TRADE, INVESTMENT AND COMPETITIVENESS TRADE, INVESTMENT AND COMPETITIVENESS EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Divestment Drivers and FDI Retention Priyanka Kher and Carlos Griffin © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Cover and layout design: Diego Catto / www.diegocatto.com Photo credits: Shutterstock Acronyms CEO chief executive officer CFO chief financial officer FDI foreign direct investment HQ headquarters IPA investment promotion agency LSS-ILG Industry Leadership Group of Life Sciences Scotland MIGA Multilateral Investment Guarantee Agency MNE multinational enterprise OECD Organisation for Economic Co-operation and Development OEM original equipment manufacturer RDB Rwanda Development Board WBG World Bank Group Acknowledgments Priyanka Kher (pkher@worldbank.org) is a Private Sector Specialist in World Bank Group’s Global Investment Climate Unit. Carlos Griffin is a Senior Investment Promotion Consultant in the same unit. The authors are grateful to Armando Heilbron (Senior Private Sector Specialist, World Bank Group) for his valuable inputs and support through the publication process. The authors are grateful for valuable inputs and comments from Soujanya Chodavarapu (Senior Private Sector Specialist, World Bank Group), Zenaida Hernandez (Senior Private Sector Specialist, World Bank Group), Eloise Obadia (Senior Consultant, World Bank Group), Jesica Torres Coronado (Economist, World Bank Group), Peter Kusek (Senior Economist, World Bank Group), David Bridgman (Senior Consultant, World Bank Group), Mark Hallan (Director, Global Investment, Scottish Development International), Paul Lewis (Senior Investment Promotion Consultant, World Bank Group), Eduardo Antonio Jimenez Sandoval (Consultant, World Bank Group) and Yan Liu (Economist, World Bank Group). The note was prepared under the guidance of Asya Akhlaque (Practice Manager, World Bank Group) and Ivan Nimac (Lead Private Sector Specialist, World Bank Group). Thanks to Marcy Gessel of Publication Professionals LLC for professional editing services and to Diego Catto Val for design and production services. This publication was made possible through the financial support of the United Kingdom’s Foreign, Commonwealth and Development Office. Contents EXECUTIVE SUMMARY 1 1. INTRODUCTION 3 2. DRIVERS OF DIVESTMENT DECISIONS 7 Type 1: Planned Market Exit 12 Type 2: Worsening of an Affiliate’s Performance 14 Type 3: New/Heightened Risks for Affiliates 15 Type 4: Change in HQ Circumstances 16 3. ACTING ON DRIVERS OF DIVESTMENT FOR GREATER INVESTMENT RETENTION 19 Step 1: Set Strategic Parameters for Retention Efforts 20 Step 2: Actively Monitor and Assess Divestment Risks 22 Step 3: Facilitate Solutions to Investor Problems 24 Step 4: Escalate and/or Advocate before Others in the Government to Take Timely Action 27 4. CONCLUSION 29 REFERENCES 31 Figures Figure 1: Biggest Obstacles Cited by Foreign Affiliates Around the World 9 in WBG Enterprise Surveys Figure 2: A Typology of Divestment Drivers 10 Figure 3: Effects of COVID-19 Lockdown Policies on Global Value Chains 12 Figure 4: Changes in the Number of Japanese Companies, Electronics Firms, 13 and Residents in Malaysia, 1990-2010 Figure 5: Trends among Top Three Divestment Motives in Recent Years 16 Figure 6: A Systematic, Four-step Approach for Optimal Retention 19 Figure 7: JVC Video Malaysia’s Transition from Analog to Digital Products 26 Box Box 1: Public-Private Collaboration for Company and Sector Growth: 28 Life Sciences in Scotland Tables Table 1: Types of Issues Potentially Leading to Divestment 8 Table 2: Illustrative Investor Retention KPIs – Year 1 21 Table 3: Characteristics of Firms and Sectors Indicating Increased 22 Likelihood of Divestment Table 4: Illustrations of Creative Problem-solving Applied to a Range 24 of Divestment-threatening Issues Executive Summary Affiliates of foreign multinationals offer potential growth and benefits through years of successful operation and successive expansions, including through job creation, new skills and technologies, and deeper participation in global value chains. In fact, reinvestment has become an increasingly important part of global foreign direct investment flows. This is evidenced by the share of reinvested earnings in global FDI1 growing from 30 percent in 2005 to more than 40 percent since 2018.2 However, these benefits can also be lost with a multinational’s divestment from affiliates. An analysis by the Organization for Economic Co-operation and Development (OECD) of 62,000 foreign affiliates around the world shows that one in five was divested during the period of 2007-2014,3 which is supported by recent analysis showing that the number of divestitures completed globally in 2021 had more than doubled from 2020 (Deloitte 2022). On the other hand, in some cases divestment is needed -for example, to transition to energy efficient production and to decarbonize supply chains. In this context, governments are challenged to systematically implement effective investment retention and expansion strategies. The need to address the issue of divestment is made more urgent by extraordinary crises. The COVID-19 pandemic, the war in Ukraine, inflation, growing geopolitical tension, volatile energy prices, climate change, an acceleration in the emergence of disruptive technologies,4 resurgent protectionism and related challenges in global value chain integration, the possibility of a global minimum corporate tax, have led to disruptions in business plans of multinationals. The beginning of 2020 saw the second largest annual decline in global FDI flows. Dropping 35 percent, FDI fell below US$1 trillion for the first time since 2005. Several countries saw net divestment. Although FDI flows recovered in 2021, much of that growth was in developed economies, driven by stimulus spending in infrastructure and large outlier projects. Latest data shows that FDI declined by 12 per cent in 2022, to $1.3 trillion (UNCTAD 2023). While much research has been done regarding how political and regulatory risks — such as arbitrary, unpredictable, and non-transparent government actions, breach of contract, and expropriation — can lead to divestment (MIGA 2009-13; World Bank 2019, 2020; Kher and Chun 2020), much less has been done on how operational issues can lead to divestment and what governments can do to avoid them. As such, this note aims to serve as a starting point, synthesizing literature and World Bank experience on the topic, to explore three questions: What 1 As opposed to equity or intra-company loans. 2 https://www.oecd.org/coronavirus/policy-responses/foreign-direct-investment-flows-in-the-time-of-covid-19-a2fa20c4/ 3 The study highlights the impact on the divested affiliate. For example, the divested affiliates experience on average 28 percent lower sales, 24 percent lower value-added, and 13 percent lower employment as compared to firms that stay foreign-owned. 4 Evidence from multiple sectors and countries overwhelmingly points to accelerated digital adoption since the pandemic. Survey evidence from the World Bank’s Global MNE Pulse Survey finds a large and persistent increase in the share of firms reporting new or increased use of digital platforms due to the pandemic in developing countries. Perception surveys also suggest most businesses plan to continue using digital technologies once the immediate crisis is over (Riom and Valero 2020, BTB/ Lloyds 2020). On the other hand, growing international gaps in technology adoption could further disadvantage emerging market and developing economies, making it harder for them to attract or retain foreign affiliates. DIVESTMENT DRIVERS AND FDI RETENTION <<< 1 1 are the drivers of divestment decisions? Are there any early In terms of setting strategic parameters, individual divestment warning signs of divestment likelihood that could be discernible threats should be prioritized on the basis of their significance to retention agencies?5 How can retention agencies leverage for the government’s development goals, retention agency’s this knowledge to enable better FDI retention? strategy, and the ability of retention officials to influence outcomes. This, in turn, requires that officials who would There are no comprehensive, publicly available datasets optimize their retention efforts ask and answer additional from global surveys of firms concerning their reasons for questions about the rationale for undertaking retention, divestment. Nonetheless, the breadth of variables studied in objectives, target audiences, activities, resources, and the existing literature, divestment cases for which details are monitoring and evaluation. publicly known, and the World Bank’s experience working with client governments to strengthen their investment institutions Knowledge of divestment risks can come either directly from show that, at the highest level, the drivers of divestment may firms or indirectly from other sources. It may be possible to be classified into four broad types: (i) planned market exit; confirm divestment threats to individual affiliates, or to observe (ii) worsening of affiliate’s performance; (iii) new/heightened heightened divestment risks at a sector or national level. While risks for an affiliate; and (iv) a change in the headquarters’ most of the divestment drivers represent changes in a firm’s circumstances. Among these, the one which appears to be circumstances, some firms and sectors may also have inherent the most significant divestment driver is the worsening of the characteristics that indicate a higher likelihood of divestment. affiliate’s performance (that is, reduced revenues, increased Officials may choose to act based only on confirmed costs, and/or worse performance than other affiliates in its divestment threats from specific companies. Alternatively, corporate network). This typology is primarily intended to they may do so based on officials’ perceptions of heightened highlight factors and situations that can help with the timely divestment risk among a pool of investors as defined by, for detection and monitoring of divestment risks. example, sector, region, firm characteristic, market dynamic, and government action. Once risks are identified, agencies To detect and reduce risks of divestment, effective retention need to engage in effective problem-solving. Problem-solving measures need to be implemented by a lead agency in close can be through provision of information, assistance, advocacy coordination with the institutions responsible for technical areas or other services. and other stakeholders. The lead agency may be an investment promotion agency (IPA) mandated to perform investor aftercare At the root of each divestment driver is a change to revenue, and retention services, an investment ombudsman office, or cost, or risk — either actual or projected. These changes a focal point within a ministry. What is critical is that the lead may arise from firm circumstances, market dynamics, and agency is legally mandated for retention, suitably empowered government actions, with each demanding a different form with access to high-level government authorities, adequately of problem-solving. What is critical for effective problem- resourced (both with financial and human resources), able to solving is the recognition of this possibility of divestment, secure effective collaboration from other agencies, and trusted timely identification of such a risk, as well as proactive by the investor community. Even these ideal characteristics engagement with stakeholders based on an analysis of and great knowledge of divestment drivers do not automatically divestment risk. Investor issues requiring the government to translate into greater retention. The breadth of the investor make a change can either be completely within the authority community, their varied and ever-changing circumstances, and of one agency, or they can require a lengthy, formal, inter- a government’s limited time and resources mean that retention ministerial, deliberative process. At the simpler end of this officials are never able to attain a comprehensive inventory spectrum, the services provided by the retention agency of divestment risks or do something about every risk of which require consideration and cooperation from another agency. they are aware. Indeed some divestments may be planned and At the more complex end, it requires advocacy to persuade needed. Optimizing risk identification and retention requires a multiple, influential stakeholders to support and/or accept a systematic approach. Retention agency officials can follow a particular course of government action with wide-ranging four-step approach, entailing (i) setting strategic parameters, (ii) effect, such as the changing of laws and national policies. risk assessment, (iii) problem-solving, and (iv) escalation and Retention agencies must accordingly lay the groundwork in advocacy (Kher, Obadia, and Chun 2021; World Bank 2019). the form of relationship-building and awareness-raising with Using this approach, officials can identify, assess, and monitor the institutions from which they are likely to seek cooperation. high-risk situations where there could be potential divestment. 5 For the purpose of this note, agencies leading government efforts to better retain investment are referred to as “retention agencies.” These typically include units within ministries, IPAs, ombudsman offices, and/or other agencies. 2 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT 1. Introduction At the beginning of the COVID-19 pandemic in 2020, the world witnessed the second largest annual decline in global FDI flows. Dropping 35 percent, FDI fell below US$1 trillion for the first time since 2005. Twenty-three countries — as diverse as Italy, Qatar, Thailand, Trinidad and Tobago, and Ukraine — saw net divestment, the largest number of countries in any year since 1986.6 Although FDI data for 2021 shows an annual increase of 77 percent, this recovery was highly uneven. Nearly two-thirds of that growth was in developed economies, driven by stimulus spending in infrastructure and large outlier projects. Meanwhile, greenfield investment in industrial sectors remained 30 percent below pre-pandemic levels globally, with some developing regions experiencing further double-digit declines in 2021.7 Quarter (Q)2/2020 had the lowest number of new FDI projects since 2015, that is, almost half of the pre-pandemic peak in 2019. 2022 started with a strong recovery, but Q3 and Q4 saw the number of projects fall back to below pre-pandemic levels. Latest data shows that FDI declined by 12 per cent in 2022, to $1.3 trillion (UNCTAD 2023). As part of the World Bank’s quarterly Global Multinational Enterprise (MNE) Pulse Survey for March-June 2022, 28 percent of respondents indicated that they would reduce investment in the host country as compared to 23 percent indicating an intention to increase investment. Alongside, the share of reinvested earnings in global foreign direct investment (FDI)8 has grown from 30 percent in 2005 to more than 40 percent since 2018.9 Foreign affiliates present great opportunities for FDI growth, global value chain participation, job creation, and knowledge spillovers. However, these benefits can be lost with divestment. An analysis by the Organization for Economic Co-operation and Development (OECD) on 62,000 foreign affiliates around the world shows that one in five affiliates was divested during the period of 2007-2014 (Borga and others 2020).10 Recent analysis also shows that the number of divestitures completed globally in 2021 had more than doubled from 2020 (Deloitte 2022). Indeed, in some cases divestment is needed -for example, to transition to energy efficient production and to decarbonize supply chains. In this context, FDI policy and promotion efforts of governments need to systematically include effective retention and expansion strategies. 6 https://unctadstat.unctad.org 7 https://unctad.org/system/files/official-document/diaeiainf2021d3_en.pdf 8 As opposed to equity or intra-company loans. 9 https://www.oecd.org/coronavirus/policy-responses/foreign-direct-investment-flows-in-the-time-of-covid-19-a2fa20c4/ 10 The study highlights the impact on the divested affiliate. For example, the divested affiliates experience on average 28 percent lower sales, 24 percent lower value-added, and 13 percent lower employment as compared to firms that stay foreign-owned. DIVESTMENT DRIVERS AND FDI RETENTION <<< 3 The need to address the issue of divestment is urgent, given Indeed, during this time of multiple crises, many agencies in the extraordinary crises and trends that now present investors charge of FDI, such as investment promotion agencies (IPAs) and policymakers with extreme economic uncertainty. Chief have responded by prioritizing retention services. A World Bank amongst these developments are the COVID-19 pandemic, Group (WBG) survey of 41 national IPAs in April 2020 found the war in Ukraine, inflation, growing geopolitical tension that a large majority intended to contact all established firms between the world’s two largest economies, volatile energy in their respective countries. Their aim was to systematically prices, climate change, an acceleration in the emergence of collect information about issues faced by investors, solve disruptive technologies,11 resurgent protectionism and related individual investor issues, and advocate before government challenges in global value chain integration, and the possibility for emergency policy responses or reforms.12 The experiences of a global minimum corporate tax. Further, the relationship of countries such as Brazil, Ethiopia, Rwanda, and Vietnam between nearshoring/reshoring and divestment is a close also show that systematic efforts to support retention and one. Indeed, divestment from one location can be based on expansion of investment can lead to concrete results (Kher, a decision to relocate elsewhere for reasons of nearshoring/ Obadia, and Chun 2021). reshoring. Retaining and encouraging expansions from existing investments has become all the more important, as Services to enable better FDI retention and expansion global, regional, and national crises, along with substantial include addressing investor issues, advocating investment fiscal constraints, reduce investment prospects (Ruta and ecosystem reforms, and collaborating for sector development. others 2022). These services are typically provided through aftercare, retention, and grievance management programs (Heilbron Much research has been done regarding how political and and Aranda Larrey 2020; World Bank 2019; Kher, Obadia, regulatory risks — such as arbitrary, unpredictable, and and Chun 2021). Such services and programs are often non-transparent government actions, breach of contract, provided by IPAs, ministries of economy, ombudsman offices, expropriation — can impact retention and expansion of special economic zone authorities, business development investment (MIGA 2009-13; World Bank 2019, 2020; Kher and offices of subnational governments, and other public offices Chun 2020). However, relatively little has been done recently tasked with private sector development. These “retention concerning how other issues faced by investors in their agencies” require a deep knowledge of what it takes for operations can lead to divestment. Thus, the aim of this note firms to grow, as well as what can threaten their success is to fill that gap and ultimately help host country investment and survival. The challenge usually faced by governments is agencies with more timely identification of potential divestment that they typically find out about divestments when it is too risks. Based on a literature review and the World Bank’s late to remedy a situation. The earlier officials can identify a operational experience, this note explores the following three potential divestment, the better their chance of successfully questions: preventing it. 1. What are the drivers of divestment decisions, including the For the purpose of this note, all divestments (that is, business cancellation of expansion plans? sales or liquidations) can be understood as occurring through 2. Are there any early warning signs of divestment likelihood one of the following modes: that could be discernible to retention agencies? (that is, agencies leading government efforts to better retain 1. An established project is sold to another foreign investment). investor. In this case, the project is still viable. Specific 3. How can retention agencies leverage this knowledge to FDI benefits, such as local sourcing, jobs, skill/technology enable better FDI retention? spillovers, and international connections, could change. In addition, there is a potential for downsizing or for upgrading The topic of divestment broadly needs more research. As in the near term. such, this note aims to serve as a starting point, documenting 2. An established project is sold to a domestic investor. available literature on the topic. It ultimately aims to support Here as well, the project is still viable, and some level of retention agencies in taking more informed steps and decisions jobs and tax collection continues. However, broader FDI to better retain investment. benefits could be lost. 11 Evidence from multiple sectors and countries overwhelmingly points to accelerated digital adoption since the pandemic. Survey evidence from the World Bank’s Global MNE Pulse Survey finds a large and persistent increase in the share of firms reporting new or increased use of digital platforms due to the pandemic in developing countries. Perception surveys also suggest most businesses plan to continue using digital technologies once the immediate crisis is over (Riom and Valero 2020, BTB/ Lloyds 2020). On the other hand, growing international gaps in technology adoption could further disadvantage emerging market and developing economies, making it harder for them to attract or retain foreign affiliates. 12 https://pubdocs.worldbank.org/en/917561588958415090/WBG-IPA-Response-to-COVID-19.pdf 4 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT 3. An established project is closed (liquidated or relocated abroad). This is the most harmful type, representing direct and indirect losses. From the host country’s perspective, both liquidation and relocation represent a total closure and direct loss of jobs, taxes, and other development benefits. A possible weakening of suppliers, customers, and the sectoral ecosystem could also occur, sending a signal to potential investors about the declining attractiveness of the location. 4. A planned expansion is cancelled. This is the next most harmful case. It is not technically a divestment. However, the cancellation of a planned expansion still means that the investor was prepared to create jobs, generate tax revenues, and produce other FDI benefits but was dissuaded. This may also have the power to dissuade other potential investors. The rest of this note is organized as follows: Section 2 presents a typology of divestment drivers, Section 3 presents a systematic approach for retention agencies to apply this knowledge for effective retention, and Section 4 presents the conclusions. DIVESTMENT DRIVERS AND FDI RETENTION <<< 5 2 2. Drivers of divestment decisions No comprehensive model has yet been developed to explain voluntary divestment (i.e., divestments not caused by expropriation or other similar government measures) (Steenhuis and Bruijn 2009). Much research has been done on divestments caused by purely government measures (such as breach of contract, expropriation, and other regulatory risks), but literature on the topic of divestments due to other reasons — what is being referred to here as operational issues — is relatively limited.13 Based on World Bank surveys (MIGA 2009-13; World Bank 2020a) and operational experience, Table 1 presents an illustrative list of the types of political risk issues and other operational issues that can potentially lead to divestment, as well as those that can be influenced by proactive efforts of retention agencies. 13 One reason for the limited extent of research literature on divestments may be that they are associated with job losses and negative economic impacts. As such, they may be perceived as failures of the company and/or host government. This can make the stakeholders involved reluctant to publicize details of divestment reasons and processes. See also Grunberg (1981). DIVESTMENT DRIVERS AND FDI RETENTION <<< 7 > > > TA B L E 1 . Types of Issues Potentially Leading to Divestment Topic Examples of Investor Issues Potentially Leading to Divestmenta Political risk issues Operational issues (These put investments at risk of divestment and can (These may not lead to investor-state disputes but can lead to investor-state disputes.) still put investments at risk of divestment.) Legal and • Sudden changes in policies, laws, and regulations; compliance • Unreasonably lengthy delays in renewing permits and licenses Regulatory feasibility (for example, work permits, visas, construction permits; Environment • Abusive refusal of renewing permits/licenses environment permits, inspection) • Changes in the terms of a contract • Systemic regulatory and policy issuesb affecting a group of • Non-transparent and inconsistent application of laws, regulations, investors or sector (for example, local content requirements), as and policies well as compliance feasibility • Discriminatory treatment against foreign investors • Any other government policies, laws, regulations, and other actions that could lead to investment disputes • Systemic regulatory and policy issues affecting a group of investors or sector Infrastructure/ • Government actions that could lead to a breach of contract • Serious issues regarding infrastructure reliability, utility quality or Utilities/Inputs • Unpredictable and arbitrary change in policy/law affecting the consistency, thus affecting investment sustainability continuity of the infrastructure project • Change in infrastructure, utility rates that renders the project • Non-transparent awarding and termination of a contract unfeasible • Expropriation Labor • Discriminatory, unreasonably burdensome, and/or improperly • Difficulty in obtaining urgent access to foreign workers (due implemented labor rules to quotas, visa process, speed, transparency, and/or a lack of information concerning available skills) • Labor/social unrest, strikes, road blockages • Inadequate skills Finance • Difficulty in finding access to affordable rescue financec Capital Transfer • Restrictions on international transfers, repatriation (ad hoc • Restrictions on international transfers, repatriation (weekly limits arrangements leading to discrimination) on banks for foreign currency transfers) Taxes • Unpredictable changes • Tax and incentive predictability, transparency • Retrospective taxation • Sudden and excessive tax increases for a sector • Non-transparent awarding of taxes • Abusive penalties • Undue and persistent targeting and harassment of particular investment projects and/or sectors by the tax administration Customs • Unpredictable changes • Customs lockdowns, trucking, port, customs strikes causing • Retrospective application of duties significant delays for imports and exports • Discriminatory, unreasonable requirements • Customs clearance (speed of import of inputs and capital goods, • Abusive penalties issuance of tax and duty exemptions for investors in special regimes, and transparency at customs clearance) Land • Unilateral cancellation or change of terms of a land lease contract • Title security and speed, lease process speed, transparency • Confiscating land of an investor or making it unusable (amounting to expropriation) Courts • Speed, predictability, transparency, enforcement, and access to mediation/arbitration/dispute resolution Crisis/Force • Contract non-performance due to crisis/force majeure • Issues stemming from a global, country, or sector crisis affecting Majeure • Sudden regulatory and policy changes due to crisis/force majeure investment sustainability • Delays in approving emergency licensing or registration to rapidly change line of business (for instance, personal protective equipment, health supplies or medical devices) Country’s Inter- • Sudden trade restrictions, sudden currency restrictions national Policies Market • Consumer preferences change, competition is increased, or Dynamics technological innovation leads to a competitive disadvantage. Firm • Change in direction of corporate strategy (for example, Circumstances nearshoring, diversification), weaker performance than sister affiliates, limited embeddedness in the host economy Source: World Bank Group. a There could be other factors that can lead to divestments, for example, macroeconomic challenges related to exchange rate volatility, inflation, and political instability. These may require more long-term, structural reforms and are not covered in this table. b Such systemic concerns could arise from both political risk and operational issues. c Financing needed for urgent or emergency situations, such as to remedy default under a debt financing agreement or to support liquidity needs. 8 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT The World Bank’s quarterly Global MNE Pulse Survey for There are no comprehensive public datasets for global surveys the second half of 2021, 28 percent of respondents indicated of firms concerning their reasons for divestment, including a that they would reduce investment in the host country. Half good range of factors across the firm circumstances, market the respondents indicated that country diversification and the dynamics, and government actions. However, the WBG’s local legal and regulatory environment were top reasons for Enterprise Surveys provide insight into areas where one such a reduction. Near-shoring, re-shoring, and a change in would expect the government to exert constructive influence. sourcing decisions were other reasons identified by a third of Figure 1 shows these “biggest obstacles” (risks), as cited by the respondents. foreign affiliates in 155 countries. These are based on each country’s most recent enterprise survey. > > > FIGURE 1. Biggest Obstacles Cited by Foreign Affiliates around the World in World Bank Enterprise Surveys Inadequately educated workforce Tax rates Political instability Access to finance Practices of the informal sector Electricity Corruption Customs and trade regulations Tax administration Transportation Labor regulations Business licensing and permits Crime, theft, and disorder Access to land Courts 0 2 4 6 8 10 12 Percent of respondents Source: World Bank Enterprise Surveys in 155 countries between 2006 and 2021 and authors’ calculations. Note: This figure includes the percentage of respondents citing each obstacle as their most significant. DIVESTMENT DRIVERS AND FDI RETENTION <<< 9 The breadth of variables studied in existing literature and the host location possessing some advantage over other locations, divestment cases for which basic details are publicly known and (iii) ownership of the foreign operations providing some indicate that divestment monitoring and retention measures advantage over outsourcing the operations through licensing, are likely to vary according to a project’s divestment visibility contract manufacturing, and so on. Operational challenges or (for example, planned versus unanticipated), leverage point issues commonly faced by foreign affiliates are presented in (affiliate versus headquarters), as well as the most influential Table 1 above. Each of these can be thought of as diminishing actors (for example, the multinational itself, other market one or more of Dunning’s three advantages. When the players, the government, and the workforce). It should also be advantages for FDI location are lost, the rationale for investment noted that much of the existing literature has been prepared may become a rationale for divestment14. with at least an implied goal of helping businesses make better business decisions. However, this note aims to contribute As noted, the topic of divestments is under-researched, towards helping governments keep existing businesses especially in recent years. However, as a starting point, and healthy and competitive. with the investor perspective in mind, World Bank experience of working with client governments in strengthening their If divestment is the opposite of investment, one can think of the investment institutions shows that at the highest level, the decision to divest as occurring only when the initial reasons for drivers of divestment may be classified into four broad types: investing are lost. For example, Dunning (1988) hypothesized (i) planned market exit; (ii) worsening of affiliate’s performance; that three advantages determined FDI location: (i) the investment (iii) new/heightened risks for an affiliate; and (iv) a change in strengthening the company’s competitive advantage, (ii) the the headquarters’ circumstances (Figure 2). > > > F I G U R E 2 . A Typology of Divestment Drivers Types of Divestment Drivers Type 1 Type 2 Type 3 Type 4 Planned Worsening of New/heightened Change in market exit affiliate’s performance risks for affiliate HQ’s circumstances For example, For example, scheduled exit, reduced revenues, For example, For example, deliberate increased costs, market, corporate withholding of worse performance government, labor, strategy, financial maintenance/ than other affiliates, environmental, circumstances, upgrading “mistaken” reputational political environment investment Source: Authors’ Analysis Note: The typology does not speak to the relative impact, frequency, or interplay of the drivers globally, historically, or in the cases of individual companies where multiple drivers are likely at play simultaneously. Of course, the status and circumstances of a company can change at any time, and a factor driving divestment today may cease to do so tomorrow. 14 McDermott 1989; Wilson 1980 10 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Type 1 has to do with planned divestments, such as those course of action when the value to headquarters (HQ) of the coinciding with product life cycles and contract end dates. affiliate’s future cash flows falls below the current value of sale or Types 2-4 all have to do with changes in circumstances, or, liquidation. This implies that the most responsible company does at least, a changed understanding of circumstances. The not wait until an affiliate is losing money to sell it; at that point, the changes in circumstances leading to divestment come down, affiliate is worth much less. Rather, when that company projects directly or indirectly, to three factors. They may hurt actual and dwindling profitability, it should either invest in strengthening the projected profitability in the following ways: company or plan for divestment at the optimal time. • Decreased revenues • Increased costs The typology takes an investor-centric view, that is, • New or heightened risks which worsen projections for examining how investors may rationalize decisions to future revenues and/or costs15. divest. Often government officials tasked with retention and working in close cooperation with policymakers, regulators, In recent years, the notion that business decisions should be and public administrators may, by default, tend to approach made on any basis other than profit maximization has gained their work from areas of clear government responsibility or some credence at the executive level. For example, in 2019, regulation, such as: licensing and permitting and access 181 Chief Executive Officers (CEOs) who are members of the to land. However, factors affecting revenues, costs, and United States (US) Business Roundtable signed a revision risks arise not only from government action, but also to its Principles of Corporate Governance, stating that the from firm circumstances and market dynamics — that is, purpose of a corporation was not just to serve shareholders, but circumstances that the government is also in a position to to also deliver value to all stakeholders, including customers, help with. Indeed, these kinds of broad categories (based employees, suppliers, communities, and shareholders.16 on government areas of responsibility) seem to be a simpler Multinationals enterprises are increasingly facing pressure to way to categorize issues. However, following a more commit to climate change reforms due to climate-conscious investor-centric approach would allow retention agencies to consumers, regulations, environment-social-governance provide more comprehensive services (that is, information, guided investors.17 While specific climate considerations are assistance, and advocacy) to investors to tackle the issue gradually shifting the calculus for MNEs in their assessment of divestment. For example, support needed may include of their business strategies, long-term profitability continues navigating the local market, accessing new markets, finding to be an important lens to present environmental, social and local input sources, and maintaining good labor relations.22 governance considerations to shareholders.18 Some shocks that may be popularly discussed as individual factors Among the four types identified, the one which appears to be — particularly during times when the need for retention efforts is the most significant divestment driver is the worsening of the magnified — can be seen through the lens of this typology as a affiliate’s performance (that is, reduced revenues, increased bundle of several divestment drivers. The COVID-19 pandemic, costs, and/or worse performance than other affiliates in the for example, does not fit under a single type of driver. Rather, it corporate network). According to EY’s 2021 Global Corporate manifests itself as several forms of divestment pressures under Divestment Study,19 two-thirds of companies reported that their Types 2, 3, and 4, depending on the circumstances of the firm. most recent divestment was triggered by suboptimal returns in This can include reduced affiliate revenues, increased affiliate the divested business.20 Wilson presents a model for making a costs, a worse position relative to other affiliates, an increased divestment decision on this basis21. He applies a cash-flow model labor risk for affiliates, a shift in corporate strategy, and/or a to his study of divestments, describing divestment as the rational worse corporate financial situation (Figure 3). 15 A recent report makes complementary observations, suggesting that the reasons for divestment can be driven by internal, firm specific, or external factors. Internal factors occur largely when a company’s investment returns do not meet the expectations of its shareholders. A key cause of divestment decisions is that investors’ expectations do not meet the reality on the ground. It mentions two main sources for this: first, the lack of knowledge about the local markets resulting in higher-than-expected operating costs; and second, when an investor’s expectations are unrealistically high due to over-enthusiastic attraction and promotion efforts. (Arriagada Peters et al., 2021). 16 https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans 17 This will gain further ground as countries start putting in place laws and regulations to mandate actions by enterprises to address sustainability issues. For example, Germany’s Act on Corporate Due Diligence Obligations in Supply Chains (Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten) took effect on January 1, 2023. The Act imposes due diligence obligations that includes the requirement to establish a risk management system to identify, prevent or minimize the risks of human rights violations and damage to the environment. The Act sets out the necessary preventive and remedial measures, makes complaint procedures mandatory and requires regular reports. The due diligence obligations apply to an enterprise’s own business area, to the actions of a contractual partner and to the actions of other direct or indirect suppliers. This means that an enterprise’s responsibility no longer ends at its own factory gate but applies along the entire supply chain. See World Bank, Investment Facilitation for Development Guide, Forthcoming. 18 Recent research shows that less than a third of the most-emitting MNEs have formally established a commitment to have net-zero GHG emissions by 2050. Large MNEs are most likely to have long term ambitions like net-zero GHG emissions by 2050, yet share of such firms having long, medium and short term strategies and a capital allocation strategy drops markedly (Steenbergen and Saurav 2023). 19 According to EY, “Results are based on an online survey of 1,040 global corporate executives and 27 global activist investors (conducted between January and March 2021), including companies from 11 industries, with 88 percent of respondents holding the title of CEO, Chief Financial Officer (CFO) or other C-level executive.” 20 https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/divestment/2021/pdfs/ey-global-corporate-divestment-study-2021-report.pdf 21 Wilson, Brent D. 1980. Disinvestment of Foreign Subsidiaries. Ann Arbor, MI: UMI Research Press. 22 Of course, any such efforts would have to be neutral from a competition perspective to avoid tilting the level playing field toward one or a few firms. DIVESTMENT DRIVERS AND FDI RETENTION <<< 11 > > > F I G U R E 3 . Effects of COVID-19 Lockdown Policies on Global Value Chains COVID-19 Domestic/ lockdown policies Foreign International Supply Demand logistics constraints shocks shocks Bottlenecks at Reduction in port Labor force Changes in Contraction ports of entry calls or increase in social composition of in orders or (upstream and downstream) transportation costs distancing consumption consumption Workers Social downgrading suspended or (women affected dismissed more than men) Disruptions of firms’ value chains Source: Brenton, Ferrantino, and Maliszewska (2022). Type 1: Planned Market Exit Others may relate to the end of a government concession or contract, as with the end of a build-operate-transfer agreement for a hydroelectric dam. Another example may be This type of driver can be thought of as consisting of a long- a garment company’s plans to switch back from pandemic- planned market exit as part of a larger strategy, for example, era production of personal protective equipment to garment for older products using older technologies, or for a less manufacturing. In one specific example, Figure 4 shows a strategic, even casual, divestment arising from a choice to trend among Japanese electronics manufacturers of divesting withhold reinvestment for upgrading or maintenance. from Malaysian affiliates. This occurred in the years after Malaysia’s peak as a hub for analog TV and VCR assembly, Scheduled exit as these technologies became obsolete. They were then Not all divestments represent failures. For example, some replaced by digital technologies whose production required are planned to coincide with the expected obsolescence of skills and production technologies not well established a technology, such as eReaders and many digital cameras. in Malaysia. 12 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT > > > F I G U R E 4 . Changes in the Number of Japanese Companies, Electronics Firms, and Residents in Malaysia, 1990-2010 1500 12,000 Total companies (Japanese Embassy) Total companies (JEITA data) Number of 1000 Japanese residents 10,000 Number of Japanese residents Number of Companies Manufacturing companies (Japanese Embassy) 500 9,000 Electronic firms (JEITA data) 0 8,000 1990 2000 2010 Source: Edgington and Hayter (2013). Note: JEITA= Japan Electronics and Information Technology Industries Association While a government need not necessarily view this as a failure of liquidation. However, it may also happen gradually when its investment climate and could conceivably let the investor go an affiliate is allowed to atrophy over time, especially by without being blamed for the loss of jobs, helping the investor find withholding the investments that might otherwise go to a business case for extending or repurposing its project could maintaining and upgrading the business. Profits may be lead to more positive outcomes (See Section 3’s description of repatriated instead of reinvested. In this case, product how the Japanese company JVC upgraded its production to innovation and market development at the affiliate are not make its Malaysian factories relevant for the digital era rather than supported by HQ. Machinery is not upgraded and may not be divest). Exits may also be planned in the context of transitioning well maintained. Some refer to this decrease in financial and to more ‘green’ and energy efficient businesses - for example managerial commitment to an affiliate as “disinvestment” rather retiring existing coal power plants before they complete their life than divestment. Within the present typology, disinvestment to cycle (Steenbergen and Saurav 2023). Energy companies in the the point of eventual divestment is labeled “gradual exit.” ranking of the top 100 MNEs are divesting fossil fuel assets at a rate of about $15 billion per year (UNCTAD 2023). Gradual exit differs from a scheduled exit in that it is less deliberate, with HQ not making a decisive plan to divest up Gradual exit front. Rather, it makes a series of explicit or implicit decisions Divestment is generally thought of as occurring in a relatively over time to prioritize other affiliates, products, or markets short timeframe, whether by the sale of the firm or by asset over those of the gradually divested affiliate. The changed DIVESTMENT DRIVERS AND FDI RETENTION <<< 13 circumstances comprising the divestment drivers of Types Increased affiliate costs 2-4 may still be behind the headquarters’ attitude toward the Sharp increases in production costs — such as labor, raw disinvested affiliate. However, the worsening circumstances materials, utilities, land and facility leases, transportation, taxes, may be so gradual or of such a vague origin that they escape and licenses — may likewise reduce profits or generate losses. close scrutiny and decisive action — whether remedial or For example, rising wages and other production costs in Costa divestment — by the multinational’s HQ or affiliate. Rica led Intel to close its semiconductor assembly and test plant after 17 years.23 In another example, Turkey’s steady, severe As discussed further under Type 2, foreign affiliates may be currency devaluation has led to much higher costs for imported one among many affiliates jockeying for internal priority and inputs and fears of a general economic crisis. investment funds. Local managers who year after year find only middling success in that internal competition may find Cost increases caused by government action — such as themselves avoiding closure, but not winning new investment regulatory changes with high marginal costs for compliance funds or being allowed to reinvest earnings. Furthermore, and increases in taxes, utility tariffs, import duties, wage and some firms only become foreign affiliates when they are benefit requirements, and public land fees — are within the acquired by other firms for their strategic assets, and their long- government’s power to address. While government actions term strategy or survivability may be only secondary concerns leading to cost increases may have been taken with full to the new HQ. This sort of gradual divestment may also be knowledge of the impact they would have on businesses, this common as a reaction to a substantial, “government-induced” is often not the case. Of course, even if there is a knowledge worsening of the investment climate, particularly when the of the potential impact, governments may have little or no company is unable to obtain redress from the government. options, especially with burgeoning deficits currently faced by many countries. Type 2: Worsening Cost increases caused by market players can sometimes be countered by the government, at least in part. However, the of an Affiliate’s Performance challenge is to do it cost-effectively (that is, in such a way that the development impact is worth the fiscal expenditure) and without distorting markets. Most governments already have The worsening of an affiliate’s performance comes down to policies meant to promote investment through reduced costs. factors hurting the affiliate’s absolute or relative performance, For example, a special economic zone with a dedicated power whether directly or indirectly, through the following factors: supply may offer concessional lease rates and save investors the cost of operating their plants with diesel generators. • Decreased revenues • Increased costs Some of these costs tend to move in unison internationally, such • Either of the above, not in absolute terms, but relative as energy, commodity inputs, and international transportation. to sister affiliates with which the affiliate finds itself in Therefore, a local price increase for such costs does not competition for HQ attention or resources. necessarily create a competitive disadvantage that would induce a multinational to move or divest from its foreign affiliate. Reduced affiliate revenues Problems affecting revenues concern the decreased ability to Worse position relative to other affiliates produce, price, and sell one’s products, as needed, to maintain or As a single affiliate within a multinational corporation consisting grow revenues. These are both internal and external to the affiliate. of many, the affiliate’s interests are subordinate to those of the Internally, this includes problems with strategy, product design, corporation. In this context, the affiliate is just one of many levers production engineering, labor, machinery, utilities, marketing, through which the corporation executes its global strategy. The and management. Externally, this includes changes in consumer importance of affiliates within that strategy is not equal, and tastes, increased competition, reduced disposable income of that inequality is reflected in the different levels of investment consumers, disrupted distribution, and reduced availability and/ and long-term commitment. To some extent, an affiliate’s or quality of material inputs, utilities, and additional labor. strategic importance is dictated by the fit of its activities into the corporation’s core business and strategic plans. However, 23 In 2020, with consistent support and attention to the investor, Costa Rica was able to attract reinvestments by Intel. 14 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT among affiliates having similar strategic purposes (for example, population, and the physical environment. It can also come attempting to grow retail sales in new markets), one affiliate’s from the affiliate itself when it creates a reputational risk for higher performance in Region A or HQ’s strategic reorientation the multinational. towards Region A may cause the affiliate in Region B to lose favor and, therewith, investment. In this sense, affiliates are in Increased market risk for the affiliate constant competition with one another, such that even a well- In this note, market risk is defined as risk that the number, performing affiliate may be disinvested when its position relative preferences, and/or capacities of customers, competitors, to another affiliate worsens.24 and/or suppliers will change in such a way as to reduce the affiliate’s profitability, market share, and/or strategic position. Reversal of an investment mistake These new or heightened risks can occur at the firm level, with The site selection process by investors typically begins after the entry of a new competitor, a supplier going out of business, a thorough collection of information from several candidate or a new trend moving consumer preferences toward features locations. They then make comparisons according to a cost- unique to the affiliate’s competitor (for example, a political push benefit analysis that leads to a single location as objectively, to “buy domestic”). They may also arise from larger economic the best location for that company’s expansion. While this changes, such as a recession, or sectoral supply chain approach may be generally applied, processes and information disruptions, as with the pandemic and invasion of Ukraine. In are not perfect, time and budget are limited, and there are many addition, they may arise from technological changes, such as ways in which subjectivity may lead to imperfect site selection. the Internet of Things and artificial intelligence. In cases where such a miscalculation comes with options Increased government risk for the affiliate to remedy the issue, IPAs may be able to help the investor. Firms can divest in response to political instability and However, some mistaken investments may be difficult to institutional weakness (Soule and Swaminathan 2014). World remedy. For example, the US discount retailer, Target, opened Bank research shows that government risks — such as 124 stores in its first two years in Canada by taking over the breach of contract, sudden and adverse regulatory changes, leases of a defunct retailer. In retrospect, these locations were lack of transparency and unpredictable actions — can cause too remote for Target’s urban clientele, and Target was never investors to divest or cancel expansion plans (Kher and Chun able to establish a proper supply chain system. Profitability 2020; World Bank 2019; World Bank 2020a). In fact, most was originally expected after one year. However, after two recently, the 2019 Global Investment Competitiveness Survey years of operation, management’s projected profits were finds that two-thirds of existing investors (foreign investors) still six years away. Therefore, Target chose to close all its would consider withdrawing investments or cancelling planned Canadian stores and exit the country.25 investments in the face of political risk exposure in host countries. Indeed, the risks of expropriation and government breach of contract evoke particularly negative investment reactions. When faced with such risks, about 50 percent of Type 3: New/Heightened investors would consider withdrawing existing investments, Risks for Affiliates and 40 percent of investors would consider cancelling planned investments. Such risks add an additional threat of liability for countries due to investors suing states for violation of their Whereas Type 2 is concerned with an affiliate’s actual investment law, treaties, and/or contracts. performance to date, Type 3 covers new or heightened risks which may turn previously positive projections to ones Increased labor risk for the affiliate characterized by operating losses, lost markets, or other An increase in labor-related risks occurs when the anticipated adverse results, thus justifying divestment. Examples include availability, cost, or skill level of workers becomes less favorable. the advent of disruptive technologies, an emerging trade war, Some examples of how a development may unexpectedly and new and unexpected climate realities. threaten one firm, sector, or economy more than others include labor unrest, higher turnover or the lower availability of workers These can come from market actors (customers, competitors, resulting from a sector boom, a loss of training capacity or and suppliers), governments, the local workforce and support, or more restrictive pandemic restrictions. Such 24 Grunberg 1981 25 https://digital.hbs.edu/platform-rctom/submission/targets-failed-entry-in-to-canada/ DIVESTMENT DRIVERS AND FDI RETENTION <<< 15 labor risks may worse anticipated profitability. For example, Increased reputational risk at the affiliate for decades, investors operated in China to benefit from The risks described above are risks experienced by the affiliate. low-cost labor. As the Chinese government shifts to a more Another kind of risk concerns reputational risk, that is, a risk to consumption-driven economy, wages have increased across the parent corporation caused by the affiliate. Improper or even several Chinese provinces, thereby presenting a heightened simply unpopular behavior by a company has the potential to labor risk (Arriagada Peters et al. 2021). damage its reputation, and that reputational damage has the potential to spread to other parts of the corporate network. This Increased environmental risk for the affiliate could depend on many unpredictable factors acting across distant Extreme weather events may damage infrastructure. For and varied geographies, including public perceptions, news example, erosion may threaten the foundation of a building; reporting, the actions of local managers, and the corporate ability recurring flooding may damage crops and buildings; or a local to detect and remedy such problems. If such a reputational risk river drying up may deprive an affiliate of water for production makes it difficult to operate, the company may decide to divest. or a transportation method for goods. Increased temperatures may increase energy costs for cooling. Climate change may change consumption patterns, where workers live, and what raw materials are available at a given time or cost. A change Type 4: Change in HQ Circumstances in environmental projections brings new risks, leading many investors to reconsider their location options. An OECD study finds that a 10 percent increase in a country’s stringency of Shift in corporate strategy environmental protection can also increase the probability With changes in technology, net-zero related commitments, of divestment by 0.5 percent (Borga and others 2020). From companies are increasingly streamlining models so that they the perspective of the host country, this calls for a balancing can pivot more quickly towards new growth opportunities and act between the possibility of divestment and environment stay competitive. In this context, divestments are being used considerations. Thus, governments could perhaps consider to fund new investments in technology, products, markets and systematic regulatory impact assessments when preparing geographies.26 In fact, in two recent global surveys concerning new regulations and broad-based investor consultations. divestment, this was the number one motive for divestment at the HQ level, as shown in Figure 5. > > > F I G U R E 5 . Trends among Top Three Divestment Motives in Recent Years 2017 2020 2022 Not part of the core Change in market/ Change in market/ Rank 1 business and/or competitive competitive reshaping portfolio landscape landscape Change in market/ Not part of the core Opportunistic Rank 2 competitive business and/or approach from an landscape reshaping portfolio interested party Response to shareholder Opportunistic Not part of the core Rank 3 activism pressure/ approach from an business and/or concerns interested party reshaping portfolio Source: Deloitte (2022). 26 https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/divestment/2021/pdfs/ey-global-corporate-divestment-study-2021-report.pdf 16 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Rapid technological change alone is expected to be a Shift in HQ’s political environment tremendously disruptive force on the competitive landscape Apart from factors, such as strategy and finances, which are and investment location patterns. A 2021 divestment study internal to a multinational’s management, pressures may found that “94% of global companies say changes to the arise that are external to management. Such pressures could technology landscape are influencing divestment decisions, lead to cuts or realignment that threaten foreign affiliates up from 59% pre-pandemic.”27 Honda provides an example with divestment. New or evolving regulations can all affect of this, specifically, with its new strategy to sell only electric the way a company’s management sees the suitability of an cars by 2040, and its consequent announcement in 2021 that affiliate to its future plans. These regulations could include it would close an engine parts plant in the town of Mooka, those pertaining to governance or environmental and social Japan in 2025. aspects of business, vocal stakeholders demanding particular actions, or political risk at home. For example, the US-China Worsened corporate financial situation trade tensions have raised the risk for US-based companies of Multinational corporations experiencing poor performance or opening Chinese affiliates and vice versa. other financial strain may come under pressure to improve performance through cost cuts, a change in management, The typology described above is primarily intended to highlight a shedding of non-core business lines, a commitment to a factors and situations that can help with the timely detection different strategy, a merger with a synergetic partner, and other and monitoring of divestment risks. Building on this, Section 3 measures. All such measures can directly or indirectly translate provides steps that retention agencies can take for detecting into divestments. In these situations, foreign affiliates may find and addressing divestment risks, including through active themselves trying to convince HQ of their long-term value. An monitoring of divestment risks. affiliate may be divested even when it is well-performing, simply because it no longer fits with the corporate strategy, or because its sale would generate much-needed cash. 27 https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/divestment/2021/pdfs/ey-global-corporate-divestment-study-2021-report.pdf DIVESTMENT DRIVERS AND FDI RETENTION <<< 17 3 3. Acting on drivers of divestment for greater investment retention Effective retention measures should be implemented by a lead agency in close coordination with the institutions responsible for specific technical areas and other stakeholders. As noted, the lead agency may be an IPA mandated to perform investor aftercare and retention services, an ombudsman office, or a focal point within a ministry. What is critical is that the lead agency is legally mandated, suitably empowered with access to high-level government authorities, adequately resourced (both with financial and human resources), able to secure effective collaboration from other agencies, and trusted by the investor community (Heilbron and Whyte 2019; Kher, Obadia, and Chun 2021; World Bank 2019). It should be noted that even these ideal characteristics and a greater knowledge of divestment drivers do not automatically translate into greater retention. The breadth of an investor community, their varied and ever-changing circumstances, and a government’s limited time and resources mean that retention officials are never able to attain a comprehensive inventory of divestment risks or do something about every risk of which they become aware. Optimizing risk identification and successful retention requires a systematic approach. This section guides retention agency officials through a four-step approach, as depicted in Figure 6 (Kher, Obadia, and Chun 2021; World Bank 2019). Using this approach, officials can identify, assess, and monitor high-risk situations where there could be potential divestment, based on the earlier discussion on drivers of divestment. Indeed, an appreciation of these drivers can allow for early recognition of signals of divestment. Experience also shows that concerted and organized efforts by lead agencies can lead to improved investment retention.28 > > > F I G U R E 6 . A Systematic, Four-step Approach for Optimal Retention Step 1 Step 2 Step 3 Step 4 Setting strategic Risk Problem- Escalation and parameters assessment solving advocacy (as needed) Source: World Bank Group 28 For example, efforts by Scottish Enterprise and the town council supported a kitchen sink manufacturing company and helped retained 23 logistics jobs. https://www.scottish-enterprise-mediacentre.com/news/carron-phoenix-23-jobs-retained. DIVESTMENT DRIVERS AND FDI RETENTION <<< 19 Step 1: Set Strategic Parameters • Target audience: The retention agency should consider which investment is both strategic in normal times and for Retention Efforts at risk of divestment. Key criteria to consider include the following: » Employment numbers, including for women and youth Not all divestments are “bad” divestments, as demonstrated in » Strategic region/location the case of planned divestments. In some cases, it represents » Current priority sector a natural market evolution. Furthermore, not all revealed » Anchor companies that link to many domestic suppliers divestment threats can be stopped. Even when a divestment » Risk of closure can be stopped by government action, it may not always be » Opportunity of expansion worth the price, and it can set an undesirable precedent. In » Revenue/sales/exports addition, it can open the government to accusations of un- » Signaling effect to other investors transparency and favoritism. Furthermore, temporary or one- » Support green transition time incentives cannot guarantee permanent retention. Ultimately, prioritization by agencies will greatly depend on the Negotiating on behalf of investors can be a valuable service overall development goals, priorities for FDI, and the agency’s with a strong contribution to retention efforts. During the ability to influence outcomes. pandemic, for example, the Moldovan IPA identified and negotiated on behalf of healthcare providers for the use of • Activities: This requires the retention agency to tailor its hotels to accommodate doctors and health workers.29 When activities to suit its objectives, for example, as many IPAs an investor believes that a government will fully support the did in helping investors adapt to the circumstances of the investor in resolving its concerns, it builds a sense of comfort COVID-19 pandemic.30 Some key steps in revising one’s and loyalty. activities might include: » Reviewing the adequacy of existing structures Strategizing for effective retention ultimately requires officials for issue identification, such as meetings with to answer this question: Which (undesirable) divestments can investors to collect information about their issues; I identify and dissuade based on my organization’s capacity, the appointment of focal points for collaboration with authority and partnerships? other agencies; the availability of online platforms for submission of investor requests for support, Individual divestment threats should be prioritized on the basis mapping of typical issues investors are facing from of their significance for the government’s development goals, existing reports, surveys, meetings with chambers and the retention agency’s institutional strategy and its ability to associations, and so on influence outcomes. This, in turn, requires that officials who » Mapping of key stakeholders to contribute to the solution seek to optimize their retention efforts, answer additional for each issue and protocols for engagement, such as the questions about their institution’s rationale for undertaking appointment of focal points, service level agreements, retention, objectives, target audiences, activities, resources, and memoranda of understanding and monitoring and evaluation. » Developing capacities, including staff skills, as well as systems and tools, such as investor and stakeholder • Rationale: “Why” is the retention agency engaging in databases, an investor relationship management system investor retention? Indicate 2-3 reasons for its importance or other tracking tools. Such tools could include an issue to the location, for example, key sectors, segments, or management or service ticket feature, a website, and specific investors suffering to the point of permanently so on. This also includes undertaking research, analysis closing operations, increasing unemployment and/ and preparation of materials to bridge information or social unrest, as well as possible legal disputes. asymmetries regarding new opportunities for investors to re-direct/route their investment towards - for example, • Objectives: “What” is investment retention aiming to save — green businesses/activities. investment projects and respective jobs in general, or specific sectors, segments, and/or regions at risk? Specific indicators can be included in a table, as illustrated in Table 2 below. 29 https://thedocs.worldbank.org/en/doc/917561588958415090-0130022020/original/WBGIPAResponsetoCOVID19.pdf 20 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT • Resources: Importantly, a strategy requires making sectoral priorities and technical areas that most frequently decisions as to what resources would be required and where cause investor issues. they would come from. For instance, deciding whether new or reallocated personnel would be doing the retention work. • Monitoring and Evaluation: This helps the retention A seasoned aftercare account manager could take care of agency to monitor progress, evaluate and adapt the about 50-60 investor engagements per month in normal program as necessary. Table 2 provides an illustration of times, including dealing with some problem resolution. how retention agencies might set targets for goals and Staffing decisions should also take into consideration any track progress over time. > > > TA B L E 2 . Illustrative Investor Retention Key Performance Indicators – Year 1 Target Progress Indicator Measure Actual (Illustrative) % Impact Investment retained US$ Millions 10 Jobs retained Number 500 Of which women and youth Number 200 Outcome Investment projects retained Number 5 Investment issues solved Number 15 Activity/Output Investment retention calls/visits Number 300 Investment issues identified Number 60 Investment issues being managed Number 45 Baseline Projects at risk Number 9 Jobs at risk Number 1000 Source: World Bank Group Note: Investments and jobs retained refers to investments and jobs that were at risk of divestment due to a specific investor issue. These could be retained due to effective resolution of the specific issue. As part of monitoring and evaluation for investor retention, However, in times of crisis when retention efforts often officials should consider: (i) how often to measure and report, become a priority, adjustments may be needed. For example, (ii) sources of information, such as official figures, surveys, during the COVID-19 pandemic, agency resource needs investor relationship management system or other tracking increased tremendously, both in terms of staffing and finances. system, interviews, site visits, (iii) reporting mechanisms, (iv) With restricted travel and a much greater need for virtual evaluation and distillation of lessons learned, and (v) program communication, prompt resource adjustments were needed modifications. to provide stronger broadband, online communications, and virtual meetings hardware/software. In addition, a more With the proper strategic approach, the lead agency can robust investor relationship management and tracking system more effectively perform and sustain their retention functions. was required.31 30 World Bank, World Association of Investment Promotion Agencies (WAIPA), Initial Response of IPAs to Covid 10, https://waipa.org/waipa-content/uploads/WBG_IPA_ Response_to_COVID-19.pdf 31 See for example, Invest India’s Business Immunity Platform. DIVESTMENT DRIVERS AND FDI RETENTION <<< 21 Step 2: Actively Monitor while most of the divestment drivers discussed in Section 2 represent changes in a firm’s circumstances, some firms and and Assess Divestment Risks sectors may also have inherent characteristics that indicate a higher likelihood of divestment. As a subset of divestment research, the body of research concerning firm characteristics Knowledge of divestment risks can come either directly from associated with divestment is even more limited. However, firms or indirectly from other sources. It may be possible to Table 3 offers several insights drawn from existing literature confirm divestment threats of individual affiliates, or to observe that can help retention agencies with the monitoring of heightened divestment risks at a sector or national level. Also, divestment risks. > > > TA B L E 3 . Characteristics of Firms and Sectors Indicating Increased Likelihood of Divestment Characteristic Effect on the Likelihood of Divestment Acquisition versus Acquired affiliates may be more likely to be divested than greenfield investments (Benito 1997, Li and Guisinger 1991), as new greenfield owners may seek to streamline the acquired affiliate’s operations within their global network or even to keep only strategic assets, such as intellectual property, and liquidate the rest. Officials who monitor investment projects and become aware that a project has been acquired may wish to check in with the local and corporate managers to better understand the acquisition motive and long-term plan. Relatedness of Foreign affiliates working in industries unrelated to those of their parent companies may be more susceptible to divestment than industry affiliates working in related industries (Benito 1997). This has been well-illustrated by the LG Corporation in the spin-off of five companies, which occurred when its management was handed off to a new generation in 2018. Citing the intent to focus on its core businesses of electronics, chemicals, and telecommunications, the company to spin off companies involved in trading, manufacturing of interior parts for automobiles, manufacturing of chips for car and phone displays, and others.32 Therefore, officials might want to more closely monitor affiliates of more diversified corporations (such as 3M, which makes “everything from Post-It notes to semiconductors”33). This would be especially true when the affiliate is further away from the corporation’s core business. Driven by access to Foreign affiliates whose purpose within the corporate network is to act as “source plants” or provide the network with access to low- low-cost production cost production factors may be more susceptible to divestment (Vereecke, De Meyer, and Van Dierdonck 2008). factors Therefore, officials may suppose that a foreign-invested company is likelier to divest if it was established for the sole purpose of extracting or purchasing commodities to be used by other companies in its corporate network. Low-end garment manufacturers or other firms whose business cases depend heavily on low-cost labor might also need closer monitoring for this reason. Corporate Foreign affiliates may be more likely to divest, the more independent the affiliates’ activities are from those of their corporate networks. interdependence For example, a food manufacturer set up in a foreign country to serve that market using local inputs is more independent. As such, it is more likely to be divested than an auto parts or consumer electronics manufacturer feeding into a global supply chain (Wilson 1980). Diversity of Foreign affiliates may be more likely to divest, the less diverse their product bases are (Wilson 1980). Therefore, an official may need product base to more closely monitor a local Proctor and Gamble (P&G) plant that produced only a few items than another plant that produces the company’s full range of consumer products. Recent change in A foreign affiliate’s divestment may be more likely shortly after a change in the CEO (Torneden 1975) because changes in the CEO management at HQ and shedding of under-performing affiliates both occur more often after a period of overall poor corporate performance range of consumer products (detergents, diapers, shampoo to over the counter healthcare products). Therefore, officials would be well- advised to keep abreast of leadership changes at the HQs. HQ problems This characteristic may include factors such as language and culture. It is less observable to someone outside of the company. in managing an However, it may be something that can be learned from the affiliate, if officials have established a trusting, collaborative relationship international network, with them. including culture and language issues Level of product Foreign subsidiaries are less likely to be sold off when they are characterized by high levels of product innovation performance, innovation human capital, or have introduced organizational innovations (Konara and Ganotakis 2020). 32 https://www.reuters.com/article/us-lg-corp-restructuring-idUSKBN2860NX 33 https://www.thebalance.com/the-most-diversified-companies-in-the-stock-market-4169730 22 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT The earlier officials know about potential divestments, the but on a much larger scale and at a faster pace than any better their chance of successfully intervening. Waiting until government agency was accustomed to. divestment plans are already publicly known is generally too late. Therefore, officials need to maintain a deep understanding Monitoring priority investors and sectors in these ways can of developments, trends, and prospects of individual firms, yield useful warning signs of divestment plans. Retention products, and sectors. The channels by which they can officials can focus on the issues of highest strategic priority. For typically do this include the following: example, a systematic assessment of observed divestment risks may help score each risk for likelihood of divestment, • Conversations with individual affiliates and HQs, for as well as for the anticipated impact of the divestment (for example through an IPA’s aftercare support example, one company or many, closure or sale of affiliate, • Surveys of affiliates and sector associations, whether critical blow to an ecosystem or negligible). Although this may conducted by retention officials, their partners (for example, sound straightforward, it requires that officials set up a system chambers of commerce), or public sources (for example, consisting of the following: international organizations) • Reporting on individual affiliates, HQs, products, and 1. An internally unified set of definitions and measures for sectors by general and sector-specific news outlets and sectors, products, company importance, company status, journals and signs of divestment • Sector conferences and seminars 2. A database of existing investors • In places where project monitoring is legally required, a 3. Personnel charged with implementation and supervision review of periodic project status reports of monitoring, assessment, service provision to investors, • Review of public-private partnership project terms for coordination with partners, and advocacy planned market exit or conditions under which the private 4. Standard operating procedures for monitoring signs partner is permitted to exit of divestment, assessing the likelihood and impacts of • Research and analysis, including public, paid/bespoke, or divestments, and evaluating the government’s options in-house, concerning shifting costs, market dynamics, and for addressing them, including the responsible offices, risks in priority sectors. Public research may come from anticipated costs of intervention, anticipated benefits, and government offices, academia, sector associations, and likely obstacles international organizations. Where these are inadequate, 5. Partnerships with similarly interested stakeholders (for officials may be able to do the research in house, example, sector associations, office of an investment including through their own conversations with investors. ombudsman, or grievance management unit) to coordinate Alternatively, they may pay market research companies for information collection and advocacy steps sector trend reports. 6. A monitoring schedule (for example, company visits/calls, surveys, and public-private dialogue meetings on the During the COVID-19 pandemic, many governments were sidelines of periodic sector-specific events) faced with a sudden, widespread surge of severe divestment 7. A tracking system to record issues raised by individual risks. Each company’s situation could be quite different. As investors and analyze them in aggregate such, company-specific intelligence and support was needed, DIVESTMENT DRIVERS AND FDI RETENTION <<< 23 Step 3: Facilitate Solutions provided are not fixed or finite. In fact, the ability to tailor services is critical for effective retention. to Investor Problems Table 4 presents a sample of the types of services that have been deployed globally, as illustrations of how particular Officials may choose to act based only on divestment threats services are suited to specific divestment drivers. As noted, from specific companies. Alternatively, they may do so based at the root of each divestment driver is a change to revenue, on officials’ perceptions of heightened divestment risk among cost, or risk — either actual or projected. These changes a pool of investors as defined by, for example, sector, region, may arise from firm circumstances, market dynamics, and firm characteristic, market dynamic, and government action. government actions, with each demanding a different form of The services rendered by retention officials to investors may problem-solving. What is critical for effective problem-solving fall under the same headings of information, assistance, and is the recognition of this possibility of divestment, timely advocacy, as all services under the WBG’s Comprehensive identification of such a risk, as well as proactive engagement Investor Services Framework. However, the specific services with stakeholders based on an analysis of divestment risk. > > > TA B L E 4 . Illustrations of Creative Problem-solving Applied to a Range of Divestment-threatening Issues Firm Circumstances Market Dynamic Government Action Revenue • During the COVID-19 pandemic, the • In a shrinking market, the IPA shares, at • A new tax stamp rule requires beverage governments of Ethiopia and Haiti no cost, market intelligence generated bottlers to place a stamp on each bottle, helped investors cut through red tape by the Ministry of Commerce concerning necessitating a major reconfiguration of to repurpose production lines from disposable incomes, consumer factory floors, thus pushing businesses garments and pharmaceuticals to make preferences, and domestic production with razor-thin margins toward hygienic masks, medical robes, and capacity, thus improving firms’ abilities to unprofitability and divestment. The hand sanitizer.34 adjust with the market. retention agency provides an objective impact assessment to the government and advocates a modified measure. This accomplishes the government’s goal, without pushing firms out of business. Costs • The retention agency introduces the firm • The retention agency advocates for relief • A new auto policy extends incentives to to local suppliers and helps the latter of a sector constraint, thereby bringing new Original Equipment Manufacturers understand how to obtain certification down costs sector-wide (for example, (OEMs) only, leaving existing OEMs from the firm, thereby allowing it to avoid establishing a water purification plant at a competitive disadvantage. The more costly, time-consuming imports. close to garment manufacturers in a retention agency advocates for inclusion special economic zone, thus allowing of existing OEMs in the new incentives. timely and lower-cost access to high quality water that is needed for more competitive production). Risks • The IPA has a standing mechanism for • Greater consumer demand for • A new government comes into office receiving and mediating labor complaints, sustainability increases the risk that promising a variety of increased thereby reducing firm-specific labor risks. firms will lose market appeal with business regulations. The retention existing practices or face unprofitability agency advocates for a consultative with the changes demanded. The process inclusive of the private sector. retention agency provides information and assistance in accessing support for greening buildings, industrial symbiosis, adding green business lines, and so on. Relations with • The retention agency helps the affiliate • An affiliate’s sales are in its host country • Tensions have been rising between other affiliates to build a business case for expansion, market A. The affiliate’s HQ is in country the governments of the affiliate’s host and HQ diversification, or greater integration B, with a worsening reputation in the host country A and home country B. The within the corporate network, thus country A, thus weakening the affiliate’s retention agency can continue to convey positioning the affiliate to be of greater market position. The retention agency its non-political, non-discriminatory long-term strategic importance. helps the affiliate understand how it is commitment to the investor community, perceived and why. It advises the affiliate including the affiliate, which remains a on potential actions that might bolster its highly valued client. domestic image. 34 https://thedocs.worldbank.org/en/doc/917561588958415090-0130022020/original/WBGIPAResponsetoCOVID19.pdf 24 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Poor performance is the leading reason for divestment. Regardless of the government’s chosen approaches to As such, any retention agency that can systematically help investment retention (proactive/reactive, continuous/periodic, affiliates avoid poor performance will significantly reduce or targeted/broad), the provision of information is important. the risk of potential divestments. Governments may help Globally, most IPAs would claim to provide information. investors avoid poor performance by providing support to However, in fact, much of that information is patchy and driven them in dealing with the factors affecting revenues, costs, their by what is available at the time of an investor request. It is not position relative to other affiliates, as well as other risks. strategically developed, maintained, and disseminated with the explicit goal of influencing, targeted investors, as well as In the normal course of their duties, many public offices other public stakeholders in the problem-solving process. produce data and analysis of great value to firms, providing insights into local markets and the business environment. This Even more useful than telling an investor where they can can help firms find new customers; enter new markets; find find good domestic supply of raw materials or how to take cheaper, higher quality, or more reliable inputs; take advantage advantage of some government incentive is the provision of of cost-saving or capacity-building services provided by the assistance in meeting suppliers or navigating the bureaucracy, government; and better understand their risks. for example. Officials who become aware of a likely divestment early enough might find a way to address the divestment Broad-based initiatives to identify economy-wide issues, drivers. Also, if divestment is going to nonetheless proceed, for example, as part of a reform or crisis response initiative, officials may be able to help the company to find a buyer may simultaneously reveal many company-specific issues so that the firm can remain open, thus preserving jobs and that present the opportunity for concrete retention through sectoral strength. individualized problem-solving. For example, a survey of 41 IPAs found that a majority had contacted all established The example of the analog electronics manufacturing sector investors during the pandemic, and 59 percent had stated being phased out in Malaysia was discussed earlier. However, they were working to solve individual investor issues related several Japanese corporations that were generally tending to the pandemic, with another 20 percent planning to do so to shift production to lower cost locations, such as China and in the two weeks that followed the survey. In several cases, Vietnam, were able to work with the Malaysian national and these efforts led IPAs, such as South Africa’s InvestSA, to state governments to create better conditions for a transition to deliver company-level problem-solving on a large scale. digital electronics manufacturing within Malaysia. This included InvestSA, which had strategically focused its pandemic support from the governments towards: (i) cluster infrastructure retention efforts on producers of essential goods and services and support; (ii) a relaxation of restrictions on skilled immigrant — such as pharmaceuticals, medical devices, food, and labor, which was needed for HQ-based technicians to train local critical manufacturing inputs — was able to identify and engineers and oversee the transition; and (iii) set up of industry- quickly address threats to their supply chains. InvestSA then specific training centers, such as the Penang Skill Development maintained constant communications with nine provincial IPAs Centre. Figure 7 shows how one corporation, rather than divest through a WhatsApp working group in order to continuously from its Malaysian factories, was able to completely transition monitor the effects of its retention work, as well as any shifts in from analog products to digital products in six years. In so divestment risks among this essential constituency. This also doing, it kept total output at comparable levels and shed some enabled good intergovernmental coordination and ground- jobs. However, this was primarily due to productivity gains.36 level support for implementation across the country.35 35 World Bank Group 2020 36 https://www.sfu.ca/content/dam/sfu/geography/People/Faculty/roger-hayter/edgington-and-hayter-upgrading-malaysia-2013.pdf DIVESTMENT DRIVERS AND FDI RETENTION <<< 25 > > > F I G U R E 7. JVC Video Malaysia’s Transition from Analog to Digital Products 4000 4000 3500 3500 3000 3000 Quantity (`000 sets) 2500 2500 Employees 2000 2000 1500 1500 s eey plo 1000 1000 Em 500 500 0 0 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 STB HDD DVC VHSC VCR Notes: Analog production: VCR = video cassette recorder; VHSC = analog camcorder. Digital production: DVC = digital camcorder; HDD = hard disk drive; STB = set top box. Source: Edgington and Hayter (2013). 26 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT With labor and environmental risks, too, the government is process. At the simpler end of this spectrum, the services likely to have a critical role in resolving any problems that may provided by the retention agency require consideration and arise. Officials can do much to assuage investor concerns by cooperation from another agency. At the more complex end, it openly and preemptively identifying potential risks, making requires advocacy to persuade multiple, influential stakeholders firms feel well consulted, as well as making firms understand to support and/or accept a particular course of government what the government is willing to do to mitigate risks. For action with wide-ranging effect, including the changing of laws example, the government may engage labor unions in a and national policies. Retention agencies must accordingly constructive dialogue or make plans to undertake public works lay the groundwork in the form of relationship-building and to protect companies from environmental risk. awareness-raising with the institutions from which they are likely to seek cooperation. Officials can also proactively support investors divest from polluting activities and divert their investment to more green A clearly defined institutional set up and empowered retention activities. For example, to leverage the very substantial oil and agencies can potentially facilitate systemic advocacy efforts, gas supply chain in Scotland (given 50 years of North Sea as well as escalate issues to higher authorities as needed. O&G exploration) and to ensure a just transition to net zero Such is the case in Rwanda, where a new law confirmed the policy goals, Scottish Development International (SDI) has mandate of the Rwanda Development Board (RDB) to address has recently taken specific steps. investor complaints arising from government action. An inter- ministerial committee called the Private Investment Committee SDI put together a policy to reposition its support for companies was set up to discuss investor issues and propose acceleration in a way that would enable the shift to a low carbon economy measures to resolve them. This is particularly relevant when with initiatives such as: there is a high chance of the investor disinvesting and/or the a. Focusing its assistance to existing overseas inward government being held liable for breach of contract or law. This investors in the oil and gas supply chain, to incentivize them mechanism provides for four stages of escalation, depending to invest in diversification into low carbon opportunities on the complexity and gravity of the problem. It starts with the (such as supporting new products and services for these RDB’s investment office, moving up to the RDB’s cabinet-level new market opportunities). This also meant moving away CEO, then the Private Investment Committee (comprising from directly incentivizing further investment purely into RDB’s CEO, the Minister of Finance, and a representative of the oil and gas sector. the Presidency), and finally the cabinet. In the first few months b. A similar approach was taken on trade support, where net of operation, the office had registered 17 issues portending zero transition market opportunities were prioritized rather a high risk of divestment or litigation in a range of sectors. than traditional oil and gas events. It resolved eight, mostly by reaching agreement on new c. A program of environmental aid (state aid approved) is put payment modalities in the case of a government agency or in place to incentivize existing investors to reduce their the investor not providing contractually obligated payments. carbon outputs from their current facilities. This aims to From these eight resolved issues, investments representing improve the carbon efficiency of existing operations. US$26.5 million and 761 jobs were retained (Kher, Obadia and Chun 2021). These interventions sit alongside work of Scottish Enterprise (the nation’s wider economic development agency) to support In the same way that one may argue “the best defense is a innovation within the O&G supply chain (building on a strong good offense,” one may contend that the best way to prevent subsea technology base) and deployment of offshore wind divestments is to promote expansions and other actions, thus (and future wave and tidal) generation. deepening a company’s roots in a location. Globally, IPAs and governments best regarded for their success in fostering FDI Step 4: Escalate and/or Advocate are those that strategize and plan to grow sectoral ecosystems in close collaboration with the private sector and critical before Others in the Government stakeholders, such as academia and labor representatives. These collaborative groups are often at the cutting edge of their sectors, staying ahead of the curve and leading growth, Investor issues requiring the government to make a policy thereby, supporting the revenue side of investors’ profit change are more complex than others. They can either be equations. Box 1 presents a good example of this type of completely within the authority of one agency to address, or collaboration from the Scottish life sciences sector. they can require a lengthy, formal, inter-ministerial, deliberative DIVESTMENT DRIVERS AND FDI RETENTION <<< 27 4 > > > B O X 1 . Public-Private Collaboration for Company and Sector Growth: Life Sciences in Scotland Companies and publicly funded research institutions are well abreast with, what technologies are emerging, how these may interact with evolving consumer preferences, what new products are feasibly commercialized, and what areas of research are most profitably funded next. Companies and publicly funded educational institutions both want to invest in workforce development, but each depends on the other to provide levels of education (for example, multi-year biological engineering degrees at public universities and weeks-long trainings on proprietary technologies and processes at life sciences companies). Without the public universities, companies would have a human resource shortage; without the companies hiring, public universities would be educating people, but without job prospects. These two sides can invest more efficiently in workforce development when they do it together. “[T]he Life Sciences sector in Scotland is defined as a priority sector of economic significance by the Scottish Government and is, therefore, fast becoming one of the most effective places to develop innovations and commercial enterprises. The Life Sciences Scotland Industry Leadership Group (LSS ILG) works in partnership with Scottish Government, academia and health professionals to create an ecosystem where scientific endeavour leads to economic growth across the Life Sciences spectrum, producing more companies of scale with international growth potential.” “[LSS ILG], is a joint industry, enterprise of agencies and government strategy teams. Their remit is to develop, drive and deliver the Life Sciences strategy in Scotland. By developing an environment where ingenuity and innovation can create jobs and wealth for Scotland, they aim to benefit the global community.” “The LSS ILG is chaired by…Director of Government Affairs at Medtronic and co-chaired by…Minister for Trade, Innovation and Public Finance, and supported by…Minister for Public Health and Sport.” “The LSS ILG consists of senior representatives from stakeholders across the spectrum of the Life Sciences community: CEOs and Directors from pharmaceutical, biotechnology, medical devices and diagnostics companies; research organisations and academic institutions; Scottish Enterprise, Highlands and Islands Enterprise, the Scottish Government and Scotland’s National Health Service.” “The LSS-ILG has focused on tackling key issues important to the sector and industry. Theme subgroups across Business Environment, Innovation and Commercialisation, Sustainable Production and Internationalisation with additional representation from colleagues across the sector have come together to address these challenges.” Source: Excerpted from the Life Sciences Scotland website (www.lifesciencesscotland.com) on July 9, 2022. 28 >>> EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT 4. Conclusion Most of the economic benefits from FDI have always come over the many years of each project’s life, and not at the instant of announcement or start-up. With FDI, governments are seeking decades of wages, tax revenues, procurement from domestic companies, export earnings, skill and technology spillovers, and stimulation of sector development. The benefits come from the sustained successful operation of affiliates, which governments should nurture through robust retention and expansion support. This note categorizes drivers according to their visibility (for example, planned versus unanticipated), leverage point (affiliate versus headquarters), and most influential actors (for example, the multinational itself, other market players, government, and the workforce). In this way, government officials can use them to identify divestment risks and approach the most influential players with tailored retention activities. A strong understanding of what drives divestments and an ability to discern harmful ones is a prerequisite to effective retention. Investment retention efforts should be strategic and systematic, with a combination of both proactive and responsive elements. The earlier a divestment risk is identified, the more time and options a government will have to do something about it. Governments need to have a suitable institutional set up, as well as a systematic approach and operating procedures to address the drivers of divestment, thereby retaining and perhaps expanding investment. Indeed, the topic of divestment remains under-researched. Thus, more updated insights are needed through investor surveys and empirical research. Some ideas needing further exploration include: (i) the relative importance of factors that drive divestment; (ii) firm characteristics that can impact divestment decisions; and (iii) in the current context of multiple parallel crises, how these different crises have impacted divestment in host countries. 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