Global debt will not disappear overnight: it is customary for smarter nations to recover as much as possible of what is due to them in economic, if not purely financial returns. For the debtors in this context, it is easier to offer customised investor solutions for lender countries in return for extra time in which to restructure their debt. This strategy seems to be working for countries with business-friendly markets and dynamic leadership that continues to break new ground. This reflects in the correlation between the ease of doing business in a country, and foreign direct investment (FDI) flows into it.
A large body of research has looked at the question of what the key drivers of FDI are. One approach sees FDI as being market-seeking (driven by economy size and country location), efficiency-seeking (driven by human capital or infrastructure quality) or resource-seeking (driven by the availability of natural resources or other strategic assets).
Many studies use a ‘gravity model,’ which seeks to explain what causes FDI flows between two specific countries. This research confirms that factors such as the size of the market and its growth prospects, distance to important markets, relative labour endowments and openness to trade tend to be important drivers of FDI. For example, the larger the market, the greater the scope for economies of scale in production, and thus the greater the chances of producing at competitive prices. Economies in central and eastern Europe have received large inflows of FDI over the past couple of decades because they are seen as entry points into the huge European market and also because they have relatively well-educated labour forces. The same is the case with emerging markets like Pakistan, where vast amounts of investments are anticipated if only we review our economic policy in terms of education and literacy.
The institutional and regulatory framework has also been shown to be an important determinant of FDI. One study finds that judicial independence and labour market flexibility are significantly associated with FDI inflows, depending on the sector of the investment.
Another view is that corruption is a significant deterrent to FDI, having an effect comparable to the impact of substantial increases in the tax rate on foreign firms. Indirect taxes on foreign investors, which are higher than the direct foreign income taxes in many countries, also reduce FDI inflows.
Business regulations matter as well. Using a data set of regulations specific to foreign investment, it was found that the number of procedures required to start a foreign-owned business and the strength of the arbitration regime both have a robust effect on FDI. Hence, economies with more effective regulations for starting a business benefit more from the FDI flows that they receive. If we analyse carefully, it is evident that governments that regulate well in one area, such as domestic business, tend to also regulate well in other areas, such as foreign investment.
Even though we are not exactly one of the best economies out there today, the future holds a different promise owing to the geopolitical situation globally, and our strategic location within Southeast Asia. Job creation will not be a problem here as we are resilient and efficient workers, whether we work as an individual or as a corporation. Yes, we have to crack down on corruption by ensuring justice prevails and ensure that decisions are taken on certain key measures that the government is talking about today. If we try and work alongside sensible lines, our economic infrastructure can turn around very successfully.
THE WRITER IS A BANKER, FREELANCE WRITER ON INTERNATIONAL RELATIONS, AND BROADCASTER FOR RADIO 1 FM 91
Published in The Express Tribune, November 19th, 2012.
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Good!
Something positive at last.