Eighth Annual Columbia International Investment Conference: “Investment Incentives – The Good, The Bad, and the Ugly: Assessing the Costs, Benefits, and Options for Policy Reform”
A draft Background Paper on Investment Incentives is available for download. A volume entitled “Rethinking Investment Incentives: Trends and Policy Options,” inspired by the Conference proceedings, published in Spring 2016, is available here.
Recent decades have seen a dramatic rise in an array of costly government incentives used to attract FDI. Yet while use of incentives by both national and sub-national governments around the world is ubiquitous, with few exceptions little is known about their prevalence, distribution, effectiveness and impacts. For the most part, the use of investment incentives has thus far escaped systematic monitoring, reporting, analysis and regulation.
But this may be changing. Certain types of incentives—especially fiscal, financial and regulatory—have increasingly been discouraged by international organizations and experts as they are costly, potentially harmful to sustainable development, and often economically inefficient, resulting in increased inequality rather than inclusive growth. Moreover, it is widely acknowledged that companies may seek—and governments may offer—incentives beyond those that may be needed to attract an investment. Other aspects of incentive packages (such as public investments in infrastructure and/or training) may be more effective but under-utilized.
Given the potentially large costs and benefits of investments and investment incentives for countries, this Conference aimed to advance our understanding about the role that incentives have played in attracting and retaining foreign direct investment; the policy rationales supporting or discouraging various types of incentives; the strategies that may be more effective at achieving the objectives of host governments; and the potential for future coordinated action on these issues.
November 13, 2013, Wednesday
8:30 – 9:00 Breakfast and registration
9:00 – 9:15 Opening remarks
9:15 – 9:45 Presentation: Taking stock of FDI incentives: what in the world is going on?
9:45 – 12:30 Session I: Do foreign direct investment incentives work? Do they attract FDI?
FDI incentives are generally justified due to information asymmetries between the investor and the host government, and the deficiencies in the investment climate, such as weak infrastructure, underdeveloped human resources, and administrative constraints. There are, however, reasons to question whether FDI incentives are indeed effective at influencing investment decisions and delivering the positive spillovers for which they are offered. A multitude of factors impacts the investor location decision: the distance to major markets, the proximity to raw materials, the size of the local market, the quality of the infrastructure, the state of property rights, contract laws and their enforcement, the extent of corruption, the skills of the workforce, the costs of complying with regulations and other government procedures, the barriers to international trade, the macroeconomic and political stability of the country, and whether capital and profits can be repatriated without restrictions. In such a complex landscape, it is important to understand whether, what types, and under what circumstances investment incentives will actually influence investors’ decisions regarding where to locate their investments.
This panel explored:
– How responsive is the locational decision of FDI to incentives which raise the return on capital? How does the responsiveness differ by country, sector, or type of FDI incentive (information and technical assistance vs. financial or fiscal grants)?
– Do incentives only divert investment or can they increase overall investment flows?
– What are the various types of FDI – vertical, horizontal, resource-based, head-quarter FDI – really attracted to?
– Do incentives only matter at the margin? Or can they have a substantial impact in attracting FDI even when fundamental business environment conditions are not met?
– Is there enough consensus to set the ground for general guidelines on when, how and which incentives ought to be used?
Louise Story, Staff Reporter, The New York Times
Shaun Donnelly, Vice President, Investment and Financial Services, United States Council for International Business
Nirmala Jeetah, Director of Planning and Policy, Board of Investment, Republic of Mauritius
Frances Ruane, Director, The Economic and Social Research Institute, Ireland
Adnan Seric, Industrial Development Officer, United Nations Industrial Development Organization
Lesley Wentworth, Program Manager, Economic Diplomacy, South African Institute of International Affairs
12:30 – 14:00 Lunch
Keynote Speaker: German Rojas, Minister of Finance, Republic of Paraguay
14:00 – 17:30 Session II: Do foreign direct investment incentives cost more than they are worth? Conducting a proper cost-benefit analysis
Is it possible to establish ‘best practice’ for systematically evaluating the effectiveness of FDI incentive schemes? The provision of FDI incentives by governments and investment promotion agencies is rarely done on the basis of a formal cost-benefit analysis. While the short-term goal of attracting FDI is easily explained and understood, the longer term costs and benefits are harder to quantify, especially at the outset. How can governments address the challenges of comprehensively and accurately assessing costs and benefits over time? Foregone tax revenue– including the opportunity costs of the foregone revenues – may, for example, not be part of a formal cost-benefit calculation, though such costs can grow quickly for governments. Moreover, economic, environmental, social and governance indicators are all relevant to assessing if a FDI project will, over a sustained period of time, provide the expected net benefits to an economy, but it is unclear whether and to what extent these indicators are used to design appropriate incentives or determine whether schemes that are in place should continue. Additionally, it is not clear what the correct unit of analysis should be when undertaking a cost-benefit analysis: a country might receive positive net benefits from an investment incentive but additional costs may be borne by countries or states external to the jurisdiction in question. To what extent can or should these costs be part of a cost-benefit analysis?
This panel discussed:
– What are the types of costs and benefits that enter into the cost-benefit matrix of analysis? Who bears the costs and who receives the benefits? How do costs and benefits change with the time period of analysis?
– How do costs and benefits vary by the type of FDI incentive – fiscal, financial, regulatory, and other incentives? Which is the most affordable and effective?
– How do the costs and benefits differ by industry and when using structured incentive packages through cluster strategies and Special Economic Zones (SEZs)?
– Overall, have FDI incentives been effective at achieving host government objectives in a cost efficient manner?
Louis Wells, Herbert F. Johnson Professor Emeritus, Harvard Business School
James Henry, Chair, Global Alliance for Tax Justice Coordinating Committee; Former Chief Economist, McKinsey & Co.
Du The Huynh, Senior Lecturer, Fulbright Economics Teaching Program, Ho Chi Minh City, Vietnam
Sebastian James, Senior Tax Policy and Tax Administration Specialist, World Bank Group
Max Lienemeyer, Deputy Head of Unit, Competition Directorate General, European Commission
Govind Mohan, Minister (Economic), Embassy of India, Washington D.C.
17:30 – 21:00 Drinks followed by a networking dinner
November 14, 2013, Thursday
8:30 – 9:00 Breakfast
9:00 – 12:15 Session III: What are the alternatives? Attracting and benefiting from foreign direct investment
There are several alternatives to traditional fiscal, financial, and regulatory investment incentives that may be more effective and/or less costly for governments, particularly when (1) the FDI would be attracted to the country or cluster irrespective of the incentive; (2) the FDI is not contributing to national development goals; or (3) traditional incentives are sub-optimal mechanisms to promote the particular domestic economic development objectives, or to correct a competitive weakness. Alternative policy measures can include: comprehensive investment in infrastructure and human capital; cluster development and provision of enabling infrastructure to TNCs; improving technical and information services; increasing transparency and reducing red tape and bureaucracy; provision of aftercare strategies; improving institutional capacity and oversight, and regulatory transparency and enforcement; and better facilitation of domestic linkages and spillovers from FDI. Comparing alternative FDI strategies, and understanding the costs and benefits of each, requires a proper diagnostic of the investment climate in each country and an understanding of the priorities and opportunity costs for public expenditures.
This panel addressed:
– What alternative strategies are available to developing economies wanting to attract or retain capital while minimizing fiscal costs or complex oversight requirements?
– Which countries have been most successful in attracting and benefiting from FDI? What role have cluster strategies, regional integration, and investment in the institutional and enabling environment played? In the case of mineral regimes, what have been the optimal ways to attract and benefit from capital over a sustained period of time?
– What are the fundamentals which investors are really attracted to? How might a country properly leverage their resources, market-size, or efficiency conferring endowments to attract, retain, and maximize the benefits from FDI?
Ana Tavares-Lehmann, Associate Professor of Economics, University of Porto
Joseph Bell, Of Counsel, Hogan Lovells US LLP; Founding Board Member, International Senior Lawyers Project
Harry G. Broadman, Managing Director and Chief Economist, PricewaterhouseCoopers
Harald Jedlicka, Investment Policy Officer, International Trade and Investment, Investment Climate Department, World Bank Group
Charles Krakoff, Senior Associate, Investment Consulting Associates (ICA)
Thea Lee, Deputy Chief of Staff, AFL-CIO
Fabien Nkot, Senior Advisor, Office of the Prime Minister, Cameroon; Professor of Political Science, University of Yaoundé II, Cameroon
12:15 – 14:00 Lunch
Keynote Speaker: Jeffrey Sachs, Director, The Earth Institute, Columbia University
14:00 – 17:15 Session IV: The way forward: policy options for the governance of FDI incentives
The final conference panel provided an opportunity to reflect on how investment promotion agencies and policy makers can most efficiently achieve their development goals with support from the international community. The goal was to enlarge the pool of capital and enhance the positive spillover benefits of FDI, for investors and, for host communities, countries and regions. The lack of coordination, information sharing and collective analysis between investment promotion agencies has led to an unnecessary race-to-the-bottom, in which governments may be using short-sighted, costly and potentially unnecessary incentives to compete for FDI withoutconsidering the long-term impacts domestically or regionally .Opportunities to enhance the type and benefits of FDI they are attracting may also be overlooked. There are limited examples of regional cooperation to prevent such outcomes. The European Union’s Multi-Sectoral Framework on Regional Aid for Large Investment Projects has had a substantial impact in limiting the unnecessary race to provide costly FDI incentives by member states. Yet governments circumvent even this framework through the use of non-explicit FDI incentives There is much academic debate around reviving a Multilateral International Investment Agreement that would regulate investment incentives, but similar models, for instance the WTO system for regulating trade-incentives through notifications, have been ineffective. Against this backdrop, the panel explored the possibilities for national, regional, and global regulatory measures to serve as an efficient mechanism to limit wasteful and inefficient FDI incentives; reduce the negative impacts of FDI competition; and enhance positive spillovers for sustainable development.
This panel addressed:
– What should be the role of investment promotion agencies in the 21st century to ensure that they remain relevant and cost effective, while serving a country’s developmental objectives?
– How can FDI incentives be implemented to ensure that a maximum of costs are privatized while benefits are socialized?
– How should FDI incentives be legislated, monitored, and evaluated in a manner which is transparent and done through the proper legislative channels?
– What regulatory frameworks have been put in place in developed and developing economies to minimize costs and distribute benefits equitably, and to what effect?
– Are global governance measures needed?
- Do tax systems of home countries affect incentives offered by host countries?
- Could international investment agreements (IIAs), which already restrict the use of certain non-fiscal investment incentives, be used effectively to regulate use of a broader set of FDI incentives?
- Are broader multilateral solutions needed? What would they look like and what would be the content?
Karl P. Sauvant, Resident Senior Fellow, Columbia Center on Sustainable Investment
Ruud De Mooij, Deputy Head, Tax Policy Division, IMF
Mark Koulen, Senior Counsellor, Rules Division, WTO
Max Lienemeyer, Deputy Head of Unit, Competition Directorate General, European Commission
Kenneth Thomas, Professor of Political Science and Fellow, Office of International Studies and Programs, University of Missouri-St. Louis
Michael Tracton, Director, Office of Investment Affairs, U.S. Department of State; Vice-Chair, OECD Investment Committee
James Zhan, Director, Investment and Enterprise Division, United Nations Conference on Trade and Development (UNCTAD)