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FDI in LLDCs:FDI in LLDCs: Challenges and OpportunitiesChallenges and Opportunities

High-level Investment ForumHigh-level Investment ForumNew New YYork, 1 October 2008ork, 1 October 2008

James Zhan, Officer-in-ChargeJames Zhan, Officer-in-ChargeDivision on Investment and EnterpriseDivision on Investment and Enterprise

UNCTADUNCTAD

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FDI Booms and the Developing Country Share Growth

Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics)

Global FDI Inflows, 1990-2007 (Billions of dollars)

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Characteristics of Global FDI Stock

• 62% concentrated in services– Mostly trade, financial services and business activities

• Manufacturing accounted for 28%– International production chains depend on cost-

effective transport and proximity to large markets

• Primary sector accounted for 8%– But high commodity prices lift the share of the inflows

to 13% in 2004-2006

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Participation in Global FDI Flows isImpeded by Geographic Isolation

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A "Boom" in FDI to LLDCsHides a Different Story

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics)

FDI Inflows to LLDCs, 1990-2007 (Billions of dollars)

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Characteristics of LLDC Inflows

• Share of global 2007 inflows was only 0.8%

• Concentrated in the oil and natural gas sectors

• Of $14 billion in 2007, 73% went to Kazakhstan alone

• $3.8 billion of FDI inflows to the other 30 LLDCs combined in 2007

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A High Growth Rate and Share of GFCF Bode Well for FDI in LLDCs

FDI Stock as

percentageof GDP

FDI inflows asshare of gross

fixedcapital formation

(per cent)

FDI inflowsper capita(dollars)

FDI inflow

s(Millions of

dollars)

Annualaverageof FDI

inflows(Millions of

dollars)

Annualaverage

growth rateof FDI

inflows(per cent)

2007 2007 2007 2007 2000-2007 2000-2007

World 28 15 277 1 833 324 1 041 198 3.5

Developedeconomies

27 16 1248 1 247 635 717 783 1.2

Developingeconomies

30 13 94 499 747 291871 8.7

LDCs 24 15 17 13 375 8 989 16.2

LLDCs 30 17 36 14 026 9 137 17.5

LandlockedLDCs

24 19 15 4 146 2 250 23.0

Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics)

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Developments in LLDCInvestment Policy

• Increasing recognition of FDI as a critical source of jobs, capital, skills, technology, access to international markets

• More national treatment, simplified procedures, fiscal incentives, investment guarantees, profit repatriation, openness to public-private partnerships

• 100 regulatory reforms since the year of the Almaty PoA*– 87% of LLDCs have averaged nearly 4 changes– 72% of changes have been more favourable to FDI

• Sectoral liberalization, e.g. telecommunications (Botswana, Burkina Faso, Burundi), railroad (Ethiopia), insurance (Swaziland)

* Figures are from 2003 to 2007 inclusive.

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LLDCs Strive for a Stable and Transparent Investment Environment through Treaties

0

10

20

30

40

50

60

Years

An

nu

al

BIT

s &

DT

Ts

0

100

200

300

400

500

600

Cu

mm

ula

tive B

ITs &

DT

Ts

Annual BITs Annual DTTs Cummulative BITs Cummulative DTTs

Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics)

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Challenges• Long distances to seaports and international markets

• Diseconomies of scale and small domestic markets

• Poor endowment of natural resources

• Lack of skilled labour, managerial resources and technical expertise

• Weak institutions and unfavourable regulatory frameworks

• Inadequate transport, transit and telecom infrastructure

• Weak integration with regional markets and institutions

• Lagging liberalization in services

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Opportunities

• Geography cannot be changed, but institutions and economic focus can.

• The incentive of an attractive investment climate may outweigh other disincentives.

• Strategic policy choices may build skills for and attract FDI to knowledge-based services.

• There is room to liberalize certain sectors in LLDCs, including telecommunications, and attract corresponding capital inflows.

• Regional economic integration and cooperation, for example through BITs, DTTs and FTAs, can improve effective market size and proximity.

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The Way Forward

A Two-Pronged Strategy:

1. Mitigate LLDC disadvantages through national and regional measures to improve infrastructure, the investment climate, and access to markets

2. Economic refocus to specialize in goods and services that are of higher value, lower bulk, and more tradable irrespective of location

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Mitigating LLDC Disadvantages

• Upgrading transport and communication infrastructure, possibly with the help of FDI

• Conducive policies and institutions for FDI entry, establishment and retention

• "Land-linking" through regional cooperation and integration schemes

• Public-private partnerships for transport and transit, with financial and technical assistance from the international community

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Economic Refocusing and Specialization

• Facilitate FDI entry, establishment and protection for producers of high-value, low-bulk, distantly tradable goods and services

• Targeted incentives, including tax breaks/ holidays, R&D partnerships, grants for job creation, help obtaining production facilities

• Strengthen labour skills, innovative capacity

• Concerted, targeted investment promotion, facilitation and aftercare in line with development objectives

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UNCTAD Investment Policy Reviews & Investment Guides

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Thank you.

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