Journal of International Economics, 65, Oxford Development Studies, 33, Applied Economics, 42, Handbook of Development Economics, 2, Eastern European Economics, 40, The Quarterly Journal of Economics, 92, Organization for Economic Cooperation and Development, Paris.
Journal of Development Economics, 75, Journal of International Economics, 61, Applied Economics, 41, Review of Development Economics, 7, The World Economy, 29, The American Economic Review, 82, Journal of Development Economics, 39, Journal of Policy Modeling, 31, Journal of Economic Studies, 30, International Journal of Economics and Finance, 3, World Bank. Atlantic Economic Journal, 34, Development Policy Review, 26, Staff Papers, International Monetary Fund, 34, Part III considers different options in regulating international investment disputes and arguments in support of each.
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Schott Institute for International Economics, Law and Policy in International Business, Vol. State Legislatures, Vol.
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One outcome is a greater industrial concentration in the hands of a few firms in each industry, usually TNCs. A subset of such agreements involves technology-related activities and is a response to the increased knowledge-intensity of production, the shortening of product cycles and the need to keep up with the constantly advancing technological frontier.
Such agreements are particularly important for enhancing the technological competitiveness of firms and their number has increased from an annual average of less than in the early s to over in the mids. An estimated 8, inter-firm agreements in technologyintensive activities have been concluded between and During , changes in FDI regulatory regimes were made by 76 countries, 89 per cent of them in the direction of creating a more favourable environment for FDI table 6.
New liberalization measures were particularly evident in industries like telecommunications, broadcasting and energy that used to be closed to foreign investors. New promotional measures included streamlining approval procedures and developing special trade and investment zones adding to the many such zones already in existence.
During alone, 36 countries introduced new investment incentives, or strengthened existing ones. The network of bilateral investment treaties BITs is expanding as well, totalling 1, at the end of figure 3. In that year one BIT was concluded, on the average, every two-and-a-half days. The number of double taxation treaties also increased, numbering 1, at the end of , with concluded in alone figure 3. Discussions of regional initiatives are taking place in most regions in the context of new or existing agreements.
If successful, the FTAA will consolidate and integrate the various free trade and investment areas already present in the region. However, the approach of the ASEAN Investment Area is different from that of other regional initiatives in that it emphasizes policy flexibility, cooperative endeavours and strategic alliances and avoids, at least for now, legally binding commitments. The ongoing negotiations on a Multilateral Agreement on Investment at the OECD reached a critical point in after two years of negotiations, when pressures grew to make them more transparent and to initiate a broad-based public debate on FDI issues.
Partly reflecting this situation, a pause for reflection until October was agreed to by the OECD ministers. The work of the WTO Working Group on the Relationship between Trade and Investment is focusing on the economic relationship between trade and investment; the implications of the relationship for development and economic growth; existing international arrangements and initiatives on trade and investment; and issues relevant to assessing the need for possible future initiatives.
UNCTAD, on the other hand, is seeking to help developing countries participate effectively in international discussions and negotiations on FDI, be it at the bilateral, regional or multilateral level. Although smaller than those of developed countries, the increases in in FDI flows into developing countries are noteworthy because they took place in an environment that presented a complex mix of adverse changes.
Unlike other net resource flows such as official development assistance or some other types of private capital, such as portfolio equity investment, FDI inflows increased in , with no developing region experiencing a decline in the level of inflows figure 4. The five Asian economies most affected by the crisis saw their combined FDI inflows remain at a level almost unchanged from that in The rate of increase of FDI inflows declined to 11 per cent in from an average of per cent between and The expectation of a decline is based on several aspects of the national and regional economy: a slowdown in economic growth from its exceptional performance of the past few years; excess capacity in several industries due to over-investment or weaker demand conditions; wage increases in the coastal areas that are eroding its locational advantage in low-cost labour-intensive investments; poor infrastructure in the interior provinces that hinders investment in low-wage activities; currency depreciations in other economies that are eroding the price competitiveness of foreign affiliate exports; and adverse economic conditions in its biggest FDI source economies in Asia Hong Kong, China, Japan, the Republic of Korea, Malaysia and Thailand , which constrict their outward flows to China.
While these considerations suggest an impending decline in FDI flows to China, ongoing FDI liberalization, massive infrastructure building, foreigninvestor participation in the restructuring of state-owned enterprises and a continued strong growth performance compared with other countries in the region could yet mitigate the expected drop.
China and Indonesia experienced large increases in outflows, with big projects in natural- resource-seeking investments, while firms from Singapore and Taiwan Province of China were actively involved in acquisitions of firms in crisis-afflicted countries. On the other hand, European TNCs, having largely neglected Asia until recently, are now taking an active interest in the region.
For Asia, and especially the five Asian countries — Indonesia, Malaysia, Philippines, Thailand and the Republic of Korea — stricken by the financial crisis in the second half of , the most important question relating to foreign investment is how the crisis and its economic consequences will affect inward FDI in the short and medium term.
FDI plays an important role in the region and could thus assist the countries in the process of their economic recovery. This is not surprising given that FDI is investment made with a long-term interest in production in host countries, in order to enhance the competitive positions of TNCs. Nevertheless, neither FDI flows nor the activities of foreign affiliates in the region, in particular in the five most affected countries, can remain impervious to the changes that the crisis has set in motion.
Indeed, the crisis and its aftermath have changed a number of factors that influence FDI and TNC operations in the affected countries, at least in the short and medium term. Some of the changes are actually conducive to increasing FDI flows to the affected countries. One is the decrease for foreign investors in the costs of acquiring assets whose prices have fallen.
Firms interested in strategic positioning in Asia and the Pacific or seeking created assets to complement their worldwide portfolio of locational assets might find it attractive to establish or expand operations in these countries at the present time. There is evidence that firms from the United States, Western Europe and less affected economies in the region have taken the opportunity to invest in the crisisaffected countries, especially in Thailand and the Republic of Korea.
A second factor conducive to increasing FDI in the most affected Asian countries is the improvement in their international cost competitiveness due to devaluations. This is especially relevant for export-oriented FDI and there are already signs that investors are responding to the changes in the relative costs of production. FDI in export-oriented industries such as electrical and electronics manufacturing has risen in Thailand — as it had in Mexico after the Peso crisis — while production for export by foreign affiliates already well established in both Thailand and Malaysia seems to be increasing.
TNCs in the affected Asian economies, which are already highly export-oriented in certain industries, can take advantage of their corporate systems of integrated international production to strengthen their export orientation substantially, especially in the short and medium term.
The potential positive impact of both lower asset prices and decreased operational costs on inward FDI could be enhanced by the liberalization moves and promotional efforts that are being made by the affected countries. Governments in the countries most affected by the crisis, most of which already have fairly liberal frameworks for FDI, have further liberalized their FDI regimes, opening new areas and relaxing rules, including in the context of IMF adjustment programmes. They have also intensified their efforts to attract FDI both individually and collectively.
On the other hand, some consequences of the crisis will affect FDI adversely in the short and medium term. For firms focused on domestic or regional markets, reduced demand and slower growth can be expected to lead to some cancelling, scaling down or postponement of FDI in the most affected countries. However, the impact on domestically-oriented foreign affiliates varies among industries.
Foreign affiliates in the services sector are particularly susceptible to local demand conditions, because of the non-tradability of most services. Affiliates producing goods and services that depend mainly on imported raw materials and intermediate inputs would be more seriously affected than those relying on domestic sources.
The automotive industry, in which TNCs figure prominently in the region, is a good example of the impact of the crisis and the range of responses: a number of automotive TNCs have scaled down, postponed or even cancelled investment projects in some of these countries; firms have also adopted various other measures to cope with the crisis, including injecting funds to help their financially distressed affiliates and subcontractors, relocating parts production, boosting exports and increasing domestic sourcing.
The implications of the financial crisis for inward FDI are also likely to extend to other, less seriously affected, developing countries in Asia. These factors could reduce their attractiveness as host countries, at least in the short run. Furthermore, and most importantly, many Asian developing countries, including China, Viet Nam and the least developed countries of the region, depend heavily on FDI from other developing Asian countries figure 6 and inward FDI flows to them could decrease because of a decrease in outward FDI from the countries affected by the crisis.
In , overall outward FDI from developing Asian economies rose, but flows decreased from all the five crisisaffected countries except Indonesia. The crisis is likely to reduce the financial capacities of Asian TNCs including TNCs from Japan to undertake FDI on account of valuation losses, increased debt burdens on foreigncurrency denominated loans, and reduced profitability of operations due to contraction of demand.
The impact of these factors is further compounded for some TNCs by a credit crunch at home and difficulties in raising funds abroad. It is difficult to predict how the various factors set in motion by the crisis will affect, on balance, inward FDI to the crisis-stricken countries and to the region as a whole in the short and medium term. Aside from that, given that the FDI determinants proper — regulatory frameworks, business facilitation and, most importantly, economic determinants of long-term growth — are attractive, and that the changes resulting from the crisis have positive as well as negative implications for FDI, there is room for cautious optimism.
However, the extent to which these various factors translate into actual flows will depend on the assessment by TNCs of the long-term prospects of the region in the context of their own strategies for enhancing competitiveness. If their assessment is negative, TNCs will be reluctant to invest, especially as far as market-seeking FDI is concerned, and cautious in acquiring assets in the region. If they take a positive view and take advantage of the crisis to position themselves strategically in the region, FDI flows to Asia will continue on their upward trend without serious interruption.
The rationale for the latter view is that the fundamental features of the region as a destination for FDI remain sound. These same features suggest not only that longer-term FDI prospects for the region remain positive, but that they may even improve as countries strengthen certain aspects of their economies in response to the crisis figure 7. The increase in inflows accounted for twothirds of the overall increase in inflows to all developing countries.
In contrast, most of the manufacturing FDI in Mexico and the Caribbean Basin has been efficiency-seeking, with the United States market being the final destination of exports. In the services and primary sectors, privatization programmes have provided opportunities for expansion for both market-seeking and resource-seeking TNCs. Government policy has also played a crucial role in generating the conditions under which the current FDI boom in Latin America and the Caribbean has occurred.
Structural reforms, macroeconomic stabilization and adequate macroeconomic management have also contributed to the export performance of foreign affiliates and domestic firms. Primary-sector FDI, still important in a number of countries, is almost exclusively geared to international markets. Services FDI, mostly geared to national markets, has given rise to some exports in certain tradable services and may have increased exports indirectly through services-related activities of manufacturing operations.
The recent FDI boom in Latin America has also been accompanied by large and rising current-account deficits, reviving concerns over a negative balance-of-payments impact. The immediate effects of trade liberalization on the balance of payments may well be negative because FDI tends to generate higher imports not only of capital and intermediate goods, but also of final consumer goods, if TNCs begin by establishing sales affiliates and distribution networks.
In the longer run, however, the strengthened export orientation of foreign affiliates should help to improve current account imbalances, especially as import growth normalizes once the adjustment of foreign investors to the new policy environment is completed, and if complementary policies to strengthen domestic capabilities and linkages are also pursued. In addition, almost threefifths of FDI flows from the major home countries of TNCs in Africa — France, Germany, the United Kingdom and the United States — have gone into manufacturing and services since , suggesting that the widely held assumption that Africa receives FDI only on the basis of natural resources is mistaken.
While Africa trails other developing regions in attracting FDI, a group of seven countries — Botswana, Equatorial Guinea, Ghana, Mozambique, Namibia, Tunisia and Uganda — stand out in terms of relative FDI inflows and their growth during , not only in comparison to other African countries but also to developing countries as a whole. While natural resources are an important determinant for FDI flows into most of these countries, they are by no means the only explanation for their relative success in attracting FDI.
A number of other factors, including fast-growing national markets, access to large regional markets, significant privatization programmes and — in the case of Tunisia — conditions encouraging the location of export-oriented, efficiency-seeking FDI in the country also play a role. Most of them have also stepped up efforts to create an FDI-friendly business climate, particularly through investment promotion activities.
The Russian Federation was the leading recipient, mainly in natural resources and infrastructure development. The FDI pattern, however, remains uneven, reflecting the diverse experiences of countries in the transition to market-based economies, the strengthening of regulatory and institutional frameworks relevant for TNC operations, and privatization efforts.
As for outflows, with the Russian Federation as the leading outward investor, outflows from Central and Eastern Europe more than tripled in To a large extent, this is explained by the fact that the majority of the countries opened up to inward FDI fairly recently; their accumulated FDI stocks are therefore small. The small stock also reflects the influence of various obstacles such as problems in the legal and regulatory frameworks, a long transition-related recession and a lack of experience in FDI facilitation measures table 7.
To explain the differences in FDI performance among countries and to ascertain why firms invest where they do, it is necessary to understand how TNCs choose investment locations. In general, FDI takes place when firms combine their ownership-specific advantages with the location-specific advantages of host countries through internalization, i. Three broad factors determine where TNCs invest: the policies of host countries, the proactive measures countries adopt to promote and facilitate investment, and the characteristics of their economies table 8.
The core enabling framework for FDI consists of rules and regulations governing entry and operations of foreign investors, standards of treatment of foreign affiliates and the functioning of markets. These include trade policy and privatization policy. The contents of both rings differ from country to country, as well as over time. However, changes in FDI policies have an asymmetric impact on the location of FDI: changes in the direction of greater openness may allow firms to establish themselves in a particular location, but they do not guarantee this.
In contrast, changes in the direction of less openness, especially if radical e. Since the mids, an overwhelming majority of countries have introduced measures to liberalize FDI frameworks, with positive effects on inward investment. Globalization and FDI liberalization have exerted mutually reinforcing pressures on each other and the momentum for neither has subsided.
This has provided TNCs with an everincreasing choice of locations and has made them more selective and demanding as regards other locational determinants. Another outcome is that countries are increasingly paying more attention to the inner and outer rings of the policy framework for FDI. The key issue for inner-ring policies is policy coherence, especially the joint coherence of FDI and trade policies. In , Tanzania approved new regulations in the mining sector that allows the government to tear up and renegotiate mining contracts, partially nationalise mining companies, introduce higher royalties, enforce local beneficiation of minerals and bring in strict local-content requirements, which could put foreign investments at risk.
According to the Doing Business report published by the World Bank, Tanzania ranked st out of countries, gaining three positions compared to the previous report. Investors are drawn to the country's commitment to implement sound macroeconomic policies, its efficient privatization program and abundant natural resources. However, low levels of industrial development, environmental concerns, lack of transparency and poor compliance with legislation are barriers to investment.
The business environment remains hampered by ineffective regulations. Labor regulations are not flexible enough to support a dynamic labor market. Foreign investment in land is limited and investment in other sectors can be screened. Since the election of President John Magufuli in , the authoritarian turn of the government has been widely criticized. Its governance style and unfavorable investor policies are causing growing mistrust of international investors and are damaging the perception of the business climate in Tanzania, which remains restrictive.
In , a large deposit of helium gas was discovered in Tanzania and its exploration work, which was due to start in , was postponed to The same year, the construction of a large port in Bagamoyo was launched, costing USD 11 billion. China and Tanzania have embarked on 19 multi-billion dollar projects. Among these projects, in addition to the port of Bagamoyo, is the project to build a 34 km road between Bagamoyo and Mlandizi, connecting the port to Tanzania's internal rail network and the Zambia Railway.
Any Comment About This Content? Report It to Us. Latest Update: October Landsprofiler Tanzania. Foreign direct investment Investment framework and opportunities. Foreign equity ownership restrictions on certain services sector telecommunications, TV channels, newspapers Lack of adequate and reliable power Poor infrastructure Lack of skilled labour force Government Measures to Motivate or Restrict FDI Foreign investors can benefit from many fiscal and non-fiscal incentives.
Automatic permit of employment to 5 foreign nationals on projects holding certificates of incentives Find out more about Investment Service Providers in Tanzania on GlobalTrade. Next Investment framework and opportunities. Doing Business Tanzania Australia. Burkina Faso.