Investors prefer predictable regulatory environment

LOW labour costs and access to natural resources matter less to investment decisions than political and economic stability and a predictable legal and regulatory environment, a World Bank Report polling 2 400 business executives in 10 major emerging-market countries has shown.

Results of the survey highlight the critical role of Government actions in reducing investor risk and increasing policy predictability for rebuilding investor confidence.

The report, “Rebuilding Investor Confidence in Times of Uncertainty”, further shows that reducing regulatory risk for investors has striking effects on Foreign Direct Investment (FDI) flows — even more than the effects of trade openness.

Foreign investors cited supportive political environments, stable macroeconomic conditions and conducive regulatory regimes as their top three investment decision factors — even more important than low taxes, low labour and input costs, or access to natural resources.

A 1-percentage point reduction in regulatory risk tends to boost the likelihood of an investor entering or expanding in a host country by as much as 2 percentage points, the research findings show.

This is better than what trade does to attract FDI. A 1-point increase in the host country’s trade-to-GDP ratio boosts the likelihood by no more than 0,6 percentage point, according to the report.

Investors closely associate with lower regulatory risk — transparency, legal protection for investors, and investor access to grievance-recourse mechanisms.

“Improving transparency and reducing bureaucratic discretion is an important first step for governments in developing economies,” the World Bank suggests.

“This can make the business outlook more predictable and less risky for companies.

“Governments can strengthen transparency by consulting systematically with the private sector and other stakeholders.”

Interestingly, this World Bank Report comes at a time the Zimbabwe Government has arbitrarily and abruptly suspended trading on the Zimbabwe Stock Exchange (ZSE).

It also comes at a time, there are suggestions that Old Mutual be delisted from the ZSE.

This makes the country’s legal and regulatory environment unpredictable and questions the role of the Securities and Exchange Commission of Zimbabwe, which is supposed to regulate the country’s capital markets.

Commenting on his tweeter handle business man and lawyer Tawanda Nyambirai said what is happening at the ZSE in general and Old Mutual in particular, “has shuttered confidence in the whole stock market”.

“We will have hell to pay for our poor execution as a country just as we have to pay for land reform, for the bad execution of dollarisation without compensation in 2009, for the de-dollarisation of bond notes without compensation in 2019,” tweeted Nyambirai.