Briefing Paper

How can an international framework for investment facilitation contribute to sustainable development?

Berger, Axel / Sebastian Gsell
Briefing Paper (15/2019)

Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

DOI: https://doi.org/10.23661/bp15.2019

The implementation of the 2030 Agenda for Sustainable Development requires enormous global investment. In developing countries alone, its realisation requires investment of $4 trillion a year (UNCTAD, 2014). Since the public sector in developing countries is often unable to mobilise sufficient domestic resources, the private sector is needed to help fill this gap. One of the key sources is foreign direct investment (FDI), which not only brings capital into developing countries but also advanced technologies and managerial know-how. It is critical that governments have policies in place to attract FDI, and to harness its advantages by enhancing its contribution to sustainable development. This can be done by establishing linkages between foreign and domestic firms, improving the absorptive capacity of local businesses, and strengthening governance capacities in order to improve environmental and social conditions.

Since 2017, a group of emerging and developing countries has been driving discussions at the World Trade Organization (WTO) on the establishment of an international investment facilitation framework (IFF), which should help to increase FDI flows. Investment facilitation covers a wide range of areas, all with a focus on encouraging investment to flow efficiently and for the greatest benefit of host countries. In the light of the 2030 Agenda, a focus on the attraction of more FDI is necessary but not sufficient; it is also important to focus on the qualitative contribution of FDI to economic growth in host countries that is socially just and environmentally friendly.

Many developing countries would benefit from attracting more FDI to support their sustainable development, but they remain outside the structured discussions at the WTO. Often, they fear a loss of policy space to pursue domestic developmental strategies. Our research shows that developing countries have implemented fewer investment facilitation measures than have developed countries, and would thus face higher implementation costs in order to comply with an IFF. Furthermore, in light of the non-reciprocal nature of global investment flows, although developing countries would benefit from their own investment facilitation reforms, they would not benefit equally from those of their negotiation partners.

An IFF can make four key contributions to sustainable development: it can help attract and retain FDI, enhance the quality of FDI in light of national strategies, build domestic institutions, and enhance international cooperation. In order to realise this potential, we make six recommendations:

1.   Bridge the implementation gap by providing capacity building.

2.   Strengthen developing countries’ negotiation capacities.

3.   Respect the policy space of developing countries.

4.   Focus special and differential treatment on longer implementation periods.

5.   Include a commitment by home countries to support their investors’ responsible-business conduct.

6.   Establish international cooperation mechanisms and increase inclusivity by supporting multi-stakeholder processes.