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RESEARCH THINKTANK


Enhancing the distribution of FDI benefits


SUBJECT THINKTANK


HOW CAN THE DISTRIBUTION OF BENEFITS AMONG THE PARTIES TO THE INVESTMENT PROCESS BE IMPROVED IN FAVOUR OF HOST COUNTRIES? BY KARL SAUVANT


FDI takes place because the inter- ests of the three principal parties involved in the investment process overlap: multinational enterprises (MNEs) undertake investments abroad because they seek to strengthen their interna- tional competitiveness by estab- lishing a portfolio of locational assets; host countries permit incoming FDI and even facilitate it because they expect it to advance their economic develop- ment; andhome countries allow (and even facilitate) outward FDI by their firms because they expect to benefit from successful firms being headquartered in their territories. It follows that, if one of the parties is no longer satis- fied with the manner in which its interests are being met, they will change their policies toward FDI. This article looks at this issue


from the perspective of host coun- tries. Its premise is that, if host countries do not benefit sufficiently from incoming FDI, they will – at least over the longer run – not encourage it and, ultimately, even pursue policies that restrict it. To be sure, so far changes in host


country policies are still mostly in the direction of making the invest- ment climate more welcoming for foreign investors. But there are signs that this is changing. Unctad’s World Investment Report 2021 reports that, in 2020, the proportion of more restrictive or more regula- tory new policy changes imple- mented in 67 countries was the highest since 2003. At the same time, governments put more empha- sis on facilitating not only more FDI, but more sustainable FDI, i.e. invest- ments that, while being commer- cially viable, involve best efforts toward making a reasonable contri-


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bution to the economic, social and environmental development of host countries, and take place in the context of fair governance mecha- nisms. This suggests that host coun- tries are no longer fully satisfied with the current distribution of benefits associated with FDI. This, in turn, should be of concern to all parties involved in the investment process and interested in an open investment regulatory framework. There are of course many areas


in which adjustments in the distri- bution of benefits can be made to ensure that the interests of the three principal parties in the investment process are met in a satisfactory manner. It is in fact a process that is already underway, as reflected in the agreement on the reformof the international tax systemreached just this year. This article outlines, by way of


example, three concrete policy areas for which it should be relatively easy to enhance the distribution of bene- fits associated with FDI in favour of host countries, without deterring foreign investors or, for that matter, antagonising home countries, to arrive at a new equilibriumin the distribution of benefits associated with FDI that is satisfactory for all. These three policy areas are:


• for foreign investors, helped by host countries, to create stronger linkages between their foreign affili- ates and domestic firms in host countries, to make the former less dependent on potentially vulnerable supply chains while strengthening the domestic enterprise sector of host countries; • for home countries to support host countries, through the provi- sion of independent assistance, in the negotiation of contracts between


www.fDiIntelligence.com August/September 2021


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