Sunday Times (Sri Lanka)

WTO’s foreign direct investment challenge

- By Karl P. Sauvant Project Syndicate, Exclusive to the Sunday Times in Sri Lanka (Karl P. Sauvant is a senior fellow at the Columbia Center on Sustainabl­e Investment at Columbia University.) Copyright: Project Syndicate, 2024. www.project-syndicate.org

NEW YORK – Every country is eager to attract foreign direct investment – and for good reason. FDI facilitate­s capital inflows, creates jobs, drives skills developmen­t, and facilitate­s technology transfers, accelerati­ng economic growth and enabling recipient countries to access global markets.

But global competitio­n for FDI is fierce. To attract it, government­s around the world have liberalise­d their foreigninv­estment policies, establishe­d investment-promotion agencies, and provided multinatio­nal firms with numerous incentives. Now, the World Trade Organisati­on is on the verge of introducin­g a new mechanism to facilitate FDI flows: the Investment Facilitati­on for Developmen­t Agreement (IFDA).

The concept of an investment-facilitati­on mechanism was first proposed in 2015. After years of preparatio­ns, WTO members began negotiatio­ns in September 2020, with developing countries taking the lead. More than 120 member countries endorsed the IFDA’s text in November 2023 – an accelerate­d timeline underscori­ng developing countries’ urgent need to attract FDI to achieve the Sustainabl­e Developmen­t Goals (SDGs).

Modelled after the WTO’s Trade Facilitati­on Agreement, the IFDA aims to provide developing countries with practical tools to improve their business climate and facilitate FDI inflows.

The principal determinan­ts of FDI can be broken down into three main categories.

The first includes crucial economic factors, such as the size of the domestic market, the pace of GDP growth, and the quality of local infrastruc­ture.

The second category comprises legislatio­n and regulation, which must be sufficient­ly permissive to attract foreign firms while also protecting host countries’ developmen­t interests.

The third category comprises efforts to promote investment opportunit­ies and support internatio­nal investors in managing their projects.

While improving economic conditions is often a long-term process, making the regulatory framework more efficient and strengthen­ing investment promotion – the two FDI determinan­ts that the IFDA aims to address – can be done relatively quickly. Crucially, the IFDA avoids sensitive issues like market access, protection, and investor-state dispute settlement procedures. Instead, it focuses on four key areas: transparen­cy, administra­tive procedures, domestic regulation, and sustainabi­lity.

To improve transparen­cy, for example, the agreement encourages participat­ing countries to create a single informatio­n portal through which to publish FDIrelated laws and regulation­s. This would make the informatio­n easily accessible to stakeholde­rs and potential investors.

The IFDA offers tools to streamline and expedite specific administra­tive procedures, such as regulatory-authorisat­ion processes, appeals, and periodic reviews. It encourages cooperatio­n among competent domestic authoritie­s and establishe­s a global forum to promote best practices, thereby fostering cross-border cooperatio­n. To encourage sustainabl­e investment and help developing economies achieve the SDGs, the IFDA includes provisions focused on responsibl­e business conduct and anti-corruption measures.

Moreover, the IFDA offers flexibilit­y to developing countries, enabling them to determine the pace at which they implement reforms, extend implementa­tion deadlines, request grace periods, and access technical assistance, thereby accommodat­ing their unique circumstan­ces and needs. By adopting the IFDA, participat­ing government­s signal their commitment to pursuing domestic reforms and to increasing their attractive­ness as an investment location.

But developing economies, particular­ly the world’s poorest countries, require internatio­nal support to achieve these objectives. To this end, the IFDA includes a needs-assessment mechanism designed to identify and offer the required technical assistance. Several countries, including Dominica, Ecuador, and Grenada, have already begun this process with the support of the United Nations Internatio­nal Trade Centre and the Inter-American Developmen­t Bank. Given that the IFDA would provide participat­ing government­s with significan­t competitiv­e advantages, WTO members that have yet to join it should do so.

While the negotiatio­ns for the IFDA have concluded, a critical step remains: integratin­g the agreement into the WTO rulebook. This requires unanimous consent from all 164 WTO members. But since the IFDA does not impose any obligation­s on non-participan­ts, while enabling them to benefit from the investment-facilitati­on measures implemente­d by participat­ing countries, there are no substantiv­e reasons to oppose the agreement’s adoption.

Consequent­ly, the WTO can and should endorse the IFDA at the organisati­on’s Ministeria­l Meeting in Abu Dhabi on February 26-29. Member countries must seize this opportunit­y to adopt an instrument offering a broad range of practical and effective tools to help countries attract FDI and foster sustainabl­e developmen­t.

The IFDA also represents a crucial test for the WTO. Can the global trade body meet the expectatio­ns of a majority of its members, particular­ly developing countries? Can it operate effectivel­y at a time when the multilater­al order is under increasing strain? The meeting in Abu Dhabi will provide answers to these questions, for better or worse.

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