Investment promotion agencies are effective in attracting foreign direct investments
In article the role of national investment agencies in attraction of direct foreign investments is considered. Key words: efficiency, investments, agencies, enterprise, economy.
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irk-123456789-240092013-02-13T03:28:21Z Investment promotion agencies are effective in attracting foreign direct investments Khadzhynov, I. Strategic management In article the role of national investment agencies in attraction of direct foreign investments is considered. Key words: efficiency, investments, agencies, enterprise, economy. У статті розглядається роль національних інвестиційних агентств у залученні прямих іноземних інвестицій. Ключові слова: ефективність, інвестиції, агентства, підприємство, економіка. В статье рассматривается роль национальных инвестиционных агентств в привлечении прямых иностранных инвестиций. Ключевые слова: эффективность, инвестиции, агентства, предприятие, экономика. 2010 Article Investment promotion agencies are effective in attracting foreign direct investments / I. Khadzhynov // Економічний вісник Донбасу. — 2010. — № 4(22). — С. 195-198. — Бібліогр.: 8 назв. — англ. 1817-3772 http://dspace.nbuv.gov.ua/handle/123456789/24009 330.322 en Економічний вісник Донбасу Інститут економіки промисловості НАН України |
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Strategic management Strategic management Khadzhynov, I. Investment promotion agencies are effective in attracting foreign direct investments Економічний вісник Донбасу |
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In article the role of national investment agencies in attraction of direct foreign investments is considered. Key words: efficiency, investments, agencies, enterprise, economy. |
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Article |
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Khadzhynov, I. |
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Khadzhynov, I. |
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Khadzhynov, I. |
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Investment promotion agencies are effective in attracting foreign direct investments |
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Investment promotion agencies are effective in attracting foreign direct investments |
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Investment promotion agencies are effective in attracting foreign direct investments |
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Investment promotion agencies are effective in attracting foreign direct investments |
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Investment promotion agencies are effective in attracting foreign direct investments |
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investment promotion agencies are effective in attracting foreign direct investments |
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Інститут економіки промисловості НАН України |
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2010 |
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Strategic management |
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http://dspace.nbuv.gov.ua/handle/123456789/24009 |
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Investment promotion agencies are effective in attracting foreign direct investments / I. Khadzhynov // Економічний вісник Донбасу. — 2010. — № 4(22). — С. 195-198. — Бібліогр.: 8 назв. — англ. |
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Економічний вісник Донбасу |
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195
Економічний вісник Донбасу № 4 (22), 2010
It is commonly acknowledged that foreign direct
investment (FDI) plays an important role in worldwide
economic development. By acknowledging the benefits
of foreign investments, governments in many transition
countries are devoting significant effort to attract FDI
flows into their economies.
There are many different methods used to attract
FDI, including use of targeted financial incentives (tax
concessions, cash grants and specific subsidies),
improving domestic infrastructure and local skills to meet
the demands and expectations of foreign investors,
improving the general business climate of a country by
decreasing administrative barriers, and promotional
programs [1].
Investment promotion by governments today is an
important tool for improving the investment environment
and for attracting FDI to their countries. At the same
time, however, there is increasing competition for FDI
investments among both developing and transition
countries. As a result, a trend has developed for many
countries to form investment promotion agencies on
national and increasingly, on a sub-national level. Few
IPAs existed 20 years ago, while today there are more
than 160 national IPAs and more than 250 sub-national
agencies worldwide [2]. The sub-national IPAs represent
regions of the country. Recent research shows that
economies in transition are succeeding in attracting more
FDI when they have agencies that assist potential and
current foreign investors, and these agencies increasingly
follow the IPA model [3].
Promotional efforts to attract FDI often become
the focal point of competition among developed and
developing countries. This competition often extends to
the sub-national level, with different regional authorities
pursuing their own strategies and devising their own
strategies or incentives to attract new investments.
Despite the competition, countries around the world
have moved to a common approach for IPA promotional
techniques and similar structures. Recent research
assesses the impact and trends related to both promotional
techniques and structural approaches.
Investment Promotion Agencies:
A Historical Review
It was only fifteen years ago when the Foreign
Investment Advisory Service (FIAS) published a paper
entitled “Marketing a Country: Promotion as a Tool for
Attracting Foreign Direct Investment,” which offered
what has become the standard approach for the structure
and function of agencies that promote foreign direct
investment [4]. The original paper focused on strategies
for developing countries.
The original work hypothesized that countries
needed to adopt an industrial marketing approach to market
the country to foreign investors, just as major industrial
organizations market their products to large customers.
Wells and Wint described a model for IPAs that recognized
the close parallels between industrial buying and the
investment decisions. They also noted that the
promotional techniques that are most effective in
attracting FDI are similar to the techniques that are most
effective in selling industrial products to corporations [4].
The initial approach for country marketing focused
on three basic investment promotion techniques: image
building, investment generation and investor services.
Wells and Wint contended that “the weight assigned to
these techniques, or the strategy of an agency, should
reflect the task that the particular country faces in
marketing itself to investors. For example, a country that
has recently changed its policies toward foreign direct
investment could benefit from an emphasis on image
building, since it might need to convey new information
to potential investors who would otherwise be unaware
of the changes.”
In 2001, Authors Wells and Wint revised their
analysis and report to include strategies for transition
countries. They described the evolution of IPAs as
experience validated the impact of basic promotional
strategies and demonstrated how countries added new
promotional techniques.
Wells reported that a fourth promotional technique
has evolved in many countries [4]. The fourth technique
involves active work by IPAs to improve the investment
climate in their countries, and in 2001 UNCTAD found
this technique embraced by about 80% of IPAs [5].
Main Functions of an Investment Promotion
Agency
Today, IPAs around the world focus on: providing
information to potential investors, creating an attractive
image for the country as a place to invest, providing
services to prospective investors, and working to improve
the overall investment climate. Promotion in this context
does not include any effort by a country to provide
incentives to foreign investors, screening of foreign
investment or negotiation with investors [4].
FIAS describes the basic promotional functions as
follows [2]:
УДК 330.322
I. Khadzhynov,
PhD (Economics),Donetsk National University, Ukraine
INVESTMENT PROMOTION AGENCIES ARE EFFECTIVE IN ATTRACTING FOREIGN
DIRECT INVESTMENTS
I. Khadzhynov
196
Економічний вісник Донбасу № 4 (22), 2010
1. Image building creates the perception of a country
as an attractive site for international investment. Activities
commonly associated with image building include focused
advertising, public relations and events. For example:
• Advertising in general financial media
• Advertising in industry- or sector-specific media.
• Cultivating journalists to seek favorable news
stories.
• Participating in investment exhibitions.
• Conducting general investment missions from
source country to host country, or from host country to
source country.
• Conducting general information seminars on
investment opportunities.
Investor facilitation and investor services refer to
the range of services provided in a host country that can
assist a current or potential investor in analyzing
investment decisions, establishing a business, and
maintaining it in good standing. Activities in this area
include information provision, “one-stop shop” service
aimed at expediting approval process, and assistance in
obtaining sites, utilities, and so on. For example:
• Engaging in direct mail or telemarketing campaigns.
• Conducting industry- or sector-specific
investment missions from source country to host country
or vice versa.
• Conducting industry- or sector-specific
information seminars.
• Engaging in firm-specific research followed by
sales presentations.
Investment generation entails targeting specific
sectors and companies with a view to creating investment
leads. Activities include identification of potential sectors
and investors, direct mailing, telephone campaigns,
investor forums and seminars, and individual presentations
to targeted investors. Investment generation activities can
be done both at home and overseas. For example:
• Providing investment counseling services.
• Expediting the processing of applications and
permits.
• Providing post-investment services.
Policy advocacy consists of the activities through
which the agency supports initiatives to improve the
quality of the investment climate and identifies the views
of the private sector on that matter. Activities include
surveys of the private sector, participation in task forces,
policy and legal proposals, and lobbying. For example:
• Participating in policy task forces.
• Developing lobbying activities.
• Drafting laws or policy recommendations.
• Reporting investor’s perceptions.
Structural Approaches for an Investment
Promotion Agency
Countries creating IPAs have two basic options, a
government-controlled agency or a private-sector agency,
tasked to carry out the non-traditional government activity
of investment promotion. Wells and Wint [4] observe
that governments may not be able to acquire the skills
needed if the investment promotion activity is to be
managed effectively. Alternatively, governments may
choose to delegate the investment promotion activity to
the private sector where it would function independently,
or autonomously. The risk with the latter alternative is
that the private sector may not be able to effectively
manage the tasks that require government management,
such as helping businesses with applications or permits
or other government requirements.
Wells and Wint report that many countries pursue a
quasi-governmental or semi-autonomous structure to bring
together the skills and capabilities required to manage the
key functions of the IPA. Such quasi-governmental agencies
report to the government but are not part of government
and do not carry many of the burdens government agencies
must carry. Additionally, the quasi-governmental agencies
have greater success acquiring the skills and management
expertise needed to manage the promotional effort, and
management controls enable the quasi-governmental
agencies to function under government oversight. Finally,
quasi-governmental agencies do not have the problems a
private agency would face with no direct access to
governments to expedite investment servicing. The quasi-
governmental agencies usually have boards or directors
and advisory groups that bring together government and
private-sector participants, while the agency functions with
day-to-day autonomy in carrying out the designated
functions. The Bleyzer Foundation reports that among the
14 national IPAs operating in the CEE and CIS regions,
seven are either autonomous or semi-autonomous
governmental agencies [3].
Research on Effectiveness of Investment
Promotion Agencies
FIAS authors Wells and Wint conducted research in
the late 1990s as they were revising their earlier work on
“Marketing a Country;” including basic research on the
effectiveness of IPAs. They found that the investment
promotional activities tended to be most successful in
attracting foreign investment when the investment is focused
on export-oriented investment, whether for export to world
markets or regional markets [4]. Their research showed
less success when IPAs focused on seeking firms to invest
to serve domestic markets. Firms that are seeking sites to
serve export markets can choose from a variety of countries.
Their research indicates that investment promotion activities
probably influenced their investment decisions.
Later research conducted by the Foreign Investment
Advisory Services (FIAS) of the World Bank provided
compelling evidence of the overall effectiveness of IPAs.
[2] Authors Jacques Morisset and Kelly Andrews-Johnson
surveyed 75 IPAs around the world in 2002, gathering
data on the 2001 results for those countries.
I. Khadzhynov
197
Економічний вісник Донбасу № 4 (22), 2010
Morisset and Andrews-Johnson found that the
effectiveness of IPAs was greater when the IPA was under
a supervisory board with representatives of the private sector,
and when the IPA had a direct reporting relationship to a
country’s president or its prime minister. In their report, it is
suggested that, in a transition economy, an IPA that has a
self-governing or semi-independent structure can be more
effective because it can help to strengthen the government’s
commitment to market reforms and affirm the agency’s
credibility and visibility in the business community.
Research from Morisset and Andrews-Johnson at
FIAS and from UNCTAD [5] suggests that the
effectiveness of investment promotion activities depends
on the functions the IPA performs, as well as the
organization, status, budget and personnel of an IPA. The
FIAS research on «The Effectiveness of Promotion
Agencies at Attracting Foreign Direct Investment» found
that 35% of all IPA activities involve image building, 33%
to investment servicing, 22% to investment generation,
and only 10% to policy advocacy. The recent UNCTAD
study reports that 80% of IPAs are involved in policy
advocacy services. The FIAS research report notes that
policy advocacy appears to be the most effective activity
to attract FDI, followed by image building and investor
service; further, it notes that investment generation is
not associated with higher FDI flows, despite the fact
that it tends to take the greatest share of most IPA budgets.
The various research on effectiveness calls attention
to the importance of management and personnel.
UNCTAD has done a number of studies on IPA personnel
and the correlation of their quality and performance to
the success of the IPA. Similar studies have gathered
data on the role and contributions of advisory boards,
particularly those composed of representatives from both
private and public sector. The involvement of private
sector representatives contributes to transparency, of
course, but also appears to help the IPA better understand
how decisions are made in the private sector [3].
The FIAS report on the effectiveness of IPAs
identifies a special advantage of a structure that brings
together public and private sector representatives. The
report suggests that policy advocacy may be the IPA
function most closely associated with FDI flows when
the IPA has both public and private sector participation.
The IPAs are in a strategic position to carry out policy
advocacy because the IPA is the interface between the
public and the private sectors. IPAs build a relationship
with private firms that can help IPAs identify the real
problems that investors in the country encounter, rather
than identifying such matters from a distance [2].
As IPAs grow worldwide, various special training
programs have been developed to prepare public and
private sector individuals for work within the IPA
structure. UNCTAD conducts programs on investment
promotion for diplomats from developing and transition
countries, which can prepare them to support IPA image
building activities. The World Association of Investment
Promotion Agencies [6] conducts training programs and
regional meetings for IPA personnel. A World Bank unit
also supports IPAs through the Multilateral Investment
Guarantee Agency (MIGA), which provides a toolkit of
international best practices in investment promotion,
designed to help national and local investment entities
attract and retain foreign direct investment [7].
Investment Promotion and Ukraine
An Investment Council was established in Ukraine in
2004, and a May 2005 report [8] indicates that President
Victor Yushchenko was named Head of the Council. That
2005 report also identified original Council membership to
include 10 Ukrainian Government officials, as well as 14
private-sector representatives, including such leaders as
the Head of Microsoft, the Delegate of the German
economy in Ukraine, the Head of Kraft Foods of Ukraine,
and other important business individuals. Various proposals
have been offered on how to organize and staff the
appropriate investment promotion agency for Ukraine,
including establishment of related working groups with
both public and private sector participants. Based on the
original Council approach, one might assume that Ukraine
is following the quasi-governmental approach with both
public- and private sector involvement. As noted above,
FIAS research shows that political visibility and participation
of the private sector are two characteristics that are
associated with IPA success in attracting FDI [2].
IPA observers point to important trends that may
be relevant for Ukraine and for those in the country
working to attract FDI. As reported above, IPAs
commonly focus on four functional areas. In practice,
however, investment promotion can cover many services,
ranging from the provision of market information to the
undertaking of feasibility studies and environmental impact
assessments. UNCTAD studies confirm that different
IPAs emphasize different aspects. Agencies in OECD
countries and other developing countries apply the most
focused approach to investment promotion with investor
targeting and after-care as prime functions. However,
UNCTAD reports that IPAs in economies in transition
tend to take up more tasks, [5] which presumably would
include policy advocacy and image building.
Investment promotion is increasingly sophisticated.
UNCTAD research of IPAs shows that investment
promotion is increasingly seen to be client-oriented, with
IPAs reporting that personal contacts with investors are
preferable to non-personal methods of promotion. IPAs
report a considerable share of promotional budgets is
devoted to arranging meetings with foreign companies,
attending conferences and trade fairs, as well as
undertaking missions abroad [5].
Research also indicates that the Internet is widely
seen as a critical tool in investment promotion. Websites
play a function as display windows on what countries and
regions have to offer and provide agencies with the
I. Khadzhynov
198
Економічний вісник Донбасу № 4 (22), 2010
opportunity to advertise their services. There are great
differences in the use of the Internet. In developed
countries, the World Wide Web serves as a prominent
research and marketing tool for IPAs. UNCTAD notes that
the information technology infrastructure also has an impact
on investment decision, and well-functioning IT and
telecommunications may become a necessary requirement
to attract certain kinds of investment. Considering these
issues, the use of IT will continue to be important for
most IPAs in the coming years. It may be worth noting
here that in December 2005 the Ukrainian Foreign
Investments Promotion Agency does not yet have a website,
although the Ukrainian Foreign IPA is listed as a member
of the World Association of Investment Promotion
Agencies [6]. The Kyiv Post reported in December 2005
that the Ukrainian government has issued a request for
proposals from public relations agencies to work with the
government on image building. It is not clear from the
news reports, but perhaps that work might support the
investment promotional activities related to image building.
Sub-national investment promotion is developing in
certain areas. Transnational corporations often are attracted
to specific locations or clusters of economic activity. Where
sub-national agencies exist, a new challenge will arise.
UNCTAD calls attention to “the need to coordinate policies
across various administrative levels within a country.
Without coordination, there could be competition among
regions within a country that may lead to “fiscal wars”
and result in waste as far as the welfare of the country as
a whole is concerned. It also increases the risk that
promotion agencies, if they are unable to coordinate with
other policy-making bodies in the country, will be unable
to deliver on promises to investors. The challenge is of
particular importance in large countries” [5].
A final trend of possible interest for Ukraine is the
development of regional cooperation among IPAs. UNCTAD
notes that some countries come together to promote their
region to foreign investors, and UNCTAD cites the Baltic
Sea Region and the Association of Southeast Asian Nations.
It is unclear the extent to which such cooperation among
potential competitors actually can have an impact on the
ability of individual countries to attract FDI.
Looking ahead, Ukraine has important opportunities
to attract foreign direct investment. It has established under
the President an Investment Council with significant
participation from leading private-sector representatives
from around the world. The Ukraine Foreign Investment
Promotion Agency is established and, as press reports
suggest, it appears work is moving forward on image
building for the country. The country has strong sub-
national organizations that can lead on regional investment
promotion. International organizations exist to provide a
broad variety of support and assistance to Ukraine’s national
or sub-national IPAs. Research by leading organizations
provides important information on what makes IPAs in
transition economies successful in attracting foreign direct
investment, calling special attention to the importance of
involvement of private-sector representatives and the need
for coordination between national and sub-national IPAs.
In summary, a direction is set and Ukraine can benefits
from the experience and learnings of IPAs around the world
to achieve even greater success in attracting foreign direct
investment for Ukraine.
References
1. World Bank, Policies to Attract Foreign Direct
Investment [Електронний ресурс]. — Режим досту-
пу : http://www.worldbank.org. 2. Jacques Morisset,
Kelly Andrews-Johnson. “The Effectiveness of
Promotion Agencies at Attracting Foreign Direct
Investment,” Vol. 1 of 1, Occasional Paper 16, Foreign
Investment Advisory Service (FIAS), World Bank, 2004.
3. Iryna Piontkivski, Edilberto L. Segura . “Survey
of International Foreign Investment Promotion
Practices,” The Bleyzer Foundation, August 2003.
4. Louis T. Wells, Jr. and Alvin G. Wint. “Marketing a
Country: Promotion as a Tool for Attracting Foreign
Investment,” Foreign Investment Advisory Service
(FIAS), World Bank, 2000. 5. “A World of Investment
Promotion at a Glance. A Survey of Investment
Promotion Practices,” Advisory Study #17. UNCTAD
2001. 6. World Association of Investment Promotion
Agencies (WAIPA) [Електронний ресурс]. — Режим
доступу : http://www.waipa.org. 7. Multilateral
Investment Guarantee Agency (MIGA), World Bank
Group. [Електронний ресурс]. — Режим доступу : http://
www.miga.org. 8. Edilberto Segura and Iryna
Piontkivska, “Ukraine: Investment Promotion Activities,”
The Bleyzer Foundation, May 2005.
Хаджинов И. В. К вопросу об эффективности
инвестиционных агентств в привлечении прямых
иностранных инвестиций
В статье рассматривается роль национальных
инвестиционных агентств в привлечении прямых ино-
странных инвестиций.
Ключевые слова: эффективность, инвестиции,
агентства, предприятие, экономика.
Хаджинов І. В. До питання про ефективність
інвестиційних агентств у залученні прямих іно-
земних інвестицій
У статті розглядається роль національних інвестиц-
ійних агентств у залученні прямих іноземних інвестицій.
Ключові слова: ефективність, інвестиції, агент-
ства, підприємство, економіка.
Khadzhynov I. Investment promotion agencies
are effective in attracting foreign direct investments
In article the role of national investment agencies in
attraction of direct foreign investments is considered.
Key words: efficiency, investments, agencies,
enterprise, economy.
Received by the editors: 09.11.2010
and final form in 01.12.2010
I. Khadzhynov
|