand). Most astonishingly, Ireland—despite being a relatively advanced country—has managed to grow at some 8 percent per year for most of the 1990s due in large part to effective attraction and deployment of foreign investment[2].

 

But how do these countries manage to attract FDI? There is no secret formula. Multinationals have to choose carefully from a multitude of alternative locations[3]. The analogy is a love relationship. FDI should often be competed for, “courted”, “seduced” and “won”. It is not like the state investment or official development assistance, which can be allocated at discretion to specific sectors or regions. FDI comes only if investors are convinced that they will obtain a reasonable rate of return on capital and adequate security and stability will be offered by host countries. There is not a single success story in attracting and making best use of the FDI.

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[1] The author can be contacted at ogutcudunya@yahoo.co.uk. Views expressed here do not necessarily represent those of the OECD and its member countries. The paper draws extensively on ongoing OECD work on incentives and the checklist.

[2] OECD (2002), New Horizons for Foreign Direct Investment, Global Forum on International Investment, Paris.

[3] OECD (2002), “Strategic Investment Promotion: Successful Practice in Building Competitive Strategies”, South East Europe Compact for Reform, Investment, Integrity and Growth, Paris.