* 23472 September 1 997 $.0~~ pj 4f I~~~~~~~~~~~~~~I AU~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~A 111, 12-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~A L E S S O N S O F E X P E RI E N C E 4bol i; FORE IGN I NVESTMENT YE A joint Service of JEC and the World Bank WASHINGTON, D.C. Copyright ©) 1997 International Finance Corporation and Foreign Investment Advisory Service 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing September 1997; second printing December 1997 The International Finance Corporation (IFC), an affiliate of the World Bank, promotes the economic development of its member coun- tries through investment in the private sector. It is the world's largest multilateral organization providing financial assistance directly in the form of loans and equity to private enterprises in developing countries. The Foreign Investment Advisory Service (FIAS) is a joint service of IFC and the IBRD. This volume is a product of the staff of the International Finance Corporation and the Foreign Investment Advisory Service. The con- clusions and the judgments contained herein should not be attributed to, and do not necessarily reflect the views of IFC or its Board of Directors, FIAS, or the World Bank or its Executive Directors, or the countries they represent. IFC and the WVorld Bank do not guaran- tee the accuracy of the data included in this publication and accept no responsibility whatsoever for any consequence of their use. Some sources cited in this paper may be informal documents that are inot readily available. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Corporate Planning and Financial Policy Department, IFC, at the address shown in the copyright notice above. IFC encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. Distributed by the World Bank All IFC publications in print are shown in the World Bank's annual Index of Publications. This index contains an alphabetical list by title; indexes of subjects, authors, countries, and regions; and complete ordering information. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, the World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A.; from Publications, the World Bank, 66 Avenue d'Iena, 75116 Paris, France; or at the online publications site: http://wxw.worldbank.org, and click on "publications." Principal authors: Dale R. Weigel, General Manager, FIAS; Neil F. Gregory, Policy Analyst, IFC Corporate Planning and Financial Policy Department; and Dileep M. Wagle, Manager, IFC Corporate Planning and Financial Policy Department LIBRARY OF CONGRESS CATALOGUING-IN PUBLICATION DATA Weigel, Dale R., 1938- Foreign direct investment / International Finance Corporation. Foreign Investment Advisory Service. p. cm. - (Lessonis of experience series ; no. 5) Principal authors, Dale R. Weigel, Neil F. Gregory, and Dileep M. Wagle. 1. Investments, Foreign. I. Gregory, Neil F. II. Wagle, Dileep M. III. International Finance Corporation. IV. Foreign Investment Advisory Service. V. Title. VI. Series: Lessons of experience; 5. HG4538.W35 1997 332.67'3-DC21 97-35907 CIP ISBN 0-8213-4050-6 CONTENTS Preface v Executive Summary1 k' k * -- t"> > 1. Introduction 5 2. The Role of FDI in Developing Countries 9 3. Promoting FDI Through Policy Advice 21 4. Getting the Policy Environment Right Annex 4A Policy Reform and FDI in Indonesia 29 5. Promoting FDI Through Project Financing 57 6. Getting Project Structures Right 73 7. Getting More From FDI 85 Bibliography 91 Appendixes 93 A. Net Foreign Direct Investment Flows to Developing Countries 95 B. IFC FDI Projects 99 C. FIAS Advisory Projects 111 | f QvB E~~~ i G N D I P E L I N V F S 'I Mi t N I1 GLOSSARY ASEAN Association of South East Asian Nations BIT Bilateral investment treaty EPZ Export Processing Zone EU European Union FDI Foreign direct investment FIAS Foreign Investment Advisory Service GATT General Agreement on Tariffs and Trade ICSID International Centre for the Settlement of Investment Disputes IBRD International Bank for Reconstruction and Development IFC International Finance Corporation IMF International Monetary Fund MAI Multilatcral Agreement on Investment Mercosur Latin American Southern Cone trade bloc (Argentina, Brazil, laraguav, Uruguav) MIGA -Multilateral Investment Guarantee Agency MNC Multinational corporation NAFTA North American Free Trade Agreement OECD Organization for Economic Cooperation and Development PFA Project financing agreement PPA Power Purchase Agreement SMEs Small and medium enterprises TRIMl Trade-related investment measure UMIA Union du Maghreb Arabe UNCTAD United Nations Conference on Trade and Development WTO World Trade Organization iv l E IX \1 )\ N I N C-A ()R I I' AR 1, A I ION PREFACIE Foreign direct investment (EDI) has been soaring in recent years. This spectacular growth has been fed by increasingly close integration of national economies, driven by worldwide competitive pressures, economic liberalization, and the opening up of new areas to investment. Developing countries have shared in the cc,. C :.. ~~~~~~~~~~~~growth in FDI inflows, and quite a few of them have become a source of outflows. Building up strong private enterprises in member . ~~~7developing countries has been a focal point of the International Finance Corporation's economic development work. By supporting local entrepreneurs A_ ~~~~~~~~~directly and assisting the evolution of domestic capital markets, the Corporation has promoted domestic private investment as well as its complement, foreign . ~ ~ ~ L .> t.)$*5direct investment. Over four decades, the IFC has invested in more than 500 companies that have foreign -*~. icttt'P investors. In the process, IFC has gained unique insights into ways of structuring projects for success. Since its establishment by IFC in 1985, the Foreign Investment Advisory Service (FIAS), now a joint IFC- libWorld Bank Group agency, has conducted more than 230 advisory assignments in 100 countries. Through this process, FIAS has learned much about the nature of policy and regulatory impediments to foreign invest- - oment in many parts of the developing world. '.: 2 KBuildingThree principles guide IFC'seWrk: the business principle, the catalytic principle, and the principle of . .special contribution. Following the business principle, IFC focuses on promoting competitive and dynamic !9' , .' ' .... . dprivate enterprises by taking on a partnership role and ^'t~ . ;by accepting the same market risk as project sponsors. The catalytic principle focuses on the demonstration effect of individual transactions, a key to extending the F c is ICDIR IN V ESTMENT v Corporation's real developmental role. The special Corporation. The report has also benefited fronm coT- contribution principle directs IFC to complement the ments from staff of the World Bank. An earlier version market, and hence focus on projects and places where of the report was discussed by IFC's Executive it can provide special value added. IFC's involvement Directors in July 1997. Data used in thc report reflcect with FDI shows how these principles interact. IFC's operational position through JTune 30, 1997. The increase in FDI fiows does not mean that they are easy to attract. Flows to emerging markets are still heavily concentrated among a relative few developing countries and play a minor role in the economtcic growth of many others. The good news is that Jannik Lindbaek difficulties can be surmounted, and with sound policies Execuzive Vice President even countries the markets consider risky can attract International Financc Corporation foreign cilrect investment. Attracting FDI, however, is only the beginning. It does not guarantee that host September 1997 countries will capture the full economic benefits of FDI. Only appropriate policies to promote open and competitive markets can do that. This report presents some of the lessons IFC has learned from its investment and advisory experience in the deveioping world. They show interactions between policy frameworks and the volume and structure of FDI. Case studies of difficult as well as successful projects show how the Corporation promotes success- ful project structures and regulatory changes as it tries to get the strongest development impact for investments. The report was prepared jointly by IFC's Corporate Planning and Financial Policy Department and FIAS. The principal authors were Dale R. Weigel, Neil F. Gregorv, and Dileep M. 'vVagle, with research support from Tracv Rahn and Felina Danalis. As with the other volumes in the Lessons of Experience series, the authors have drawn upon a full range of operational experience with FDI transactions from across the vi I IR X N A I I N IN I R I' ( R A r XI N 4t-4-tV.- EXECUTIVE SUMMARY ,,9,*,.iQLF n t n o l r y 4 7 V F~~~~~~~~~~~~~~ounreiginestmEnuty invethent fomoflans oeeihr iniequtysa (portfolio) or direct, known as foreign direct invest- ment (FDI). FDI does much more than provide devel- - ~~~~~~~~~~oping countries with financing for their growth. It brings them new technologies, management tech- -- ~~~~~~~~~~~niques, and market access as well. FDI may he stimu- lated by exploitation of proprietary technology or natural resources or by access to markets. THE ROLE OF FDI IN DEVELOPING COUNTRIES Foreign direct investment in developing countries has a long history. It has fluctuated over time, as investors have responded to changes in the environment for investment, including government policies toward for- ~~~~~~~~ ~~~~~~~eign direct investment and the broader economic poli- ,~~~~~~~~~~~ ~~~~cy framework. Hence, trends in FDI have reflected .t~~~~~~W'" :~~~~~~~rt9 ~~~changes in policy stances by developing countries, from ;.Kit ~~~~~~~~~~~~~~ ~import substitution in the 1950s and 1960s through natural resource-led development in the 1970s, struc- tural adjustment and transition to market economies in -~~~~~~~ ~~~the 1980s, and an increased role for the private sector in the 1990s. EDI in developing countries has flowed mainly into manufacturing and processing industries. It has tradi- tionally been concentrated in a small group of coun- tries, which partly reflects the size of their economies and partly their attractiveness as a location for FDI. In the past, attractiveness has been closely linked to pos- session of natural resources or a large domestic market. With the shift toward globalized production and trade, V., A ~ ~ ~ ~ ~ ~ ~ ~ ~~~~cmettvness as a location for investment and exporting has become the main determinant of attrac- tiveness. OR I ~~;4 .~F'R I iI4t NVFSIN The largest developing-country host for FDI is China, FDI is not just attracted to the economic giants, with but Eastern Europe has emerged as an important new large domestic markets. Countries of all sizes at differ- location for FDI. FDI has also reached the poorest ent stages of development from all over the world have countries. Although the actual amounts invested are attracted FDI worth more than 5 percent of GDP, generally low, reflecting the small size of their including Czech Republic and Malaysia. What they economies, FDI flows relative to GDP in poorer coun- had in common was an evolving policy framework that tries are as high as in richer countries. Countries in was attractive to foreign investors. South Asia and Sub-Saharan Africa, however, lag behind in the volume of FDI flows relative to GDP. PROMOTING FDI THROUGH POLICY ADVICE IFC was established to promote private investment in For a long time, FDI came almost exclusively from the developing countries, including FDI. It was one of many major industrial countries. Recently, the sources of FDI international initiatives that promoted FDI, including in developing countries have widened, and many devel- bilateral trade agreements, bilateral and multilateral finan- oping countries have emerged as sources in their own cial institutions, and investment promotion programs. right, particularly for their own regions. Regional Links are also important for FDI from developed economies. Together with other members of the World Bank Group, IFC set up the Foreign Investment Advisory Recent trends toward globalization of production and Service (FIAS) in 1985 to advise developing countries consumption patterns have led to a sharp increase in on policies to promote FDI. Since then, it has assisted global FDI. At the same time, trade and investment more than a hundred countries in various ways. Its liberalization has brought more developing countries advice takes many forms, from diagnostic studies giving into the globalized economv. This has led to a dramatic an overview of constraints to FDI, to investment policy surge in FDI flows to developing countries, which studies giving specific solutions for specific issues or sec- increased fivefold from 1990 to 1995, and exceeded tors or for building institutions to accompany policy $100 billion in 1996. This increase went mainly to 12 change and promotional strategies. Dialogue on the pol- large developing countries, in part reflecting their eco- icy framework for FDI also occurs in the context of nomic size. Thus, China alone received $167 billion other IFC advisory work and project financing. between 1990 and 1996 (1996 prices). Already a sig- nificant part of the economy in many developing coun- GETTING THE POLICY ENVIRONMENT RIGHT tries, FDI is likely to continue at high levels for the Many factors influence the flow of foreign direct foreseeable future. investment to developing countries, but the most obvi- ous one is often overlooked: namely, the willingness of Policies have also played a role in this increase. India, developing countries to aliow it. Historically, many the next largest developing country after China (mea- countries have placed onerous limitations on the scope sured by population), received only 0.2 percent of for FDT, even when seeking to promote it. Inevitably, GDP in FDI inflows, compared to China's 5.4 percent this has acted as a deterrent. of GDP Since both are populous, low-income coun- tries, differences in population or income level do not Restrictions on inflows of FDI have taken many forms, explain this disparity. Prior to 1982, India had received including limits on entry to certain sectors, complex more FDI in relation to GDP than China. What approval mechanisms, high taxes and complex incen- changed was China's policy stance toward foreign tive regimes, restrictions on share of foreign ownership, investors. After years of strictly regulating FDI, China and restrictions on use of land and expatriate labor. began to see that it could make a welcome contribution Restrictions have been imposed for many reasons, to modernization and integration into the world econ- including concerns over excessive foreign influence and omy. This was reflected in a changing policy frame- loss of national wealth, desire to promote indigenous work, to which foreign investors responded quickly. entrepreneurship and workers, and desire to achieve Since 1992, however, India's steps toward economic transfer of technology and management techniques. liberalization have also had a positive impact on FDI Only fairly recently have a number of developing flows and are indicative of its future potential. countries reduced their restrictions. Wider policies also matter. A liberal trade and pay- foreign sponsored, and nearly two thirds of them have ments regime encourages FDI. Often, imports lead to been structured as joint ventures with local partners. In investment and production for the world market. these, the foreign sponsor is usually responsible for Liberal payments systems allow foreign investors to day-to-day management or technical support. A fifth take advantage of these opportunities. A number of of the projects have local sponsors, who bring in for- other administrative barriers, often long unrecognized, eign partners to provide access to technology, manage- have deterred FDI. Important barriers include the ment expertise, or marketing support. Projects with exclusion of foreign investors from land ownership, equal stakes between foreign and local partners have restrictions on the use of expatriate labor, and require- done relatively poorly. ments for sundry permits and approvals. Until the 1980s, most IFC foreign direct investment A large state role in the economy can also deter FDI, projects took place in highly regulated economies, whether through price controls, methods of capturing which influenced the relative attractiveness of produc- rents from natural resource exploitation and monopo- tion for domestic and export markets. As a result, few lies, or through the presence of a large state enterprise FDI projects were based on international competitive sector. Privatization methods can have a large direct advantage. Instead, they were oriented toward produc- impact on FDI inflows, as can the structure of direct ing for protected domestic markets or exploitation of sales and the sales process. Privatization can have posi- developing countries' natural resources. There were no tive indirect effects on FDI, too. Although very high investments in nontradables such as infrastructure. The effective tax rates can deter FDI (and some investments policy environment also influenced the ownership are particularly sensitive to tax rates), selective incen- structure of projects, with few wholly foreign-owned tives can be both costly and ineffective in attracting ventures. These patterns are reflected in the types of FDI. Attempts to foster domestic linkages with foreign product and the country locations and affect the pat- enterprises have generally been counterproductive, too. tern of project performance. Projects have done better in open than in protected markets and better still with Finally, getting policies right may not be enough; active contractual marketing arrangements. investment promotion may be required as well, unless the domestic market is sufficiently attractive to FDI. Since 1980, a marked shift has occurred in the compo- Effective promotion involves image building, invest- sition of IFC's foreign direct investment portfolio, one ment generation and investor servicing to influence that has accelerated in the 1990s. Projects are increas- investment decisions. Needless to say, promotion with- ingly based on production for global markets or provi- out good policies will not work. sion of nontradables, and reliance on contractual mar- keting arrangements has grown. Foreign control has PROMOTING FDI THROUGH PROJECT FINANCING increased, with more projects majority owned by for- IFC has invested in developing countries in every part eign investors, and more wholly foreign-owned pro- of the world since 1958, in more than five hundred jects. Privatization has brought foreign investors into companies that have foreign investors. IFC's invest- many previously local enterprises. This is reflected in ments have been spread broadly among countries, even the changing country composition of the portfolio, the the poorest countries. The Corporation has been an changing sectoral composition, and the improved per- early investor in new and risky locations for FDI and formance of the more recent portfolio. has worked with investors from many different coun- tries supporting FDI in a wide range of sectors. GETTING PROJECT STRUCTURES RIGHT Sometimes, even the largest multinationals have found The structure of IFC's foreign direct investment pro- benefits in cofinancing with IFC, and developing- jects reflects the policy constraints under which they country governments have often welcomed IFC's pres- were formed, with most taking the form ofjoint ven- ence in a venture. tures. Though a common form of business organiza- tion, joint ventures are inherently fragile. Forced part- IFC's projects have been largely successful and prof- nerships are more difficult to implement, particularly itable, despite sometimes difficult investment condi- when they are with public enterprises, and equal part- tions. Two thirds of the projects financed have been nerships have been problematic. F ORE I G N DI RE CT INV E STM EN T 3 Limits on foreign ownership have impeded effective ed to be sustained without major reversals, as more and project structures, too. They have sometimes had the more countries see the benefits of more liberal policies effect of reducing sponsor commitment to meet addi- toward FDI. tional costs or to resolve management problems. They have also encouraged foreign sponsors to find alternative Global integration will continue to drive FDI flows, means to profit from the venture. FDI project structures wherever the economic environment is open to it. are also affected by restrictions on capital transfers. FDI Globalization will increasingly blur the distinction projects have been vulnerable to delays and cost over- between foreign and domestically owned enterprises, and runs, including those generated by extensive government between developed and developing countries. Countries regulation. Close regulation of FDI projects reduces that are open to foreign investment stand to share in the their flexibility to respond to developments. rising global prosperity that globalization brings. With careful project design, however, joint ventures Nevertheless, to create an enabling environment for can be implemented successfully. It is important to FDI, a large unfinished agenda of policy reform ensure appropriate management arrangements through, remains. Some of the countries that have made progress for example, a management contract; clear financing in reducing restrictions, including some already receiv- arrangements; and careful handling of each partner's ing large amounts of FDI, still have some way to go interests as a contractor with the enterprise or as a toward providing a fully open environment for FDI. holder of related assets. Many more countries have only begun to reexamine their policies toward FDI or the impact of their general GETTING MORE FROM FDI economic policies on FDI flows. Yet these countries Governments have been eager to maximize the benefits have not missed their chance to participate in global from FDI and minimize harmful side effects. Restrictive FDI flows. The rapid increase in FDI volumes in recent economic policies have reduced the benefits and years has shown that this is not a zero sum game. As increased the costs of FDI through deadweight costs of more countries open up to FDI, global integration will regulation, economic costs of protection, inefficient increase, leading to an increase in overall FDI flows. project structures, encouragement of the use of transfer The challenge for the future is therefore to open more pricing to repatriate profits, and fiscal losses from tax economies and sectors to foreign direct investment, incentives. Recently, countries that have liberalized thereby bringing opportunities for economic develop- have benefited more from FDI. This process is expect- ment to a larger part of the developing world. 4 I NT E RNAT IO NA L F I NAN C E CO RPO RAT IO N INTRODUCTION Foreign direct investment (FDI) has played an impor- tant-i'f at times controversial-role in the growth of emerging economies. From time to time, developing countries have expressed serious misgivings about the economic, social, and political consequences of foreign investment. Most commonly, they have feared losing control to foreigners over important parts of their economies -and excessive drains on profits as foreigner investors, exercising "oligopolistic powers," make off with excessive profits. Developing nations, perceiving a coflict between national and foreig croaegals, ~~~~~~~~~~ ~~~~~~~~have imposed a variety of restrictiv policies in an effort to protect themselves. Some of these policies .. ~~~~~~~~may have captured a larger part of the economic rents, ~~~~~ 3~~~~~~~~~~~ ~~~but at the expense of reducing the investment's overall ... 4.P t.benefits. Restrictions notwithstanding, the volume of FDI flows has swelled, from an average of 877 billion in 1983-87 to $318 billion in 1995. Developing countries, with coerges hinflowvs of only $18 billisoivn 1983-8, re nearly $100 billion by 1995, a more than fivefold increase. Fundamental changes in the structure of the global economy over the period explain much of this increase: a strong movement toward the market, espe- cially among the former socialist economies, and a lib- cralization of trade and investment regimes in many developing countries. Above all, global economic inte- gration increased enormously, and developing countries : * i - >-z h o effoparticipated in it (albeit unevenly). FDI has given the global integration process a major boost by helping link markets for capital and labor and raise wages and capital productivity in recipient coun- *it; g6U tries. With newly liberalized trade and investment V.. FOR E IG N DihfR I N VFS T MFNTF 5 regimes and new technologies lowering transport and As a result, efficiency gains from FDI were often limit- communication costs, multinational firms have ed not only by the adverse effects of protectionism but espoused increasingly global strategies to capture the also by the impact of many developing countries' large savings arising from specialization and dispersion restrictive investment frameworks. These included coIn- of activities. As a world network of multiple linkages trols on investment size, direction, location, and extent has developed, intra-firm trade across national bound- of ownership. Host-country insistence that forcign aries has increased sharply between parents and their subsidiaries take on local partners, whether they want- affiliates in developing as well as developed countries. ed them or not, was another limiting factor. Though intended in part to promote rapid transfer of skills and The developed countries have been the driving force technology to the local economy, such structurally behind the surge in FDI flows, with outflows rising weak joint ventures usually did little to maximize comr- from an average of $72.6 billion in 1983-87 to $270.5 petitive efficiency. In addition, they often deterred the billion in 1995. Though small in comparison, outflows very types of foreign investment developing countries from developirng countries also rose enormouslv: from would have welcomed, for example, those irivolving $4.2 billion in 1983-87 to $47 billion by 1995. This high-technology products. activit, signals their growing integration into the glob- al economy-and the still-untapped potential. Restrictive frameworks were an outgrowth of develop- ing countries' assumption that the supply of FDI Recognizing the costs of being locked out of the global resources was inelastic and therefore unresponsive to economic expansion, many developing countries have the nature of the investment-incenti e framework. changed their attitude toxvard FDI over the past Recognition that this assumption was erroneous and decade. As a result, they have been pursuing much carried economic costs provided strong motivation for more open policies on industry entry and exit condi- subsequent economic liberalizations. tions, factor and product market regulation, and barri- ers to trade. Liberalization has led to significant In the second phase, the 1980s and 1990s, the role of increases in FDI flows-in some cases spectacular. In FDI has changed noticeably. With integration of inter- China, Poland, Czech Republic, Vietnam, Hungary, national production and cross-border markets by multi- and the Russian Federation, FDI inflows have risen national corporations (MNCs), the key ingredients of more than tenfold in the four or five years preceding growth-created assets, technology, intellectual capital, 1995. In l\Iexico, India, Brazil, and Malaysia FDI has learning experience and organizational competence- grown twofold or more. have become much more mobile across national bound- aries and increasingly housed in MINC svstems. In 1995, 74 percent of flows went to only 10 develop- ing countries. The skewed nature of this distribution GOVERNMENT OBJECTIVES reflects differences in some countries' economic size, On the whole, government policies toward foreign but also in their progress on the policy front. As investors have been based on straightforward objec- important as the investments themselves, the influx of tives: maximizing economic gains while minimizing FDI has led to significant improvements in the effi- any socioeconomic and political costs. The problem has ciency of production in the more liberal countries, been that in practice, costs and benefits have been where globallv competitive industries operate in a varn- closely intertwined. They have therefore involved a ety of export markets. choice of trade-offs, so that seldom have there been any clear-cut means for implementing these objectivcs. A CHANGING FRAMEWORK In the 1960s and 1970s, but to some extent now, too, From a look at FDI's evolving role in emerging mar- governments in developing countries have faced a kets in the past three or four decades, two distinct series of dilemmas in shaping their policies toward for- phases stand out. In the first phase, the 1960s and eign investment. For instance, permitting multination- 1970s, closed-economy models of development were als to repatriate most of their profits could be taken as in vogue, and foreigners often made direct invest- allowing them to siphon off much of the newlv created ments to reach lucrative opportunities inside tariff wealth. Forcing multinationals to reinvest their profits walls to exploit natural resources or take advantage of locally, however, would in effect allow them to increase trade quotas. their control over the national economy. Similarly, if 6 I N T E R N A T I O N A L F I N A N C E C ( R F O R A 1- I ' N multinationals paid local wage rates they would be FDI to developing countries: foreign project sponsors "exploiting local labor." If they paid higher than aver- looking for financing support from the Corporation are age wages, they would skim off the best labor to the rarely major multinational corporations seeking to disadvantage of local firms. establish wholly owned subsidiaries abroad. Instead, they are usually sponsors who may be concerned about Resolving these dilemmas entailed a variety of con- country risk because of their own size and financial stantly shifting policies. Their impact was sometimes strength or because of project structures with which perverse, resulting in unnecessarily weak project struc- they are not fully comfortable, particularly joint ven- tures and sponsor commitment. This diluted the tures involving local partners. Nevertheless, IFC's pro- expected benefits and frustrated the object of the exer- ject experience provides a window into the manner in cise. The more liberal policies of later years were partly which the investment framework has changed in devel- due to a recognition that there were different and more oping countries and its implications for the success and practical ways of achieving the same objectives and efficiency of FDI ventures. While analysis of project capturing the efficiency gains associated with FDI. performance has not been the main purpose of this IFC's experience over this time period illustrates the report, these results have been valuable in highlighting impact of these policies, particularly on project struc- the very real link between policies and project perfor- ture and competitive efficiency. mance. Improvements in policies the world over have been reflected in improvements in project results, and PURPOSE OF THE REPORT hence gains from FDI. IFC has had a long association with FDI at both the investment and advisory levels. From its first FDI pro- This report attempts to: ject in 1958 to the present day, IFC has supported * put IFC's project lending and policy advice (through (through equity, loans, and mobilization of commercial FIAS) into the context of global trends in FDI finance) more than 500 companies involving foreign * describe IFC's experience as a policy adviser and direct investment in more than 100 countries in the project financier developing world. In addition, through its Foreign * draw lessons from IFC's experience in these roles. Investment Advisory Service, IFC has provided a range of advisory services to governments seeking to promote In the light of developing countries' still limited share foreign investment in their countries. In consequence, in global flows of foreign direct investment and the the Corporation's role in facilitating the flow of FDI to huge potential for increase, these lessons may prove developing countries has grown over the past four interesting to policymakers wrestling with the chal- decades. lenge of attracting FDI as well as to investors looking toward emerging markets for profits. Policymakers may The breadth of the Corporation's experience with find pointers for identifying and eliminating barriers to direct investment transactions provides a unique foreign investment. Prospective investors may gain opportunity to examine FDI's evolving role in econom- insights into ways of working effectively within the ic development, even though IFC's population of FDI confines of the economic and regulatory frameworks projects is not wholly representative of global trends in they are likely to encounter. F O RE I G N DI RECT I NVESTMENT 7 ;: :J::; n THE ROLE OF FDI IN DEVELOPING COUNTRIES .t - -. ~ -. ; . Foreign investment in developing countries has soared over the last ten years, overtaking official finance as a source of external funding for economic development. FDI BRINGS MORE THAN JUST FINANCE Foreign investment can take two forms. Foreign equity investors can simply buy a stake in an enterprise or take a direct interest in its management. The first, indirect form of investment, is called foreign portfolio investment. Foreign direct investment (FDI) involves ' tt.":':;',.i' '<'."'':' R.zr; '"'S - - more than just buying a share or a security. It is the ...t§7v. ! .- tamount of financing provided by a foreign owner who ~ ~. 4W .. ialso is directly involved in the management of the s;7: ,-r, /Kenterprise.' For statistical purposes, the International . 4g *< :. - -. . Monetary Fund (IMF) defines foreign investment as VIN ~~~~~~~~~~~~~~direct (FDI) when the investor holds 10 percent or W 2 . .; , . . ^more of the equity of an enterprise. As a rule of thumb, this is usually enough to give the investor a say in the management of the enterprise. Sometimes an investor with a smaller share plays an active role, or a larger investor may remain passive.' Both foreign port- folio and direct investment were quite small until the mid-1980s, but have grown rapidly since (Figure 2.1). .FDI 4 ~~~~~~~~ , > .... .J.. ..RrU . lPL :. NV3M N 'it~~~~~~~~~~;.... ~~~~~- LA . ,. Figure 2.1. Real Foreign Direct Investment and Box 2.1. Cayeli Copper Mine, Turkey-Drawing Foreign Portfolio Investment to Developing on FDI to Develop a Natural Resource Countries, 1970-96 (1996 $ billion) The Cayeli copper/zinc underground deposits are located 120 - n northeastern Turkey, close to the Black Sea. The ore- body's potential had been known for many years, and 100 small-scale mining had taken place at the surface and wvith short tunnels since Roman times. The Cayeli orebodv Foeindiet nvsmetis, however, unusually complex. ETiBANK, the State- owned mining enterprise which held the mining rights to 60 Foreign portfolio equity the orebody, shared the financial and investment risk by seeking the participation of a foreign investor with mmn- 40 -ing experience and also domestic investors. 20 -A joint venture (JV) was established in 1983 between ETiBANK, PHELPS DODGE (an Amnerican Company, which 0 - ~~~~~~~~~~~~sold its shares to INMET of Canada in 1987) and GAMA 1970 72 74 76 78 80' 82 84 86 88 90 92 94 96 (a Turkish private company). ETiBANK leased its mining Source: World Bank Debtor Reporting System, rights to the newly formed JV in return tor a royalty fee. a. Preliminary data. The company is overseen by a board of erectors consti- tuted of representatives from INMET, ETiBANK, and llAMA. Most major decisions require 60 percent support, so the sponsors must reach consensus. INMET established Wvirh portfolio investment, the enterprise benefits from and onerates the mine under a technical assistance the finance, and (in the case of equity) a sharing of agreement. The operator has maintained sufficient free- risk. Direct investment can bring additional benefits ro dom to run the mine successfully, and the snareholders improve investment productivity: have provided consistent financial support as required. INMET has performed effectively, completing the project * Involvement in management may provide access to on time and on budget. better management techniques. Since This project began, at least two other private sector *Access to technologies: technology owners are often mining projects have been developed, and m-ining has the unwilling to make technology available to a partner potential to become a major contributor to the Turkish unless they can retain some degree of management economy. control, which FDI provides. The host economyv benefits from the additionial econio- * Access to marketing expertise and market links: the my activity; creating emrployment and tax revenuec. FDI partner may be a customer for the products or Entry by foreign firmns can also inicrease comipctntonl in may have better access to export markets or better domestic markers, reduce monopoiv profits, and s,trimU- marketing skills. late quality; upgr-ades of products and services hI all firm--s In the sector. Thus, inivestmenrt in Mlauritius byv a Thus EDI can provide miore than just a finance flow. It textile company fromi Hong Kong, (U,,helped rake can also provide an operational link between an enter- the Mlauritian textile industryr upmarker (Box 2.2). prise and a foreign partner. A foreign partnier that has investment expertise, technology, or market access not A 1995 study, of 69 developing countries, found th-at avalable in the host economy can raise the productivity EIsiuae cnmcgot,adhsalre of the enterprise. For example, the Turkish government impact than domestic investment. It also found thtat far exploited its copper resources in Cayeli/Rize in part- from crowding our domestic inivestmient, FDI seemis to nership with domestic and foreign mining companies supplement it.3 (Box 2.1). Operational links often provide the imlpetus' for IDI. 10 I NlFItRN AtI IrK NA.I[ tN AN siP L Oit.'. ~) ltAtFI UN Box 2.2. TIL Textiles, Mauritius-FDI Takes the difficult for foreign partners to enforce in many coun- Textile Industry Upmarket tries. With increased concern about retaining control over intellectual property, obtaining technology under The textile industry in Mauritius benefits from good infra- contract has become more difficult. Suppliers of structure and supportive government policies, including know-how and technology may prefer to take an equity an Export Processing Zone (EPZ) that provides generous stake (FDI) so they can exercise some control over the incentives and stability in labor relations. Focusing on use of their inputs and share in the financial rewards value added, labor intensive products, the industry has for taking risks. For example, production of auto com- grown rapidly. Textiles and manufacturing account for ponents in India has been fostered by FDI (Box 2.3). about 90 percent of employment in the EPZ, and 53 per- cent of Mauritian exports. Marketing advantages cut both ways. The foreign part- ner can be expected to have superior access to interna- When IFC invested in Textile Industries Limited (TIL), the tional marketing channels or more experience in inter- company had been established in Mauritius for 18 years. national markets. For its part, the local partner may be It is a wholly owned subsidiary of Esquel of Hong Kong, able to provide access to the local market. FDI may China, which supplies its inputs, and markets its prod- occur so that a foreign partner shares in the domestic ucts. With support from IFC, it developed new production partner's market advantages, or vice versa. Again, the facilities using CAD-CAM technology which enabled it to partnership may involve equity holdings by both part- move its products upmarket, while saving labor. This was ners (i.e., involving FDI) as a means of sharing control, necessary, because Mauritius had exhausted its potential risks, and rewards. for further economic expansion through labor-intensive manufacturing, and TIL had had to import scarce FDI'S LONG HISTORY unskilled labor. The story of development almost everywhere includes foreign direct investment, from the Persian Gulf's oil After implementation of the project, TIL increased exports fields to India's tea plantations and Malaysia's rubber to such private labels as Ralph Lauren, Yves St. Laurent, plantations. Early in the twentieth century, a large part Tommy Hilfiger, and Nautica. It has become one of the of the world's infrastructure was developed through world's leading high-quality shirt manufacturers. About foreign direct investment, including electric power in 80 percent of its production is now for the top-end cus- Brazil and telecommunications in Spain. British firms tomers. invested in consumer goods manufacturing abroad from an early date. German chemical companies were TIL offers an in-house training program for ail employees. expanding outside Germany before World War I as The quality of its products confirms the high skill level of were U.S. auto manufacturers. Swedish, Swiss, French, its work force. Trained Mauritians hold most senior man- and Japanese firms had established foreign subsidiaries agement and supervisory positions. Productivity has been at an early date as well. particularly high at TIL because it is one of the few EPZ companies that has been able to upgrade its product line These investments were based on new technologies and invest in technologically advanced, capital-intensive and management and organizational practices. By equipment. 1914, the world stock of FDI was estimated at $15 billion, about one third of all international investment Although most of the direct returns to the enterprise at the time. The United Kingdom was then the largest accrue to the foreign investor, the company's success has source of investment, followed by the United States helped raise the standards of the whole EPZ textile indus- and Germany. The United States was the largest recip- try. It has established the reputation of Mauritius as a ient of FDI. source of high-quality textiles and has encouraged other companies to emulate its move upmarket. The stock of world FDI had risen to $66 billion by 1938, with U.K. firms still the largest investors. More Although management, technology, marketing, and than half of this investment had been made in devel- other know-how can be supplied under contract, such oping countries, mainly in Latin America and Asia. arrangements normally involve less control. Nor are Much of it was in agriculture and mining, but a signifi- they immune from risk, particularly since contracts are . . cant part was also in infrastructure. F ORE I GN DI R EC T I NV E STM14EN T11 Box 2.3. UCAL Fuel Systems, India-Strong FDI also continued unabated to countries that were Sponsor Relations with Technical Partner rich in natural resources and locations that gave prod- Underpin Auto Parts Industry Development ucts preferential access to export markets. For example, textile production shifted to developing countries such In 1989, Mikuni of Japan formed a joint venture with as Mauritius that had unused quotas for export to Carburetors Limited (CL) of India to manufacture carbure- industrial country markets under the Multi-Fiber tors and fuel pumps, based on Mikuni technology. The Agreement. However, there was disinvestment in infra- main customer for these products was Maruti, an Indian structure sectors during this period as many developing car maker, which was a 60-40 (now 50-50) joint venture governments took over control of firms from foreign between the government of India and Suzuki of Japan. (and domestic) private investors. UCAL currently buys components from 120 suppliers. Escalating commodity prices in the 1970s had two Through regular meetings, UCAL enforces the same disci- effects on FDI. First, high prices encouraged increased pline and high standards in these relationships that Maruti FDI in extractive sectors, particularly oil and gas. This does. Most UCAL suppliers have had to expand capacity benefited countries such as Congo, Ecuador, Indonesia, and many have successfully reduced their reliance on and Nigeria, which saw sharp increases in FDI in the UCAL as a single customer. The project has enabled early 1970s.4 Maruti to increase the level of domestic component sourc- ing in an efficient way, and lowered its exposure to yen- Second, the balance of payments surpluses of commod- rupee parity changes. UCAL's carburetor now costs Maruti ity-exporting countries provided an abundant source of about 30 percent less than the Mikuni import and about investable capital. This money was recycled to develop- 15 percent less than European substitutes. ing countries through large-scale sovereign lending by commercial banks. Thus, developing countries became more reliant on sovereign borrowing and less interested in attracting FDI. In addition, some developing coun- tries benefited sufficiently from commodity price These patterns shifted after World War II as U.S. firms increases to meet their own investment needs from became the main source of FDI, and manufacturing domestic savings, without FDI. The economic buoyan- investment became most prevalent. As mentioned in cy of many developing countries in this period encour- Chapter 1, during the 1950s and 1960s, most develop- aged policymakers to pursue inward-oriented ing countries pursued "inward-oriented" development approaches, often expressly aimed at delinking from strategies, which emphasized the growth of domestic the global economy. A number of countries tightened industry behind trade barriers. Production for the policy restrictions on FDI.s Investors responded to the domestic market was encouraged over exports, and apparent lack of interest, or even hostility, of host gov- imports were discouraged or restricted. Governments ernments by reducing their FDI in many developing played an active role in regulating and directing private countries. Colombia, Kenya, and Pakistan were among business. In doing so, many policymakers were con- countries where FDI fell sharply in the early 1970s. cerned about possible adverse consequences of FDI The second trend proved stronger than the first: such as creation of economic dependency, political Chile, Egypt, Venezuela, and Zambia saw massive dis- interference, and weakening of domestic companies. invcstment, despitc abundant natural resources, as a result of deliberate policies favoring domestic, public Such policies generally deterred FDI. The creation of investment in extractive industries. Several countries domestic markets protected from imports gave foreign used the additional resources generated by higher raw producers an incentive to shift production into the material prices to buy out foreign owners of mining country, instead of trying to export to it. Thus, FDI and petroleum ventures. As a result, FDI to developing was concentrated in import-substitution industries countries stagnated in the 1970s (Figure 2.1). through a process known as tariff-jumping. This incen- tive was strongest in countries with large internal mar- This stagnation continued into the first half of the kets such as Brazil and Mexico in Latin America, 1980s, as developing countries struggled to restore eco- which attracted large volumes of FDI to industries nomic stability in the face of falling commodity prices, protected from imports. recession in industrial countries, and high global inter- 12 IN T E RN AT IO NA L F INA NC E CO R PO RAT IO N est rates that together triggered a debt crisis. Box 2.4. Gold Mining, Ghana-Developing an Furthermore, the consequences of inward-looking, Important Export Industry Through FDI state-oriented economic policies became apparent in low investment productivity and public enterprises' In the early 1960s, Ghana was producing over 26 tons of mounting losses. Insulation from the global economy gold a year. By 1984, output declined to less than 8 tons led to a collapse in exports and massive balance of pay- as a result of lack of private investment, which was dis- ments deficits in many countries. couraged by government interference in the sector. Lack of capital and technical expertise that foreign direct In response to deep-seated balance of payments and investment can provide were binding constraints on the fiscal deficits, many countries embarked on structural expansion of mining. In 1986, the government took deci- adjustment programs, designed to reorient their sive steps to reverse the decline, with advice from IFC and economies toward private sector production, interna- the Foreign Investment Advisory Service (FIAS). It created tional trade, and competitiveness. This involved reduc- a Minerals Commission that acted as a focal point to ing tariffs and other restrictions on trade, making cur- interact with foreign investors; revised the mining code; rencies convertible for current transactions, and liberal- and allowed the use of offshore forex accounts to guar- izing the business environment, including deregulation antee repatriation of earnings. The effect of these mea- of FDI. Nowhere were these trends more marked than sures was dramatic as foreign direct investment rehabili- in the former socialist economies, which by the end of tated the sector. the 1980s began the transition to market economies. IFC financed the rehabilitation of Ashanti Goldfields FDI flows to developing countries began to increase in Corporation, which now ranks among the world's top 10 the second half of the 1980s in response to these gold producers. It also financed new investments in new changes (Figure 2.1). These flows were more focused gold producers Bogosu and Iduapriem. IFC invested $330 than in the past on export-oriented industries, attract- million for its own account and through mobilizations. It ed by low operating costs and market links. advised all three companies on the application of state-of- the-art technologies. Because of the significant improve- As private enterprise proved more effective than the ments in Ashanti Goldfields' performance, government public sector at mobilizing investment and providing has divested 17 percent of its shareholding with an offer- efficient services in many countries, governments con- ing on the London and Accra Stock Exchanges. tinued to open up more areas of economic activity to the private sector in the 1990s. Infrastructure, once the Gold production increased three and a half times, from 8 preserve of the public sector in most countries, became tons in 1984 to 28.5 tons in 1992, and an estimated 45 increasingly open to private investment. FDI in infra- to 50 tons by 1996. Since the reforms of 1986, exports structure grew accordingly.' have more than doubled, to more than $416 million in 1993. Ghana has become Africa's second largest gold Privatization provided a direct means to transfer eco- producer. nomic activities from the public to private sector.- Where the privatization process was open to foreign Source: IFC, Building the Private Sector in Africa (Washington, direct investment (as in Argentina, Chile, and D.C: IFC, 1995). Colombia), it attracted FDI, both directly and indi- rectly. Privatization accounted directly for $38 billion in FDI to developing countries in 1988-1995 (Chapter 4). Liberalization of FDI policies by developing countries continues into the 1990s, hand in hand with liberal- ization of trade policies, both unilaterally and as part of the Uruguay Round of multilateral trade negotiations. Indeed, it would be difficult to find a developing coun- try that has not enacted more liberal investment laws in the 1990s. In Ghana for example, changes in invest- F 0 RE I G N D I RECT I N V E STM E N T 13 ment policies paved the way for a resurgence of the distance commercial services is also growing fast and gold industry through FDI (Box 2.4). promises to become a large segment of world trade. The number of bilateral treaties on the promotion and Increasingly, the ingredients of economic growth-cre- protection of investment have increased almost three- ated assets, technology, intellectual capital, learning fold during the 1990s. Multilateral agreements on experience, and organizational competence-are investment have also been developed, mainly as part of housed in company systems. To gain access to these wider multilateral agreements such as the North ingredients developing countries need these companies American Free Trade Agreement (NAFTA). The to participate in the domestic economy. For example, industrial countries are negotiating a Multilateral sale of Chilean telecommunications to a foreign Agreement on Investment (MAI) treaty to govern investor brought Chile's telephone services up to global investment flows into these countries and World Trade standards (Box 2.5). The role of FDI in global eco- Organization (WTO) members are increasing the idea nomic activity, as measured by the ratio of FDI inflows of a global investment agreement. The thrust of these to gross domestic fixed capital formation, has doubled treaties and agreements is to continue the liberalization in the past two decades to 4 percent in 1995. of the policy framework for FDI. The newly industrializing countries of East Asia and FDI AND ECONOMIC GLOBALIZATION other countries that are well integrated into global Economic liberalization, combined with advances in trade and investment flows have benefited from these communications and transport, has led to growing trends, exhibiting sustained high rates of growth. This integration of world markets for goods, services, and has encouraged other developing countries to recognize capital. This process has emerged in the 1990s and is the benefits of greater integration into the global econ- expected to continue for some time to come. omy. A fear of being locked out of the expanding glob- al economy and the globalization of firms has spurred FDI has given the global integration process a major developing countries to change their approach to FDI, impetus by helping link markets for capital and labor in some cases dramatically. and raise relative wages and productivity of capital in recipient countries. Multinational firms have adopted The criterion by which developing countries measure increasingly global strategies based on greater special- the value of FDI has shifted from its direct contribu- ization and dispersion of activities and have aimed to tion to local value added to its longer term conse- capture the substantial economies to which they give quences for the competitiveness of domestic resources rise. The growing multiplicity of linkages is reflected in and capabilities. This has in turn resulted in a greater a sharp rise in intra-firm trade across national bound- acceptance of the need for deregulation, market liberal- aries, between foreign affiliates in developing countries ization, and removal of a variety of control and regula- and parent companies in developed (and sometimes tory impediments, all of which-by adding to transac- other developing) countries as well as between foreign tion costs-have created serious disincentives for FDI affiliates within developed countries. in the past. As a result of policy changes, developing countries have increased their share of FDI from 12 To illustrate, between 1983 and 1993, the share of percent in 1990 to 36 percent in 1995. intra-firm exports in total exports of U.S. parent firms rose from 34 percent to 44 percent, and for imports Together, these changes have led to an almost revolu- from 38 percent to 49 percent. At the same time, the tionary change in the sources of foreign capital for share of intra-firm exports among U.S. foreign affiliates developing countries. The growing importance of increased from 55 percent to 64 percent, and of imports resource flows from private sources to developing from 83 percent to 86 percent.' Excluding exports from countries is evident, accounting for over 85 percent of parent firms to affiliates, the share of exports by affili- the total in 1996, compared with only 44 percent in ates to other affiliates rose from 37 percent in 1977 to 1990 (Figure 2.2). FDI has become the largest single 60 percent in 1993. Multinational corporations now sell source of external funds for development, exceeding more goods through foreign subsidiaries than they official development finance by a large margin. export from their home countries. Provision of long- 14 I N T E R N A T I O N A L F I N A N C E C O R P O R A T I O N Box 2.5. CTC, Chile-Bringing Telecoms up to Figure 2.2. Aggregate Net Resource Flows to Global Standards Through FDI Developing Countries, 1990-96 ($ billion) Comparia de Telefonos de Chile (CTC) provided 95 per- cent of Chile's local telephone services. In 1988, govern- * Portfolio equity investment ment privatized CTC, with IFC help. The Bond * Foreign direct investment Corporation of Australia bought a controlling share, but 300 Private debt flows due to financial difficulties, it sold its stake in 1990. It official development fin was bought by Compahiia Telefonica de Espana (CTE), 250 - which now controls 43.6 percent of CTC. The manage- ment team is mostly Chilean but has some senior man- 200 - agers from CTE. IFC helped finance a major investment program by CTE, 150 which modernized and expanded the wireline network and introduced a cellular telephone service. This doubled 100 the number of lines in service, and increased the number of payphones by half. By end-1993, the network was 50 fully digitized and automated, placing CTC among the world's most modern systems. CTC's services were o l , I E brought up to international standards. Staff productivity 1990 1991 1992 1993 1994 1995 1996a has increased 27 percent between 1990 and 1993, when its level of 176 lines per employee put it on a par with Source: World Bank Debtor Reporting System. the best international players. a. Preliminary data. By 1993, CTC had 34,000 cellular subscribers, using a network of 56 sites. Since then, the company has contin- Figure 2.3. External Finance Flows to ued to expand local services, and move into long distance Developing Countries, 1996a services, cable television and other communication ser- vices. It is now undertaking foreign investment in cellular Official services in cooperation with CTE. Portfolio development equity ~~~finance investment 14% Source: Privatization: Principles and Practice, Lessons of 16% Experience 1, Washington, D.C.: IFC, 1995. FDI to developing countries has grown rapidly, espe- Private cially since the mid 1980s. In 1970-96, these flows Foreign f3 o grew by 10 percent a year in real terms. Real FDI in direct 1980-89 was 50 percent more than in the previous 10 investment years, and two fifths of that in the next 7 years. FDI 39% now averages 1.7 percent of developing countries' GNP and accounts for nearly 40 percent of all global 100% = $284.6 billion FDI flows to developing countries (Figure 2.3). Developing countries now receive one third of global FDI (Figure 2.4). Source: World Bank Debtor Reporting System. a. Preliminaiy data. F O R E I G N D I R E C T I N V E S T M E N T 15 Figure 2.4. Real FDI Flows to Industrial and Developing Countries, 1970-95 (1996 $ billion) 200 - Industrial countries 150 - 100 / Developing countries 50 - 50 1970 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 Source: IMJF International Financial Statistics, and World Bank Debtor Reporting System. The rapid growth in FDI in the past few years partly among the largest developing countries but conceals represents a stock adjustment. In other words, assets important changes in the composition of FDI.' For are being transferred from public to private ownership, example, FDI in Indonesia has shifted from the oil and and investors are rebalancing the global composition of gas sector in the 1960s and 1970s to manufacturing in their portfolios as barriers to FDI fall. This process is the 1980s and 1990s. just beginning, because developing countries still have room for further policy liberalization. At the same time, the accelerating trend toward global integration Figure 2.5. Sectoral Distribution of FDI Stock will create further opportunities for rebalancing invest- in Major Host-Developing Countries (percent) ments and greater involvement of developing countries in global production patterns, thus providing further stimulus for FDI. 100 - : *~~Tertiary THE PATTERN OF FDI FLOWS TO DEVELOPING 80 Secondary COUNTRIES * Primary Information on sectoral distribution of FDI is available for only 16 developing countries, but these account for 6 68 percent of developing-country FDI. For these coun- tries, secondary activities (manufacturing and process- 40 - ing) account for over 40 percent of FDI. However, between 1975 and 1990 a shift occurred from secondary 20 - -- toward tertiary activities such as services (Figure 2.5). 0 _ 1 A A fairly stable group of countries have been the largest 1975 1980 1985 1990 hosts for FDI (Table 2.1). Brazil, Indonesia, Malaysia, Mexico, and Thailand have been among the top 12 recipients in the three successive 10-year periods from Source: UNCT4D, World Investment Report 1993. Ness York, N.Y, 1970 to 1996. This largely reflects their positions as 1993. 16 I N T E R N A T I O N A L F I N A N C E C O R P O R A T I O N Table 2.1. Top 12 Developing-Country Table 2.2. Top Developing-Country Recipients Recipients of FDI of FDI, 1996 By percentage Rank 1970-79 1980-89 1990-96 Rank By value of GNP 1 Brazil Mexico China 1 China Angola 2 Mexico Brazil Mexico 2 Mexico Vietnam 3 Nigeria China Malaysia 3 Malaysia Malaysia 4 Malaysia Malaysia Brazil 4 Indonesia Cambodia 5 Indonesia Egypt Indonesia 5 Brazil Czech Republic 6 Greece Argentina Thailand 6 Poland China 7 South Africa Greece Argentina 7 Colombia Tanzania 8 Iran Thailand Hungary 8 Czech Republic Bolivia 9 Egypt Colombia Poland 9 Thailand Peru 10 Ecuador Nigeria Colombia 10 Peru Colombia 11 Thailand Indonesia Chile 11 India Ghana 12 Algeria Chile Czech Republic 12 Chile Mozambique Note: Excludes countries with 1994 population below 5 million. Note: Excludes countries with 1994 population below 5 million. Source: World Bank Debtor Reporting System. Source: World Bank Debtor Reporting System. Measuring FDI as a percentage of GNP takes account Figure 2.6. Real FDI to China and India, of country size: larger countries offer larger domestic 1980-95 (1996 $ billion) market for labor, materials, services, and other inputs and for sales of output. On this ranking, in 1996, Malaysia maintained its prominence, and China, 40 - Colombia, and the Czech Republic featured among the 35 - China top 12 by either measure (Table 2.2.). Although the low-income countries' economies are too small to 30 - attract large amounts of FDI in absolute terms, in rela- 25 tivc tcrms they do quite well: half of the top 12 recipi- / ents of FDI as a percentage of GNP are low income. 20 - Similarly, Africa, with its preponderance of small, poor countries, does not make the top 12 in absolute terms, 15 but measured against GNP, a third of the top 12 are 10 African countries. 5 India The big story of the past 15 years has been the rise in 0 FDI in China (Figure 2.6). With changes in economic 1980 82 84 86 88 90 92 94 policy since 1979, China's FDI rapidly caught up with its size and rate of economic growth. Between 1990 Source: World Bank Debtor Reporting System. and 1996 China received some $167 billion (1996 prices). Measured in relation to GNP, however, it ranked sixth in 1996. By contrast, the next largest Eastern Europe and the Central Asian republics of the developing country, India, remains way down the list, Former Soviet Union have emerged as important FDI with FDI of only 0.6 percent of GNP, against China's hosts during their economic and political transition, 4.8 percent. This reflects India's relatively slow progress driven in part by privatization. Poland, Hungary, and in restructuring growth and orienting its policies to the Czech Republic, the farthest along toward becom- encourage FDI. ing market economies, have attracted the most FDI. F O R E I G N D I R E C T I N V E S T M E N T 17 Figure 2.7. Real FDI by Income Group (1996 $ billion) 50- Low-income 40 - 30 Upper middle-income 'a I / 20 - 10 - Lower middle-income 1% -,^ t >Low income excluding China 0 l; l 1970 72 74 76 78 80 82 84 86 88 90 92 94 96a -10 _ Source: World Bank Debtor Reporting System. a. Preliminary data. For example, FDI in Poland has risen from $11 million Ghana illustrates Africa's changing fortunes. It received in 1980 to $4.2 billion in 1996 (1996 prices). an average of $62 million a year (1996 prices) between Countries with slower transitions (for example, Bulgaria 1970 and 1979. Over the next 10 years (1980-89), gov- and Romania) have seen a smaller FDI response. In the ernment pursued inward-looking, public-sector oriented Central Asian republics, most FDI has been in thc oil policies, and the economy weakened. As a result, FDI and gas sector. The share of FDI in Europe tripled dwindled to only $9.6 million annually. After the initial from the 1970s to the 1990s (Figure 2.9). rigors of economic stabilization and reform, however, Regional patterns are influenced by the relative attrac- strong economic growth and a liberal economic envi- tiveness for FDI in each region as well as by income ronment led FDI to surpass the levels of the late 1960s level. Using FDI to GNP ratios again to normalize for and early 1970s, averaging $95.1 million a year (1990-96). economic size, from 1990-96 East Asia received the highest flows at 3.5 percent of GNP. At the other end Excluding China, absolute FDI flows to low-income of the range, South Asia had the lowest ratio at 0.3 developing countries remain far below flows to middle- percent, followed by Sub-Saharan Africa with 0.7 per- income countries. However, when account is taken of cent of GNP the smaller size of low-income countries, the disparity is much less. Low-income countries (excluding China) Low FDI in South Asia reflects a long history of received FDT flows equivalent to 1 percent of GNP in restrictive policy environments, which has only recently 1996, compared to 1.4 percent and 1.5 percent in lower begun to change. In Sub-Saharan Africa, low FDI in and upper middle-income countries, respectively (fig- the 1990s reflects the aftermath of the economic crisis ures 2.7 and 2.8). of the 1980s and continuing civil unrest as well as restrictive policies. This contrasts with the 1960s and Measured in relation to country size, FDI flows are 1970s, when investments in resource extraction made significant for a wide range of countries. Excluding Africa the second largest host region for FDI to devel- offshore finance centers and countries with population oping countries, despite restrictive policies. Africa has under a million, some 57 countries received FDI flows recently only begun to see renewed FDI flows, in greater than or equal to 1 percent of GNP in 1996 countries that have achieved a measure of economic (Table 2.3). For 24 countries, it was worth more than stability and liberalization. 3 percent of GNP, and for 6 countries it was over 18 I N T E R N A T I O N A L F I N A N C E C O R P 0 R A T I O N Figure 2.8. Real FDI as Percentage of GNP, 1996a Figure 2.9. FDI by Host Region, 1970-96 Real (percent) FDI/G NP 1996 3.5% - South Asia 3% - 100 _ 80 - _Middle East and 2.5% - North Africa 60 - Latin America and 2% - Caribbean 40- Europe and 1.5% _ 20 - Central Asia *% 0 . East Asia and Pacific 0% _ _-20 1970-79 1980-89 1990-96 0% 1 _Africa Low- Low-income Lower Upper income excluding middle- middle- China income income Source: World Bank Debtor Reporting System. Source: World Bank Debtor Reporting System. a. Preliminary data. 5 percent of GNP. This means that FDI is already become important investors in developing countries. important for all these countries, and shows how Today, the group of source countries is wider than ever important FDI could become for other developing before, and includes developing countries themselves. countries. Improvements in developing countries' economic poli- cies have created a climate for strong international SOURCES OF FDI businesses to emerge. Multinational enterprises are no Until the 1970s, the United States and the United longer found only in industrial countries. Developing- Kingdom were the largest sources of FDI to develop- country businesses are growing in importance as out- ing countries. Since then, Germany and Japan have ward investors. Comparing 1990-95 with 1984-89, the Table 2.3 The Importance of FDI Flows to Less Developed Countries, 1996 an ola . Albania Hungar - erbaijan Philippines Co d : - Boitia -. - Jarrialcd -Eot;v>ana - --a Boiaii Mal, Czech Republic Chile - Laos Bulgaria Lebanon Slovak Republic Malaysia China Mozambique Cameroon Lesotho Sloverria Trinidad and Tobago Colombia Nicaragua Dominican Macedonia, Thailand Vietnam Costa Rica Papua New Guinea Republic FYR Tunisia Ecuador Peru Egypt Mexico Uganda Estonia Poland Gabon Morocco Uruguay Ghana Tanzania The Gambia Oman Venezuela Guinea Namibia Zambia Honduras Nigeria Indonesia Paraguay Note: Excludes offishorefinance centers and countries withspopulation less than I million. Source: World Bank Debtor Reporting System. F O R E I G N D I R E C T I N V E S T M E N T 19 share of FDI from developing countries in world FDI determining the location of FDI for manufactured doubled from 6 percent to 12 percent.'0 East Asia exports. With a shift away from manufacturing, the accounts for 90 percent of FDI outflows from develop- strength of regional links may diminish. However, the ing countries; Hong Kong, China, has become the prospects for regional integration will continue to largest single outward investor among developing encourage regionalization of production and market- countries, with 80 percent of it going to China. Some ing, and hence FDI. of this may represent "round-tripping" of Chinese investment through a foreign partner to take advantage With appropriate policies, FDI flows to a wide range of incentives for FDI, or investment by firms from of countries and sectors. The increasing diversity and Taiwan, China. Brazil, China, Chile, and Thailand are volume of FDI flows between countries of all income the other main outward investor countries. One moti- levels show that policy restrictions, not any basic char- vation for this has been to seek a supply of key raw acteristics of FDI, limit the distribution of FDI flows. materials (such as minerals and logs). Another has What the preceding examples suggest is that with been to seek lower labor costs in less developed appropriate policies, many different types of economies economies, as domestic industries in the home coun- could attract much larger FDI flows. Thus, the current tries become technology intensive, and labor costs rise. concentration of FDI in a few developing countries could well dissipate as other developing countries take FDI flows between developing countries are mainly steps to reduce their own economies' obstacles to FDI. intra-regional and are greatest in East Asia. In 1994, 57 percent of FDI flows from developing countries LESSONS OF EXPERIENCE were invested in the same region. Excluding Japan, A review of historical trends in FDI to developing some 60 percent of FDI in East Asia comes from countries shows that: within this region; for examplc, Indonesia is the fourth largest foreign direct investor in Malaysia. This partly 1. Countries at every stage of development can attract reflects the influence of regional economic groupings FDI across a wide range of sectors from developing such as Association of South East Asian Nations countries as well as industrial countries. (ASEAN) in lowering barriers to intra-regional trade 2. The largest economies naturally attract foreign and investment and partly the importance of business direct investment, but experience shows that it can ties between ethnic groups in different countries. be an important part of even the smallest, poorest countries' economies. Regional links are also important for FDI from devel- 3. The volume and direction of FDI flows respond to oped economies. The European Union accounts for the national and international policy environment. most FDI flows to Eastern Europe and Central Asia. 4. Current trends toward integration of the global The United States has historically directed the largest economy provide a stronger impetus than ever share of its FDI to Latin America. This partly reflects toward FDI in developing countries for those coun- the importance of physical proximity as a factor in tries open to it. Notes 1 Financing can include loans by the foreign owner as well as equity investment. 2 Foreign portfolio and direct investment mav represent only a transfer of assets, not necessarily an economic investment in the host country. 3 E. Borenzstein,j de Gregorio, andj Lee, "How Does Foreign Direct InvestmentAffect Growth?" NBER Working Paper 5057, Cambridge, Mass., 1995. 4 The oilprice increase itself raised the value of inventories held byforeign subsidiaries, which increased the companies' net worth. This in itsef resulted in a recorded FDI inflow, to accountfor the increase in net worth. 5 However, Malaysia, Chile, and afew other developing countries began to liberalize their FDIpolicies during the 19 70s. This set the stagesjfr an early resur- gence of EDI in them. 6 Financing Private Infrastructure, Lessons of Experience 4 (Washington, D. C.: IFC, 1996). 7 The evolution ofprivatization methods in developing countries is discussed in depth in Privatization: Principles and Practice, Lessons of'Experience I (Washington, D.C.: IFC, 1995). 8 All datafrom United Natisns, World Investment Report 1996: Investment, Trade and International Policy Arrangements, New York, NY, 1996, Chapter 4, especially Table IV2. 9 Data on gross FDIflows to developing countries are not widely available. The FDIflows reported in this chapter theref re refer to net flows (inflows minus outflows). Because FDI overflows are smallfor most developing countries, there is little difference between net and gross FDI However,for countries such as Brazil, Chile, and Thailand, gross outJlows are between a quarter and a half of gross inflows. Thus, net FDI data sign icantly understate the importance of FDI inflows to these countries. 10 All datafrom World Investment Report 1996: Investment, Trade and International Policy Arrangements, United Nations, New York, N.Y,1996. 20 I N T E R N A T I O N A L F I N A N C E C O R P O R A T I O N PROMOTING FDI THROUGH POLICY ADVICE Since the end of World War 11, the industrial countries have encouraged international private capital flows as a prime policy objective. As a result, barriers to private capital flows among industrial countries have been reduced, and institutions and policies have been devel- oped to facilitate private c-apital flows. INTERNATIONAL SUPPORT FOR FDI Increased flows of private capital and technology to developing countries have been seen as a key to eco- ~~~~~~ ~~~~~nomic growth in the less developed regions of the :\., .'. ; . wold Thsldt h saliheto h ol p F - :. inace Chedorp Worato.dF manarI,the endutilcompasses both investing in productive private etprises and ,F, ~~~ rmeplc ojcive Ase pia t resut,arers topivt E :<: cadvising member countries on ways to establish poli rdcies and institutions that would hlp create a welcom- ing climate for foreign and domestic private investment. IFC was one of the international community's first oi- tiatives to channel the flow of foreign direct investment -. :.~ ::, .4,' - *~'-;.* +.(FDI) to developing countries. To improve the policy framework for FDI, including investment in develop- ing countries, bilateral and multilateral legal agree- -i., ;a- t+,.4\-;,-,t -<-.<- v world. ments were also implemented. To protect investors against loss from political risks in developing countries, bilateral and multilateral investment guarantee pro- grams were established. Individual industrial countries set up financial institutions alongside bilateral and multilateral investment promotion programs. Countries have improved the legal and policy framework for foreign direct investment through a series of biateral investment treaties (BITs). Most of these treaties have been between an industrial country and a developing country, but recently, some have been between rwo developing countries. Altogether, 155 countries have FORP,EI GN D i1,E C 'N V tST M ENT 21 Ax ~ ~ ~ ~ ... . iaea n mliaea netetgaatepo been involved in one or more BITs.' These treaties aim * guidelines on investment and bribery by the to improve the conditions for investment by firms of International Chamber of Commerce, a private each signatorv country in the other. According to the group International Centre for the Settlement of Investment * the United Nations model double taxation conven- Disputes (ICSID', the number of BITs has expanded tion and set of principles for controlling restrictive steadily, reaching nearly 1,130 by Mav 1997. business practices * the World Bank/International Monetary Fund In addition to bilateral agreements, a series of multilat- Development Committee guidelines on the treat- eral instruments have been approved that help improve ment of foreign direct investment. the frameworks for international investors, including those from developed countries investing in developing The potential for discrimination from inconsistencies countries. These include both multilateral treaties in investment policies, as well as the desire to harmo- binding on all ratifying countries and non-binding nize and improve investment rules in general, has led instruments. Scveral of the most recent multilateral to attempts to negotiate stronger binding rules govern- treaties contain closely similar provisions to those of ing investment in a multilateral framework. Some BITs. In this way, BIT practices are being brought into progress was made in this direction in the Uruguay a multilateral framework. Round, with the negotiation of the three agreements mentioned above on trade-related investment measures Some binding agreements deal with settlement of dis- (TRIMS), trade in services, and trade-related aspects putes between investors and host countries. One of the of intellectual property rights. A Multilateral most important agreements established the ICSID, a Agreement on Investment (MAI) is now being negoti- multilateral institution, part of the World Bank Group, ated among the OECD countries. Efforts also are that provides a mechanism for arbitrating investment being made to initiate multilateral negotiations on disputes. Another important treaty is the Convention investment matters among a larger number of devel- on the Recognition and Enforcement of Foreign oped and developing countries within the World Trade Arbitration Awards, which provides uniform standards Organization (WTO). for mutual recognition and enforcement of arbitration awards and dispute settlements made in participating Nearly 15 of the OECD countries have established countries. national financing institutions with mandates to support national firms' investments in developing countries. Still another agreement, establishing the Multilateral Some of these institutions can also invest with firms Investment Guarantee Agencv (MIGA), also part of from other countries. These financial institutions have at the XVorld Bank Group, provides political risk insur- their disposal the same instruments as IFC, including the ance to investors in developing countries. In addition, ability to make equity investments and loans in private several agreements reached during the Uruguay Round sector projects in which a company from the sponsor- trade negotiations limit aspects of host-country policies ing country also invests. Some of these institutions toward foreign direct investors that would adversely operate with restrictions such as a preference for affect international trade. The North American Free investing with small and medium-sized national firms Trade Agreement (N\AFTA) treaty is an example of a instead of large multinational corporations. regional treaty between developed and developing countries. Like some of the most recent BITs, this Besides the national financial institutions, groups of treatv enumerates investment liberalization obligations OECD countries have established other multilateral and establishes high standards of investment protec- institutions. The European Union supports tion. Other new multilateral treaties with similar provi- International Investment Partners to promote FDI in sions on investment include the Investment Protocol of developing countries. The Inter-American Mercosur, the G-3 Free Trade Agreement, and the Development Bank has its Inter-Armerican Investiiieiit l,, l.Charter Treaty. Corporation whose activities parallel those of the IFC. Scveral other non-binding models, guidelines, and Many industrial countries operate investment promo- other instruments have influenced the international tion programs to encourage their national firms to investment environment. These include: invest in developing countries. These programs try to 22 1 N T E I' N A I I O N A IE I N A N (I F C O R P () R A TI ) N help firms secure information about investment oppor- erning imports of equipment, or employment of expa- tunities. The techniques used include providing general triate managers and technicians. information about the host countries, sponsoring mis- sions of potential investors to specific countries, IFC also has a long history of advising on the legal and matching a potential investor with a specific project, institutional framework for capital markets and more and giving financial support for feasibility studies, pro- recently on privatization methods and the content and ject development, and start-up. Table 3.1 shows the administration of environmental regulations. Advice in programs offered by 13 OECD countries. these areas is given under advisory assignments and in the context of project financing. Many of these programs are targeted to a specific group of investors in the sponsoring country. When Several characteristics set IFC-sponsored advisory used, targeting is usually aimed at small and medium- activities apart from those of other private and public sized firms, which are assumed to lack the resources advisory agencies: needed to seek out investment opportunities, particu- larly in developing countries. Hence, as in all the pro- * Advice provided by IFC-sponsored units is grams to encourage investment in developing coun- informed by IFC's considerable experience as a tries, the use of public funds is justified by a market lender to, and investor in, private sector projects in a imperfection, in this case the cost and difficulty of wide range of developing countries. This practical securing information about investments in developing experience with the problems of investing, combined countries.' with its economic development mandate, makes IFC an almost unique source of hands-on advice on cre- IFC'S ADVISORY ROLE ating a friendly environment for private investment. As one of the first attempts to facilitate private capital flows to developing countries, IFC has always dealt * IFC policy advice is demand driven. These demands with investment policy issues that come up while often arise in the course of project financing, a pri- arranging financing for specific projects. If left unre- vatization program, or other efforts to improve a solved, these issues could derail the projects. Examples country's investment climate. Because IFC responds include dividend repatriation restrictions, regimes gov- to a client's needs instead of trying to convince a Table 3.1. FDI Promotion Programs of Industrial Countries Project Missions Sectoral Feasibility development Country Information Matchmaking and seminars studies studies and start-up Austria oLI c * Belgium * * * * Canada * * * b Denmark * U * b Finland LI* L * France * c b Germany * * * Italy * * * * * L Japan * * * * * o Netherlands * * Sweden E l b b Switzerland United States Source: OECD and FIAS. F OR E I G N D I R E C T I N V ES T M E N T 23 developing country to change its ways, its advice is Box 3.1. Some Common Policy Issues in Project more likely to be accepted. Financing * As a member of the World Bank Group, IFC draws * C.(:.rtc:,n price control (Uzbekistan) on, and contributes to, the Group's expertise and involvement in client countries. Together, the Group * Fertilizer price controls penalizing efficient plants- can cover the full range of issues involved in invest- ih'ially prtn.ire-and subsidizing inefficient plants- ment policies. usually in the public sector (India) * Because IFC's advice reflects practical experience * Price controls on hotel rooms during inflation, mak- with investments, it is usually specific, detailed, and ing new hotel investments unprofitable and causing pragmatic-designed to correct flaws. IFC seeks losses in established hotels (Kenya) workable solutions to problems, not optimal policies, to get investment moving. The World Bank Group * Establishing a system for setting the price of electric and other agencies are better equipped to focus on power from independent power producers so as to the broad economic policy issues. facilitate private investment * Advice from IFC-sponsored units is oriented a Setting natural gas prices to make investment in gas- toward opening up opportunities for private sector using industries viable, while providing adequate initiatives. The aim is to reduce or eliminate govern- return (Thailand and other countries) ment restrictions on private activity and government interference in the market so that markets can func- tion. At the same time, IFC advice is also intended policy-for example, taxes, tariff protection or environ- to promote the host country's welfare. For example, mental issues-or may be project specific (Box 3.1). it often advises against tax incentives because they are unlikely to be cost-effective. Taxes of various kinds have raised issues affecting pro- ject viability. In the Russian Federation, multiplicity of * IFC advice usually aims to promote competition and taxes, the resulting tax level, and the instability of the ensure transparency in regulatory processes-princi- tax system have impeded IFC investments with foreign ples that will help the host developing country to oil companies. In an African country, assessing the obtain the best outcome. same tax on ethanol as on gasoline made the ethanol production unviable. As IFC and other investors appraise a project financing opportunity, policy issues often arise. In these cases, As a development institution, IFC has played an IFC raises the issue with the host-country government increasing role in promoting good environmental stan- and suggests a range of solutions that will allow the dards including attention to the social impact of project to go ahead. investments. IFC has helped governments set environ- mental codes for private sector including FDI, in a Policy issues have come up in the context of financing number of sectors. For example, it helped the govern- activities since IFC first began operations. Because dia- ment of Egypt set environmental standards for devel- logues with government on such issues were rarely docu- opment of tourism along the Red Sea coast, so that the mented, the magnitude of such assistance over the years ecology of the area is not threatened by development. cannot be measured. However, some examples of topics In the context of individual projects, IFC ensures that covered illustrate the range. Lessons learned in such potential environmental and social impacts are cases can also be incorporated in the policy advice given assessed, and seeks appropriate mitigation and avoid- by the Foreign Investment Advisory Service (FIAS). ance measures before investing. Policies that distort market prices often affect the via- Aspects of the legal framework are often addressed in bility of projects in developing countries. Output prices the context of a project appraisal. IFC helped Ghana, may be controlled and input prices may be distorted in Kazakhstan, and Uzbekistan draft mining codes when various ways. The distortion may be due to general it became apparent that existing codes were not ade- 24 I N T E R N AT I O N A L F I N A N C E C O R P 0 RA T I O N quate for prospective new investments. In the Russian In response to this interest, IFC established the Federation, JFC helped set up an institution and a sys- Foreign Investment Advisory Service, which it now tem for registering shares. IFC helped Uzbekistan draft sponsors jointly with the World Bank. The mandate of a bankruptcy law. Because as a lender, IFC has to be FIAS is to advise member countries on policies, pro- concerned about the security of its loans, it helps to grams, and institutions that would enable them to perfect security instruments such as land mortgages attract more beneficial FDI. This is free-standing poli- and the transferability of oil and mining concessions to cy advice, independent of project financing, that draws the lenders in case of bankruptcy. on IFC experience in its project financing as one of the sources of information on policy and institutional Specific issues affecting foreign investors are often issues in the host developing countries. raised in the context of IFC projects. For example, IFC itself is generally considered a foreign investor under FIAS advises developing-country governments on spe- many countries' ownership laws. Mexico, the cific policies, programs, and institutions that affect the Philippines, and some other countries, however, have amount and the quality of foreign direct investment been willing to regard IFC as a local investor, or at that a country receives. This includes general diagnos- least not foreign, in calculating ownership shares. This tic studies, specific investment laws, sector-specific has enabled IFC to give comfort to minority foreign studies, institution building, and promotional strategy owners who feared loss of control over a venture. IFC development. The World Bank and other institutions has also persuaded some countries to loosen ownership advise on general economic policies that may affect restrictions on a trial basis to facilitate specific foreign FDI flows. investments. Examples may be found in the banking and insurance industries. In its 12 years of operations (through FY97), FIAS has completed 231 advisory projects in 100 countries and Restrictions on the access of foreigners to land are not every part of the developing world. Asia and Africa uncommon in developing countries. IFC raised these have each been the locale of about one third of the issues and sought specific solutions in India and advisory projects. Europe and Central Asia, Latin Indonesia, for example, to facilitate investment in agro- America, and the Middle East and North Africa industry projects. together make up the other third. Raising policy issues in the context of project financing Two thirds of the projects dealt with policies, about and privatization has both advantages and disadvan- one third concerned investment-related institutions, tages. The advantage is that the issue is concrete, and mainly investment promotion agencies and promotion the consequences of not resolving it are usually clear strategies. Policy work (diagnostic studies, specific (that is, the project will not go ahead). The disadvan- work on investment policies, and sector work) was tage is that solving one case may not solve the problem most prominent in Europe and Central Asia and generally for other investors. That is why free-standing Africa. This emphasis makes sense in light of Eastern advisory services (that is, not associated with individual Europe's transition to market-based economies, and projects) have a role to play. IFC has provided such Africa's undeveloped policy structure for foreign invest- free-standing advice affecting FDI mainly through ment. Development of institutions received more FIAS. emphasis in Latin America reflecting that region's more open policy environment for foreign direct THE FOREIGN INVESTMENT ADVISORY SERVICE investment. In the mid-1980s, developing-country governments, increasingly aware of the benefits of foreign direct FIAS undertakes diagnostic studies to identify a coun- investment, began to ask IFC for assistance in structur- try's main policy impediments to productive foreign ing policies and institutions to attract more of it direct investment. The issues typically identified (Chapter 2). Governments went to IFC for such assis- include prohibitions on foreign investment in many tance because it was the only multilateral development sectors or locations; restrictions on the share of foreign institution that was itself an equity investor and was thus ownership in the equity of domestic companies; diffi- expected to know what kinds of policies and institution- cult administrative approval processes; restrictions on al arrangements would be good or bad for investment. repatriation of dividends and capital; taxes; the charac- F OR E I G N D I R E C T I N V E S T M E N T 25 Box 3.2. Some Common Issues in Diagnostic ernment. This advice follows guidelines developed by Studies the World Bank Group in 1992.' FIAS advice gets into much morc specific details than are contained in * A requirement that foreign firms generate tiroucuh the guidelines. Among the issues treated have been exports all of the foreign exchange ihe-v Qould need restrictions on foreign ownership share, investment for imports, royalties, and repatriation of dividends and incentives and taxes, legal guarantees, and dispute set- capital (China, 1986) tlement mechanisms (Box 3.3). * Different legal systems in West Bank and in Gaza after Box 3.3. Some Examples of Investment Policy the peace agreement Studies * Inadequate functioning of the legal sYsTeni which * FIAS helped the government of Honduras prepare a made enforcement of contracts almost impossible for new investment law that applied to all investors, both foreign and domestic prifate bus;nesses domestic and foreign; guaranteed equal treatment to ,'Bangladesh 1993) all investors; set out the principle that foreign invest- ment was open in all sectors except those prohibited * A multiround approval process fa.r icreiQr investors by specific negative lists; and provided guarantees, (Bahamas, 1992) including access to foreign exchange. * Foreign investors' difficulty in gaining access to land * Poland was advised in 1990 to provide more certain (Lesotho) access by foreign investors to foreign exchange, and to circumscribe the authority of the Foreign Investment Agency to screen new investments, impose ownership structures, and review business decisions ter and functioning of legal systems; and problems for- after enterprises were established. eign firms have in gaining access to land and bringing * The Philippines revised its investment law to expand in technical and managerial staff (Box 3.2). 0TePiipnsrvsdisivsmn a oepn sectors open to foreign investors and allow up to 100 percent foreign ownership where not prohibited in the constitution. Projects and sectors eligible for tax incen- A report on the Russian Federation, completed in tives were reduced, and administration of incentives 1992, identified eight broad areas for improvement to was made more automatic create an acceptable environment for foreign direct investment. These areas reflected the transition of the Russian economy at the time the study was done, and included stabilitv of laws, acquisition of foreign except for a short negative list of activities that would included stabslty of laws, acquisition of foreign be regulated for reasons of public health and safety. exchange, the legal framework for private businesses, Regulations that delayed company registration, land and laws on land ownership and leasing. A diagnostic acquisition, duty drawbacks, local borrowing, and study of Zimbabwe in 1993 was much more narrowly access to foreign exchange were targeted for simplifi- focused. It identified problems due to the investment cation or elimination approval process, policies governing the availability of foreign exchange for dividend and capital repatriation, * rinr-idad and Tobago was advised to simplify its invest- foreign ownership restrictions, and the extent of gov- ment incentives, reducing the number, moving away enmient involvement in the economy. from discretionary incentives to those that are more automatic and part of the general tax system. It was Diagnostic studies identify issues, but few go far in suggested that corporate taxes be decreased, thus designing solutions to the problems identified.reuigtendfodsctoayicniv. Investment policy studies explore specific issues in detail and make detailed recommendations to the gov- 26 I N T E R N A T I O N A L F I N A N C E C O R P o R A T I O N FIAS has also helped governments identify-and fix- Box 3.4. Some Examples of FIAS Institutional the policies that affect FDI in specific sectors of inter- Development Work est, most frequently agriculture or infrastructure sec- tors. The investment policy issues in these sectors have U In Venezuela, CONAPRI was created, a new promotion usually resulted from specific sectoral policies such as institution owned jointly by both the public and private land ownership policies or commodity pricing policies sectors, with a Board of Directors dominated by private in the case of agriculture. companies. As policies toward foreign direct investment open up, U In Tunisia, a new Foreign Investment Promotion institutions have to evolve. Once policies have been Agency was created, drawing staff from an existing eliminated, parts of government that administered them government industrial promotion agency. have to be cut or reoriented. At the same time, institu- tions to promote investment in newly opened areas U In Malaysia, MIDA, an established and successful pro- have to be developed. FIAS has assisted developing motion agency, reoriented its activities away from countries in both aspects of this transition (Box 3.4). approval of investment incentives to more active investment promotion and facilitation. The most difficult part of this work has been getting existing organizations to reorient their activities and * After major policy changes, the Ghana Investment staff from investment approvals to investment promo- Center and the Board of Investments in the Philippines tion as policies change. In some cases, this change has reoriented their activities from investment approvals to been successful, as in the Philippines, while in others it investment promotion. has not, as in Bangladesh. * Croatia created a new investment promotion agency. With the liberalization of investment policies, several countries have become interested in promotion pro- U Sri Lanka converted an Export Processing Zone grams of another kind: namely, promoting linkages authority for a region into a national board of between foreign investors and domestic firms. Such investments. programs were first introduced in developed countries such as Ireland and in some of the newly industrialized economies such as Singapore and Taiwan, China. FIAS has drawn on this experience to help Indonesia, Mexico, Philippines, and Thailand develop linkage programs. Finally, FIAS has been involved in helping several countries build institutions to collect data on foreign is needed. Direct "selling" of the country to specific direct investment. This work has been both conceptual, investors has proven the best way to promote new involving transfer of the concepts and techniques of investment. This means that the agency must decide on investment data collection, and institutional. The insti- which sectors, countries, and specific firms to contact. tutional work has helped governments develop the FIAS has helped Tunisian, Sri Lankan, Moroccan, and organizations necessary to collect data and, perhaps Costa Rican promotion agencies, among others, to more important, methods of intra-agency cooperation. devise such strategies. Strategies for promotion agencies can be specified at two OTHER IFC ADVISORY WORK levels. At the "grand strategy level," the agency has to In addition to its work with FIAS, IFC has provided allocate resources among the three major aspects of developing countries with free-standing policy advice investment promotion: image building, investor servic- on privatization and capital markets development. ing, and targeted investment generation. When an Though not specifically directed at FDI, these advisory investment promotion agency reaches the stage of doing activities have helped generate FDI flows to these targeted investment generation, a more specific strategy countries. FORE I G N DIRECT I NVE STM ENT 27 IFC has advised developing countries on capital mar- the need to attract FDI where it will enhance the via- kets policies and institutions since the early 1970s. bilitv of an enterprise. Foreign investors are most con- Covering a wide range of subjects, including securities cerned about maintaining control of their investments, market development, policies affecting banking and either through majority ownership or through other other financial institutions, and specialized financial means such as management contracts. services such as leasing, the capital markets advisory program assisted 90 countries in almost 800 separate In its privatization advisory work, IFC has tried to advisory projects through fiscal year 1997. overcome these conflicting goals. Sometimes, IFC sug- gests combining foreign investment With employee Free-standing advice on privatization is of more recent share-ownership plans. The privatization of Peru's elec- origin but covered more than 80 projects in 30 coun- tric company, Electrolima, an Argentine integrated tries.4 An important part of this work has been in steel producer, and several Polish cement companies designing and implementing small-scale privatization were all based on this model. In other cases, manage- (shops, transport equipment) that can be replicated in ment agreements give a minority foreign investor, for many localities. Of more interest to foreign investors example KLM in Kenya Airways, an effective voice in are mandates given to IFC by governments for devel- management. oping and implementing the privatization of a single, generally large enterprise. These are pragmatic solutions that can work in some situations. But both the advisory and investment expe- The objective of capital markets advice has been to aid rience of IFC point to some key policies that can allow the growth of domestic capital markets, but the pro- developing countries to make the most of their poten- gram has helped to attract foreign direct investment as tial for FDI. well. Establishing a viable policy framework for finan- cial institutions of all types has enhanced their oppor- LESSONS OF EXPERIENCE tunities for FDI. IFC's work in facilitating the devel- In conclusion, review of IFC's role as a policy adviser opment of leasing industries in many countries is the shows that: most obvious example of this positive impact.5 Of course, a vibrant, competitive capital market also helps 1. IFC's role has been part of a larger international foster FDI flows: direct investors like to rely on local effort to encourage greater flows of private capital capital markets for some financing needs, even includ- and technology to developing countries. ing the sale of shares. 2. IFC's policy advice has been unique, drawing on IFC's experience as an equityv investor, and in pro- The privatization mandates have dealt with several viding detailed and specific advice as a financier of issues that concern foreign investors. One of these is projects. the share of equity that foreign investors are permitted 3. IFC's advice has helped shape the environment for to hold. A common goal of many privatizing countries FDI in the context of projects, through FIAS advi- has been to ensure a wide distribution of ownership of sory work, and through other advisory assignments. privatized enterprises. This goal often conflicts with Notes 1 International Centrefor the Settlement of Investment Disputes. Bilateral Investment Treaties (Washington, D.C.: ICSID, 1997),p.l. 2 T7 Belot and D.R. Weigel, E _ in Industrial Countries to Promote Foreign Direct Investment in Developing Countries,' FIAS Occasional Paper 3, IFC and MIGC, Washington, D.C., 1992. 3 Legal Framework for the Treatment of Foreign Investment: Guidelines, vol. 2, (Washington, D. C.: Iorld Bank, 1992). 4 Privatization: Principles and Practice, Lessons of Experience 1 (Washington, D. C.: IFC, 1 995). 5 Lessons from IFC experience with leasing is treated extensively in an earlier volume in this series: Leasing in Emerging Markets, Lessons of' Experience 3, (Washington, D. C.: IFC, 1996). 28 1 N T L R N A T I O N A L F I N A N C E C ORP ' 0 R A T I O N GETTING THE POLICY ENVIRONMENT RIGHT Z:' f.:~~~~~~~~~ ~Many different factors affect the type and volume of foreign direct investment (FDI) flows to develop'ing countries. These include: conditions in the investors' home countries; market size in host countries; their macroeconomic policies; and structural changes leading to globalization of industry. Factors of this kind lie beyond IFC's reach in either its investment or policy advisory roles. IFC is much more involved in microeconomic policies, which have a direct impact on investment projects. Microeconomic policies encompass investment restrictions, taxes and incentives, pricing, specific trade and payments restric- tions, privatization procedures, and other more specific policies that immediately affect an investment's feasi- bility and profitability. At this level, IFC has identified a number of important links between specific policies '"'' ' .A 't "7'and flows of direct investment.' RESTRICTIONS ON ENTRY BY FOREIGN DIRECT INVESTORS Many developing countries spent decades building bar- riers to foreign direct investment. These have included restrictions on the proportion of equity a foreign investor may hold in an enterprise, and restrictions on the types of enterprise that foreign investors may undertake. Though commonly designed not to block FDI but to promote domestic enterprise, these restric- tions have nonetheless deterred FDI and impaired the quality of FDI flows. Restrictions on foreign ownership have forced foreign investors to form joint ventures with local investors. Although these arrangements often make commercial sense, legal limits on FDI have led to commercially weak joint ventures, sometimes because of the quality of the local partner, sometimes because of the inherent difficulty of managing joint r o R E I XN D I P. I V F S M E N [ 29 ventures, especiallv those betveen local and foreign For a few years in the early 1990s, Mexico operated a partners. system that allowed foreign investors meeting certain conditions (location, size, employment creation) to Limits on foreign investor ownership have also had the establish without approval. A check was made after the perverse effect of reducing the investor's incentive to firm was established to see that the investor had com- make a success of the project. Where the potential plied with the criteria for establishment. Some coun- returns from equity were small, the investor could tries have provided for "automatic" approval of invest- choose to earn profits through the contractual relation- ments not on a negative list (Indonesia) or on a posi- ship with the company instead (for example, as a sup- tive list (India). These "automatic" approvals were really plier of technology). Where the equity at stake was simplified approvals with a time limit and relatively limited, a foreign investor was likely to be less commit- objective criteria. ted to the project and less likely to invest money and effort in making a success of it. Where the investor was Vague criteria. Sometimes clear and objective criteria in a joint venture with a local partner with limited governed the approval decisions (for example, sector, resources, agreeing on arrangements for injecting addi- size, employment, location). More often, decisions tional finance was likelv to be difficult. IFC's experi- were based on vague criteria such as those used by ence of these shortcomings is discussed in more detail Poland (above) or approval was denied because the in Chapter 6. The point here is that restrictions on for- investment might "disrupt markets" (Korea, Philippines). eign ownership have weakened the quality of FDI. Many countries xvere willing to approve investments that would "contribute to the economic development of Systems for controlling inflows of FDI have included the country." Such criteria were not sufficiently trans- the following elements: outright bans in selected parent for potential investors to know in advance whether industries, requirements for official approval, vague cri- or not their investments would qualify for approval. teria for approval, heavy taxes requiring relief through investment incentives, limitations on the foreign firm's Taxes and incentives. In some countries, taxes and tar- equity, and local content requirements. iffs were so high that only investment incentives could make a project viable, and obtaining incentives often Outright ban. Many developing countries excluded constituted an additional approval. For example, in foreign direct investment in a number of "important" countries with high import tariffs on capital goods and sectors. The forbidden industries were specified by raw materials, a tariff exemption may have been either a positive list, specifving sectors open to FDI, or required to allow an investment to compete in world a negative list, specifying the industries closed to FDI. markets. In many such cases, approval of the exemp- Negative lists are considered the more open of the two tion constituted an approval of the investment. In methods because of the practical difficulty of specifying Thailand, for example, no investment approval was in detail a vast array of sectors where investment is required, but tariff exemptions were important to banned. The sectors permitted (positive list), or banned investors. These were given based on a positive list of (negative list), were sometimes specified in concrete "promoted industries." terms (for example, by using a Standard Industrial Classification, as in Korea) and sometimes imprecisely Equity limits. Restrictions on the share of a firm's (as in Poland's 1988 law banning investments that equity that a foreign investor could own were another threaten "the economic interests of the state"). Positive important barrier to FDI. Many developing countries, or negative lists have also been expressed in terms of until recently, did not allow 100 percent, or even geography: that is, foreign investment may be permitted majority foreign investment. Most countries in the only in certain regions, or FDI may be banned in cer- Persian Gulf still do not allow majority foreign owner- tain regions, usually the main metropolitan areas or on ship. It was only in 1991 that India allowed majority coasts or borders. (51 percent) foreign ownership in 33 industries 'with "automatic" approval. Some of the countries that gen- Official approval. Investments in the nominally open erally restricted foreign ownership allowed it in return sectors or regions were, nevertheless, often subject to for certain performance such as exporting a large part official approvals. If no approval was required, the of output (perhaps from an Export Processing Zone), or investor may still have had to register the investment. bringing advanced technology to the country. 30 '.I [ I. Investments under these conditions, of course, were egating decisions to provinces and cities, coupled with subject to an approval process. a desire at the local level to encourage investment. In some cities, it is said, an approval can be secured over Local content rules. Local content requirements dinner. Of course, it helps that potential investors are restricted foreign investors' flexibility to make efficient willing to put up with a lot to gain access to China's use of domestic and local resources, and to use estab- resources and markets. It also helps that many, perhaps lished suppliers of inputs. Similarly, restrictions were most, of the investors are ethnic Chinese who are bet- often placed on the proportion of foreign staff ter able to operate in the system than investors from employed (discussed below). North America, Europe, and Japan. Where investment approvals were required, additional MOTIVES FOR RESTRICTIONS complications often arose from dispersal of authority. Why have developing countries built such barriers to Some countries centralized their approvals in a single foreign direct investment when most developed coun- agency, at least for the entry decision (although other tries today have few restrictions? The reasons cited decisions could involve additional agencies). Ghana, usually involve fear of foreign control, a desire to build Indonesia, and Mexico had centralized decision mak- up domestic industries, and anxiety over division of ing. Many other countries required multiple approvals. profits. Sometimes, several ministries had to approve invest- ments, as in Kenya. In other countries, a hierarchy of Risk of foreign control. A link is perceived to exist decision makers culminated in approval by a minister between the share of an enterprise's equity owned by a or a prime minister. In one Persian Gulf country in the foreign firm and the control that foreign investors can early 1990s, prospective investors had to obtain exercise. Developing countries that had just achieved approval from the Ministry of Industry to apply for an political independence from colonial powers did not application to make an investment. The licensing want to substitute economic control by foreign firms department and a foreign capital investment bureau in for foreign political control. Governments feared that the ministry reviewed the application and made recom- these firms' broader objectives would lead them into mendations to an interministerial committee. That decisions that were not in the best interests of the host committee, in turn made recommendations to the country. For example, when the world nickel market Minister of Industry, who had the power to make the weakened, it was feared that the Canadian company final approval. INCO would close a mine in Panama rather than one at home, in Canada. Where multiple approvals were required, governments sometimes established a coordinating body to help Possible inhibitions on local enterprise. Another rea- investors secure the necessary approvals. The Board of son for controlling foreign investors was to keep open Investments in the Philippines has been such a body. opportunities for local firms. Paralleling the infant- Some coordinating bodies only did legwork for industry argument for trade protection was the fear that investors; others had some influence and authority in foreign direct investors, if allowed free rein, would take their own right. Though sometimes thought of as "one over markets and prevent domestic entrepreneurs from stop shops," often they were simply "one more stop." emerging. This was the main reason for excluding for- Navigating through the approval process could take eign investors from some sectors such as retail trade. It months, even years, and the uncertainty of the out- was also a reason for preventing 100 percent ownership come, or even the route, dissuaded potential investors by foreign firms in other industries: in joint ventures, from applying. local firms presumably could learn from foreign firms, while still exercising control in the national interest. In some cases, a seemingly opaque and complex approval process actually operates in a way that facili- Capturing rents. A desire to bargain over the division tates investment, as in China, for example. On paper, of profits was another reason for ownership restric- the process is multilayered; the criteria for approval, tions. One way for a host country to capture the eco- opaque. Nonetheless, the system operates in such a way nomic rents from exploiting its natural resources was to that tens of thousands of even small investors have share ownership with foreign investors. Bargaining also secured approvals. The secret in this case has been del- may have been possible when the source of profits was F O R E I G N D I R E C T I N V E S T M E N 1 31 in the technology or management skills of the invest- Box 4.1. Liberalization of Foreign Direct ing firm. In these cases, restriction of foreign owner- Investment Policies ship may have enabled a local partner to share in the Korea, Mexico, Poland, and India are among the coun- profits from the foreign firm's capabilities. tries that have liberalized their investment policies. In many developing countries, government-created n Korea. Moving through the liberalization process, market distortions have opened the gates to high prof- Korea switched from a positive to a negative list of its. Import restrictions enhance the attraction of pro- open sectors, liberalized ownership restrictions, and ducing import substitutes, and in banking, interest rate progressively reduced the number of investments sub- controls can raise profitability. In those circumstances, ject to approval. Now, most manufacturing and service it is rational for developing countries to limit the entry industry sectors are open to 1 00 percent foreign own- of foreign firms, for the profits they capture from such ership on the basis of a simple notification rather than distortions constitute a pure loss to the host country. If an approval procedure. a local company's profits increase because local con- sumers buy a product for more than the international M Mexico. By allowing majority ownership in enterprises price, that is a transfer within the country. If the extra that met specific criteria, Mexico modified its approval profit accrues to a foreigner, it is a loss to the host process for majority foreign ownership in 1989. These country. changes were made in the implementation of the 1973 Investment Law. Subsequently, the law itself was The economic success of countries such as Singapore, changed as a result of the North American Free Trade which welcomed foreign direct investment instead of Agreement treaty. The changes opened more sectors restricting it, prompted other countries to loosen their to majority foreign ownership without any approval. policy framework for FDI. In 1979 China's opening up Recently, Mexico has moved a step backward, putting to foreign direct investment for the first time in the secondary petrochemicals back on the negative list of postwar period gave the liberalization process a real industries where majority foreign ownership is not boost. Since then, it has gathered speed (Box 4.1). It allowed. was aided in the early 1980s by the world debt crisis, which cut off foreign capital from commercial banks M Poland. Moving rapidly through the liberalization for many countries. A further impetus came in the late process, Poland passed its first foreign investment law 1980s, with the collapse of communism in Eastern in 1976, allowing small private investments by foreign- Europe and the disintegration of the Soviet Union. ers of Polish descent. In 1988 before the fall of Communism, Poland enacted a liberal foreign invest- The process of liberalizing entry regimes has generally ment law that allowed FDI, even 100 percent foreign followed a certain pattern. First, governments have ownership in all sectors, but subject to approval tried to make the existing system work more efficiently according to vague criteria. This law was quickly by setting time limits for various approvals and amended to eliminate the approval process, and now appointing a single agency to coordinate the approval Poland is open to all foreign direct investment. process. Then, the sectors open to FDI have been increased, perhaps by shifting from a positive list that U India. In 1991, India began a liberalization process. specified what was allowed to a negative list that speci- The government opened 33 sectors to majority-owned fied what was banned. Ownership restrictions might foreign investment (up to 51 percent) with "automatic" then be liberalized, permitting majority foreign owner- approval by the Reserve Bank of India (rather than an ship in some sectors. The stages of liberalization are inter-ministerial committee managed by the Ministry of illustrated by a case study of Indonesia (Annex 4A). Industry). In addition, a cabinet-level Foreign Investment Promotion Board (FIPB) was established in Giving up approvals has been the big decision in this the Prime Minister's office to approve higher levels of process. The first step might be to move to a system of foreign ownership in the 33 industries, as well as in "automatic" approvals for many investments. These are other industries. Up to 1997, India has made no fur- streamlined approvals according to set criteria. Once ther liberalization moves and the FIPB has been put broad classes of investments are free from restrictions, back into the Ministry of Industry. approvals can usually be eliminated. 32 IN T E RN AT IO NA L F INA NC E CO R P' ORA T IO N Today, there are still plenty of restrictions on foreign ownership of enterprises in developing countries. Yet vir- Box 4.2. A Liberal Trade Regime Opens tually every developing country has reduced the number Opportunities of sectors where FDI is banned, has eliminated approval processes or made them more transparent and less In the mid-1950s, the government of Turkey decided that bureaucratic, and has increased the share of equity that Turkish farmers needed protection from the possibility of foreign firms can own. Countries such as Indonesia, the importing poor quality foreign seeds that might also Philippines, and the Andean countries that had phase- bring in plant diseases. As a result, the government out requirements have largely abandoned them. established a state enterprise to produce seeds and to develop new seeds for Turkish farmers. It also set up Liberalization of entry and ownership policies has been restrictions on seed imports and decreed that any seed one of the main factors underlying the dramatic growth sold in Turkey had to be tested for several years by the in FDI in the 1990s (Chapter 2). China's policies since Ministry of Agriculture to establish the seed's productivity 1979 were, of course, essential for the subsequent under Turkish growing conditions. growth of FDI: before 1979 FDI was banned in China. India began to receive significant amounts of FDI only This system had the expected effect of closing off Turkey after entry restrictions were liberalized in 1991; remain- from modern seed development. By the late 1970s, ing restrictions in India still keep FDI below potential. Turkish agriculture was falling behind other countries, Indonesia and the Philippines likewise saw a surge in with stagnant and falling yields, and a black market in FDI after liberalizing entry restrictions. modern imported seeds. A Turkish aglri:ulLJUral attache at the time remarked that he could make his fortune by fill- TRADE AND PAYMENTS REGIMES ing his pockets with tomato seeds when he went home. A liberal trade regime and international payments sys- tem are important factors facilitating increased flows of Seeing this situation, the World Bank concluded that efficient foreign direct investment. Liberal trade policies Turkish agriculture needed an infusion of new technology are important both to allow firms to develop markets from foreign seed companies. The Bank enlisted IFC in an and to produce goods and services efficiently once an effort to promote FDI: by these firms in Turkey. The pro- investment is made (Box 4.2). Liberal payments systems motion effort found, however, that Turkish seed policies allow investors to repatriate dividends and capital so as precluded any investment. The foreign firms wanted to to realize benefits if an investment is successful. enter the market by first importing seeds to test varieties, while building a marketing infrastructure. Only after Of course, trade restrictions have motivated much for- ascertaining what types of corn, tomato, or soybean eign direct investment in developing countries. In the seeds would work, and determining the size of the mar- 1950s, 1960s, and 1970s, import substitution was a pri- ket, were the firms willing to consider investing. mary force behind most manufacturing FDI in Latin America. Much of the FDI motivated by trade restric- IFC and the Bank at this point switched their emphasis tions was not beneficial to the host country, however, from promotion to policy. A new government with a pri- because these investments often resulted in operations vate sector orientation had just come to power in Turkey that were too small and too isolated to produce effi- and made the necessary changes in policy. The process ciently. Furthermore, the trade restrictions themselves leading to FDI began to unfold: a number of companies reduced economic welfare by raising prices and reduc- began to export seeds and established marketing net- ing competition in the domestic market.2 works in Turkey. Many of these firms later established seed production and research facilities, after testing the Moreover, FDI motivated by trade restrictions was sig- market and developing the marketing infrastructure. nificant mainly in the larger developing countries and Ultimately, more than 20 foreign firms established opera- for manufacturing industries. Even in those countries, tions in Turkey. These firms did not need protection in the the process ran out of steam by the mid-1970s, after Turkish market. In fact, besides serving the domestic mar- the easier import substitutions had been achieved. The ket, many began to export to other countries in the relatively recent liberalization of trade and payments region and beyond. Hence, imports ultimately led to FDI systems established the conditions necessary for the and exports. rapid post-1980 growth of FDI. F O R EI G N D I R E C T I N V ES T M E N T 33 IFC has invested in a wide range of projects that began Box 4.3. A Case of Export-Led FDI with exports into the country, and led eventually to an investment as the market developed. A number of these Brahma, a Brazilian brewery, began exporting to investments originated in other developing countries Argentina in 1986. Within eight years, it acquired about (Box 4.3). This process has been aided by the reduction 4 percent of the rapidly growing Argentine beer market, of trade barriers that has made exports possible. despite relatively high transportation and handling costs. Domestic markets of many, perhaps most, developing In 1995, in keeping with its overall Latin American expan- countries are too small to support efficient operations in sion strategy, Brahma chose to undertake a greenfield many manufacturing and even service industries. The investment and build a brewery, with IFC financing, near growing possibility of exporting a part of the output Lujan, about 70 kilometers outside Buenos Aires. makes investment a more realistic possibility. The investment decision was based on several factors. Trade liberalization, of course, can create problems for First and foremost, the venture was designed to replace operations that were established behind trade barriers. the inefficient and costly practice of exporting to IFC has seen several of its investments with foreign Argentina, which entailed transporting beer packaged in sponsors in textile plants in East Africa fail, as barriers glass bottles 1,300 kilometers by train and truck, and to imports of finished products fell even as other barri- then collecting and returning bottles to Brazil for recy- ers continued to raise costs of other inputs. A study cling. By brewing nearer to the main market in Greater done for FIAS of foreign investment in Latin America Buenos Aires, substantial cost savings would be realized. showed that unilateral reduction of trade barriers had motivated many of the firms surveyed to rationalize The ready availability of agricultural inputs such as barley, production in the region. Some plants were closed, and rice, and sugar would also help control costs while ensur- production was concentrated in fewer plants, each with ing a steady supply of inputs. In terms of market poten- perhaps a narrower product range than before but serv- tial, too, Argentine beer consumption was steadily ing a larger market area. increasing and beginning to spread to the provinces. Finally, the project would further contribute to the inte- The opening of world markets has made it possible for gration of the Mercosur economies in a sector in which all developing countries to attract foreign direct invest- integration offered great potential for future growth as ment on the basis of local resources (natural, human, large national brewers recognized opportunities to cap- locational, or infrastructural) rather than on the basis ture relatively small market shares of growing markets in of market size. Thus, Costa Rica recently attracted a neighboring countries. major Intel semiconductor assembly and test facility to supply chips to the United States, Europe, and Latin While it may be premature to speculate on the venture's America (Box 4.11). Exports of electronics products success, some preliminary comments can be made. from Costa Rica can enter the United States duty free Brahma has successfully injected a healthy dose of com- as a result of provisions in the Caribbean Basin petition into the formerly monopolistic Argentine beer Initiative. Costa Rica has also concluded a free trade market and has become the second largest beer produc- agreement with Mexico. Tariffs and other trade restric- er, with a 13 percent market share. Sophisticated mar- tions on chips are not so high in other parts of the keting and distribution methods have also been devel- world as to preclude substantial exports from Costa oped, with more efficient ways of distributing from plants Rica as well. directly to retailers. Brahma Argentina, in addition to serving the local market, plans to begin exporting to Export-oriented investments are still hampered by Uruguay and Paraguay in the near future. physical barriers and by poor infrastructure. And, because the world has not achieved universal free trade, export possibilities still constitute something of a patchwork. Intel can more easily export chips from Costa Rica to the United States, for example, than to sufficiently large to allow efficient investments to be Japan. Common markets and free trade areas are play- established. In other cases, they are less desirable since ing a greater role in determining the market area for they lead to investments, both foreign and local, that foreign investments. Sometimes these market areas are divert trade from lower cost sources. 34 I N T E P N A I I 0 N A I r I N A N C D (C O R P O R A T I c N Developing countries must establish conditions that ing repatriations over the limit, but subject to increasing allow foreign investment to produce for the world mar- tax rates. If these restrictions are binding (that is, if they ket. This includes trade liberalization that enables cause firms to repatriate less than they would in the investors to get inputs of equipment, subassemblies, absence of the restriction), they effectively reduce the and raw materials at world market prices. General amount of direct investment that will be made.' trade liberalization is the best way to do so. However, many developing countries have instead used free trade Liniits on repatriation by foreign exchange earnings. zones and investment-specific investment incentives to Some countries limit use of foreign exchange-for all allow duty free imports of material and equipment. purposes, dividend repatriation as well as imports of The Intel plant in Costa Rica mentioned above, for materials-to all or part of a company's foreign example, will be given free trade zone status.3 exchange earnings. Ghana at one time restricted repatri- ation to less than 25 percent of a company's foreign LIMITS ON FOREIGN EXCHANGE TRANSFERS exchange earnings. Until the late 1980s, China imposed Liberal payments systems allow foreign investors to a foreign exchange balance requirement on foreign take advantage of opportunities created by liberal trade investors that limited their foreign exchange use to the regimes. Foreign firms regard restrictions on repatria- amounts earned (Box 4.4). Such a requirement, of tion of profits and capital as a nearly insurmountable course, essentially limits FDI to export-oriented invest- barrier to direct investment. If they cannot get money ments. Such restrictions would limit direct investment in out, they see little point in investing. Restrictions on profit and capital repatriation take many forms, from outright blocks to percentage limits. Box 4.4. China's Payments Regime and FDI Flows Blocks. In an outright block to repatriation, the China did not begin to get large inflows of FDI 'jrl-ii it blocked currency might have to be held in a noninter- moved away from a strict 1ppiicaiti:;n of the foreign est bearing account at the central bank awaiting repa- e-ch r,rge balance requirement. The Foreign Investment triation. This kind of restriction has been applied in Advisory Service and other advisers emphasized the cen- Kenya, for example, as well as in several other African tral importance of a more market-based foreign exchange countries. A less stringent arrangement of this type allocation system. In a 1986 survey by FIAS of almost 100 would allow reinvestment of the local currency at mar- actual and potential investors in China, tIe foreign ket interest rates while awaiting repatriation. e di,aroe ba3lance requirement was named the number one impediment to investment. Repatriation delays. Long delays in repatriations, sometimes years after the dividend date, erode the rate In 1988, FIAS made proposals for r-ipro.-,, rig the function- of return on investment particularly where the currency ing of China's foreign e. Jorge centers. The proposal was depreciates in value. In effect, blocked dividends are a t r jib, ;h more centers, increase access of private firms, forced loan to the country at below market interest and link the centers into :orrethiiq of a national market rates (if the market rate would incorporate exchange system for fc-,r&i;.rll e l,:i,r,ae China moved in these direc- rate risk). As an equity investor, IFC suffered in earlier tions and, as a result, for;a-;r, investors were n-:re.-;ir,-1I, years from blocked or delayed dividend repatriations in able to gain access to foreign exchange not qer-erated Kenya, other African countries, and Turkey. themselves. Limits on repatriation by net worth. A more sophisti- The result was a marked reduction in the importance cated restriction of profit repatriation allows repatriation given by investors to foreign exchange issues. In another of dividends that are below a given percentage of a for- FIAS survey of investors in 1991, foreign exchange issues eign investment's net worth. Here, net worth expressed were of less concern to investors than issues of adminis- in local currency may or may not be indexed for infla- tration, labor relations, and several other matters. tion or currency depreciation. Profits that cannot be Improvements in the foreign exchange allocation system repatriated can be reinvested, thus increasing the net helped to facilitate the subsequent rapid growth in FDI worth basis for calculating allowable repatriation the which began in 1991. Many investors found investment next year. Brazil has used such restrictions for long peri- opportunities in China attractive only after a more liberal ods of time, with the additional complication of allow- f'.,-iw-i e h.arnge regime was established. F O R E I G N D I R I C -1I N V E S T M E N T 35 any country whose macroeconomic policies had an anti- tries had created such barriers that when they decided export bias. to seek more FDI they were not much better off than China was in 1979, when it opened up to FDI. Among Many developing countries have improved foreign the more important barriers found by FIAS in its work investors' access to foreign exchange, at least for current were difficulties investors had gaining access to land, account transactions. This is shown by the fact that in difficulties in bringing in management and technical 1975, only 29 developing countries had made their personnel, and requirements that investors obtain a currencies convertible for current account transactions myriad of other permits and licenses. (including profit repatriation) by accepting the obliga- tions of Article VIII of the International Monetary Inability to gain access to land. Foreign investors have Fund Articles of Agreement. By July 1997, that num- faced many difficulties in owning or leasing land in a ber had increased to 111 developing countries. host developing country. These difficulties have dis- couraged FDI because no firm wants to invest without Notable among the countries that have not yet accept- secure tenure of the land where its facilities are located. ed Article VIII obligations are Brazil and Nigeria. The fact that a country has not ascribed to Article VIII In many countries land is communally owned, and does not necessarily mean that it restricts profit repa- mechanisms have not been developed to afford private triation. Still, Brazil even now bases approvals for repa- companies secure access. In other cases, the state owns triation of dividends on a 1965 decree limiting divi- the land, and either policy or inadequate legal mecha- dends to a percentage of net worth. The continuing nisms have restricted access by private investors. Even possibility of restrictions on profit repatriation from where land was held privately, lack of clear conveyance Brazil may help explain why, until only recently, the and titling mechanisms has impeded acquisition by real value of FDI in Brazil was no higher than in the investors. Finally, government policies might enable early 1970s. Expressed in 1994 dollars, FDI in Brazil local private landowners to monopolize land and hold reached $3.5 billion in 1973 and stayed near that level it off the market for speculative reasons. Lack of title until the debt crisis in 1982, when it began to fall to to land can make it difficult to raise finance domesti- about $1 billion. Most of this amount probably was cally, as land is often taken as collateral. accounted for by (sometimes forced) reinvested earn- ings. FDI in Brazil did not surpass the 1973 level until Communal ownership has been prevalent in Africa, 1995. Meanwhile, FDI in Malaysia increased tenfold parts of Asia, and in the Pacific Islands. Governments over the same period. FDI in Brazil increased dramati- in these countries have used various methods to make cally in 1996, after reduction of macroeconomic imbal- land available to private investors. Namibia has a mix- ances and further liberalization of restrictions on divi- ture of freehold and communal land available. Freehold dend repatriation. land has been in short supply, particularly in the main cities. Communal land is made available through a OTHER RESTRICTIONS "permission to occupy," but this does not give investors The barriers to entry discussed above are only one of enough security. Currently, the government is convert- many impediments to FDI. Many developing countries ing some communal lands to freehold. In Swaziland, spent decades developing wide-ranging regulation of most land is held by the Swazi Nation and has been private sector activities, including FDI. When a coun- allocated by local chiefs. Freehold land has been avail- try decides that it wants more foreign direct invest- able to foreign investors, but restrictions on transac- ment, the liberalization process has to cover a wide tions have created potential difficulties for foreign range of subjects and deal with each in sufficient detail investors. ultimately to create a conducive environment for for- eign investment. As an example, Chinese officials esti- The state controls allocation of land in many countries. mated in the mid-1980s that more than two hundred Most of the transition economies of Central and laws had been enacted to create a framework for FDI Eastern Europe and the former Soviet Union are try- that even then was still relatively primitive. Work on ing to shift to a system of private ownership of land that framework is still a work in process. China, be- but have been impeded by difficulties including inade- cause it had to build from a starting point of no FDI at quate surveys and title records. A unique difficulty in all, is an extreme example. However, many other coun- Central and Eastern Europe is the uncertainty created 36 I N T E R N A T I O N A L F I N A N C E C O RP O R A T I O N Box 4.5. Gaining Access to Land in Indonesian Plantation Agriculture Indonesia has a comparative advantage in the pnc1..-rrJr of tropical tree crops such as palm oil, rubber, and coconuts. Prior to independence, these crops were developed on large plantations, usually foreign owned. Land for these planta- tions was leased by the colonial government for 99 years to private investors under provisions of an 1870 agrarian law. This law was changed after independence to provide for several different types of land title: full ownership, the right of exploitation (basically the same as the old lease), and the right of use. Neither this law nor the 1870 law permitted full ownership to foreign companies. In 1980, a presidential decree provided that the right of exploitation (the long-term lease) could not be held by a foreign company or by a joint venture in which a foreign company was a partner. In the case of a joint venture, only the Indonesian partner could secure a long-term lease to a property and cornvey a right of use to the joint venture company. Thus, foreign and domestic partners would have unequal rights in the joint venture. Not :iirpris;ncK;. foreign investment in Indonesian plantation agriculture practically ceased as a result of these measures. No investor was ..ltrig to commit to a venture to plant trees that would require at least eight years to mature without I-, ,t.erm, control of the land on which the trees were planted. The Indonesian government became concerned with the implications of its policy in the late 1980s, when it becamre clear that the state enterprise producing tree crops could not take .aJvar.tage of opportunities in the sector. As a result, IFC was asked to help structure a project that Tiqght deal with the concerns of foreign investors, and FIAS was asked to review the overall policies that had brought foreign investment in the sector to a itaridstdl!. The IfC project devised an innovative mechanism to get around the strictures of the law and the decree. The long-term land lease in this case was held by a subsidiary of an Indonesian development finance company (PDKCI) which, itself, was a small shareholder in the project. PDFCI was considered to be a creditable holder of the land-use rights because both the Indonesian y .rr'nenl and IfC were shareholders. Moreover, Indonesia's Government Investment Agency (BKPM) gj,Jr Arte-, that the land use rights would not be transferred to another investor without BKPM's agreement. While this project was being structured, the FIAS review raised the larger policy issue of secure access to land. FIAS rec- ommendations summarized points made by others before, that Indonesia find ways to give foreign firms secure access to agricultural land. All of Oi.ese recommendations became part of the government policy discussion. The result was a change in policy in the early 1990s, subsequently amended in 1996. Under the new policy, joint ven- tures established under Indonesian law can obtain title to land for business operations for a period of 35 years, renew- able for another 25 years. These titles are registered and can be used as collateral for debt. This change goes a long way toward eliminating the legal problems foreign investors had of gaining access to land. by claims of prior owners on property confiscated by investors hold potential prime commercial property as communist regimes. In Lesotho and Mozambique, too a speculative investment. These prime tracts were little land was made available, due in part to inade- transferred to local investors by the government. There quate institutions to survey and process requests for is no pressure to develop the land because land taxes leases. In Lesotho, leases were not transferable and are not based on potential best uses. The result is a thus could not be used as security for loans. In scarcity of land available for new investments in Indonesia, the government restricted foreign investors' Casablanca and Tangier, and substantially higher land rights to own and lease land (Box 4.5). Finally, in costs than FIAS found in four other sites around the Morocco, land is scarce in the main cities because local Mediterranean. FO RE I G N DIRECT INV EST MEN T 37 Box 4.6. Expatriate Worker Restrictions: parents, ;ibblingi and children n.-ludi,lig those who would Trinidad and Tobago, Estonia, UAE not be joining the applicant in Estonia); photocopies of the applicant's entire passport; copies of diplomas and Trinidad and Tobago, The restrictions on expatriate other evidence of qualifications; and a declaration that employment in Trinidad and Tobago were substantial one was not an agent of the Russian Security Agency. according to a FIAS study in 1996. Person-by-person This process was in addition to the requirement of prov- background checks were conducted for all work permit ing that no Estonian was qualified for the same position, applicants. These were handled, first of all, by the as evidenced by advertising in a local newspaper. No Ministry of National Security, where the Department for exceptions were allowed for this latter provision, serving Immigration is situated. They required the following: as a particularly severe barrier to small firms and single proprietorships. The application for the work permit also * evidence that no qualified national is available, had to be approved by the Ministry of Labor, which typi- normally in the form of advertising for the position cally took at least two n-c v-ii,: The Immigration Office * a police record showing no convictions from the cur- frequently attempted to process residence permit applica- rent place of residence tions within three months, but delays up to a year * character references, including one from current and remained common. Both types of permits had to be previous employers renewed annually. * a completed application form in quintuplicate. United Arab Emirates. UAE relies on expatriate workers Applications were sent to a committee of representatives at all levels, including highly :1 1lied managerial, profes- from the Immigration Department, the Ministry of Trade sional, and technical personnel. According to a FIAS and industry, and the Ministry of Energy, which met study in 1993, the Ministry for Labor and Social Affairs biweekly to review them, and were signed by the issued expatriate work permits, normally for a period of Minister for National Security. In recent years the process three years. Unlike in other countries, the ministry did has been streamlined, with a reduction in committee rep- not limit the number of expatriate workers by quotas or resentatives from 12 agencies to 4. The time required to targets. Instead, it responded mainly to private sector comply, however, remained a number of months, if the demand. The control which the ministry exerted was to time to generate all background materials is included. limit, on a case-by-case basis, the numbers of expatriate workers to those it considered absolutely necessary for Estonia. Residence and work permits posed a major diffi- the operation of any given project. Based upon its view culty for foreign investors in Estonia. As of 1996, laws of the company's need, permits were issued. Given the designed mainly to stem the tide of immigration from government's tendency to issue the minimum number of surrounding countries were a drag on the activities of all permits possible (in keeping with the general policy foreign investors, According to the 1993 Law on Aliens, objective of reducing or at least limiting the size of the there is an annual immigration quota of 0.1 percent of large expatriate population), companies reportedly exag- the permanent population of Estonia (currently 1,000 per gerated the number of their applications to ensure they year). This includes foreign investors and expatriate were granted the number necessary for their operations. employees as well as their families and dependents. The practice of rationing by administrative allocation was inefficient, largely because of the unclear criteria for The application process for residence and work permits rejecting applications and because it did not provide an for expatriates was particularly onerous, requiring medical efficient and market-oriented system for transferring sur- and psychiatric exams; medical histories of the applicant's pluses of labor to sectors and firms in need. Restrictions on expatriate labor. Most developing The restrictions may take the form of an absolute ban countries have restricted the right of foreign firms to on more than one or two foreign staff in a venture. In bring in their own personnel to operate their invest- other cases, the proportion of foreign staff in different ments (Box 4-6). Host countries hope to force foreign categories may be limited. A particularly onerous ver- firms to train local labor for technical and managerial sion of this kind of restriction is a requirement that a positions that otherwise might be occupied by expatri- majority of the company's Board of Directors be local, ates. This kind of training is one of the benefits that regardless of the ownership of the company. Finally, developing countries hope to get from FDI. each expatriate may be subject to a case-by-case 38 I N T E R N A T I O N A t I I N A N C E C O RP I O R A T I O N Figure 4.1. Administrative Approvals in Ghana, 1993 Generai Approvals,`, Specialized OeSite Development: Site Develpment: Oprational Permits, and Approvals Land and Utility Providers Requirements Licenses Construction : *Vinistry of Food . Electnicity ' Bank of Ghana * Registrar- and Agriculture * Lands . Corporation of * Factories General Ghana Standards Commisson -Ghana .nspectorate * Ghana Investmernt Board * Town ad * Ghana Water and . Labour Promotion Centre * Ghana Tourism Country Planning Sewerage -lnspectorate * Bank of Ghana Board * Local Assembly Corporation * Social Security * tnternal Revenue * Forestry (Engineering and * Posts and and National Service Department Health Telecommuni- Insurance Trust * Ghana * Timber and Departments) cations * Customs, Excise Immigration Export * Environmental Corporation and Preventive Service Development Protection Council Service * Local Assembly Board * Customs, Excise and Preventive Service approval of visas and work permits. When such technical and managerial skill, can be realized only approvals are granted, they often have to be renewed at through people. By restricting the use of foreign staff, short intervals (for example, yearly). In Lesotho, for developing countries are reducing their potential bene- example, work permits are issued for only a year, and fits from FDI, as well as limiting the amounts of the delay in issuing the permits has been a year. Hence, investment foreigners would be willing to make with- foreign personnel receive permits that are ready to out the restrictions. expire. Recognizing these problems, some developing coun- Restrictions on the use of expatriate personnel can tries are liberalizing their treatment of expatriate staff constitute an important barrier to foreign investors. One approach, adopted by Malaysia a number of years Investing firms are concerned about their ability to ago, is to allow automatically a reasonable number (five control the enterprise in the host-developing country in the case of Malaysia) of expatriate personnel for through managers provided by the firm. Moreover, cor- each investment, with the number increasing with the porate, technical, marketing, and managerial know- size of the investment. Other countries have stream- how is usually embodied in personnel who have been lined the approval process for foreign personnel and with the parent company operations elsewhere in the have lengthened the time period for visas and work world. When the use of such personnel is restricted, permits. Even with these changes, however, less liberal- investors fear that the investment may not be able to ization has probably occurred in this area than in the perform up to the company's international standards. case of entry restrictions. Restrictions on foreign personnel by developing coun- Requirements for other permits and approvals. tries may not be needed, since investors usually have a Difficulties in gaining access to land and permits for strong economic incentive to substitute local for expa- expatriate workers, together with other permit and triate staff as soon as possible: expatriates generally cost approval requirements, pose a formidable set of barriers two or three times as much as a local equivalent. Most to investment. Hernando de Soto, working in Peru, of the benefits developing countries hope to get from was one of the first to demonstrate the deadening foreign direct investment, for example, a transfer of effect of such administrative barriers on private invest- F O R E I G N D I R E C T I N V E S T M[ L N T 39 ment.5 As an example of the magnitude of these barri- An indicator of the height of administrative barriers is ers, Figure 4.1 lists the administrative approvals of var- the ratio of implemented to approved investments. ious types required to make an investment in Ghana in Investor-friendly countries target realization rates of 60 the early 1990s. to 70 percent, and Singapore claims 80 percent. In Costa Rica, FIAS has interviewed relatively large Formidable though this list is, it still gives only part of investors who had plants up and running within one the picture. The magnitude of the problem becomes year after first visiting the country. At the lower end of evident when the number of approvals is combined the range, the implementation rate has been as low as with complicated processes and, perhaps, inefficient or 14 percent in Pakistan, and was around 30 percent in even antagonistic officials. Figure 4.2 illustrates the Indonesia in earlier years. Implementation in Vietnam process in Ghana in the early 1990s to obtain just one has been similar, and Ghana has also been at the low set of the approvals listed in Figure 4.1: general end of the range. approvals, permits, and licenses. The number of agen- cies involved and the number of back-and-forth steps Developing countries interested in attracting foreign made the process time-consuming and the outcome direct investment have approached administrative bar- uncertain. The FIAS study of such barriers in Ghana riers in much the same way they have approached concluded that an investor who followed all of the pro- entry barriers. First they have tried to make the exist- cedures would need a year and a half to two years to ing process work better. Their smallest step in this complete them.6 direction is to centralize administration of the approval process by designating one agency to coordinate Many other developing countries have similar barriers approvals.7 Actually centralizing decision-making that discourage investment, even if administered hon- power is a more politically daring step, and hence more estly and efficiently. Moreover, the existence of myriad rare. But eliminating steps and improving the function- approvals can give rise to corruption, which further ing of the institutions that administer the remaining distorts investment decisions. steps is the most effective way of reducing administra- Figure 4.2. General Approvals, Permits, and Licenses in Ghana, 1993 Local Assembly A 7 Pay for Bsiness L -enses arc Property Tar 1 a- Sui t application and process ng Regs - egistraon of corporton Investor 2 Submrform ab e proces-ng fee Ghana Investnet General's 5a Somit formsaroproofofcapita - Promotion Centre Depaftment nvest-t > 5b Certificate to commence business 4a Subm t app 'cat on / ~~~~~~~~~~~~~~~for resident pe mt t 3a. Make t_ \ 3dP1 Icm 6a Ssbm t forms ci ia a T r egstraw Ion R' d- p-nesmnt,tt vstr Internal Revenue -o Tax regitrti Comnercial b es ont permI Ghana Immigration Service c tate Bank/Customs Service *30 e,form at cap La |,nvestmnent Bank of Ghana 3c rform of capita investment Source: HAS. 40 I N T E R N A T I O N A L F I N A N C E C O R P O R A T I O N tive barriers. This is the route taken by virtually every themselves, seemed reasonable. Taken together, they country that succeeds in attracting and implementing precluded investment and perpetuated crop losses. large amounts of FDI. This example could be replicated over many crops and THE ROLE OF THE STATE IN THE ECONOMY in many countries. The same kinds of distortions affect Governments have played an active, often a dominant agricultural inputs. For example, India operated a fertil- role in many developing countries' economies. They izer pricing scheme that established a uniform price for have taken action to influence prices to achieve social fertilizer across the country and penalized more effi- as well as economic objectives. They have directed and cient plants (usually privately owned) to provide subsi- channeled private investment and have established dies to the less efficient plants (usually state enterpris- state-owned enterprises in sectors where they thought es). This arrangement left little incentive for an efficient private investment would be inadequate or undesirable. foreign investor to establish a plant in India. In some cases, governmental intervention has stimulat- ed FDI, but its overall effect has been to deter it Many of the general policy issues IFC has raised with (Chapter 2). governments in the context of project financings have concerned price distortions. India's fertilizer pricing Price controls. Price manipulation by developing- was one such case. Others have involved pricing raw country governments has been a major inhibitor of materials and other inputs controlled by the host- investments by foreign firms. These manipulations country government. have two effects. First, they can reduce the profitability of investments by reducing margins between inputs Setting prices for natural resource exploitation. One and outputs. Perhaps more important, pervasiveness of the more difficult issues concerns the pricing of nat- and randomness of government price interventions ural resources controlled by the government. If the increase risk, thus deterring investment. price set for extracting these resources is too high, investment in extractive activities will not take place. If Almost every government manipulates prices of agri- the price is set too low, government loses some of the cultural products, food products, and agricultural potential economic rents created by ownership of the inputs to some extent. These manipulations are wide- resource. Furthermore, resources may be overexploited, spread and of great magnitude in many developing forgoing futiure rents. This is particularly important for countries. Although their intent is to protect farmers, renewable natural resources such as timber, which extract surplus from the agricultural sector, or aid con- could be sustained if the rate of exploitation is kept sumers, their effect has been to inhibit FDI in the sufficiently low. Underpricing can lead to the perma- agriculture and agribusiness sectors. nent loss of such resources. The Philippines offers an example of the problem. Regulating monopolies. Most governments regulate FIAS was asked to find out why more private invest- the prices of monopoly suppliers of services in the ment, both domestic and foreign, had not been made interests of consumer welfare. Again, excessive price to provide post-harvest services for rice farmers. Up to controls will discourage investment, while lack of con- 25 percent of the harvest was being lost every year trols could lead to excessive prices. Many infrastructure owing to inadequate drying, storage and transportation services are regarded as monopolies and so treated. In services. Thcsc losses could have been cut through some countries, the government owns, operates, and investments in plant and equipment to dry and handle sets prices for all infrastructure services such as rice and ship it to processors. telecommunications, electric power, water, highways, and ports. In other countries, private investment in But investment was not forthcoming for a simple rea- infrastructure is allowed, and the government regulates son: the margin between farm gate prices and retail prices. In the case of infrastructure, it is not a question prices left no room for service providers to make an of whether governments will be involved in pricing, but adequate profit. The government had raised farm gate how and at what level prices will be set. prices to give farmers more income. Consumer prices, on the other hand, were held down to reduce the cost Price levels and the mechanisms for changing them as of a staple food item to consumers. These objectives, by conditions change are key factors in determining F O R E I G N D I R E C T I N V E 5 T M E N T 41 whether private investors, whether domestic or foreign, Box 4.7. Egypt: The Effect on FDI of a Large will be interested in investing in infrastructure projects. State Enterprise Sector Countries such as China have opened infrastructure to foreign investment only to find that potential investors Dominance of state enterprises in Egypt's economy consider the government-set price or return levels too impeded FDI in a number of concrete ways, according to low. Other countries such as Pakistan and the a survey by FIAS of actual and potential foreign investors Philippines have devised acceptable formulas and have in 1990. At that time, Egypt's public sector accounted for received large amounts of investment. Pakistan is will- 70 percent of industrial value added, 98 percent of all ing to buy power from independent power producers at exports, and nearly 90 percent of industrial exports. To a fixed price (but subject to adjustment periodically) protect important state enterprises, Egypt restricted pri- and is not concerned about the producer's rate of vate investment in some sectors. In industries where return. China, on the other hand, seeks to regulate the private investors were allowed to compete with public rate of return, as do most U.S. state regulatory agencies. enterprises, they were at a disadvantage because they had to pay international prices for inputs. Public enter- Large state enterprise sector. Foreign direct invest- prises paid subsidized prices for domestic inputs such as ment will run into additional problems if the host energy and obtained imported inputs at the subsidized country has powerful state enterprises in many indus- official foreign exchange rate. The following are some tries that it wants to protect from foreign competition specific examples identified in the survey: (Box 4.7). This protection is one important reason for the entry restrictions on foreign investors discussed A U.S. investor in a glass bottling venture reported higher above, particularly the sectoral prohibitions. costs than the competing public enterprise. The competi- tor not only paid lower prices for energy and imported Even without such restrictions, a large presence of state soda ash but also underpriced output because it was not enterprises will put a damper on FDI because foreign under pressure to show profits. investors will not want to compete with government enterprises or rely on them as a source of inputs or as a Another U.S. company had to give up on a synthetic fibers market for outputs. These enterprises may enjoy venture because public enterprises producing textiles could advantages in input prices over private firms or they buy cotton at subsidized prices. Domestic production of may be unreliable customers. FDI to produce electric synthetic fibers would have freed more natural cotton for power in India has been held back because the pur- export at (higher) international prices. chasers of power would be state power grids that are considered uncreditworthy. State enterprises that have French investors were reluctant to participate in joint access to government subsidies or preferential access to ventures with Egyptian public enterprises because civil credit can also sustain pricing and marketing strategies servant managers of these enterprises lacked business that a private firm could not compete against. experience and ability to respond to market signals. Furthermore, state enterprises' preferential access to credit can starve private enterprises of credit, including French investors complained about scarcity of small and FDI ventures of credit. medium private enterprises to be subcontractors and sup- pliers of inputs needed by their enterprises. The predomi- Many developing countries have scaled back the state nance of large public enterprises retarded the development enterprise sector by selling or transferring enterprises of a private small and medium enterprise sector. to private parties, including local private firms, foreign firms, management and workers in the enterprises and Foreign investors also complained about the dearth of the general public. This has had a large impact on FDI private Egyptian business partners because of the pre- flows to certain regions, where these programs have dominance of state enterprises. been most prominent. PRIVATIZATION IFC's experience as an adviser and as an investor in pri- vatization transactions has shown that the way privatiza- tion is handled can have a large effect on the direct par- 42 IN T ER NAT IO NA I F INA NC E CO RI' OR ATI ON Box 4.8. Privatization and FDI The wave of privatizations in the developing world since the late 1980s fed the explosive growth in FDI inflows. In 1988-95, developing countries received almost $38 billion in FDI inflows and another $21 billion in portfolio invest- ments, together representing 45 percent of all privatization revenues. For many countries, privatization with foreign investor involvement presented a major opportunity to attract productive capital into their economies. For the economies of Central and Eastern Europe, for example, privatization is the centerpiece of the entire transformation process and usually involves foreign direct investors. During the particularly active period of 1988-95, these countries received slightly over 45 percent of their FDI inflows through privatization sales. However, the effect of privatization on FDI inflows does not stop with a sale of assets to foreign investors. An econo- metric analysis for a cross-section of 36 developing countries in 1988-93 shows that privatizations have a strong sec- ondary effect on FDI, attracting inflows independent from privatization sales themselves.* Each dollar in privatization sales attracts another 88 cents in additional FDI, according to estimates. A possible explanation for this result is that a strong privatization program sends an important signal to the investor community, that the government is willing to support private sector development and remove impediments and restrictions on foreign involvement. The strong attrac- tion of infrastructure privatizations for additional FDI-$1 invested in infrastructure privatization results in another $2.4 in FDI inflows-seems to confirm this argument. Investors welcome improvements in infrastructure services for improv- ing the business environment and reducing operational costs. Thus, privatization can have a positive long-term impact on the availability of productive capital from abroad, enhancing the countries' development prospects. However, it depends very much how privatization programs are managed. The most successful privatizers during this period-defined by the relative size of the privatization program as well as their political stability-managed to c . ritirouali, increase their FDI inflows. Most important, these inflows continue to rise even after most privatizations have been completed. Other countries with smaller and less predictable programs, on the other hand, did not manage to send strong signals of commitment to the investor community, and FDI inflows remained unchanged. * Frank Sader, "Privatizing Public Enterprises and Foreign Investment in Developing Countries, 1988-93,' Chapter 6, FMS Occasional Paper 5, Washington, D. C., 1995, pp. 26-32. FDI Inflows for the Most Successful Privatizers, 1988-93 25 Total FDI Inflows Other privatization revenue 20 * FDI from privatization 15 10 o 1988 1989 1990 1991 1992 1993 Note: Countries included are Argentina, Cbile, Czech Republic, Hungary, Jamaica, Malaysia, Mexico, Philippines, and Portugal. Source: Kathy Megyery and Frank Sader, 'Facilitating Foreign Participation in Privatization, FMS Occasional Paper 8, IEC and World Bank, Washington, D.C., 1996, p.6. F O R E I G N D I R E C T I N V E S T M E N T 43 ticipation of foreign investors (Box 4.8). Privatization Issues with ownership structures of enterprises being can be carried out in two basic ways: bv direct sale of privatized seem to have been more prevalent in Central individual enterprises or by transfer of assets to the gen- and Eastern Europe than in Latin America. Central eral public.: Clearly, direct participation of foreign and East European countries have relied more heavily investors is only possible in the case of direct sale: mass on mass privatization techniques than have Latin privatization of ownership is usually closed to foreign American countries. Even in direct sales, Latin participation. This does not mean, of course, that foreign American countries seem to have been more willing to firms are forever excluded from ownership of enterprises have control pass to foreign firms. transferred through vouchers and other arrangements. The new owners, whether individuals or funds, may at FIAS has also found that the process by which privati- some point sell shares to foreign firms. zation is carried out affects the willingness of foreign investors to participate.1' Attractive privatization pro- Direct sales of state enterprises have generated sub- grams share three important characteristics: political stantial flows of direct investment to developing coun- commitment, business orientation, and transparency. tries in recent vears. In 1988-95, $37.6 billion in FDI To implement a program based on these principles, went into enterprises sold individually. This amounted moreover, the individual sales process should be sepa- to almost 10 percent of all flows of FDI to developing rated from general policy decisions and political inter- countries during the period. Flows were concentrated ference. The less privatization agencies are involved in mainly in Europe and Central Asia ($16.4 billion, 45 the political process of privatization, the more effective percent of FDI flows to that region), and Latin thev usually are. America ($16.3 billion, 15 percent of total FDI flows). The flow to Africa, the Middle East, and Asia was Following these principles can maximize participation much smaller, either because there were fewer privati- by foreign firms in the direct sale of state enterprises. zations (for example, in Middle East, North Africa, These sales, in turn, can stimulate additional FDI. In Sub-Saharan Africa, and South Asia), or because for- 1988-93, FDI outside direct privatization sales increased eign direct investment provided a smaller share of total almost dollar for dollar with FDI associated with priva- financing for privatization (as in Asia). tization. Foreign direct investment in the privatization of infrastructure enterprises and industrial enterprises Even in direct sales, particular arrangements may affect seems to have the greatest impact on other FDI flows.2 the participation of foreign investors. Sometimes sale is reserved for local investors, including the firm's man- There are a number of reasons for this association. agement, workers, or other local organizations. This First, large-scale privatization tells investors something was the case of a meat packing entity in Ukraine that positive about the climate for other investments. was advised by IFC.' In other cases, some shares may Among other, more concrete links, poor infrastructure be allocated to foreign investors along with other has discouraged investment in many developing coun- prospective owners. Sometimes the government is will- tries, and privatization usually leads to capital infusions ing to sell only a part of the enterprise, often a minori- and improved operations. Moreover, privatization of ty position. The balance of political forces in the coun- industrial enterprises is usually followed by additional try usually drives these decisions. investments for rehabilitation and expansion. Thus, some additional FDI is relatively closely associated Willingness of foreign investors to participate in mixed with investments in privatized enterprises. ownership structures depends very much on the specifics of the case. Foreign investors are very much Substantial privatization programs thus affect FDI concerned about being able to maintain control of flows in several ways: by providing a concrete vehicle enterprises in which they invest. Particular ownership for direct investment to participate in the country; bv structures that may result from a politically motivated removing the impediments to investment due to a large division of shares may preclude the kind of participa- overhang of state enterprises; by improving infrastruc- tion foreign firms want. Direct investment may not be ture and, finally, by sending a signal that the govern- forthcoming in these cases, though sought by the pri- ment is taking steps to create a favorable environment vatizing government.1' for private investment. 44 I N T E R N AT I O N A L. F I N A N C E C O RP PO R A T I O N INVESTMENT INCENTIVES type of fiscal relief and, moreover, many other countries Most officials of developing countries report that for- give fiscal incentives. eign private investors always seek all available invest- ment incentives, and claim that without the incentives As both investor and adviser to governments, IFC has they would not make an investment in the country. At seen both sides of this debate. From this perspective, the same time, most surveys of investors show that tax levels help to determine whether an investment incentives are relatively far down on the list of factors occurs or not, and the relative levels of taxation influ- that influence investment decisions. How can these ence in some circumstances the location of invest- two seemingly contradictory bits of evidence be recon- ments. Therefore, developing-country governments ciled? have to decide whether to set effective tax rates at attractive levels for all investors or, instead, provide One explanation of this seeming contradiction can be incentives for selected groups, or individual investments. found in the meaning of incentives, as used by business and government officials. A broad meaning of the term Clearly, taxes that arc too high can deter foreign direct would include any governmental action that raises an investment. FIAS worked with one country in Africa investment's profitability above the levels that would be that taxed away 80 percent of income through a com- possible without the action or which reduces their risks. bination of income and dividend repatriation taxes. Stephen Guisinger, in a study of investment incentives That rate would preclude most investments. sponsored by IFC in the early 1980s, identified 60 such actions that governments have used to either increase However, some kinds of investments generate huge revenues, reduce costs, or reduce risk." economic rents, because of a monopoly position (for example, sole telecoms supplier) or ownership of a Defined so broadly, incentives clearly have an impact nonrenewable natural resource (for example, oil on investments, including foreign investments in devel- deposits). As an alternative to price controls, some gov- oping countries. For example, trade barriers, which ernments attempt to capture such rents through special both increase an investment's profitability and reduce tax structures. This is economically efficient as long as risks, are known to have influenced direct investments the producer can still earn an acceptable rate of return. in developing countries. Other more positive measures This is not easy to determine, and tax treatment can be to improve profitability and reduce risk also are the a major factor influencing foreign investment in such essence of economic development, and no doubt influ- industries. ence private investment decisions. As an alternative way of capturing a share of the rents, The more generally accepted meaning of incentives, many governments insist on taking large equity stakes however, refers mainly to fiscal measures such as vari- in enterprises in such sectors as mining and oil and gas ous ways of reducing taxes or providing other financial production. In this way, rents distributed as dividends relief to an investment. Tax relief could come as "tax to equity holders will partly accrue to the government. holidays," corporate tax rate reductions or tax waivers This avoids the deterrent effect of high taxes but intro- for a period of time. Tax relief also is provided by duces the deterrent of limits on foreign ownership and investment tax credits or accelerated depreciation. the difficulties of running a business with government Other financial relief could be in the form of an up- as a major shareholder. front cash grant. A country's total tax burden is measured by the effec- It is the impact of such fiscal measures on foreign tive tax rate which is determined by the actual tax rate, direct investment that is debated. Business sponsors tax holidays, depreciation schedules, tax credits and emphasize the importance of fundamentals such as other features of the tax system (Box 4.9)2 The tax market size, labor costs, and productivity. They down- rate a company actually pays also depends upon the play the effect of fiscal incentives in determining when rigidity of tax regulations and the quality of enforce- and where they make investments. For their part, gov- ment. In many developing countries there is ample ernments do not want to relinquish fiscal incentives room to reduce tax payments through alternative finan- because they find that investors seek every possible cial arrangements. For example, high taxes on profits F O R E I G N D I R E C T I N V E S T M E N 1 45 can be reduced by using various means to lower a sub- Box 4.9. Effective Tax Rates sidiary's declared profits. One of the most common ways open to foreign investors is through the use of Effective tax rates vary widely among countries, and even transfer pricing, whereby profits are transferred to among industries within a country. That is, the fiscal sys- related offshore companies by adjusting intra-firm tem has different impacts on different industries, usually pricing to reduce profits made in the high-tax country. because of the effects of depreciation rates on industries with different asset structures. The f.:i:., ir. table shows Some countries persist with permissive tax regimes, on a range of effective tax rates at the end of 1994. In a paper or in practice, as a way to attract FDI, for fear few countries, the effective tax rate was negative because that strict enforcement of high tax rates would deter the fiscal system raised the financial return, u ,. iai, by FDI. While this may be true, an uncertain tax regime creating accounting tax losses that presumably were used is a greater deterrent, as it increases the uncertainty of to offset income in other businesses. The table shows the economic environment. A low-tax, comprehensive that some countries may have had a problem because regime that is enforced is therefore preferable to a effective tax rates were relatively high. India was one high-tax regime that contains many loopholes, and is such country. The Czech Republic also had higher effec- poorly enforced. tive tax rates than the more advanced countries of Western Europe. In the case of India, the high effective If effective tax rates are set at reasonable levels, tax rate was reduced for those (relatively few) firms that research and practical experience suggest that FDI could get a tax holiday. responds mainly to investment fundamentals such as market size, labor productivity, and infrastructure. Effective Tax Rates in Selected Countries (percent) These factors will determine the markets foreign inetr wIl choose to serve and the possible invest- Without ta holidays WVith tax holidays investors willcostosreadtepsieins- Countrv Manufacturing Services M1\anufacturing Senie ment sites from which these markets might be served. Argentina 12.8 13.7 - - Differences in effective tax rates, due to fiscal incen- argentish 12.9 937 9 1 tives or other features of the tax system, may influence Chile 8.3 5.6 9 1 the choice of one location over others with roughly China 12.9 20.8 17.8 21.1 similar basic attractions. For example, once a firm Czech Republic 37.4 25.9 22.2 19.8 decides to invest in the United States or Southeast France 23.3 21.5 n.a. n.a. Asia, based on the attractions of the market and the Germany 25.4 29.8 n.a. n.a. availability of production inputs at favorable costs, Hungaryb 4.2 -31.7 6.0 5.1 incentives may determine the choice of one locality India 52.8 46.6 20.7 21.1 over similar locations within the United States or Indonesia 32.6 27.4 - _ Southeast Asia. Whether fiscal incentives in any coun- Korea, Rep. of 5.6 15.5 21.3 20.2 try will affect the basic decision to invest in the region Malaysia 18.3 14.7 12.7 11.5 is, however, doubtful. Mexico 15.9 16.8 10.4 17.3 Pakistan 37.6 2.3 11.2 13.9 Only heavily export-oriented firms are very sensitive to Spaina 25.9 23.2 n.a. n.a. effective tax rates below the prevalent levels in most Thailand 28.5 28.9 8.6 8.2 major advanced countries. Export-oriented firms such Turkeyab -279.2 -307.4 n.a. n.a. as garment manufacturers operate in highly competi- United States 26.9 15.5 n.a. n.a. tive markets with very slim margins. Moreover, these firms are often highly mobile and sought-after because - not available they generate jobs. Hence, taxes can be an important n.a. not applicable part of their cost structure, and the firms can easily Source: WorldBank, IFC, FLAS, March 1995 a. These countries offer investment tax allowances or credits for invest- move to take advantage of more favorable tax regimes. ments in machinery and/or structures in place of tax holidays These are the companies that respond to Export b. The negative rate implies that the true value of deductions and credits Processing Zones, which usually offer benefits to firms exceeds the amount of taxes paid on income earned that export a minimum share of total output, usually 70 percent, 80 percent, or more. Virtually all of these 46 I N T E R N A T I O N A L F I N A N C F C O R P () R A T I O N zones grant investors a lengthy tax holiday (often 10 Another reason for caution is that certain types of years), a reduction or a waiver of import taxes on "investment" incentives are not actually linked to machinery and production inputs, and less cumber- investment. Tax holidays are based on the establish- some importing and exporting procedures than avail- ment of an enterprise, even if that establishment results able nationally. in no new investment in the economic sense. In coun- tries that give tax holidays, the motivation is strong to Among the different types of incentives that can lower reconstitute an enterprise in a different form after the a country's effective tax rate, investors prefer up-front holiday period ends in order to get another tax holiday. incentives to those that are contingent on some out- The incentive given by an investment tax credit, on the come such as corporate profits. Hence, tariff rebates on other hand, is directly linked to the size of an invest- imported equipment are among the most popular ment. For this reason, the tax credit may be a prefer- incentives, as are up-front cash grants, used by some able way of giving an investment incentive. European countries but rarely by developing countries because of the fiscal cost. Developing countries have Despite these problems with use of selective incentives, used debt-equity swaps, a form of up-front incentive developing countries are reluctant to give them up in without a fiscal cost to governments. IFC has found favor of a general lowering of effective tax rates for all that debt-equity swaps used by several Latin American investors. In the experience of FIAS, client countries countries did affect investment decisions.'5 often reject recommendations in favor of low tax rates for all investors and against selective incentives. The Countries with high effective tax rates can reduce them selective approach to tax reduction is attractive to many to more competitive levels by giving tax incentives only countries because it may minimize the effect on fiscal to a selected group of firms, while maintaining high tax revenues. Some countries such as those in Central and rates for others. An alternative is to change the general Eastern Europe traditionally have depended heavily on fiscal system to lower the effective tax rate for all firms. corporate taxes for revenue; and reducing the corporate Between these two extremes lie any number of options. tax rate for all firms to, say 15 percent, would have a major revenue impact.17 Moreover, countries know that To lower effective tax rates for investors in selected sec- some types of investors do respond to especially low tors or industries, developing countries have used, tax rates (such as those producing mainly for world besides Export Processing Zones, tax and import duty export markets), and that other countries, including reductions. The Philippines, Thailand and other coun- advanced countries, offer selective incentives. tries in Asia, for example, have established lists of pro- moted industries in which investments receive tax bene- Though difficult for most developing countries to give fits. These "promoted" industries are often specified in up the use of selective incentives in these circum- great detail by size, location, and amount of foreign stances, some developing countries have done so. For ownership required. One country, for example, included example, Indonesia gave up selective incentives in the on its promotion list hotels with more than 200 rooms. mid-1980s, but has continued to receive growing amounts of FDI (Appendix A). Jordan and Lesotho However, governments are not very good at targeting are among countries that have adopted relatively low investments that are both sensitive to incentives and tax rates for most investors (without totally eliminating beneficial to the country. There is a great risk of giving selective incentives). Malaysia and China have both incentives to firms that would invest without any moved to reduce incentives. incentive or would not benefit the country in any event. Moreover, giving tax incentives to some In conclusion, use of selective investment incentives investors and not others introduces issues of discrimi- presents a certain risk of needlessly forgoing tax rev- nation between, for example, foreign and domestic enues for little or no effect on investment. Before con- investors,'6 investors in different industries, newcomers sidering an incentive regime, first a modern and mod- and established firms, and even between individual erate general tax regime, conducive to investment of all firms in the same industry. For these reasons, a moder- types, must be put in place. Then countries can look at ate and transparent tax system for all firms is likely to the few special cases in which selective incentives may be more effective than an extensive program of target- be justified. ed incentives. F O R E I G N D I R E C T I N V E S T M E N T 47 POLICIES TO ENCOURAGE DOMESTIC LINKAGES have found that active promotion programs also con- Developing countries have been concerned that FDI- tribute to the formation of linkages between the up- owned enterprises may not be connected closely graded domestic firms and foreign investors. enough to the domestic economy to transfer knowl- edge and skills to local companies. Host governments Market liberalization is important in this process have perceived inadequate links between foreign and because it creates the incentives that will lead some of domestic firms, particularly for purchases of inputs the using industries to expand both in the domestic from local firms. These backward linkages are thought market and sometimes to supply the export market. to be particularly valuable for local firms, both as a This expansion, in turn, helps to create a market that is source of demand and as a mechanism for transmitting large enough for the local suppliers to reach an effi- technical and management know-how. As a result, cient scale of production. After the Philippines reduced policies to force domestic integration such as domestic tariffs on major appliances, for example, local appliance value-added requirements were imposed, particularly manufacturers had to consolidate models and upgrade on foreign-owned manufacturing firms. production to compete with imports. By producing fewer models in longer runs, the appliance manufactur- These measures were aimed at increasing the return to ers found they could export, increasing scale still fulr- the host economy by both reducing the drain on for- ther. This opened up a large market for domestic sup- eign investors (for example, by restricting foreign own- pliers to the appliance manufacturers who, in turn, were ership shares) and by raising returns to local citizens able to become competitive. Some of them began to (for example, through training required). The effect export as they continued to supply domestic appliance was also to reduce the financial return to foreign manufacturers. investors, often stifling foreign interest in the projects, excluding beneficial investments, and exacerbating This process can open up opportunities for foreign problems of efficiency in investments that were made. investors in the supplying industries. For example, IFC has helped finance a large number of investments to Rules on minimum domestic value added make it more produce auto parts, often with foreign firms. difficult for firms to reach an efficient scale of opera- tions, which make them less competitive on world Developing world-competitive local suppliers is as markets and against imports. To the extent they can be important for multinational companies producing in operated at all, policies to force increased domestic developing countries as it is for the host country. The value added have to be supported by direct or indirect most efficient producers in assembly industries such as subsidies such as protection of the domestic market. autos and electronics rely on a close relationship with suppliers. Production processes that use just-in-time Use of local content rules was recently proscribed by methods and supplier participation in product design the international agreement resulting from the often work best when suppliers and users are located Uruguay Round of negotiations under the General near each other. Because of this natural interdepen- Agreement on Tariffs and Trade (GATT). Called dence, suppliers often coinvest with assembly firms. trade-related investment measures (TRIMS), these Thus, Intel's announcement of an investment in an rules were considered to be barriers to trade. The electronic chip assembly and test facility in Costa Rica TRIM agreement prohibited the use of these measures is expected to prompt other investors, domestic and unless justified under GATT exceptions. foreign, to furnish inputs to the Intel plant. There are better ways than local content rules to Several advanced and developing countries have devel- encourage links between firms with foreign invest- oped programs to support upgrading of potential sup- ments and domestic firms, according to research by plying industries as part of broader efforts to help FIAS and others."i A combination of market liberaliza- improve national firms. Korea, Singapore, and Taiwan, tion, including trade liberalization, and programs to China, all have noteworthy programs to help upgrade help upgrade the technical and management capabili- local companies' technology and managerial capabilities. ties of potential domestic and supplying firms can Sometimes this includes financing for investments. improve the prospects for links between foreign and domestic firms. In addition, a number of countries 48 IN T ER NAT IO NA L F INA NC E COPR PO RAT IO N Other developing countries have had local industry Box 4.10. Many Countries Aren't on Investors' support programs that are less useful for fostering link- Maps ages with foreign firms. Usually operated as small and medium enterprise (SME) development programs, "Will the opening of Central and Eastern Europe to FDI they often overlook the domestic firms that have the divert investment from other developing countries?" best chance of meeting the needs of foreign suppliers. Fearing that investment around the Mediterranean basin The SME programs in the Philippines, for example, might be especially vulnerable, FIAS put this question to a focus mainly on small firms outside metropolitan group of corporate executives in 1990. The survey group Manila. However, the firms that have the potential to came from a hundred West European, North American, meet the high standards international firms require of and Japanese companies. They were from seven indus- suppliers are usually larger and located in the Manila tries: apparel, autos and components, intermediate chem- area. These firms need assistance, too, but cannot get it icals, electrical equipment, electronics, telecom services from the government programs. and tourism. To be effective, the host country's industry-support Except for firms in the apparel industries, developing programs have to be designed with a sharp focus on countries of the Mediterranean basin were not on the target market. They should nurture the best local prospective investors' lists of possible investment sites, firms, not the weakest. Only such hard-headed pro- 3.:'.r1II-g to the survey. Companies that had any knowl- grams stand a chance of success. edge of these countries thought they were too risky to include in their corporate business strategies. Some East Active promotion of linkages can also be useful. Just as European countries were viewed as risky, too, but others promoting foreign direct investment makes sense in a were part of the European strategies of the companies world where information is not perfect, it is also true interviewed. that foreign investors do not always seek out domestic suppliers. Governments could usefully support activi- The survey brought into stark relief the main question ties that help bring potential supplier and user firms facing the Mediterranean basin countries: how do they together. get into the investment game? How do they get into investors' line of vision? Policy improvements and INVESTMENT PROMOTION upgrades of infrastructure and labor quality might be Some economists argue that, if countries would only part of the answer. Even after making such improve- get their investment policies right, investors would ments, however, the investor community would have to search out all worthwhile investment opportunities. be told about the changes in investment promotion This view is supported by investors' willingness to try campaigns. new and challenging environments, such as China. The fact that even small oil companies seek out and identify Source: CA. Michalet, 'Investment Strategies of Multinational oil exploration opportunities offshore of West Africa Corporations and the Attractiveness of Host Countries, 'FIAS Occasional Paper;forthcoming. also supports the idea that potential investors are always looking for good opportunities, no matter how far away or how risky. IFC has seen the effects of this imperfect search process in its own investment work, as it searches Nevertheless, prospective investors, even the largest for potential foreign partners in developing-country firms, do not always conduct systematic worldwide projects. Many countries, developed and developing, searches for opportunities. The search for opportunities as well as cities, counties, and states, are devoting is a bureaucratic process whose initiation and direction resources to promoting investments in an effort to may be swayed by many factors, including imperfect bridge the information gap. Companies also recog- information and skewed risk perceptions."'9 Most com- nize the imperfections of markets and for this reason panies consider only a small range of potential invest- establish marketing programs, even for industrial ment locations. Many other countries are not even on products that will be sold to other firms. Some their map (Box 4.10). countries may not need to promote investment. China, for example, has never had a national promo- F O R E I G N D I R E C T I N V E S T M E N T 49 tion effort. But when the joint venture law opening When the investor visits the country, the promotion China to FDI was implemented in 1979, businessmen agency prepares an itinerary and provides whatever flocked to China in droves. Policy change itself gener- information is requested. The agency follows up with ated publicity and interest. China's huge population the investor to help the firm make an investment also inspired visions of huge markets, which was commitment. enough to induce a number of firms at least to look, even though the policy framework was still rudimetary. Investor servicing. Investment service is the third ele- Russia has had similar advantages, but has not yet cap- ment of a promotion program. Its techniques include italized on them. counseling, expediting application and permit process- ing, and providing post-investment services. These The same cannot be said for Morocco and Tunisia, two techniques are designed to convert an investment com- Mediterranean countries that have markedly improved mitment into an actual investment and, later, to ensure their investment policies. Both countries need intensive that the investor is pleased with the investment envi- promotion campaigns like Singapore's, Malaysia's, and ronment. This process is intended to make the new Ireland's to get attention. investor an "ambassador" who will influence other firms to consider the country as an investment site. Successful foreign investment promotion campaigns share three main elements: image building, investment All these activities can influence the amount, character, generation, and investor servicing, FIAS has found.20 and location of investment. A developing country will want to focus on different aspects of promotion Image building. Image-building techniques include depending on its circumstances. Investor servicing may general and specialized media advertising, participating need to be the focus if the investment environment has in investment exhibitions; conducting general invest- deficiencies that impede investment implementation. ment missions from source countries; and conducting Image building will be useful when there is a good general information seminars on investment opportu- story to tell the international investment community. A nities. These techniques set the stage, helping convince country should not, however, try to convey an image prospective foreign investors that a certain country may that does not reflect reality. Prospective investors will be a good place to invest; no one expects them to find out the truth, to the detriment of the country's directly generate investment. Image building is useful image. Finally, investment generation will be useful when the reality in a country is better than the percep- when the other elements are in place and there is a tion held by the international investment community. clear idea of the kinds of investment that offer poten- Trying to create an image that is at variance with the tial in the country. facts is counterproductive. Success stories from investment generation efforts Investment generation. Investment generation activi- abound. One is the Intel Corporation's plan to locate a ties are designed to interest a specific investor in inves- large assembly and test facility in Costa Rica (Box 4.11). tigating opportunities and to make the investment. Direct mail campaigns, industry- or sector-specific Generating investment is both time consuming and investment missions, or informational seminars are labor intensive. Some agencies have courted certain effective tools. investors for years. Positive results do not come from one meeting or one investors' conference. They depend But the best technique, one used by all successful on the steady efforts of a professional organization, investment promotion agencies, is direct presentations working over a period of time and building on an to specific targeted firms. This technique involves acceptable investment environment. identifying opportunities in host-country industries and sectors. Firms that may want to invest in those Promotion institutions can help the investment process industries are then identified and specific decision as long as it is sufficiently independent of the govern- makers within the firm are targeted for presentations ment to have freedom in hiring and setting salary by the promotion agency. The presentations outline scales. After all, promoting investment is marketing, the investment opportunity and try to get the decision and salaries have to be high enough to attract skilled maker to investigate the opportunity on site. and experienced people from the private sector. At the 50 IN T ER NAT IO NA L F INA NC E COPR PO RAT IO N Box 4.11. How Governments Can Make a Difference: Intel's Decision to Invest in Costa Rica Policies to attract export-oriented foreign direct investment have been an important part of Costa Rica's overall develop- ment strategy since the early 1980s. CINDE, an investment promotion institution established outside the government with financing mainly from the U.S. Agency for International Development (USAID), has been the main executing agent. The first sector singled out for targeting and promotion was the apparel industry, but by the late 1980s, focus was turn- ing toward the electronics industry. This shift reflected the inherent attractiveness of the sector but also acknowledged that Costa Rica, with its relatively high per-capita incomes, would be increasingly hard-pressed to compete for the loca- tion of an industry driven mainly by cheap labor. By targeting individual electronics companies, often beginning with no more than a "cold call," CINDE had been instru- mental in influencing several electronics firms to locate in Costa Rica. Facilitation was an important part of this process. After helping to persuade a company to visit the country, CINDE took it as part of its brief to ensure that prospective investors met the right people, got the information they needed, and avoided unnecessary complications in applying for government licenses and permits. Thus, through the normal course of its business, CINDE enjoyed excellent working relationships with the country's public and private sector leaders. Costa Rica was a late addition to the short list of Latin American countries Intel was considering as the location for a new $300 million semiconductor and testing facility. A presentation to Intel executives by CINDE showed that Costa Rica met the many threshold tests of the company during its rigorous site-selection process. Yet, on the eve of sending senior members of its site selection team to visit Costa Rica for the first time, some executives continued to have reser- vations about the whole enterprise. A main concern was whether a small country like Costa Rica could accommodate an investment of this scale. Intel's 1996 sales, at $20.6 billion, were three times larger than Costa Rica's entire GDP. The investment itself would be about six times larger than the annual average of all other foreign direct investment entering the country. At full capacity, the factory's output, all of it for export, would be equal to the country's total current exports. As one executive remarked, putting Intel into Costa Rica would be like trying to put a whale into a bathtub. CINDE recognized immediately that the size and strategic importance of an Intel investment placed it in a category by itself, although its needs for investor-facilitation services were not necessarily different in kind from those of CINDE's other clients. Consequently, a senior team was established to help Intel with its site investigation. In this investigation, Costa Rica certainly did not "score" best by every measure Intel considered important. Some com- peting sites, for example, could offer cheaper labor; others a bigger pool of skilled technicians and managers; others still a more highly developed infrastructure and substantially cheaper electricity costs. In the final analysis, no small part of Costa Rica's "edge" in this intense competition came from the interest, direct involvement, and rapid response of senior members of government and officials working in tandem with a promotion agency and other parts of civil society. same time, the agency needs connections with govern- The private sector should have a strong say in the pro- ment that are strong enough to influence decisions motion agency's operations to keep the operation lean affecting individual investments as well as investment and in tune with the mentality of private decision mak- policy. Because the promotion agency is the govern- ers. Most of the funding, however, will have to come ment's eyes and ears in the investment community, it from the government, possibly with some support from should have a voice in the policy process. international agencies. Investment promotion produces a public good for which private firms cannot be expect- F O R E I G N D I R E C T I N V E S T M E N T 51 ed to pay, although local banks, utilities, and other pri- 1. The national policy environment is a major factor in vate firms that will benefit directly from additional determining FDI flows to developing countries. investment may contribute. However, most of the fuind- 2. The policy environment can constrain FDI in many ing to support the operation of a promotion agency will ways, some of them obvious, but some not immedi- have to be provided by the government. ately apparent to policymakers. 3. Liberalization of economic policies in general, and The bottom line is that investment promotion will suc- FDI policies in particular, can make a huge differ- ceed only if the country is attractive to foreign ence to the qualitv and quantity of FDI that a coun- investors. Promotion can supplement policy reform; it try receives. is not a substitute for it. 4. Getting policies right may not be enough; active promotion may be required as well, but fiscal incen- LESSONS OF EXPERIENCE tives are rarely worthwhile. From its experience with foreign direct investment in 5. Attempts to promote greater linkages to the domes- the field, IFC has learned: tic economy are usually counterproductive. Notes 1 Most c/ the examples used in this chapter reflectpolicies andpractices in developing countries severalyears ago. Most of these policies andpractices have now been improved, reflecting the general trend ofpolicy liberalization. 2 In evaluating its investments, IFC has analyzed economic eff iciency ofprospective operations and avoided participating in those not promising to be economically - Ex-post evaluations have shown that this effort was largely, but not totally successful. 3 This is not a special concessionfor Intel. Costa Rica'sfree trade zone legislation providesfor individualplants to operate as a stand-alonefree trade zone. There are many such plants in Costa Rica, in electronics and other industries. 4 See D.R. Weigel, "Restrictions on Dividend Repatriation and the Flow of Direct Investment to Brazil, "Journal of International Business Studies (Fall 1970), pp. 35-50. 5 See, for example, H. de Soto, The Other Path (New York, N.Y: Harper & Rovw, 1989), pp 131-35. 6 Ghana szubsequentlv took action in response to this study to eliminate unnecessary harriers to investment. 7 See L. T: Wells, Jr, andA. G Wint, "Facilitating Foreign Investment,v Chapter 3, FIAS Occasional Paper 2, Washington, D. C., 1991, pp. 20-29. 8 For a more detailed discussion ofpolicy options in privatization, see an earlier volume in this series, Privatization: Principles and Practice, Lessons of Experience 1 ( Washington, D. C.: IFC, 1995). 9 Ibid Box 4.6, Chapter 4, p. 2 7. 10 Ibid, Box 4.5, p. 26, which describes the attempt to secureforeign partnersfor two power equipmentproducers in the Czech Republic. In one case the transaction was not completed, and the enterprise became insolvent. 11 For a detailed discussion of the privatization processes most attractive toforeign investors see Kathy Megyery and Frank Sader, .Foreign Participation in Privatization, "FIAS Occasional Paper 8, Washington, D. C., 1996. 12 F Sader, .'- . - Public Enterprises and Foreign Investment in Developing Countries, 1988-93, " Chapter 6, FIAS Occasional Paper 5, [Washington, D. C., 1995, pp. 26-32. 13 S. Guisinger and Associates, Investment Incentives and Performance Requirements (New York, N.Y:Praeger, 1985). See Table 1-1, p. 2,for a list of the incentives used by governments. 14 For a more detailed discussion of effective tax rates, see jM. Mintz and T Tsiopoulos, "Corporate Income Tax and Foreign Direct Investment in Central and Eastern Europe, "FIAS Occasional Paper 4, Washington, D.C., 1992. 15 j Bergiman and W Edisis, 'Debt Equity Swaps and Foreign Direct Investment in Latin America, " IFC Discussion Paper 2, E D. C, 1988. 16 Central and East European countries often distriminated against localfirms early in their transition to a market economy. They taxedfirms with for- eign investment at lower rates than state-owned enterprises and extended other benefits such as preferential access toforeign exchange and moreflexible labor laws. The understandable reaction of many localfirms was to enter into (sometime bogus) joint ventures to get those benefits. 1 7 For many other developing countries, however, collecting 10 percent to 15 percent of corporate profits would increase corporate tax revenues. These coun- tries woould be in a position to establish a low, but collectible tax ratefor allfirms. 18 J Battat, I. Frank, andX Shen, "Suppliers to Multinationals, " FIAS Occasional Paper 6, Washington, D. C, 1996. 19 An early study that showed the bureaucratic nature of the search process is YairAharoni, The Foreign Investment Decision Process (Boston, Mass.. Harvard Business School, 1966). 20 This tripartite division, and much of the rest of whatfollows is taken from L. T Wells, Jr., andA. Wint, I 1:L.. a Country, "FIAS Occasional Paper 1, Washington. D C, 1990. 52 I N I ER N A T I O N A L F I N A N C E C O R I'PO R. A I I O N ANNEX 4A POLICY REFORM AND FDI IN INDONESIA Indonesia has long been an important destination for FDI.' However, government policies toward FDI have fluctuated over time, leading to changes in the level and type of FDI flows. FIAS has been advising the government on policies to attract FDI since 1988. Indonesia therefore provides a good case study of the relationship between policy changes and FDI flows. Indonesia has distinguished foreign companies from domestic companies in several ways: foreign companies have been restricted in which sectors they may enter, in access to domestic capital, in entitlement to govern- ment incentives, and are subject to regulations regard- ing minimum capitalization, minimum foreign owner- ship, and eventual divestiture to Indonesian ownership. The constitution reserved nine "public interest" sectors under government control, including infrastructure; these were initially reserved for Indonesian public, and then later private investors. Foreign investment policy in Indonesia has undergone wide swings from liberal to restrictive in the four phas- es since 1964 (Table 4A.1). These were largely driven by the availability of capital, which was initially closely linked to oil revenues. 1967-73: open door. In the late 1960s, the Suharto Government adopted a favorable stance toward FDI. Nationalized enterprises were returned to their previ- ous owners. An FDI law was passed, which provided, inter alia, a 30-year guarantee against expropriation and incentives in the form of reduced import taxes and income tax holidays. Under the "open door" policy of this period, 100 percent foreign ownership was allowed, divestiture requirements were not mandated, and most sectors were open to foreign companies. F ORE I G N DIRECT INV ES TM ENT 53 However, FDI was seen as a supplement to domestic Indonesian ownership in 10 years. An increasing num- investment, and it was expected that foreign participa- ber of sectors were closed to foreign investment. tion in the economy would be phased out in time. During the rest of the 1970s, there were periods of lib- eralization when capital flows slowed down such as 1974-1985: growing restrictions with occasional after the Pertamina crisis in 1975 and before the sec- relaxation. Strong nationalist sentiments in the 1970s ond oil boom in 1979. led to increasing restrictions, culminating in 1974, when government prohibited 100 percent foreign own- All FDI investments required presidential approval. ership, limited foreign participation in joint ventures to The Board of Investments was created in 1973 to 80 percent, and required divestiture to majority screen FDI proposals. In 1977, it was made a one stop Table 4A.1. Changes in Policy and Procedure Toward FDI in Indonesia 1967-94 Ownership and Year Administrative procedures Sectoral access Incentives finance restrictions 1967 Negative list of Income tax holidays Minimum capital $1 m closed sectors Import duty exemptions Minimum 20 percent foreign 30-year license Exclusion from owned; max 100 percent general incentives 30 year-expropriation guarantee Limits on domestic capital use 1973 Board of Investment 1974 Longer negative list Maximum 80 percent foreign owned Divest locally in 10 years 1977 BOI One Stop Shop Positive list of open Greater foreign ownership sectors permitted with local share sales 1984 Shorter positive list No income tax holidays 1987 General incentives 100 percent FDI in some available if 51 percent sectors, with divestiture in local 1 5 years; no divestiture with 10 percent local ownership Fewer restrictions with local sale of equity 1989 Negative list of closed 100 percent FDI in some sectors: shortened sectors/regions 1992 Divestiture after 20 years More 100 percent FDI allowed 1994 Public interest sectors taken 100 percent FDI in off negative list most sectors Limited divestiture requirements 54 IN T ER NAT IO NA L F INA NC E CO R PO R A -1- IO N Figure 4A.1. Real FDI to Indonesia, 1970-95 5,000- 4,000 - 3,000 - 2,000 - 1,000 _ 0 -1000 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 Source: World Bank Debtor Reporting System service where investment screening and associated tion of continued liberalization and improvement of license applications could be processed in one place. foreign investment policy became evident. From 1977, the Board of Investments based recommen- dations for approval on an annual Priority List of In 1986 maximum foreign ownership was raised to 95 Investments. This was a positive list of permitted percent for export oriented industries in East Indonesia, investments. It was highly regulatory, as production using high technology, and requiring over $10 million capacity and the number of licenses in each sector were capital. In 1987, the period to achieve divestiture was controlled. The criteria for issuing licenses became increased to 15 years. The conditions for treatment of a increasingly opaque. firm as domestic were progressively widened, to allow domestic treatment for companies with 51 percent local Government responded to the fall in oil prices in the ownership, or 45 percent locally owned plus 20 percent early 1980s with an industrialization policy that became of shares issued locally. On the sensitive issue of 100 increasingly protectionist and nationalistic. The invest- percent foreign ownership and divestiture, government ment climate deteriorated as more sectors were closed moved step by step, not applying liberalization nation- to foreign investors. In 1984, tax holidays were elimi- wide at first. nated as part of a wider tax reform. In 1986-88, the priority list was made more transpar- 1986-93: renewed liberalization. After 1986, the need ent, by adopting standard ISIC definitions of sectors, to adjust to falling oil prices by restructuring the econo- and removing limits on capacity and numbers of licens- my away from oil led to a change in perception by the es. From 1987, investors have been able to expand or government on the role of the private sector, including diversify up to 30 percent of existing capacity without foreign investment. Government came to see FDI as new licensing. The sectors open to foreign investment important to bring in capital, technology, managerial were greatly expanded to include tourism, garment capability and access to export markets. A clear direc- manufacturing, chemicals and machinery. Imports of F 0 R E I G N D I R E C T I N V E S T M E N T 55 used equipment were permitted. In 1987, foreign stimulated some FDI to exploit the large, protected owned enterprises were allowed to export their own Indonesian market; this offset a decline in oil and gas products for the first time and to engage in trading investment. However, FDI only started to grow in real activities. In 1989, a negative list of sectors excluded terms after 1986, when the period of renewed liberal- from FDI was introduced, with a gradual reduction ization began. Unlike earlier phases, FDI in the 1980s since then from 64 sectors to 35, of which the most and 1990s has been heavily weighted toward manufac- important is retail distribution. turing for export markets. 1994 onward: extensive liberalization. After experi- As part of the regional integration of production in encing an investment boom in 1989-91, government Southeast Asia, Indonesia has attracted FDI (especially responded to the slowdown in 1992 with a spate of from Japan, Korea and Taiwan, China) to produce a bold liberalization measures, culminating in a major range of industrial and consumer products for export to deregulation package in 1994 removing most restric- the region and beyond. As other Southeast Asian tions on foreign enterprises. One hundred percent for- countries have seen production costs rise, production eign-owned companies are now permitted and the shifted to Indonesia as a relatively low cost location. amount to be divested in 15 years is left up to the This relative advantage was reduced by improvement investors. Joint ventures can be formed with maximum in the investment climate elsewhere, notably the liber- 95 percent foreign ownership and no divestiture alization of the FDI regime in China after 1989. requirement. The nine public interest sectors previously Combined with a slowdown in outward investment by closed to foreign investment were opened for joint ven- Japan due to recession in 1992, this led to a pause in tures. The minimum capital requirement, in place since FDI growth, before the upward trend continued and 1967, was removed. accelerated, as the policy reforms of 1994 enabled Indonesia to share fully in the global surge in FDI to Pattern of FDI flows. The phases of FDI policy are developing countries with attractive policy environ- reflected in changes in the levels of FDI ( Figure ments. 4A.1), and the types of investment. FDI rose in the late 1960s under the Open Door policy, but was heavi- Role of FIAS. FIAS has worked with the Government ly concentrated in extractive industries such as oil and since 1988, when it first reviewed the regulatory frame- gas, where policies against long-term foreign owner- work for FDI in conjunction with the World Bank. In ship were less of a deterrent. Following the tightening 1989-90, FIAS reviewed policy and regulatory impedi- of controls on FDI in the early 1970s, FDI fell sharply, ments to FDI in the agricultural sector FIAS then except for a brief recovery in 1975 following the posi- helped reorient the national investment organization tive oil price shock. BKPM from a regulatory to a promotional role, start- ing in 1991. In 1995 FIAS advised on policies to pro- For the rest of the 1970s, levels of FDI fell in real mote linkages between domestic and foreign firms. terms as the investment climate became increasingly More recently, FIAS has again advised on investment restrictive. Following the fall in oil prices in the early policy issues, particularly those relating to ownership 1980s, the protectionist policy followed by government restrictions. Notes 1 M. Pangestu, "Evolution ofLiberalizing Policies Affecting Investment Flows in the Asian Pacific. " paper preparedfor the PEAS High-Level Roundtable on Competition Jor FDI-JmtplicationsojrAsia and the Pacific; 1995; processed 56 1 N 1 1 R N A\ I O N A 1 F I N A N C L CO R I' O R A T I O N : . l~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.I PROMOTING FDI THROUGH PROJECT FINANCING For over 40 years, IFC has helped to bring foreign direct investment to developing countries by: U sharing the risk of projects with private investors. Even the largest multinational corporations have limits on the amount of money they will expose to risks. IFC's ability to provide equity and debt financing enables projects to go forward. X . ffi * helping reduce perceived risk by its presence in a project. As an international organization owned by its member countries, IFC involvement gives investors some reassurance in the face of political risk. '* providing information on investment opportunities. As an investor itself with strong links to domestic business communities, IFC is a credible source of information about investment opportunities and 4,t !. -conditions in the host country. * facilitating the steps in the investment process from approval to ground-breaking. IFC's first investment, in 1958, involved a U.S. direct investment in Mexico. The number of foreign direct *: t-~ - ; ; ; investment (FDI) projects has matched IFC's growth: 114 between 1958 and 1979, 149 in the next 10 years to 1989, and 275 in the most recent 8 years through 1997.' FDI projects have comprised about 32 percent of IFC's portfolio by number of projects and 36 per- cent by project cost (Figure 5.1). Overall, IFC has invested in some 538 companies. IFC invests in projects through a mixture of debt, equity, and quasi-equity Because it does not take an -FORE I G N D I R E C1 N V E S T M E N T 57 active role in management, however, its own invest- CHARACTERISTICS OF IFC'S FDI PROJECTS ment is not classified as FDI. It thus differs from its As of June 1997, IFC had invested in FDI projects in private partners, who are regarded as foreign direct 100 different countries. IFC's own investments gener- investors, when they have at least 10 percent equity ally correspond to the global pattern of FDI (Chapter and an active management role. 2). Argentina, India, Indonesia, and Mexico have been Figure 5.1. Share of FDI Projects in IFC Portfolio by Value and Number, 1960-Sept. 96 (percent) 60 50 Cost of project, moving average 40 PNumber of projects, moving average 20 1111111111111111111II I1111111111111111111 10 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 Source: IFC MPD/SIS Database. Figure 5.2. IFC FDI Project Volume vs Global FDI Volume, by Region 1970-96 A. 100% IFC FDI = 1996 US$49.0 billion B. 100% Global FDI to Developing Countries = 1996 US$706.3 billion Middle East and North Africa South Asia 2% Latin America 6% _ Middle East and North Africa 3% and Caibea Asiah Latin America and Sub-Saharan Africa 6% Caribbean 34% ,, 51 Caribbean 34% S ^Eastern Europe EA and Central Asia 11% - ~~~East Asia and Pacific 25% Eastern Europe and Central Asia Sub-Saharan 11% East Asia and Pacific 44% Africa 17% Source: IFC MPD/SIS Database; World Debtor Reporting System- 58 I N T E R N A T I o N A L F I N A N C F C C R I' O R A T I O N among the top host countries, reflecting their large Box 5.1. Measuring Country Risk size among developing countries. However, IFC's FDI project portfolio does not show the strong bias toward T.,.:e a year Institutional Investor polls 75 to 100 interna- China in recent overall private FDI flows. Compared ,ir,al bark,-. X grade countries from 0 (the least) to 100 to all FDI to developing countries, IFC project costs lthe hl-,1her'" chance of :o. ereir&a default. The analysis were less concentrated in East Asia and the Pacific gives more weight to responses from banks with greater and more in the Middle East, South Asia, and Africa worldwide exposure and better country analysis systems. (Figure 5.2 and Table 5.1). A stc9re belcl., ' -i hic-, risk) indicates little access to inter- national financial markets, 40 to reasonably good access. Table 5.1. Top 12 IFC FDI Host Countries, by Depending ;r-i :'ur,trv c:,rdtr:,r, and repayment records, Project Cost Institutional Investor ranks some upper middle-income countries a- po;ir- r.r, ris; than low-income countries Rankl1958-79 1980-89 1990-97 R9t.r e -irprsle ujrpE r middle-income Venezuela was rated 1 Brazil Chile Philippines 32.1, while lower income India was rated 46.3 in the 2 India Egypt Thailand SEptenibr 1996 survey). 3 Argentina Argentina Indonesia previously command economies. In 1987, it had its first FDI project in Hungary. Poland followed in 1991, 4 AlIexico M' lexi. ~co Pakistan Romania and the Czech Republic in 1992; Russia, 5 Pakistan Philippines Argentina Estonia, and Kazakhstan in 1994; Kyrgyz Republic and Latvia in 1995; Uzbekistan in 1996; and Tajikistan in 6 Indonesia Brazil Csongo,197 Republic ot 1997. 7 Philippines Zambia Mexico IFC's FDI projects are concentrated in developing countries with medium to high country risk (Box 5.1). 8 Kenya Gabon Chile This is in contrast to all FDI to developing countries, 9 Chile Senegal China which is concentrated in the lower risk countries (Figure 5.3). 10 Former Indonesia Poland IFC has cofinanced projects with foreign direct 11 Malaysia India India investors from 70 different countries. From the begin- ning, these have included both developing and devel- 12 Colombia Colombia Russian Federation Figure 5.3. Distribution of FDI by Risk Note: excludes states with 1994 population less than 5 million. Categories, 1982-96 Cumulative Source: IFC MPD/SIS Database. Of IFC's FDI projects, 37 percent, comprising a _ - Lower Risk fourth of all project costs, have been in low-income countries (excluding China). This compares with only 80 r Medium Risk 14 percent of all FDI to developing countries (exclud- 60 Higher Risk ing China). In keeping with its mandate to develop new markets, 40 - IFC has supported FDI projects in countries that had hitherto received little FDI. In 1960, it invested in its 20 _ first FDI project in newly formed Tanzania; in 1968, it had its first FDI project in Mauritania; in 1977, it 0 began investing in FDI projects in Madagascar: all poor IFC FDI Global FDI countries largely ignored by FDI until then. The Source: Institutional Investor, World Bank Debtor Reporting System, Corporation was also in the forefront of FDI flows to and IFC. I O R E I G N D I R E C T I N V E S T M E N T 59 oped countries. IFC has worked with foreign direct the United Nations Conference on Trade and investors from nearly 50 developing economies, so Development (UNCTAD) on the basis of turnover helping their integration into the global economy. and other criteria. Half of these have been in the IFC has done FDI projects in every economic sector, petroleum and chemicals extraction and processing from construction, agriculture, and mining, through industries, where IFC has played an important role in manufacturing, processing, and financial and consult- reducing country risk. Partners have included familiar ing services (Figure 5.4). The largest number of FDI names such as AKZO, Amoco, BP, Chevron, Du Pont, projects have been in agribusiness, mining, and infra- Elf, Exxon, GE, Hoechst, Mitsubishi, Mitsui, Shell structure. By project cost, the largest sectors of activity and Total. have been infrastructure (total project cost of $10.2 bil- lion in 1996 prices), mining ($9.4 billion) and oil and PROJECT PERFORMANCE gas ($9.2 billion). According to IFCs portfolio rating system (Box 5.2), 71 percent of IFC foreign direct investments have been Infrastructure, motor vehicle industry, and construction completed successfully or are proceeding without major materials projects have been concentrated in Latin problems; 21 percent were classified as posing some America, agribusiness, mining, and textiles in Sub- problems. This performance is slightly below the overall Saharan Africa. Other sectors have been more evenly IFC portfolio average of 75 percent with no problem, balanced between regions. and 16 percent posing various levels of problems, for reasons discussed below. However, rating a project as Sometimes, even the largest multinationals find problematic does not mean that it will fail or that IFC benefits in cofinancing with IFC. About 10 percent will lose money on it. Only 1.2 percent of IFC funds of IFC's FDI investments have been made with invested in FDI projects have had to be written off, the multinationals from the "Top 100," as defined by same proportion as for the whole IFC portfolio. Figure 5.4. Sectoral Distribution of IFC FDI Projects by Value and Number By Company By Value 1996 US$ billion 100% - oChemicals lo Construction materials 80% l o Food and agribusiness 60% - l Hotels and tourism * Infrastructure 400%o -om Manufacturing 20% 0 El Mining * Motor vehicie industry 0% ma0il and gas 1958-79 1980-89 1990-97 1958-79 1980-89 1990-97 100%=114 100%=149 100%=275 100%=$8.7 100%=$11.5 100%=$35.4 M Other companies companies companies Source: IFC MPD/SIS Database. 60 I N T E R N A T I O N A L F I N A N C E C O RP Ol 0 R A T I c N Figure 5.5. IFC FDI vs Non-FDI Project As shown in Figure 5.5, 81 percent of IFC FDI pro- Performance (percent) jects with calculated financial rates of return showed positive returns; 56 percent showed rates of return 100 -IFC non-FI projects exceeding 10 percent a year. This is slightly below IFC FDI projects IFC's non-FDI portfolio performance, where 86 per- 80 _ cent of projects show a positive return and 63 percent exceed 10 percent a year. 60 The difference in rate of return may reflect the differ- 40 - ent roles IFC plays in FDI and non-FDI projects. FDI project sponsors typically have better access to financ- 20 - ing from their domestic capital markets than local pro- o _ _ject sponsors, because most developing countries' local FRR>0 FRR>10% capital markets are less developed. Thus, IFC is less Note: Based on 336 IFCprojectsfor whichfinancial rates of return likely to be brought into a project simply to provide (FRR) are available. financing not otherwise available to the company, Source: IFC MPD/SIS Database. Box 5.2. Assessing IFC Project Performance IFC has invested in 1,617 companies (referred to "as the overall IFC project portfolio").Of these, 538 projects meet the criterion of FDI (namely that a foreign private sponsor has an equity stake greater than 10 percent). These are listed in Appendix Table B. IFC keeps project structure and performance records on, for example, ownership, financing structures, size of IFC investments, write-offs and loss reserves. These data are updated periodically, but only provide a snapshot of the structure and performance of a project at the time of last updating. They are there- fore not wholly reliable but give a good picture of overall portfolio trends. For all projects in the portfolio, investment staff annually assess a portfolio rating of the current state of perfor- mance from IFC's perspective as an investor: satisfactory, potential problem, or problem. When a project exits the portfolio, it is given a final rating of satisfactory or problem. Many projects rated as potential problem or problem at some stage are finally rated satisfactory, since the purpose of the system is to flag emerging problems so that they can be addressed. Nevertheless, the ratings provide a snapshot of the performance of IFC's portfolio at a par- ticular point in time. Portfolio ratings quoted in this chapter refer to the final rating for exited projects or the most recent rating for ongoing projects. Projects less than one year old are excluded from this exercise. For many projects, an Investment Assessment Report is prepared three to five years after project inception. This reassesses prospects for the project's success, and estimates the ex post financial rate of return. It describes perfor- mance to date by the company and identifies lessons learned. Such reports are available for a sample of 99 FDI companies (referred to below as sample projects, or the sample), and provide a rich source of detailed analysis. These projects are identified in Appendix Table B. This sample is broadly representative of the IFC FDI portfolio, but contains some sample biases. For example, larger projects and problem projects are more likely to be assessed, and newer projects have not yet been assessed. Furthermore, the assessment of project performance is undertaken early in the life of the project. At this stage construction risk is behind it, but most market risk still lies ahead. The ex post financial rate of return is thus partly influenced by projections of future market trends. Ex post financial rates of return have sometimes been calculated for projects apart from an Investment Assessment report. As a result, IFC has a database of ex post financial rates of return for some 334 projects, including 134 pro- jects from the IFC FDI portfolio, that is, a further 35 projects beyond the 99 sample projects (referred to below as IFC (FDI) projects with calculated financial rates of return). F O R E I G N D I R E C T I N V E S T M E N T 61 regardless of project risk. Instead, it is usually brought foreign-sponsored sample projects, day-to-day opera- in because the project and country risks make mobiliz- tional management was undertaken by staff recruited ing finance for the venture difficult and make sponsors locally, often from the local partner. Hiring local man- seek ways to mitigate the risks. IFC's entire portfolio is agement staff is more common when a company pro- weighted toward riskier projects and countries but, duces for the local market. because of IFC's developmental role, this weighting is much stronger for FDI projects. Table 5.2. Ownership and Day-to-Day Management in Foreign/Local Joint Ventures PROJECT STRUCTURE In two thirds of the sample projects, a foreign investor Sponsora has been the sponsor, defined as the largest single pri- Foreign Local Equal Total vate shareholder. Of these, 54 percent owned more than Day-to-day Foreign 34 3 8 45 50 percent of the equity, giving them furll management management Local 19 11 5 35 control. Foreign sponsors predominated in oil and gas, Total 53 14 13 80 mining, infrastructure, hotels, textiles, and the motor vehicle industry, and were more common in exporting activities. Of the foreign-sponsored projects in the sam- Source: IFC FDI Sample Database. Note that ex post equity structures are ple, nearly two thirds were joint ventures with local availablefor only 80 projects out of the sample of 99 FDIprojects. a Defined as largest single private shareholder equity partners. There are a variety of reasons for this. Because many countries restrict entry by foreign investors without local partners, foreign investors may In most markets, recruiting staff locally is generally con- have to find local partners to comply with legal require- sidered more cost-effective than importing expatriate ments, rather than to meet a business need. One hotel managers. ''hus, when the foreign sponsor does not see operator, for example, brought local equity partners into a clear advantage in providing management, cost consid- its Southeast Asian subsidiary solely to meet govern- erations lead joint ventures to minimize reliance on ment restrictions on foreign ownership; it retained full expatriate staff (Chapter 4). Sometimes government effective control of the subsidiary (Box 6.5). restricts use of expatriate staff Sometimes local staff offer management skills that a foreign sponsor does not Foreign sponsors sometimes select local partners for have. For example, Westel Radiotelefon (a joint venture their local marketing links, access to inputs, and busi- between US West and Matav, the Hungarian state tele- ness know-how. For example, when a German manu- phone company) initially developed its cellular telephone facturer decided to develop products for south network in Hungary with expatriate staff, but rapidly European markets, it formed a joint venture with a transferred responsibility to local staff, who knew the local manufacturer in Turkey to handle local market- local market and could better respond to it. (Box 5.3). ing. Half of the projects in the sample with foreign sponsors were directed to the local market. In a quarter of the locally managed sample projects, the foreign partner provided support through a formal tech- In a third of the joint ventures, the local partner was a nical assistance contract. For example, the Mantos public enterprise. In such cases, it is common for their Blancos copper mine in Chile has operated successfully equity contribution to be in kind, for example, use of since its establishment in 1958 with day-to-day opera- raw materials and existing fixed assets. For instance, tions managed by local staff with technical assistance Zambia Hotel Properties, a public holding company from the foreign sponsor, the Hochschild Group of owning hotel properties, transferred these properties to Bolivia. In Indonesia, PT Viscose produces viscose under a joint venture with Intercontinental as its equity con- local management, with a technical assistance contract tribution (Box 6.2). with its 42 percent equity holder, Leizing of Austria. Management skills are part of the value added that In a fifth of the joint ventures in the sample, a local FDI can bring. Staff provided by the foreign partner company was the largest equity partner, a quarter of managed 64 percent of foreign-sponsored projects day- them holding a majority of the equity. Most of them to-day, bringing technological and managerial know- produced for domestic markets, and were more likely how directly into enterprises (Table 5.2). In the other to be in protected than open markets. 62 I N T E R N A T I O N A L F I N A N C E C O RPO R A T I O N Box 5.3. Westel, Hungary: Successful FDI of dry batteries. However, in the 1980s a local investor Through Development of Local Management was able to establish a successful battery manufacturing In 1990, Westel was awarded a concession to build and plant with technical support from a foreign battery operate the first analog cellular telephone network in producer which held a minority equity stake. Similarly, Hungary. Westel is a joint venture between US West and in 1978 Amoco was brought in as a technical partner Matav, the Hungarian state telephone utility. IFC helped and 10 percent equity holder in Temex, a PTA project finance expansion of the Westel network outside in Mexico; ownership restrictions prevented interna- Budapest. By 1993, the national network was complete, tional petrochemical companies from majority owner- and the company was well placed to compete with addi- ship in Mexico at that time. tional cellular operators from 1994. Whether exploiting a protected market or a natural Early in the project, US West provided Westel with a resource, or entering a competitive market, one of the great deal of support in every area, including general most important motivations for seeking a foreign part- management, finance, marketing, network design, and ner has been access to technology. Two thirds of locally training. In the past five years, Westel has gradually sponsored projects involved either foreign management turned into a company run almost entirely by Hungarians. or foreign technical assistance contracts. Suppliers of Local managers and staff have handled all further techni- technology may be reluctant to license their use to cal and marketing development. The strong Hungarian other companies, for fear of losing control over its use. management team, well trained in western managerial To mitigate this risk, a technology supplier might and marketing skills, is complemented by a well-trained become an equity partner in the company, with a seat staff. This team developed by the sponsors has been a key on the Board, thus gaining access to information about factor in the success of Westel. It has given Westel a good the use of technology and some control over its use. understanding of the local culture and consumer behavior For these reasons, when Pilkington glass supplied new and has made it more responsive to the Hungarian busi- glass production technologies to Viplamex, a Mexican ness and operating environment. As a result, Westel's glass producer, it took a 40 percent stake in the com- business is growing. Its success is exemplified by the trans- pany. Such an arrangement is also attractive to the fer of the former General Manager and a large group of local partner who gains access to proprietary technolo- his managers and staff to lead Westel 900, a new busi- gy. Bringing in the technology partner as an equity ness providing digital (GSM) cellular service. Today, Westel partner helps balance incentives and rewards between Radiotelefon and Westel 900 combined have 1,300 local the technology supplier and the local enterprise. For employees and only one expatriate. example, Tunisian pharmaceutical manufacturer Adwya struggled in its manufacture of generic drugs due to lack of support from product licensors. After another However, not all locally sponsored projects relied on pharmaceutical company took an equity stake, the protection: one in five was based on international com- Tunisian company became better able to obtain tech- petitive advantage, rather than protection. In some nologies and market drugs locally (Box 6.1). cases, local sponsors owned natural resources such as mineral deposits or timber and needed foreign part- This approach is common in the chemicals and phar- ners' help in their exploitation. This was the case with maceutical industries. For example, when the the Rio Norte bauxite deposits in Brazil and the Venezuelan state-owned petrochemical company, Fluobar minerals mine in Tunisia. However, most nat- Pequiven, wanted to develop a plant venture (Pralca) to ural resource-based projects in the sample were for- produce ethylene compounds for the domestic and eign-sponsored. regional market, it entered into a joint venture with the Olin Corporation of the United States, which provided The large number of joint ventures with minority FDI technical assistance in design, construction, and opera- partners largely reflects policy restrictions on foreign tion of the plant. Olin was also a customer for the ownership, which means that foreign investment and plant's output, as a partner in the adjacent ethoxylates technology could only come in through minority part- company, Etoxyl. nerships with local companies. For example, interna- tional dry battery manufacturers did not set up produc- The long and successful partnership between Akerland tion in Nigeria, despite high protection against imports and Rausing of Sweden and Packages of Pakistan F O R FI ( iN D I rc E -t1 I N V I S I M F. N f 63 shows that ventures of this kind can be very successful IMPACT OF CHANGING POLICY ENVIRONMENT (Box 6.8).Working together since 1957, they first ON FDI PROJECTS introduced Tetrapak packaging to Pakistan and have For many years the policy environment in most devel- continued to exploit A&R's technology to bring new oping countries posed a number of obstacles to FDI products to the local market. (Chapter 4). A fifth of the locally sponsored joint ventures involved Pre-1980s. Before 1980 almost all IFC FDI projects day-to-day management by a foreign partner, often were subject to policy constraints that affected their under a formal management contract. This is common design and execution. Later projects began to benefit in mining and tourism projects, where the local spon- from more liberal policy frameworks. The defining sor may possess the physical assets such as real estate or characteristic of the earlier policy stance was a prefer- mining rights but not the management capacity to ence for domestic production over imports. This led to exploit them. Thus, the operation of all the hotels in a mixture of import restrictions, quotas, and high tariffs the sample was under foreign management, even in the that raised profits in home markets, while leading to three projects where the local sponsor owned a control- overvalued exchange rates that depressed profits from ling share of the equity. In Thailand, one of the foreign exports. As a result, domestic producers could produce partners in Star Petroleum was contacted by the more profitably for domestic markets than for export, domestic sponsor to operate the oil refinery. In the and, in fact, 69 percent of sample projects prior to 1980 Democratic Republic of Congo, the Sotexki textile were targeted mainly at domestic sales (Figure 5.6). plant and activities are managed under contract by Maurer Textiles of Switzerland, who holds a 25 percent Figure 5.6. Export Orientation of Sample equity stake in the company. Projects (percent) Local sponsors often seek foreign partners to help with 100 international marketing, and export markets were the Export target of more than a quarter of the locally sponsored 80 - Domestic sample projects. Thus, when the China Bicycle _ Company wanted to expand export production, it 60s - invited Schwinn Bicycles Company of the United 40 States to take 30 percent of the equity, with the inten- 40 tion of marketing up to 60 percent of the company's output in the United States through Schwinn (Schwinn's subsequent bankruptcy forced the company C0 --l to make other arrangements-underlining the impor- 1958-79 1980-89 1990-97 tance of careful partner selection). CMPC, a long- Source: IFC FDI Sample Database. established Chilean pulp producer, formed Celpac, a joint venture with Simpson of the United States to Businesses that use mainly power, unskilled labor, tex- help it develop new markets for its products there and tile yarn, or other tradable or commonly available in East Asia (Box 6.3). inputs and sell on international markets have great flexibility over where they base production. They can Foreign and locally sponsored projects have similar set up wherever the economic and regulatory regime success rates, with 75 percent and 70 percent, respec- provides a competitive advantage, which may be far tively, achieving financial returns greater than 10 per- from the source of some inputs and far from output cent a year. However, projects structured as joint ven- markets. Unfavorable policy environments strongly tures where foreign and local partners hold equal influence these projects and can divert the investment shares, have a markedly worse success rate, with only to other healthier climates. The effect of this can be 58 percent of projects exceeding a 10 percent a year seen in the sample from pre-1980: only 19 percent of financial rate of return. This reflects the difficulties of projects were started on the grounds that the host joint ventures with equal shareholdings (Chapter 6). country was a competitive location to produce for domestic or export markets, in the absence of tariffs, quotas or other government controls (Figure 5.7). 64 I N TE R N A T E o N A L F I N A N C t C o R P o R A T I O N These included food and agribusiness projects such as applies to some types of natural resource industries shrimp farming and tea production, and chemical such as timber logging and agriculture. It is even true production. of tourism projects, which must be located where trav- elers want to go. Figure 5.7. Rationale for Sample IFC FDI Projects (percent) Resource extraction projects, especially oil and gas, typ- ically source many of their inputs from abroad and sell in international markets. As a result, their linkages to 100 - ~---~ the domestic economy may be tenuous, and govern- 80 - ments often treat them as special cases for taxation and regulation. This sometimes leads to tighter regulation. 60 Equally, it often enables foreign investors to negotiate specific terms for their investments in these sectors, 40 -which delink them from the general FDI framework. This has allowed resource extraction FDI to continue, 20 - even in countries where the general environment for o ' t _ FDI has been least attractive. 1958-1 979 1980-1989 1990-1997 Exploit natural resources Governments historically gave a large role to the public Access protected markets sector in production, which crowded out private invest- Access protected markets ment, including FDI, particularly in public infrastruc- Produce nontradables ture services such as roads, telecommunications, and Competitive location water. Ownership restrictions also tended to be stricter on the provision of services such as commercial bank- ing than on the production of tradable goods. Until 1980, IFC financed no FDI projects in nontradable Source: IFC FDI Sample Database. sectors such as financial services or infrastructure. However, the existence of trade barriers meant that Until recently, developing countries had placed a varn- setting up production in the protected markets was the ety of restrictions on foreign ownership. These had only way to be competitive in selling there. This was explicitly or implicitly pushed foreign investors into the strongest motivation for FDI projects in the IFC forming joint ventures with local partners, either sample before 1980, accounting for 56 percent of pro- because it was a condition of investment or because it jects. Examples include SKF Bearings' production of was the only way to invest while respecting limits on ball bearings in India, Dunlop's production of tires in foreign ownership. Furthermore, ownership restrictions Nigeria, and Suzuki's car production in Hungary and prevented foreign sponsors from holding a controlling Pakistan. equity stake in many projects; only 37 percent of pre- 1980 IFC FDI projects had majority foreign owner- A quarter of the sample projects were located in devel- ship, and in 69 percent the main sponsor was a local oping countries to exploit their natural resources-oil investor Only 7 percent of projects started prior to and gas, minerals, or, in the case of tourism, scenery 1980 had more than 90 percent foreign ownership. and climate. These projects include oil exploration and production in Argentina (Hidra Oil), gold mining in The proportion of foreign equity in IFC FDI projects Ghana (Ashanti Goldfields), and tourism in the has varied over time. In the early 1960s, two thirds of Caribbean (Club St. Lucia). projects had majority foreign ownership. By the late 1960s and 1970s, many governments placed restric- Such activities are less sensitive to the policy environ- tions on FDI shares in equity; as a result, the number ment, as they have less choice about where to locate. of IFC FDI projects with majority foreign ownership For example, gold can only be mined in a small num- fell to a quarter in the late 1970s and early 1980s ber of countries. The same applies to many other min- (Figure 5.8). eral extraction projects, including oil and gas. It also F o R E I G N D I R E C T I N V E S T M E N T 65 Figure 5.8. Proportion of Foreign Equity in IFC FDI Projects, 1962-97 80 70 Average foreign equity share as percent of total equity in IFC FDI projects 60 - 50 - 40- 30 1 E l l l l l l l l l l l l l l 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 Note: Based on five-year moving average. Source: IFC MPD/SIS Database. FDI projects are financed through a combination of be used locally, and hence were an obvious source of foreign and local equity, foreign and local loans, and financing. Locally sponsored projects relied more on cash generation from current activities. Local financing loans, equity, and quasi-equity. Overall, foreign and provided 53 percent of the project costs for locally locally sponsored projects had similar gearing, with sponsored projects in the IFC sample, reflecting spon- debt-equity ratios around 2 to 1. sors' limited access to international financing. Unsurprisingly, foreign-sponsored projects had greater Figure 5.9. Sectoral Distribution of IFC FDI foreign financing but still relied on local financing for Projects by Value, pre-1980 an average of 32 percent of project costs. Local financ- ing was highest in South Asia (64 percent) and the Middle East and North Africa (57 percent), reflecting Hotels and tourism 2% both the relative sophistication of domestic capital Manufacturing 2% Mining 28% markets and the relative lack of access to international Food and agribusiness 3% Oil and gas 5% capital markets. By contrast, the regions where sample FDI projects relied most on foreign financing were Construction Sub-Saharan Africa (65 percent), reflecting very limit- materials 8% ed domestic capital markets, and Eastern Europe and East Asia, which have had relatively good access to international capital markets. Motor vehicle industry 14% Foreign-sponsored projects relied on internal cash gen- eration for 12 percent of project financing, compared Other 21% to 4 percent of locally financed projects. This is partly Chemicals 17% due to limitations on repatriation of capital, which meant that foreign investors preferred to use finds 100% = 1996 US$8.7 billion already in the country instead of transferring in funds that might be hard to transfer out again. It also meant that profitable projects generated funds that could only Source: IFC MPD/SIS Database. 66 I N T E R N AT I O N A L F I N A N C I O R PI< R AT I O N Before 1980, the main sectors in IFC's FDI portfolio However, results have improved considerably in later were mining, chemicals, (especially fertilizers and pes- time periods, with 78 percent of both FDI and non- ticides), and motor vehicles (including parts). Mining FDI projects since 1990 achieving returns greater than was drawn to developing countries despite barriers to or equal to 10 percent. FDI, due to the location of unexploited mineral and metal resources. The chemical (especially agricultural Figure 5.11. Performance of IFC FDI vs Non-FDI chemicals) and the motor vehicle industries were wide- Projects (percent,) ly and heavily protected, as countries sought to build up what they saw as basic industries for their agricul- 80 - IFC non-FDI tural and industrial development (Figure 5.9). 70 I 60 IFC FDI Where markets are protected, market size and location co of natural resources are the major factors driving FDI. 4 At the same time, some countries placed greater restrictions on FDI than others. Notably, China was - virtually closed to FDI before the 1980s. Thus, Latin 20 - America dominated IFC's FDI portfolio due to the 1) - large size of its markets and the resource extraction 0 opportunities (Figure 5.10). 1958-79 1980-89 1990-97 Figure 5.10. Regional Distribution of IFC FDI Source: IFCprojects with calculatedfinancial rates of return. Projects by Value, pre-1980 a. Percentage offinancial rates of return greater than 10percent ayear. The higher failure rate can be partly explained by the South Asia 17% SAfrica 14% impact of different trade policy environments. Of sam- Middle East ple IFC FDI projects selling into protected markets, 29 and North percent showed negative financial returns, compared Africa 2% East Asia and with 20 percent of projects selling in open markets. Of Pacific 11% sample projects in open markets, 70 percent showed a 10 percent a year or more rate of return, compared Eastern Europe with 64 percent for projects in protected markets. and Central Asia 6% Projects relying on protected markets are vulnerable to Latin America changes in levels of protection. Furthermore, they are and Caribbean 50% protected from the competitive forces of global trade which force companies to employ best-practice tech- 100% = 1996 US$8.7 billion nologies and management techniques. Projects selling into open markets have to be globally competitive from Source: IFC MPD/SIS Database. the beginning and are under constant competitive pres- sure to maintain high standards. They are also less affected by changes in government policies. During this period, 22 percent of the projects were classified as posing some problems for IFC's portfolio, Of these enterprises, 18 percent sold their products compared to 77 percent that were implemented with- under some form of long-term contract or marketing out any problems. Only 41 percent of IFC FDI pro- arrangement, for eample, under a concessional put- jects in the pre-1980 period with calculated financial chase agreement or to a partner company. Such rates of return achieved a 10 percent financial rate of arrangements provide some insulation from market return (Figure 5.11). Moreover, 22 percent showed a risks. Market weakness was a factor in nearly half of negative financial return. This is significantly worse the poorly performing projects in the portfolio. Thus, than for IFC's non-FDI projects of the same period, projects with some form of contractual marketing and below the average for all IFC FDI projects. arrangement show a better than average performance, F O R E I G N D I R E C T I N V E S T M E N T 67 with 72 percent of projects exceeding 10 percent a year At the same time, the globalization of production net- financial rate of return, compared to 69 percent for the works has increased the proportion of trade conducted whole sample. Before 1980, only 13 percent of sample intra-firm or between affiliated firms with contractual projects were of this type. relationships. Again, this reduces market risk, in that the commitment between seller and buyer is longer Post-1980. Since 1980, IFC has seen a marked shift in term than in open market sales. Of course, it does not the composition of its FDI portfolio in response to insulate the enterprise from market risks that affect the changes in the policy framework and new opportuni- whole supply chain. ties. These changes have become more pronounced in the 1990s, as policy liberalization and globalization of Thus, the proportion of projects whose market risk is production have together led to a surge of new FDI mitigated by some form of contractual marketing flows to developing countries. arrangement rose to 17 percent of the sample in the 1980s, and 22 percent of post-1990 projects (Figure The greatest change has been in the market for FDI 5.12). production. Instead of selling into domestic markets protected from international competition, IFC FDI Figure 5.12. Market Access for Sample IFC FDI projects are increasingly based on global competitive- Projects (percent) ness in domestic as well as export markets. This is reflected in the sample. Since 1990, 28 percent of sam- 100 ple IFC FDI projects have been based on international Protected competitive advantage, compared to 22 percent still 80 O Open located in developing countries because of market pro- tection (Figure 5.7). Excluding nontradable infrastruc- 60 - Contractual rure projects, export orientation rose to 56 percent of sample projects in the 1980s, before falling back to 51 40 percent in the 1990s reflecting the emergence of investment in other nontradable sectors (Figure 5.6). 20 Meanwhile, liberalization and privatization have opened 0 up new sectors to FDI, particularly nontradables such 1958-79 1980-89 1990-97 as financial services and infrastructure. IFC began Source: IFC FDI Sample Database. investing in nontradable FDI projects in the 1980s, when they comprised 6 percent of the sample FDI portfolio; since 1990, nontradables have accounted for The evolution of policy framework is reflected in for- 25 percent of sample IFC FDI projects (Figure 5.7). eign equity shares (Figure 5.13). The average share of foreign equity projects in Eastern Europe and East As governments have developed policies to attract pri- Asia has increased by more than a third between vate investment to new sectors such as infrastructure, 1980-89 and 1990-97. The share of foreign equity in they have developed regulatory frameworks that make IFC FDI projects in Africa rose slowly from 39 per- greater use of contractual marketing arrangements, cent of equity (average of all IFC FDI projects, 1958- such as power purchase agreements from power sta- 79) to 56 percent (1990-97), as the policy environment tions, or concessions for telecommunications markets.2 became less restrictive. Similarly, the FDI share of Under such arrangements, competition occurs in the equity in the Middle East and North Africa has risen award of market access for a set period. Such access is slowly but has not yet reached 50 percent. South Asia, not necessarily exclusive; multiple licenses may be however, averaged only 38 percent over all three pern- issued, and multiple supplier contracts negotiated. ods. The only sector that has consistently averaged over Nevertheless, those arrangements attenuate market 50 percent foreign equity has been oil and gas ventures, risk. Although an element of price risk and counter- where foreign sponsor equity has averaged 54 percent. party risk persist, contractual arrangements can make them more manageable (for example, through use of Privatization has brought FDI into many industries insurance, guarantees or derivatives). that were previously state-owned. Privatization has 68 I N T E R N A T I O N A L F I N A N C E C O RP O R A T I O N Figure 5.13: Average Foreign Equity Share, by Region 56% Sub-Saharan Africa 46% Ai South Asia 45% Middle East and North Africa Latin America and Caribbean so 38°o 54° Eastern Europe and Central Asia East Asia and Pacific 45% 42% 57% 1958-79 1980-89 1990-97 Source: IFC MPDiSIS Database. become a popular means to transfer these assets to have become more open to FDI, IFC has diversified sponsors with the capacity and the resources to run away from Latin America, which accounted for more them more successfully. Twelve of the projects in the than one in three projects and over half of project costs sample brought in FDI as a result of privatization. FDI up to 1979 (Figure 5.10), to only one in four projects, went into infrastructure (gas, water, telecommunica- and 24 percent of project costs since 1990 (Figure tions, and transport), manufacturing (Mokra, a cement 5.14). The other big shift in regional composition has plant in the Czech Republic), and banks (BNI-Credit been toward Eastern Europe and Central Asia, where Lyonnais-Madagascar). the number of IFC projects rose from 6 percent in the These foreign investors not only bought out govern- Figure 5.14. Regional Distribution of Projects ment equity in the project but also invested in new by Value, 1990-97 capacity. For example, the sale of the gas distribution network in Buenos Aires to Transconor, a U.S.- Middle East Canadian consortium, led to extension and upgrading and North Africa of the system; the sale of CTC in Chile to Telefonica and Caribbean 4% South Asia of Spain led to a doubling in the number of telephone 24% ^ f lines in four years. Philips invested heavily in the light- ing factory it purchased in Poland, safeguarding 3,000 jobs, and increasing sales per employee by 93 percent Sub-Sarahan over three years. FDI through privatization also brings Africa in new management and technologies. When Credit Lyonnais acquired BNI-Credit Lyonnais-Madagascar Eastern from the government of Madagascar, it introduced new Europe and working methods and computer systems, and retrained Central Asia staff (Box 6.6). 16% East Asia and Pacific Impact on IFC's FDI portfolio. These trends are 32% reflected in IFC's project portfolio. As other regions 100% 1996 US$35.4 billion Source IFC MPD/SIS Database. F O R E I G N D I R E C T I N V E S T M E N T 69 1980s to 25 percent in the 1990s, and project costs Figure 5.15. Sectoral Distribution of IFC FDI from 3 percent to 5 percent. Most East European tran- Projects by Value, 1990-97 sition countries joined IFC as part of their process of reengaging with the international financial system. Motor vehicle industry 3% While the number of projects in East Asia rose to 19 Food and agribusiness 3% percent of all IFC FDI projects, project cost increased Hotels and tourism 3 aom markedly in the 1990s, due to the improved policv Manufacturing 5% environment for major infrastructure investments. Construction Infrastructure 29% Between 1990 and 1997, they accounted for one third Materials 6% of the cost of IFC FDI projects. Chemicals 8% Liberalization and globalization have led to striking changes in the sectoral composition of the IFC FDI portfolio. For example, chemicals accounted for 17 per- Mining 11% cent by value of all IFC FDI projects between 1958 and Oil and gas 19% 1979, but only 8 percent since 1990, as countries have moved away from efforts of setf-reliance toward free Other 13% international trade in fertilizer. Similarly, investments in 100% = 1996 US$35.4 billion motor vehicles have fallen from 14 percent to 3 percent, as the industry has globalized. Fewer countries restrict Souirce. IFC MPD/SIS Datahase. imports and thereby provide the basis for separate pro- duction in each market. Since 1979, as developing The financial rates of return have also improved since countries have opened more sectors to foreign invest- 1980. Since 1990, 93 percent of IFC FDI projects have ment, including infrastructure and financial services, had positive financial returns, 78 percent exceeding 10 IFC's FDI activity in these areas has expanded, espe- percent. Again, this suggests that FDI projects are no cially since 1990. Infrastructure investments, less than 1 longer inferior to other IFC projects. percent of IFC's FDI portfolio before 1990, have been 29 percent since. Within the extractive sectors, mining Analysis of the sample of projects sheds light on the has fallen in volume from 28 percent of the portfolio reasons for the improved performance. The proportion before 1980 to 11 percent since 1990, while oil and gas of foreign-sponsored projects exceeding 10 percent a extraction and refining have risen from 5 percent before year returns has increased from 71 percent before 1980 1980 to 19 percent since 1990 (Figure 5.15). to 77 percent since 1990. Thus, foreign-sponsored pro- jects appear to have benefited from the improved As the nature of the portfolio has shifted, its perfor- investment climate. mance has also changed (Figure 5.16). Performance declined in the 1980s, due to economic dislocation in Liberalization of trade regimes has enabled IFC to developing countries after the collapse of commodity benefit from the higher returns of FDI in open mar- prices and the onset of the debt crisis. Volatile interest kets. Apart from the 1980s, 80 percent of the projects and exchange rates in developing countries and con- selling into open markets showed returns above 10 per- traction of domestic and export markets affected IFC's cent, compared to 57 percent of projects selling into entire portfolio to a degree, but FDI projects were protected markets. At the same time, the increase in affected more due to their greater exposure. Since 1990 projects with contractual marketing arrangements (for the portfolio ratings have been better than ever, with 85 example, power stations with power purchasing agree- percent classified as posing no problem and only 7 per- ments, cellular phone companies with service licenses) cent regarded as posing some problems, compared to 22 has helped returns. Since 1990, 88 percent of such pro- percent before 1980. This means that after a deteriora- jects have shown returns above 10 percent. Thus, the tion in the 1980s, the FDI portfolio again compares in changing mix of FDI investments has clearly improved quality with the overall IFC project portfolio. project performance. 70 I N T E K N A T I ( N A IF I N A N C F C () R P ( R A I I 0 N Figure 5.16. IFC Portfolio Ratings of FDI Projects IFC FDI projects All IFC projects 100 -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ * - Problem 80 Potential problem 60 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~ * Satisfactory 40 20 0 1958-79 1980-89 1990-97 1958-79 1980-89 1990-97 Source: IFC MPD/SIS Database. LESSONS OF EXPERIENCE Review of IFC's portfolio of FDI investments across a wide range of countries and sectors, in different periods, shows that: 1. IFC has helped bring FDI to the poorest, riskiest locations. 2. Successful FDI projects may have dominant foreign or local partners, but equal partnerships do relatively poorly. 3. The performance of IFC investments has been affected by the policy environment, which has influ- enced the market orientation of projects and their ownership and management structures. 4. Economic liberalization since 1980 has led to a reorientation of FDI investments toward production for the global economy, and toward provision of infrastructure, and has improved their performance. Notes 1 Throughout this chapter projects are dated by the IFCfiscalyear (July-June) in 'which they commenced (first commitment of IFCfunds). 2 For a detailed discussion, see Financing Private Infrastructure, Lessons of Experience 4 (Washington, D. C.: IFC, 1996). 3 Portfolio ratings aregiven eitherattime of exitfrom theIFCportfolio, or fstill in theportfolio, as of December1996. Projects less than oneyearold are excludedfrom this exercise. F OR E I G N D I R E C T I N V E S T M E N T 71 GETTING PROJECT Ap-= S STRUCTURES RIGHT Like all ventures, EDI projects are exposed to a range ~~~~~~~ ~~~~~of project risks.' Weak markets, weak management, govermentcontrols, and cot overruns are the four t ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~gvrmn cosSi most frequently cited causes of poor performance in the sample of IFC FDI projects (Figure 6.1). The very nature of FDI projects increases the risks in several ways. First, cross-border investments pose additional informational challenges. Implementation delays, cost overruns, and misjudgment of market prospects are more likely when investors are less familiar with the business environment. Second, cross-border business Al J l R k zii s Fhas extra hurdles to navigate, caused by trade, capital, and labor restrictions, including policies specifically directed at FDI (Chapter 4). JOINT VENTURES .3 ~~~~~~~Limits on foreign ownership in many countries have left foreign investors with little alternative to joint ven- tures. Ninety percent of IFC's foreign direct invest- | :: & | >r; j ment (FDI) projects are joint ventures between foreign IFF :. ll | - - - - --and local partners. Within these joint ventures, govern- ment regulations often prevent the foreign partner -L' $from holding a majority stake. As a result, when own- ership restrictions are liberalized, foreign investors usu- ally move to increase their ownership and control of joint ventures. This is what happened in India after the liberalization of ownership restrictions in 1991, and more recently in China. Foreign investors unable or unwilling to invest without local partners are more likely to need IFC participation to reduce risk and help structure and manage the part- nership. Foreign investors considering joint ventures in developing countries find that bringing IFC into the partnership can reduce project risk. This is particularly true of joint ventures with government or public enter- - AfI G N .D I i E C N V E S T M E N T 73 prises, where IFC's multilateral status puts it in a Box 6.1. Adwya, Tunisia: Equity Stake Increases strong position to negotiate with governments and act Technical Partner Commitment as an honest broker between government's and foreign investor's interests. Governments often welcome IFC The government of Tunisia opened the pharmaceuticals playing this role, too. market to private producers during the 1980s. A group of Tunisians formed Adwya in 1983 to exploit the opportu- Figure 6.1. Causes of Poor Performance of Pro- nity to manufacture brand-name drugs to compete with jects with Financial Rate of Return < 10 percent imports. They initially held 54 percent of Adwya's equity; domestic financial institutions and IFC held the rest. Percent of projects 0 3 6 9 12 15 When IFC invested in the project in 1986, Adwya was Implementation negotiating license agreements with six major interna- delay tional pharmaceutical houses to manufacture and sell Cost their products in Tunisia. A new manufacturing facility, overrun constructed at a cost of $10 million, was completed in Weak December 1990, 18 months late. Sales had begun in management December 1989 but built up very slowly. By the end of 1990, Adwya was selling only 9 products, instead of the Lack of 25 originally planned. The company was pinched for technical support orgnlycmpn_ice t.cUical support cash, and fell behind on loan service. Government controls Economic During the construction period, two of the intended Economic_ climate licenses fell through, and a third was canceled when the licenser decided to set up its own production facility in Weak Tunisia. The sponsors negotiated replacement licenses marketTuii.Tesosrneoitdrpaeetlcss with two new companies. As a result, the project design had to be repeatedly altered to match the changing prod- uct mix. The sponsors' financial and technical manage- ment of project implementation was weak, and the Joint ventures are a common form of corporate struc- licensers did not rush to complete the project because ture, both within countries and across borders. their profit margins were larger from continuing to sell Although products and services can usually be pur- their products as imports. Profitability was further dam- chased through arm's-length agreements, parties some- aged by licensers' increases in input prices. times prefer joint venture arrangements. They can increase suppliers' control over the use of their technol- In 1990, one of the licensers, Rh6ne-Poulenc, bought 17 ogy, brand names, and other proprietary items and give percent of the equity, introducing FDI into the project. them a tangible share in the success of the enterprise. The company provided a finance director and technical For the local sponsor, joint ventures can be a way to support. By 1991, two thirds of Adwya's products were ensure the supplier's interest in the success of the licensed from Rhone-Poulenc. Production and sales enterprise instead of only in selling the service or prod- picked up, Adwya became profitable in 1992, and uct. For both parties, a joint venture spreads around the cleared its loan arrears. In 1993 IFC sold its 10 percent risks and rewards.2 For example, Adwya, a pharmaceu- equity stake to Synthelabo, bringing in a second FDI tical producer in Tunisia, struggled under licensing investor. By 1995, Adwya was making 71 products and arrangements, but prospered after forming a joint ven- held 13 percent of the Tunisian household drug market, ture with a foreign partner (Box 6.1). with a 13 percent operating margin. From a shaky start, it has emerged as a successful company. The change in For foreign sponsors, bringing in a local partner in a relationship with the technology suppliers from licenser to joint venture can sometimes reduce project risk in sev- direct investor was the catalyst for this improvement. eral ways. First, it can reduce the financial commit- ment of the foreign sponsor and cross-border transfers of resources. Second, the local partner can help reduce 74 I N T E R N A T I O N A L F I N A N C E C O R P O R A T I O N risks to the venture, through greater familiarity with trol, for example, through diversified local sharehold- the local business climate, government policies, and ings, or they may choose local partners who are willing economic conditions. Third, a local partner can help to be passive investors instead of for their ability to mobilize additional local financing and may have better contribute to the enterprise. access to land. Such approaches make equity holdings by local More recently, globalization has given companies fur- investors unattractive, as they may be excluded from ther reasons for forming closer relationships across key management decisions, and are poorly placed to borders. International integration of production, sup- ensure that they receive a fair share of company profits. ply, and marketing chains makes companies more They also negate much of the intended benefits of reliant on their partners' performance. For this reason, enforcing local participation in FDI projects, for exam- joint ventures have increased in popularity as a means ple, transfer of technology or learning by doing. of integrating international production and marketing structures, together with other forms of contractual Alternatively, IFC and other international agencies have relationships.3 sometimes been brought into projects to hold a balance of equity, giving the foreign sponsor effective control, As a weak form of business structure, however, joint without breaching foreign ownership ceilings. For exam- ventures have a high failure rate. Because joint ventures ple, the Capuava carbon black project in Brazil proceed- are dynamic relationships, the basis for the intercorpo- ed with 49 percent government and foreign ownership rate marriage can change considerably over time. Both (by CS Cabot), with IFC holding the balance. sides need to sustain comparative advantages in the rela- tionship, or their absence, on either side, will cause the Third, limitations on foreign equity holdings shift venture to be less successfuil or, at the extreme, to fail. incentives for the investor away from earning a return on equity, to profiting from the enterprise as a contrac- An IFC study of 70 joint ventures in six developing tor or a customer. Investor commitment to the enter- countries (Argentina, Brazil, India, Mexico, Philippines, prise is weakened, with adverse effects for the enter- and Turkcy) found that joint vcnturcs are fragilc affairs, prisc (below). difficult to negotiate and to maintain. It saw choice of a complementary partner as the key to success. A well- Governments sometimes insist that FDI projects designed agreement can lay the foundation for a fruit- include a public enterprise as a partner to ensure that ful partnership. Technology transfer was found to be government shares in the profits of the enterprise and one of the more sensitive and difficult issues.4 has a say in its operation (Chapter 4). This is particu- larly common in the oil and gas and mining sectors, Half of the joint ventures surveyed in the study result- where governments want to capture economic rents. In ed from government restrictions on ownership. This C6te d'Ivoire, for example, all mining investments have may have contributed to the difficulty one third of the to be made through joint ventures with the state min- potential partners had in negotiating equity structure ing company, SODEMI. agreements. The study found difficulties in negotiating management structures for joint ventures and later Working under these arrangements is particularly diffi- problems in assuring clear management control, partic- cult for joint ventures. Public enterprises commonly ularly as the interests of the partners evolved. Disputes have other objectives besides profitability, or their com- were common over product line, sourcing of raw mate- mercial decisions come under political pressure. Rarely rials, and the use and cost of technology, do they have much freedom to raise capital or to con- tribute additional funds to the joint venture. In view of the scope for disagreement wvithin these partnerships, government regulation to force foreign Thus, in Tunisia, the Fluobar mining project had a direct investment into joint ventures impairs the majority public enterprise partner, with a minority FDI investment quality unless the business reasons for the partner. It suffered a 44 percent cost overrun in con- venture are sound. In the first place, foreign investors struction, as the management responded to the public often simply decide not to invest under such restric- enterprise's concerns for generating employment and tions. Second, they may seek other ways to obtain con- pursuing low-priority investments. In Guinea, the F O R E I G N 1) I R F C T I N V E S T M E N T 75 Box 6.2. Zambia Hotels, Zambia: Consequences Box 6.3. Celpac, Chile: Strengths and of a Lack of Agreed Project Management Weakness of a Joint Venture Equal Partnership Responsibilities When CMPC, a long-established Chilean pulp producer, Zambia Hotel Properties (ZHP) owned two five-star hotels: wanted to expand pulp production for export, it looked a business hotel in Lusaka, and a tourist hotel in for a foreign technical partner to share the risk and pro- Livingstone, next to the Victoria Falls. ZHP was a joint vide international marketing skills. It linked up with venture of a Zambian parastatal, NHDC, and an interna- Simpson, a U.S. pulp and paper producer that markets its tional hotel operator. NHDC was the dominant partner, products internationally, particularly to East Asia. with 80 percent of the equity, but contracted with the Together, CMPC and Simpson formed a joint venture international partner to operate the hotels. company, Celpac, in which each sponsor holds equal shares, with IFC holding the remaining 2 percent. This In the early 1 980s, the sponsors decided to refurbish and structure was chosen because neither party wanted to expand the two hotels to meet strong demand for f p,, ilr, give the other management control. Celpac's managers hotel services. Financing was assembled for a $30 million were recruited from both CMPC and Simpson, which also expansion by 1983. However, the sponsors disagreed provided limited technical support. The pulp was to be over project management: the local sponsors wanted to marketed through Simpson in the United States and the manage the construction work themselves; the foreign Far East, and through CMPC in Europe. sponsor wanted to hire a project manager. After much delay, it was eventually agreed that NHDC would handle Celpac built a modern pulp mill and related infrastruc- the work at Livingstone, and a project management firm ture, close to budget and schedule. The plant historically was engaged for the Lusaka hotel. Further delays arose has run well, achieving the sponsors' goal of becoming because the parastatal partner had to go through the one of the world's lowest cost softwood kraft pulp pro- National Tender Board in letting contracts for work. ducers. Celpac quickly established itself in the interna- tional market as a producer of high-quality pulp, and its Project implementation was heavily controlled by NHDC, managers have been successful in negotiating difficult and the main contractor was another parastatal, ZECCO. market conditions for pulp sales. Monitoring of the work was poor, and the project was never completed, nor were projects costs fully accounted Nevertheless the sponsors' differing viewpoints have for. The quality of the work done was of variable quality, complicated management decisions about marketing and and the intended standard of hotel service was never capital increases, but neither party wants to buy out the achieved. other. The even split of ownership between the domestic and foreign partner has resulted in stalemates on some In the meantime, a general economic downturn put pres- key management decisions. In this case, IFC's balancing sure on hotel revenues, and ZHP became technically insol- equity share enabled it to play a constructive role in bro- vent. NHDC was itself wound up, and its holdings trans- kering agreements between the joint venture partners. ferred to the Directorate of State Enterprises pending pri- vatization, leaving the foreign sponsor without a domes- tic partner. The operator's equity stake became worthless, but it continued to receive remuneration for its manage- ment contract. Aurifere gold mining project and the Aredor diamond Joint ventures with equal shareholdings can lead to mining project ran into trouble because the public deadlocked decision making. For example, Celpac in enterprise joint venture partners were unable to meet Chile was a 50-50 joint venture. As the venture additional financing needs. The Zambia Hotel evolved, the views of the two partners diverged. With Properties project also illustrates some of the trials and neither party dominant, or willing to sell to the other tribulations of working with a public enterprise partner partner, strategic choices became difficult to make (Box (Box 6.2). 6.3). IFC can play a helpful role in such partnerships by holding the balance of equity and acting as honest broker between the parties. For example, the Sariville 76 1 N T L R N AT I ( N A L F I N A N C E C O R P O RAT I O N Box 6.4. A Plantation Project in Southeast Asia: new owner that did not want to invest in plantations A Committed Sponsor Holds Key to Project bought out the sponsor (Box 6.4). Once this stake was Success resold to a sponsor more strongly committed to planta- tion development, project performance improved. A government-owned financial institution formed a joint Conversely, the Conrad Hotel in Istanbul needed addi- venture in 1982 with an experienced English plantation tional financing to defray construction cost overruns, operator to develop an oil palm plantation on publicly and received additional financing from its international owned land. Before start-up, a foreign public corporation technical partner, Conrad, because it initially had a 40 took over the English company. percent equity stake in the hotel. Likewise, the Dusa nylon yarn project in Turkey was supported by the for- The plantation operator managed the project under a tech- eign partner (du Pont), when construction delays led to nical assistance agreement and assisted in marketing. Its cost overruns. strong background in plantation development made it a capable manager of agricultural and processing operations. Lack of financial resources to provide this kind of sup- port is one of the main drawbacks of forming joint Although the project was completed on time in 1985, a ventures with governments or public enterprises. sharp fall in palm oil prices and high debt burden led to Often, their initial equity contribution is in kind and continuing losses. The plantation operator's new owners does not provide working capital. If additional financ- did not want to provide the project with additional funds, ing is needed, public enterprises are often unable to due to a change in their plantation investment strategy. provide it. This impaired project performance and caused some delay in restructuring the project. As part of the eventual For example, when Pancontinental Mining of Australia financial restructuring in 1990, the operator's sharehold- and Acec-Union Miniere of Belgium developed the ing was sold to another foreign private plantation group, Koron and Didi gold deposits in Guinea, the govern- which took over plantation management and injected ment took a 50 percent stake in the joint venture as a new finance. Under the new operator, the company means to share revenues from the mine. Development reduced costs and became profitable. costs turned out to be higher than anticipated, but the government had difficulty funding its share of addi- tourism resort project in Turkey was implemented suc- tional financing despite the project's remaining finan- cessfilly with the foreign partner (which provided the cially attractive, with a projected financial rate of return management) holding 40 percent of the equity, the of nearly 50 percent. Although the government's local partner (which provided the land and buildings) inability to fund was not the main reason for the pro- holding 40 percent, and IFC the remaining 20 percent. ject's ultimate failure, it resulted in serious delays in project implementation and forced a financial restruc- LIMITS ON FOREIGN OWNERSHIP turing involving rescheduling of debt. Not surprisingly, the strongest theme that comes through from review of the sample of IFC's FDI pro- Managerial resources. A sponsor who is not fully jects is the importance of sponsor commitment to the committed to a project may refuse to make difficult long-term success of an enterprise. Hence, government management decisions, thus jeopardizing project suc- restrictions on ownership that reduce sponsor commit- cess. For example, in the case of Shenzhen Y.K. Solar ment are especially damaging to the enterprise. When Energy in China the priorities of two foreign sponsors a sponsor is not fully committed, problems can arise diverged: one wanted to concentrate on selling equip- over decisions to devote financial and managerial ment while the other wanted to stay on top of emerg- resources to an enterprise. ing technology. When the foreign technical sponsor ran into financial difficulties and could no longer keep Financial resources. Project financing needs frequently its commitment to the project, the other foreign change, often requiring additional investments. investor was not in a position to take on the responsi- Without strong commitment, a sponsor may not want biity. As a result, the project ran into technical diffi- to make additional investments, particularly if they culties and has proved to be a financial drain on its conflict with its exposure guidelines. For example, a shareholders. plantation project in Southeast Asia struggled after a F ORE I G N DI RE CT INV ESTME N T 77 In another example, the Adwya pharmaceuticals pro- Box 6.5. A Southeast Asian Resort Hotel: ject in Tunisia succeeded only after a foreign technical Ownership Restrictions Encourage Foreign partner took a significant equity stake in the enterprise Investor to Earn Profits on Side as Contractor (Box 6.1). Proteison, a vegetable oil processing project in Mexico, had widespread local shareholding and a Southeast Asia's natural beauty and rich culture make it a foreign partner with only a 25 percent shareholding. prime tourism destination. To this region, an international When it ran into problems, it was difficult to get hotel operator brought a tried and tested formula for shareholder agreement to restructuring. successful beach resorts. It constructed a 700-bed resort hotel through a local subsidiary. IFC was brought in to Restrictions on foreign ownership can prevent the for- provide long-term loan finance. To comply with govern- eign investor from having full control of project man- ment regulations, the operator also sought local equity agement. This can lead to disagreements over manage- investors for the venture, with limited success. It there- ment arrangements, which can spell trouble, particular- fore took 75 percent of the equity, with the balance held ly where major revisions are needed. by the national tourism development corporation and two local financial institutions. Government FDI policy When a Japanese engineering company tried to enter required ventures to become 51 percent locally owned the heavy engineering market in a South Asian country within a set period. The operator therefore envisaged in the 1970s, government restrictions on foreign own- eventual flotation of the venture on the local stock ership forced it to do so as a minority partner in joint exchange. ventures. Its first venture was in shipbuilding in part- nership with a local company. Although the Japanese The hotel was constructed to a very high standard, and company was the technical partner, it was not able to opened on time in 1986. Construction and operating exercise effective control over the venture. Decisions by costs were higher than anticipated, due to adverse the local partner such as negotiating sales contracts at exchange rate movements and rapid increases in local prices below direct costs compromised the viability of labor costs. Nevertheless, the resort was a success from the venture. After running continual losses, the joint the start, with high occupancy rates. Since the hotel venture was liquidated. offered 'lI iii:ru-,e packages, little revenue was generat- ed at the hotel itself. The operator sold resort packages In Mexico, a joint venture between several local part- through its international r l,rr'q company. It paid the ners and an FDI partner was established in the 1970s hotel 50 percent of the revenue, but this was no more to produce chemicals. A local partner, a consumer of than necessary to cover operating costs. Thus, none of the venture's production, opposed increases in product the profits reached the local r.t:: s's. Local shareholders prices sought by other partners. At the same time, the received no dividends, the government little tax revenue, venture's technical partner, a foreign minority equity and the subsidiary was only able to stay current on its partner, was unhappy because the venture's products debt service through advances from the hotel operator. competed with its own products in export markets. This led to management conflicts during the first year after project completion until the partners agreed on Partners often have other interests in a project besides marketing and pricing arrangements. their equity stake. To take one common example, an equity partner may also be a contractor to the enter- Government policy often reduces the flexibility needed prise. Limits on foreign equity participation can mean to make a joint venture work, for example, by respond- that the foreign investor can earn a better return as a ing promptly to changes in costs and market develop- contractor to the joint venture than as an equity holder. ments by adjusting their financing structure or product Thus, when a hotel operator invested in a Southeast mix. However, FDI regulations have often required Asian country, government regulations forced it into a time-consuming government approval for changes in joint venture with local partners. However, it was able ownership structure, location, or new products. to benefit from its marketing contract with the venture instead of solely from its equity stake in it (Box 6.5). 78 IN T ER NAT IO N A L 1 INA NC F co RI' OR AT IO N When a mobile telephone operator established a joint Box 6.6. A Commercial Bank in Madagascar: venture with IFC and other partners to provide cellular The Value of Management Control by an telephony in an African country, the project partners Experienced Technical Partner did not include covenants concerning related business- es. Although the joint venture proved profitable for all BNI-Credit Lyonnais-Madagascar was created in 1976 as shareholders, the operator was able to capture a larger part of the nationalization of the banking sector. It was share of returns by establishing an international gateway the first bank to be privatized in 1991, when Credit to the network as a separate wholly owned company. Lyonnais .,-i::r,: 51 percent of the equity. The privatiza- tion has been a success, despite difficult economic condi- Even without any contractual relationship, equity part- tions. Once a moribund bank, saddled with bad debts ners may have other means to profit from a project and facing grim economic prospects, today BNI-Credit besides the return on equity. For example, local Lyonnais-Madagascar is a sound bank well placed to take investors may have adjacent land holdings, which will advantage of improvements in ' I:ci td economic benefit from the development of agriculture, tourism, situation. or industry. Foreign partners may be more concerned about the profitability of their global brand than the When Credit Lyonnais took over the management of BNI- profitability of any single affiliate. Thus, in the case of Credit , ,:'ni:-;r l. ,j : t'_r , tl, it standardized the bank Zambia Hotels, the hotel operator maintained its with the rest of the Credit Lyonnais International Group, branded product mix (room decor, hotel facilities) even j.lqr tiJi'l working methods and computer systems and after it proved unprofitable in the Zambian market. retraining staff. The presence of a strong sponsor has This may have been good for the operator globally, but been a necessary but nuffi' i'-'" condition for the pro- it was not good for Zambia Hotels. ject's success. A strong sponsor is effective only after appointing a seasoned management team, well versed in Despite all these problems, IFC experience shows that the sponsor c.:,rp.-r,, methods and able to adapt them with careful design, FDI projects can succeed even in to local circumstances. Strong management, totally com- less than perfect policy environments (Chapter 5). The mitted to its strategic plan, has protected BNI-Credit key to success lies in taking account of policy-imposed Lyonnais-Madagascar's commercial , dri' from poten- constraints and structuring the project to maximize its tially damaging outside interference from, for example, effectiveness within these constraints through appro- the government. BNI-Credit Lyonnais-Madagascar's man- priate management arrangements, clear financing agement has succeeded where others have failed, by arrangements, and careful handing of each partner's sticking to a tried and tested formula. its experience in interest as a contractor with the enterprise or as a setting up and managing new and existing operations holder of related assets. enabled it to take over management of the bank with a minimum of disruption. Clear lines of management control are important to ensure adequate involvement in management by the technical partner. Government policy permitting, the simplest way is for the technical partner to take a con- For example, a hotel in Southeast Asia was managed trolling equity stake in the enterprise. Thus, the priva- by its main sponsor under a management contract. tization of the commercial bank BNI-Credit Lyonnais- Management achieved an operational cohesiveness that Madagascar gave Credit Lyonnais 51 percent of the has been partly responsible for the hotel's successful equity. This gave them the management autonomy to opening and for the fast building up of its occupancy upgrade banking practices (Box 6.6). and profits. Although only 8 of the 600-plus staff were brought in from other hotels owned by the sponsor, Where government restrictions mean that the technical locally hired staff received thorough company training partner cannot hold a controlling share of the enter- (Box 6.7). The Philagro coconut mill project in the prise, a management contract can allow the controlling Philippines was owned equally by Filipino and Indian shareholder to delegate day-to-day management to the investors, reflecting government restrictions on foreign technical partner. Management contracts, clearly defin- ownership, but a minority (21 percent) partner, ing the technical partner's responsibilities, have gov- Tungabhadra Industries of India, managed the mill erned many of IFC's most successful FDI projects. under contract. F 0 R F I G N D I R E C T I N V F S T M 9 N T Box 6.7. A Southeast Asian Hotel: Strengths Box 6.8. Packages, Pakistan: Success Through and Weaknesses of a Foreign Management Effective Technical Partner Support Contract Packages beqar, producing paper board and packaging in In 1991, an Asian hotel operator decided to build a 260- 1957. It was originally majority owned by a Pakistani room, international standard resort hotel on a beach in a family wlho brouaht in a Swedish company, Akerland and newly developing tourism region of a Southeast Asian Rausing (A&RI as a minority equity partner. Subsequently, country. It would be the countrys first luxury resorr hotel much of the equity has been offered to the public, but The project equity was 80 percent owned by the foreign the famtly retains control; A&R's minority stake has been sponsor, and 20 percent by local portfolio Investors. taken on by Stora, a Swedish holding company, which Managers from the sponsor company were responsible until recenil. ovsned A&R. for project management. In addition to its equity stake, A&R provided technical Unexpected difficulties with land titling, s5te preparation, assistance and training in return for a royalty on sales. lack of water, and poor contractor performance delayed Financial arid operational management has been the the hotel's opening Escalations in payments to contrac- resoonsibility of the Wazir Ali family. This arrangement tors and project managers increased construction costs by proved iself over many wears, as Packages has expanded 50 percent. Preopening expenses were excessive, since its line of paper products and built a very successful busi- slaff Rere hired and marketing launched before the hotel ness. The advances in technology provided by A&R have was ready to open. These failings partly reflected -he kept 7he company At the high end of the domestic mar- expatriate project managers' limited knowledge of, and ket, rnaintainina profitability despite increasing competi- adaptabilitY to, local conditions for construction. tion. For example, it introduced "Tetrapak" paper cartons for milk and other perishable liquids, capturing much of Nevertheless, the finished hotel met very high *iandards the Pakistani rriarket from glass containers. A&R still has a of esthetics. comfort. and style. Soon after opening in technical services contract with Packages, but now based 1993, it achieved high occupancy rates and above aver- on an annual retainer plus fee for service. age operating margins. The hotel's opening coincided with a spurt of visitor arrivals in the country. Led by the The success of this business can be attributed to the local success of the hotel, six more resort hotels have opened sponsors' integrity and good business sense. Their finan- or are planned. cial resources, allowing problems to be handled as they arise, their good managerial ability, their forward looking The success of the project rested principally on the for- attitude, and good technical support from the FDI partner eign sponsor's experience, widely knovin international have kept the company on the leading edge of its market. brand, and marketing expertise. Alternatively, a clear technical assistance contract can Investors often respond by not investing, out of con- ensure adequate support from the foreign technical cern that they could not subsequently repatriate the partner. Thus, Packages, a Pakistani paper products returns from the investment (Chapter 4). Sometimes company, has prospered under local management with investors respond by rearranging the company's affairs strong technical support from a foreign minority part- to transfer value through other means such as contrac- ner under a technical assistance contract (Box 6.8). tual arrangements with the parent company. In this way, parent companies can treat subsidiary companies RESTRICTIONS ON CAPITAL TRANSFERS as "cost centers" instead of "profit centers." This means Like limitations on foreign ownership, limitations on that they do not try to earn profits on their investment repatriation of equity earnings reduced the incentive to in the subsidiary but benefit from the services or prod- ensure that the joint venture generates a return on ucts the subsidiary provides. equity. Many countries have limited transfers of equity earnings, either as a permanent measure or in response For example, a hotel operator transferred the profits to balance of payments problems. These have had the from a subsidiary operating a Southeast Asian hotel to effect of reducing the value of enterprise profits to the its international marketing company by means of a rev- foreign investor. enue-sharing formula that allocated only enough sales 80 IN T E R NAT IO N AL F INAN C E C OR PO RAT IO N revenue to the subsidiary to cover hotel operating costs Box 6.9. Project Funds Agreements (Box 6.5). It is also a common approach with process- ing facilities such as aluminum smelters. For investors in a joint venture, the risk of "non-comple- tion," of a project's not becoming fully operational, is Each partner brings different contributions and inter- increased by the possibility that completion costs may ests to a joint venture partnership, but the agreement exceed the funds invested in the venture. Additional has to be structured at the outset to allow for the funds would then be needed promptly to ensure comple- inevitable adjustments in the balance of interests over tion without undue delay. One way of managing this risk time. Since sponsors finance many joint ventures as is for joint venture partners to agree beforehand on a separate projects, off balance sheet, after the initial cap- Project Funds Agreement. This predefines the responsibili- italization there may be no automatic provision for ties of investors for providing adjditor,.ni funds (including meeting further financing needs. That is why enough working capital) needed to complete the project. financing should be provided at the beginning to cover Completion is .iaiII defined in three dimensions: physi- contingencies. Because off-balance sheet status also cal completion, operating verification, and financial com- means that surplus funds are not automatically avail- pletion. able to the sponsors, the sponsors may prefer not to overcapitalize the venture initially, but provide further Physical completion means finishing the physical struc- injections of capital if needed. This makes it vital that tures of the project, r,dudir,r, acquiring all equipment, sponsors agree in advance on provisions for injecting suppliers, and consumables needed for operation. and withdrawing capital. Operational completion means that the project can do Shareholder agreements for capital withdrawal can what it was meant to do: that all permits, licenses and allow orderly replacement of a foreign investor, if other government permissions have been obtained and investor or project objectives and constraints change. that the project has actually operated at a specified Because IFC's objective is to turn over its holdings to capacity for a given period, predicting a satisfactory out- maximize its development impact, it usually negotiates put. This is more difficult to define than physical comple- exit arrangements before taking equity. Such agree- tion. Usually, operational completion tests are defined in ments can include put options or agreement to a public terms of units of output of commercial quality. offering. Alternatively, investors may take forms of quasi-equity. Since such agreements depend on the Financial completion ascertains that there is sufficient ability of the parties involved to meet their commit- working capital in the project. This requires a financial ments, their financial strength should be carefully audit at project completion. assessed. Project Funds Agreements should not only allow parties IFC's project experience suggests that cost overruns, to call for additional funds once it becomes evident that often closely related to delays in project implementa- the project will not be able to meet the completion tests. tion, are the most common divergence from joint ven- Additional funds can be provided in the forms of equity, ture plans in a developing country. Of the sample of quasi-equity such as deeply u'L:*-in.aed and perhaps projects, 27 percent suffered serious delays and 22 per- convertible loans, or by shareholder advances. The choice cent, major cost overruns. That is why the joint venture will depend upon existing debt-equity ratios, the ability of agreement must define responsibility for meeting cost partners to provide different forms of financing, and the escalation during the implementation phase. importance of preserving the existing distribution of equi- Otherwise, projects can slip into a vicious cycle of ty between the partners. delay leading to cost overruns, as the sponsors negoti- ate how to meet the additional costs. The most straightforward way of dealing with cost ject is up and running. Alternatively, the sponsors may overruns is through a Project Funds Agreement (PFA), provide full or partial guarantees, or other forms of signed when the joint venture is established (Box 6.9). completion agreement. The risk of cost escalation can This defines responsibility among partners for meeting also be reduced by contracting out construction under a project cost increases in a timely manner until the pro- fixed-price contract. F O R E I G N D I R E C T I N V E S T M F N T 81 Box 6.10. UCAL Fuel Systems, India: Arms-Length Transactions Confer Competitive Advantage In 1989, Mikuni of Japan formed a joint venture with Carburetors Limited (CL) of India to manufacture carburetors and fuel pumps, based on Mikuni technology. The main customer for these products was Maruti, an Indian car maker, which was a 60-40 joint venture with Suzuki of Japan (now 50 percent owned by Suzuki). The sponsors hold equal stakes in UCAL. Two thirds of CUs equity contribution was in the form of a transfer of land, buildings, and machinery to UCAL. The land and buildings were transferred at market value, as determined by indepen- dent valuations, and the machinery, which was all unused, was transferred at book value. Under the Heads of Agreement, UCAL committed to undertake all transactions on an arms-length basis and to obtain its indigenous capital equipment and machinery from the cheapest and most reliable sources. Most of the imported machinery was to come from Mikuni, which agreed to lock in price quotations. The effectiveness of these procurement arrangements is evident from the flexibility that UCAL was able to show during the implementation phase in substituting domestic equipment for imported equipment and manual equipment for auto- matic equipment, and to adapt to changed market circumstances. It sourced a significant quantity of machinery from India, instead of from Mikuni, without sacrificing performance parameters. It was also able to substitute manual or semi-automatic systems for fully automatic systems in a number of instances, thus saving capital costs without jeopar- dizing operational requirement. UCAL estimates that its capital costs were about half those of an equivalent-sized Japanese plant as a result of capital and import substitutions, while its labor productivity is about 80 percent of the Japanese level. The management team was drawn from CL, assisted by two Mikuni executives. Mikuni felt that this enhanced the value of its stake in UCAL. The company has been well managed throughout, and no problems or disputes have arisen between the sponsors. The relationship between Mikuni and UCAUs in-house R&D capabilities has not only encouraged a constant transfer of technology from Mikuni to UCAL but has also enabled UCAL to adapt it efficiently to Indian conditions. For example, UCAUs R&D department developed an all-aluminum two-wheeler carburetor based on Mikuni's zinc and aluminum design, which was lighter and hence more fuel efficient, and which also avoided the need to import zinc. The two companies coordinate closely, and Mikuni tests all critical components in Japan. The project has enabled Maruti to improve the efficiency of domestic component sourcing and lower its exposure to yen-rupee parity changes. UCAUs carburetor costs Maruti about 30 percent less than the Mikuni import and about 15 percent less than European substitutes. Since the relationship between the partners was well defined and balanced in the Heads of Agreement that each party signed at the outset, management was able to adjust the project configuration to keep up with rapidly changing conditions and brought the project in very close to the budget and target dates. PFAs have played an important role in keeping many Where an equity partner is also a contractor to or cus- IFC projects on track. For example, the Mexinox steel tomer of the venture, or holds related assets, conflicts project in Mexico built a facility for cold-rolled stain- of interest are hard to avoid. However, other equity less steel products. Unexpected site problems and holders should be aware of related interests and adopt delays in procuring equipment delayed construction. appropriate decision-making procedures to ensure that Thanks to a Project Funds Agreement, the six local enterprise decisions are not unduly influenced by them. and two foreign shareholders provided timely addition- IFC frequently includes covenants in project agree- al equity financing, which covered the additional pre- ments requiring arm's-length treatment of transactions production costs and allowed successful implementa- between affiliated companies and sometimes requires tion of the project. Similarly, lengthy start-up problems the project company to handle all related business so as at the Cosigua steel project in Brazil led to a 100 per- to avoid "creaming off" profitable aspects of the busi- cent cost overrun, but a Project Funds Agreement ness to affiliate companies. This eliminates the possi- between the Brazilian and German partners promptly bility of transferring value to partner companies at the made additional financing available. expense of joint venture profits but at the expense of 82 IN T E R NAT IO NA L F INA NC E COPR PO RAT IO N weakening links to partner companies. Since much Box 6.1 1. Magyar Suzuki, Hungary: A Strong, FDI is explicitly intended to develop and exploit syner- Committed Foreign Sponsor Can Reorient a gies between partner companies, this approach is clear- Project to Achieve Success ly not always appropriate. In 1991, Suzuki launched a joint venture with a consor- In India, UCAL Fuel Systems gained considerable ium *t Hungaria state-owned automotive component competitive advantage from a joint venture agreement pi iu:err r, , bujdJ H,,r;.i n'S first car assembly plant. that allowed the company to source capital equipment Low-cost, small cars were to be assembled, at first mainly and machinery from the cheapest and most reliable f,:,r * i*,:'e-.- sale. In the next five years, European com- source, not necessarily from the sponsors (Box 6.10). ponent %-n,rtel,t would be raised to exceed the 60 per- cent rhrl,cIc.Id .mr which the cars would gain quota-free Contracts related to the profitability of the enterprise access to the European Union EI- i At t -i. ',gpe EU can help align the interests of the contracting partner sales of this model would be sourced from Hungary and other joint venture partners. In Poland, Chemagev rather than Japan. Hungary would then replace Japan as is a joint venture between U.S. real estate and engi- t-,e courr e f jr 'Suki Xs EU sales of this model. neering companies and a Polish state-owned construc- tion company. It owns an office and retail complex in .~. oleenf'lo plac,r .'.-c; built near Budapest with a capaci- the heart of Warsaw. One of the minority U.S. partners ty r4 ,r :CCI--r cars per year. Suzuki provided a small num- is the leasing agent, who is compensated by a fee based e',r r ae'atrate riiai,x-i,:U-.U to train local staff. Staff were on the lease revenue over the life of the leases. This has also sent to Japan for . , , , periods of time. Car pro- proved to be a strong motivator to get the best lease duction was launched ;.u:,etxilt, in 1993 and soon met terms, and the building is very profitable. Similarly, Jui e w .u . . and ::r.ly standards. However, Akerland and Rausing's technical assistance contract domestic sales were il' ...1,rir . due to slower than with Packages was originally remunerated by a royalty e, p,ece e.'f:,r,cur,: growth and .:ag competition from on sales (Box 6.8). imported second-hand cars. At the same time, apprecia- tion of the yen increased the cost of Japanese compo- Cross shareholdings in partner parent companies can nents and yen-denominated debt. .,-.5, 1rjrai, sales provide another means of ensuring that all partners and profit margins were low, and the company rapidly share project returns. IFC sometimes takes equity or accumulated losses. some other form of profit participation in the parent company, if it is to be heavily engaged in transactions r,:,rf, :rr4 d L.. these problems, the foreign sponsor inject- with the project company. If this is not possible, part- ed more e-:.irj to repay most of the company's long-term ners may negotiate exit values for their investment by debt, porn.:ui3?i ,u6riidri,;,,aI.'1 debt, and accelerated means of put options to sell the equity to the other domestic component sourcing. By mid-1994, production partners. This provides a guaranteed floor to fiture met the I,, ,I content Ir., .-i, for unrestricted sales to equity values, while allowing the partner to share in the EU. In I 9 >,' Suzuki transferred sourcing for EU sales gains in equity value from the project. of this car to Hur.}er,'. The restructuring plan has led to increased cale: i:,1ImT,re and increased profitability Other forms of quasi-equity such as redeemable prefer- ence shares, subordinated loans, and income notes can Tt ', , ea,:r,,:e underlines the importance of strong spon- also be used to assure partners of dividend streams, sor upf.:rt .r)tj c.ommitment to a !:"-ie bli to sur- while maintaining participation in risks and rewards. vive adverse circumstances. The foreign sponsor's commit- IFC uses put options and a range of quasi-equity ment to l, r,r':ja was substantial both in terms of equity instruments to secure an appropriate share in the contribution and in terms of 3p.S r"ri support, refi,:Tflno returns on its investments. I areg. commitment to the project's success. Even with limited equity stakes, sponsor commitment is possible when the project is important to a sponsor's broader interests. A foreign investor's global business interests will be more important to its bottom line than any particular investment, however large its stake in it, F O R E I G N D I R E C T I N V E S T M E N T 83 as in the case of Zambia Hotel Properties (Box 6.2). CONCLUSIONS Equally, a local investor may have other business inter- IFC's project experience reveals the impact of the poli- ests that are more important than the success of an cy conditions under which the projects were imple- individual enterprise. mented. Restrictions on foreign shareholding and capi- tal transfers, for example, created obstacles that, while Conversely, a partner may invest time and money to not insurmountable, weaken project structure and turn around a project that is initially unsuccessful if it reduce competitive efficiency. Together, they reduce the meets its wider business goals. Thus, Suzuki weathered flows of foreign direct investment and its benefits. adverse market developments in Hungary to establish profitable car manufacturing plants (Box 6.11). Review of a sample of IFC FDI investments shows Likewise, Volvo do Brazil became profitable after ini- that: tially difficult trading conditions, with strong support from its Swedish parent. In both cases, the FDI invest- 1. Restrictive policies have forced FDI investments ment was important for the parent company's broader into relatively weak joint venture structures. strategy of globalizing production. A sponsor is also 2. Limits on foreign ownership and capital transfers more likely to stay committed to a project if it needs have been counterproductive, reducing the contribu- the enterprise to succeed as a supplier of inputs or as a tion of foreign investment and weakening project market for outputs. performance. 3. Careful attention to project structuring and imple- mentation arrangements is key to sustained good performance. Notes I The project examples used in this chapter are drawn from IFCs FDI portfolio. 2 JH. Dunning, Multinational Enterprises and the Global Economy (Wokingham, UK:Addison-Wesley, 1993). 3 For an earlier description ofcross-border corporate relationships, see C. Oman, Newv Forms of International Investment in Developing Countries (Paris: OECD, Development Center, 1984). 4 R. R. Miller, "InternationalJoint Ventures in Developing Countries,"IFCDiscussion Paper29, !.g: 't D.C, 1996. 84 I N T F R N A 1 I 0 N A L F I N A N C F C O R P' O R A T I 0 N 4f, ,> ti GETTING MORE FROM FDI Y~~~ ~~ V Eager to increase investment and economic growth, a growing number of developing countries welcome for- eign direct investment (FDI) as one way to do it. In the past, however, some developing countries have been skeptical of FDI's benefits, based on some of its supposedly negative characteristics. These concerns focused on: * adverse balance of payments impact if dividend and royalty repatriation exceed inflows of capital * loss of tax revenue through use of transfer pricing to reduce declared profits * creation of enclaves with few ties to the domestic economy * impaired development of domestic firms through direct competition, abuse of market power, and .- Si R >political influence * loss of economic sovereignty through dependence on the actions of foreign investors. RESTRICTIVE ECONOMIC POLICIES CAN BOOMERANG Though intended to address these concerns and cap- ture greater benefits from FDI, restrictive policies often deterred it instead (Chapter 4). When FDI did occur, restrictive economic regimes reduced its benefits to the domestic economy through deadweight costs of regula- tion, economic costs of protection, inefficient project structures, encouragement of transfer pricing to repa- 1triate profits, and fiscal losses from unnecessary tax incentives. Costs of regulation. Government regulations and poli- cies that impair efficient business operations reduce the return to both investors and the economy. This is a "deadweight loss"-everybody loses. Complex regula- tions for establishing and running foreign enterprises I R E C V E S T M E N T 85 are of this type (Chapter 4). If an economically benefi- domestic economy than an investor who was in the cial investment is delayed or diverted to another coun- country to stay. try as a result, the country loses out. Costs of restrictions on profit transfers. Policy Costs of protection. The overall economic framework frameworks restricting the open transfer of profits out influences the economic efficiency of financially viable of a country that limited a foreign investor's equity enterprises. If government intervention distorts prices holdings in an enterprise, or which placed heavy tax and markets, the foreign enterprise may make profits and regulatory burdens on enterprises that declared but at a cost to the economy. Protection of the domes- profits, served to encourage alternative means to tic market is the most common cause of this. Though extract profits. In particular, transfer pricing was some- often intended to promote domestic industry by raising times manipulated to enable repatriation of profits and the profits from domestic production of protected reduce the foreign investor's tax payments to the host goods, it encourages FDI, even where the scale of pro- government. Accounting standards and tax enforce- duction means that producing locally costs more than ment werc oftcn too lax to prevent these practices. importing. Domestic consumers pay higher prices which become increased profits for foreign investors. Restrictions on transfer of profits and equity shares Unlike high profits for domestic enterprises, which are sometimes stemmed from a mistaken concern that a transfer between citizens, foreign profits are a direct profits transferred out of the country cost the country a cost to the country. Liberalization of markets and trade net loss. If successftil investment did not transfer more policies reduces the potential for such projects to harm back to the investor than was originally invested, how- the domestic economy. ever, there would be no motive to invest. The host country still benefits from the surplus above the profit When FDI enterprises were established behind tariff that the investor needs to earn as a reward for invest- barriers, they were often designed to produce for an ing. These benefits can come as returns to any domes- uncompetitive local market instead of serving as a base tic equity holders or as profits earned by any related for internationally competitive production. This domestic enterprises. Moreover, investors often choose allowed industries to develop with obsolete technolo- to reinvest profits in the host country. Studies of indi- gies and with limited linkages to international markets, vidual countries suggest that on average a third of FDI instead of bringing the host country the new techno- flows consist of reinvested profits.' logical and marketing links that governments wanted to encourage. Often, lower import tariffs on intermedi- Costs of tax incentives. Even without channels for ate than on final goods encouraged foreign enterprises sharing benefits, the host country can gain on taxes to import inputs at a lower tariff for final assembly in collected from the enterprise. That is why policymakers the host country to avoid the higher tariff on finished should not negotiate away too much tax revenue goods. In many countries, domestic car assembly began through incentives and should ensure tax compliance. using imported kits containing all the necessary parts. Governments often try to compensate for unattractive Costs of restrictions on project structures. Regulations economic and regulatory policies by providing fiscal that affected the structure of foreign ventures often incentives to FDI. Here, governments sometimes forgo resulted in less viable ventures and inefficient forms of revenue without getting the consequent benefits from business organization, reducing their benefits to the FDI. For example, in countries with high import taxes, economy (Chapter 6). Joint ventures with local firms investors that import equipment often seek waivers of formed simply to satisfy government requirements for import duties. If an enterprise does not generate local partners often led to weakly structured projects enough taxable profits, waivers are not recouped. and ineffective management. Such restrictions also weakened sponsor commitment to a long-term pres- Partly as a result of these inefficiencies, developing coun- ence in the economy. They encouraged foreign enter- tries sometimes thought they had to intervene to pro- prises to enter markets more to make money selling or mote linkages to domestic firms (Chapter 4). But these buying from the local company instead of benefiting policies have generally been counterproductive, either from the success of the enterprise. Foreign investors of deterring FDI altogether or reducing its efficiency. that mindset were less likely to promote linkages to the 86 I N I I R N A T I O N A L F I N A N C t C C RP I ) PR A T I (\ Recent economic liberalization has led not only to rapid Emerging FDI hosts. Countries such as Brazil, increases in FDI flows to developing countries but has Ghana, and India have taken a number of important also provided the framework for improved investment steps toward creating an enabling environment for quality. FDI projects in liberal environments are more FDI, but significant obstacles persist. These obstacles likely to be oriented to global markets and based on keep the FDI flows below their potential, although, as international competitiveness (Chapter 5). In this way, in Brazil, they are already substantial. For this group, FDI draws developing countries into the global econo- further efforts to identify and alleviate remaining my, raises standards across the host country's economy, obstacles are the key to achieving increased FDI and leads to transfers of technology and management (Chapter 4). techniques, according to one study. FDI boosted growth in eight Pacific basin economies where distortions were Pre-emergent FDI hosts. Still other countries have low but had a negative effect in other countries with less yet to take the first steps to reorient their policies to favorable economic environments! attract FDI under a liberal economic framework. Some of them receive some FDI because of their abundant When enterprises can freely choose their ownership natural resources or large, protected markets and may structures, sponsors will be more strongly committed to therefore not see the need to change. Others have not enterprise success and more oriented to maximize prof- yet made the policy decision to attract FDI. These its instead of profiting through contractual links countries face the most challenging programs of (Chapter 6). With secure access to domestic and export reform, since action may be needed on a number of markets, property, local labor, and capital markets, for- fronts before a significant pick up in FDI can be eign investors become more committed to a long-term expected (Chapter 4). presence in a country. Investors who plan to stay in a country will be more willing to make long-term invest- Thus, across most developing countries, a large unfin- ments such as upgrading infrastructure and training ished agenda of reform remains. These later reformers staff. They will also take pains to develop connections can learn from the experience of early reformers which with local suppliers and purchasers. Without bother- policies most need attention. some taxation and transfer restrictions, enterprises have less incentive to distort their operations to reduce their The pace of integration into the global economy is taxes or repatriate their profits. related to progress on creating an enabling policy envi- ronment for FDI (Chapter 1). Further progress on THE UNFINISHED AGENDA this unfinished agenda can therefore be expected to The obstacles to foreign direct investment take time to lead to increases in FDI to reforming countries. remove (Chapter 4). Although many countries have Although the pace of reform will continue to vary from taken some measures to encourage FDI, few have com- country to country, the overall direction of change is pleted the whole agenda of policy reform. Developing expected to remain strongly oriented toward more lib- countries are in three stages of the reform process: some eral frameworks. This process is self-reinforcing, as ini- are leading FDI hosts, others are emerging FDI hosts, tial reforms lead to expanded FDI flows that encourage and some countries have not started to promote FDI. further reforms. Moreover, later reformers seeing the benefits of strong FDI flows already accruing to early Leading FDI hosts. Having removed the major reformers, receive encouragement to persist. impediments to FDI, Chile, Indonesia, Malaysia, and other liberalized countries receive large amounts. Even Progress on the broad agenda of structural reform and within this group of countries, however, some sectors or liberalization is beginning to pay off in improved eco- industries remain effectively closed to FDI. These excep- nomic growth prospects in developing countries. As a tions include industries still dominated by state enterpris- result, developing countries should grow twice as fast es or heavily regulated by government, for example, infra- as developed countries over the next decade.3 This, structure and financial services. The case study of too, will encourage additional FDI flows. Indonesia (Annex 4A) shows that sometimes successive rounds of reform may be needed to move toward an Unlike earlier FDI flows, which often exploited ineffi- open environment for FDI. Often, only after one con- ciencies in developing countries, these new FDI flows straint is removed does another become apparent. are more likely to be oriented toward efficient produc- F O R E I G N D I R F C T I N V E S F M E N 1T 87 tion for global markets (Chapter 1). This generates global standards can increasingly access finance on momentum for further investment, both domestic and international capital markets. This means that scarcity foreign, to maintain competitiveness. As leading pro- of capital in home countries is less and less a constraint ducers increase their efficiency through global produc- on expansion. tion patterns, their competitors will be driven to follow suit to maintain their competitiveness. In this way, In the future, FDI is likely to become less a vehicle for whole industries will go global, in much in the same capital transfer, which capital markets will achieve way as the motor vehicle industry already has. much more easily, and more a vehicle for transfer of global knowledge, systems, and technologies. Multi- Globalization of production will increase pressure on national enterprises will continue to develop as a governments to address policy impediments to invest- means for generating economies of scale in core ser- ment in order to avoid losing share in world produc- vices, including technology and knowledge that can be tion. This is already prompting heightened internation- shared throughout the enterprise. But this sharing is al discussions on multilateral policy regimes toward becoming a two-way street, too. Technology is not investment. For example, policymakers are negotiating simply transferred from developed to developing a Multilateral Agreement on Investment within the economies. What developing-country subsidiaries learn Organization for Economic Cooperation and will increasingly be transferred back to parent compa- Development. Other nonmember countries could nies, too. accede to such an agreement, too. Even after taking relative size into account, differences The prevalence of two-way flows of inputs, products, in the policy framework perpetuate wide disparities in and finance between affiliated companies in different the distribution of FDI flows (Chapter 2). This leaves countries is one aspect of global integration. The broad enormous scope for FDI to flow to countries, sectors, international composition of enterprise financing is and regions as yet untouched by globalization, with another. For example, FDI is frequently combined with attention to policy reform. This does not imply a diver- financing from domestic markets. As barriers to inter- sion, but rather an augmentation, of FDI flows. national capital flows fall, and capital markets in devel- Extension of the reach of FDI in developing countries oping countries improve, foreign and domestic finance will expose a greater proportion of their economic increasingly convene in global enterprise financing. activity to the potential for integration into global pro- Companies raise money where the terms are best and duction and service standards. This will both benefit invest where the returns are highest. consumers in developing countries and enable develop- ing countries to compete effectively in global export These developments are eroding the distinction markets. between foreign and domestic enterprises. Attempts to provide differential policies for domestic enterprises LESSONS OF EXPERIENCE become increasingly difficult to sustain. For this reason, Four main lessons emerge from IFC's experience with Indonesia and a growing number of other countries FDI in developing countries: offer domestic and foreign enterprises a single standard of treatment (Annex 4A). This will further improve the 1. Appropriate policies are the key to capturing foreign environment for FDI. investor interest. Government policies and regula- tions toward FDI should be enabling, not restrict- The rise of outward investment by developing coun- ing. Wider economic policies and regulations also tries is another characteristic of recent FDI patterns matter, especially a liberal trade and payments (Chapter 2). For example, the Chile Telecom regime. Across the developing world stretches a Corporation (CTC) is investing in cellular telephony large unfinished agenda of policy reform, to create a in other Latin American countries (Box 2.5). more welcoming environment for FDI. Beginning with flows to other developing countries, 2. Paradoxically, attempts to regulate FDI to increase particularly within regions, FDI is starting to flow benefits to the host country and to reduce the costs toward developed countries, too. This reflects the tend to have the opposite effect. Countries gain delinkage between the location of an enterprise and its most from FDI in a liberal policy framework. financing. Developing-country companies that meet 3. Careful structuring is the key to project success. 88 I N T E R N A TI O N A L F I N A N C E C O R P OR A T I O N This is more difficult in restrictive policy environ- ments. Joint ventures are inherently fragile but can be succcssful with appropriate structuring. Limits on foreign ownership impede effective project structur- ing: forced partnerships, particularly with public enterprises, are hard to make work. 4. With better policies, even countries currently con- sidered risky by the market can succeed in attracting FDI flows. Global integration will continue to drive FDI flows-wherever the economic environment is open to it. Notes 1 United Nations, World Investment Report 1996: Investment, Trade and International Policy Arrangements, New York, NY, 1996. 2 M. Fry, "Foreign Direct Investment in a Macroeconomic Framework Finance, Efficiency, Incentives and Distortions," World Bank Policy Research Working Paper 1141, Washington, D. C., 1993. 3 World Bank, Global Development Finance, Washington, D.C, 1997. FOREIGN DIRECT INVESTMENT 89 BIBLIOGRAPHY Aharoni, Y. 1966. The Foreign Investment Decision Process. Boston, Mass.: Harvard Business School. Battat, J.; I. Frank; and X. Shen. 1996 'Suppliers to Multinationals." FIAS Occasional Paper 6, Washington, D.C. Beamish, PW. 1988. MultinationalJoint Ventures in Developing Countries. London: Routledge. Belot, T., and D. R. Weigel. 1992. "Progress in Industrial Countries to Promote Foreign Direct Investment in Developing Countries." FIAS Occasional Paper 3, IFC and MIGA, Washington, D.C. Bergsman, J., and W. Edisis. 1988. "Debt Equity Swaps and Foreign Direct Investment in Latin America." IFC Discussion Paper 2, Washington, D.C. Borenzstein, E.; J. de Gregorio; and J. Lee. 1995. "How Does Foreign Direct Investment Affect Growth?" NBER Working Paper 5057, Cambridge, Mass. de Soto, H. 1989. The Other Path. New York, N.Y.: Harper & Row. Dunning, J.H. 1993. 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F O R E I G N D I R E C T I N V E S T M E N T 91 Michalet, C.A. "Investment Strategies of Multinational Corporations and the Attractiveness of Host Countries." FMS Occasional Paper, Washington, D.C. Forthcoming. Miller, R.R. 1996. "International Joint Ventures in Developing Countries." IFC Discussion Paper 29, Washington, D.C. Mintz, J.M., and T. Tsiopoulos. 1992. "Corporate Income Tax and Foreign Direct Investment in Central and Eastern Europe." FIAS Occasional Paper 4, Washington, D.C. Oman, C. 1984. New Forms of Investment in Developing Countries. Paris: OECD. Pangestu, M. 1995. "Evolution of Liberalizing Policies Affecting Investment Flows in the Asian Pacific." Paper prepared for the FIAS High-Level Roundtable on Competition for FDI-Implications for Asia and the Pacific. Processed. Sader, F. 1995. "Privatizing Public Enterprises and Foreign Investment in Developing Countries 1988-93" FIAS Occasional Paper 5, Washington, D.C. United Nations Conference on Trade and Development. Annual. World Investment Report, Geneva. 1996. Companies Without Borders. Transnational Corporations in the 1990s. London: International Thomson Business Press. Weigel, D.R. 1970. "Restrictions on Dividend Repatriation and the Flow of Direct Investment to Brazil." Journal of International Business Studies (Fall), pp 35-50. Wells, L.T., and A. Wint. 1991. "Facilitating Foreign Investment." FIAS Occasional Paper 2, Washington, D.C. . 1990. "Marketing a Country." FIAS Occasional Paper 1, Washington, D.C. World Bank. Annual. Global Development Finance. Washington, D.C. 1992. Legal Frameworkfor Treatment of Foreign Investment. Washington, D.C.: World Bank. 92 I N T E R N AT I O N A L F I N A N C E C O RP O R AT I O N APPENDIXES A. Net Foreign Direct Investment Flows to Developing Countries 95 B. IFC FDI Projects 99 C. FIAS Advisory Projects Fo1 IR_ I C B. NF V PESTMENtT 93 ~~~gC ISAvioyPoet 1 Appendix A. Net Foreign Direct Investment Flows to Developing Countries, 1970-95 (1996 US$ million) Region/Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 East Asia and the Pacific Cambodia 36 60 76 153 China 471 707 1,436 1,976 2,300 2,752 3,631 3,778 3,796 4,733 12,159 30,746 37,056 36,279 Fiji 25 24 30 44 29 26 0 0 0 13 39 38 40 36 27 26 10 14 36 9 87 16 54 32 71 68 Indonesia 325 521 726 44 -100 879 630 396 431 297 194 139 246 324 253 369 317 458 655 759 1,190 1,607 1,937 2,239 2,313 4,400 Kiribati -1 Korea, Democratic 1 People's Republic of Lao People's Democratic 2 7 8 9 134 65 89 Republic Malaysia 368 375 399 483 1,153 648 698 683 773 753 1,007 1,325 1,530 1,400 911 827 600 503 818 1,857 2,540 4,334 5,649 5,594 4,769 5,870 Mongolia 2 9 9 11 10 Myanmar 1 0 0 -2 0 9 5 0 3 4 4 10 Papua New Guinea 38 33 60 58 81 90 94 154 132 99 111 111 175 226 169 220 320 -2 -5 458 Philippines -98 -4 -42 154 7 182 241 355 156 9 -114 180 18 117 10 14 156 365 1,064 627 577 590 248 1,383 1,745 1,496 Samoa 1 0 0 8 3 5 6 3 3 Solomon Islands 15 9 7 7 5 3 0 1 0 2 1 4 12 2 13 11 16 15 17 19 17 Thailand 169 146 239 218 381 41 145 179 86 73 205 304 209 388 458 194 322 418 1,257 1,977 2,661 2,183 2,303 2,016 1,498 2,093 Tonga 0 0 0 0 0 0 1 2 2 2 Vanuatu 8 7 8 5 2 15 12 10 14 27 28 29 33 31 Vietnam 19 14 9 4 17 35 26 28 110 152 Subtotal 789 1,063 1,353 943 1,470 1,790 1,760 1,654 1,513 1,207 1,415 2,096 2,631 3,133 3,239 3,513 3,822 4,647 7,661 9,275 11,081 13,773 22,804 42,298 47,770 51,132 Europe and Central Asia Albania 22 65 58 71 Armenia 8 Azerbaijan 111 Belarus 8 11 16 20 Bulgaria 4 61 46 61 115 137 Croatia 83 107 82 Czech Republic 225 434 654 731 963 2,599 Estonia 89 181 235 203 Former Yugoslavia 14 0 20 -9 18 -34 8 25 10 73 129 101 89 Greece 196 157 194 174 136 45 558 652 661 804 725 545 478 488 554 532 578 812 1,031 837 1,094 1,230 1,247 1,D92 1,076 1,066 Hungary 1,585 1,612 2,626 1,255 4,573 Kazakhstan 109 168 203 287 Kyrgyz Republic 11 15 Latvia 32 50 235 182 Lithuania 11 13 34 74 Macedonia, Former Yugoslav Republic of Malta 45 43 16 15 21 29 26 31 33 21 29 41 23 27 30 23 27 23 46 58 50 83 44 63 132 99 Appendix A (continued) Region/ Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Moldova 19 16 13 65 Poland 11 8 39 39 11 19 is 18 32 18 20 14 17 12 97 315 739 1,916 2,056 3,703 Romania 43 84 105 374 424 Russian Federation 763 782 699 2,041 Slovak Republic 222 223 185 Slovenia 126 140 178 Tajikistan 11 15 Turkey 227 169 152 221 129 211 18 45 53 98 19 100 60 51 129 118 153 137 402 738 745 878 920 711 667 896 Ukraine 218 223 174 270 Uzbekistan 44 50 55 116 Subtotal 469 369 362 410 287 285 613 737 786 963 794 717 576 604 736 709 743 995 1,522 1,942 2,289 4,759 6,760 9,385 8,852 17,422 Latin America Antigua and Barbuda 4 -11 11 21 23 25 6 5 19 28 46 35 46 66 60 22 17 27 25 Argentina 43 41 34 27 19 242 386 270 731 877 249 206 306 1,095 704 -23 1,304 1,145 1,999 2,644 2,785 3,891 661 1,335 Barbados 34 60 61 16 5 42 13 8 14 7 3 9 5 4 0 6 9 8 13 9 12 8 15 10 11 12 Belize A 4 6 8 16 21 19 15 17 10 16 21 Bolivia -297 7 -37 13 52 99 -15 -2 18 46 51 79 34 8 8 12 12 45 -11 -27 12 27 38 28 22 152 Brazil 1,650 2,006 2,090 3,876 2,678 2,406 2,845 3,086 3,099 3,174 2,061 2,639 3,187 1,733 1,824 1,606 393 1,4S7 3,375 1,411 1,077 1,196 2,246 1,444 3,369 4,917 Chile -310 -247 -4 -13 -1,124 92 -2 35 280 320 230 401 439 150 89 136 142 274 160 1,435 642 567 762 904 1,945 1,715 Colombia 169 161 65 67 83 69 46 109 165 167 169 278 401 687 667 1,219 827 379 231 641 544 495 795 1,072 1,828 2,531 Costa Rica 103 83 90 106 93 128 113 105 75 57 57 73 32 67 64 83 75 95 139 113 177 193 246 276 327 401 Cuba 1 11 5 4 5 7 Dominica 0 0 3 4 3 12 8 9 14 16 23 15 24 12 Dominican Republic 281 243 152 97 108 118 110 120 98 22 100 83 -2 54 78 43 61 106 121 122 145 157 196 213 145 274 Ecuador 347 606 283 147 155 176 -36 58 75 83 76 63 44 56 57 74 86 89 91 89 137 173 194 524 582 476 El Salvador 15 26 23 17 41 24 24 31 36 -13 6 -6 -1 31 14 15 30 22 19 14 2 27 16 18 22 38 Grenada 0 2 0 0 0 2 3 3 5 6 17 17 12 14 16 25 22 21 24 Guatemala 115 107 56 98 96 148 23 164 197 154 119 133 84 50 43 74 84 179 375 85 52 99 102 160 71 76 Guyana 35 -209 9 23 3 1 -48 -3 0 1 1 -2 5 5 5 2 3 3 Haiti 11 13 14 20 16 5 14 13 15 16 14 9 8 9 5 6 6 6 11 10 9 15 9 9 2 2 Honduras 33 27 11 19 -2 13 10 15 20 37 6 -4 15 23 23 33 37 46 55 57 48 56 52 30 38 51 Jamaica 635 655 341 206 62 -3 -1 -16 -41 -35 30 -12 -17 -21 14 -11 -6 64 -14 64 150 144 155 87 128 169 Mexico 1,266 1,147 1,053 1,284 1,370 1,125 1,149 937 1,273 1,748 2,326 2,969 1,813 512 445 585 1,869 3,860 2,949 3,382 2,775 5,140 4,788 4,904 12,034 7,047 Nicaragua 59 50 35 37 28 20 24 17 11 4 16 44 44 71 Panama 131 82 47 100 70 14 -19 18 -4 65 -50 6 3 80 11 71 -76 68 -59 41 144 44 151 174 219 223 Paraguay 15 27 10 26 42 45 40 37 38 66 34 33 40 5 6 1 1 6 10 14 83 91 149 124 197 202 Peru -274 -218 84 198 117 583 311 91 39 93 29 131 53 42 -102 1 27 38 30 66 45 -8 148 749 3,137 1,918 St. Kitts and Nevis 1 1 2 15 7 10 11 20 15 45 53 23 14 16 16 20 St- Lucia 5 22 32 34 33 40 29 11 14 20 18 18 19 30 49 63 45 38 35 64 St, Vincent and the Grenadines -1 I 1 1 2 2 2 2 5 7 12 9 10 21 35 56 31 Suriname -20 -25 -6 40 -1 0 0 -21 -12 -20 11 36 -7 51 -45 14 -41 -86 -109 -187 -47 11 -33 -53 -33 is Trinidad and Tobago 326 386 301 1.84 242 172 242 141 199 1113 199 270 223 1311 129 1 -18 39 '12 1166 lig 183 194 424 S66 303 Uruguay 111 199 283 312 51 45 60 53 0 0 0 1 114 170 125 Appendix A (continued) Region/Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Venezuela -90 789 -1,316 -236 -868 772-1,627 -5 104 115 59 193 281 96 21 81 20 25 101 237 491 2,077 686 416 892 911 Subtotal 4,276 5,816 3,396 6,350 3,283 6,050 3,221 5,317 6,307 6,829 6,632 8,375 6,949 4,016 3,692 5,208 4,363 6,884 9,036 9,062 8,841 13,554 13,885 15,718 26,583 23,172 Middle East and North Africa Algeria 184 -562 68 144 724 220 342 300 209 34 376 14 -59 0 1 0 7 4 15 13 0 13 13 17 20 5 Bahrain 36 191 -451 0 31 71 161 121 -39 -43 252 201 -4 -8 -10 -6 -34 -27 Egypt 15 112 176 492 1,596 591 788 322 544 832 1,403 1,494 1,127 1,353 1,392 799 274 500 551 1,378 605 Iran, Islamic Republic of 110 244 319 1,579 653 260 -149 -88 49 -45 -137 -366 69 -21 -394 25 -185 -56 2 17 Iraq 94 -465-2,702 835 -432 20 2 1 -6 0 2 15 0 3 0 -3 -1 1 0 0 Jordan 2 6 14 47 -14 19 87 35 36 147 65 39 88 30 28 47 27 -1 41 -13 45 -38 3 44 Lebanon -1 1 6 8 13 1 0 2 7 2 4 7 8 35 Libya 545 525 -8 -412 -483 -1,135 -950 -760 -1,070 -771 -1,175 -779 -429 -363 -19 142 -231 -126 111 139 173 173 163 179 88 91 Morocco 78 86 46 -3 -41 0 70 96 73 51 96 61 87 51 54 24 1 71 96 186 180 344 460 549 604 293 Oman -123 196 149 81 133 154 106 65 199 172 181 192 172 42 104 125 154 162 95 111 143 152 Saudi Arabia 78 -416 118 -1,760 -7,536 3,446 -726 1,318 859-1,667-3,444 36 68 32 112 298 51 489 -94 -22 2,029 173 -86 1,531 384 -1,900 Syrian Arab Republic 44 80 8 138 82 77 67 73 197 157 66 Tunisia 63 86 114 164 56 83 201 157 141 65 253 307 373 205 129 129 77 109 69 88 83 137 573 628 474 267 Yemen, Republic of 30 37 42 33 9 8 4 7 1 0 0 -143 632 784 1,009 19 0 Subtotal 1,152 -502 -2,042 552 -7,170 3,152 -817 1,388 960 -284 -3,573 682 543 675 1,596 2,349 1,523 1,380 2,140 2,189 3,001 1,978 2,428 4,679 3,244 -351 South Asia Bangladesh 0 -1 0 3 4 2 0 3 1 4 16 12 2 India 180 179 64 107 115 158 95 -61 28 64 85 96 79 7 22 126 145 252 103 281 176 153 165 305 680 1,316 Maldives 7 6 1 5 7 8 8 8 9 9 Nepal -1 1 1 1 1 1 1 7 2 4 7 8 8 Pakistan 90 4 61 -10 7 47 15 26 50 76 68 113 70 33 63 156 129 153 211 233 266 279 365 387 460 414 Sri Lanka -1 1 1 1 3 0 0 -2 2 62 46 52 70 42 37 31 36 71 52 22 47 52 134 218 182 64 Subtotal 269 184 126 99 12S 205 110 -37 80 202 200 261 218 81 122 314 321 487 371 542 505 494 680 940 1,350 1,812 Sub-Saharan Africa Angola 331 287 142 149 233 -365 721 314 337 384 405 Benin 26 10 17 10 -5 4 5 5 1 5 5 2 1 0 0 1 1 14 8 11 5 1 Botswana -71 21 21 63 168 120 93 23 26 71 64 86 135 45 47 103 -9 -2 -321 -15 71 Burkina Faso 2 4 -2 12 5 1 4 8 2 2 0 3 2 2 2 -2 4 1 0 Burundi 12 1 3 1 1 2 2 1 1 1 1 1 0 0 2 Cameroon 63 6 12 9 44 50 30 15 63 81 140 142 122 238 20 377 23 14 77 -97 -123 -16 32 6 115 103 Cape Verde 3 0 -1 0 1 -1 3 2 10 CentralAfricanRepublic 5 3 5 -1 12 10 7 -5 9 30 6 6 10 5 6 4 10 14 -4 1 1 -5 -12 -11 4 3 Chad 2 1 0 17 28 38 49 36 53 11 64 35 10 1 21 0 4 2 17 8 7 Comoros 9 4 4 -1 3 1 2 2 2 Congo, Democratic 30 146 100 178 79 0 73 -2 -214 -37 82 7 -65 -5 -7 -13 16 1 1 1 1 Republic of Appendix A (continued) Region/Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Congo, Republic of 182 232 192 93 28 3 3 6 22 43 32 39 62 40 15 27 52 10 1 C6te d'lvoire 120 59 65 143 66 128 82 25 129 98 102 34 52 42 25 35 87 104 59 21 52 17 -252 98 19 19 Djibouti 1 2 3 3 4 Equatorial Guinea 0 11 46 22 26 29 1 Ethiopia 15 21 34 87 58 36 8 10 2 -3 6 0 -1 -4 2 0 13 1 7 7 8 7 Gabon -3 59 61 45 161 308 71 59 87 72 34 57 144 124 9 18 135 107 151 -34 81 -60 138 -127 -113 -51 Gambia, The 0 6 6 4 2 0 2 0 3 15 0 2 2 1 16 0 11 7 12 11 10 Ghana 266 114 40 40 21 131 -33 32 15 -4 17 17 18 3 2 7 5 6 6 17 16 22 25 140 256 233 Guinea 36 -1 0 0 1 1 10 15 18 14 20 42 22 3 33 35 Guinea-Bissau 2 1 1 0 1 1 2 0 0 0 1 1 Kenya 54 46 0 0 0 32 85 95 53 110 85 15 14 26 12 22 40 51 0 69 62 21 7 2 4 32 Lesotho 5 5 3 5 3 6 3 7 24 15 19 9 3 17 21 23 Liberia 149 72 75 38 55 41 -19 -20 46 Madagascar 39 -7 42 30 28 9 3 -5 -6 -9 -1 0 0 4 10 0 17 4 3 14 24 15 23 17 7 10 Malawi 34 36 35 22 46 16 18 9 14 -2 10 1 0 3 0 1 0 0 1 1 Mali -2 12 2 0 5 5 5 -1 0 3 4 2 3 12 3 -10 -7 1 17 -8 4 -9 -22 49 1 Mauritania 3 0 0 28 4 -227 3 7 4 83 29 13 16 2 10 8 6 2 2 4 8 2 9 18 2 3 Mauritius 6 5 -1 -4 5 7 6 4 7 2 1 1 2 2 5 10 9 21 27 40 45 21 16 17 21 15 Mozambique 2 3 -3 0 2 7 5 4 10 25 27 34 36 36 Namibia 32 131 113 44 56 48 Niger 2 -20 3 3 14 42 18 22 66 61 53 -6 31 1 2 -11 -2 74 -1 0 -1 1 0 1 1 1 Nigeria 803 1,068 1,068 1,049 520 772 621 739 327 407 -798 572 474 383 228 570 205 717 428 2,096 640 772 978 1,503 2,149 658 Rwanda -1 6 2 6 4 6 11 8 7 17 18 19 23 12 17 17 22 21 24 17 9 5 2 3 1 1 Senegal 20 37 53 14 21 42 66 47 -8 12 16 36 31 -39 33 -19 -10 -5 16 0 62 -9 23 -1 73 1 Seychelles 12 12 10 10 10 11 11 10 11 14 17 23 26 26 22 22 32 21 55 40 Sierra Leone 32 19 13 12 21 19 16 9 38 21 -20 8 5 2 7 -37 -172 47 -26 25 35 9 -7 -8 -4 1 Somalia 18 6 16 2 1 12 4 13 0 0 0 0 -1 -9 -17 -1 4 76 -49 -46 7 0 3 2 1 1 South Africa 1,313 971 411 77 1,399 341 34 -205 -169 -640 -21 127 370 77 496 -535 -66 -90 132 9 -5 -233 -821 -318 -157 3 Sudan -4 1 10 -4 0 0 0 4 Swaziland 7 27 14 34 34 73 29 39 -15 -6 6 14 31 72 62 84 42 86 88 67 89 59 Tanzania 20 19 2 -10 17 -10 -1 5 7 0 0 13 22 55 152 Togo 3 17 4 9 -79 10 10 20 144 69 46 11 18 2 -11 20 8 9 15 8 Uganda 16 -4 -42 15 3 4 2 1 2 2 0 0 2 0 0 -5 0 0 6 -2 0 1 3 61 97 122 Zambia -1,164 0 103 91 78 69 57 29 60 46 67 -40 43 29 20 61 35 89 106 182 221 37 54 61 66 67 Zimbabwe -6 4 0 2 4 -1 -2 -3 3 9 -36 -21 -11 -13 3 16 31 38 40 Subtotal 1,675 2,641 2,189 1,912 2,557 2,026 1,446 1,222 1,194 832 36 1,310 1,498 853 1,038 1,132 838 1,670 1,303 2,788 1,008 1,731 889 1,780 3,414 2,183 Total 8,631 9,571 5,383 10,266 552 13,509 6,332 10,281 10,840 9,748 5,493 13,441 12,415 9,360 10,423 13,225 11,612 16,063 22,033 25,799 26,725 36,290 47,446 74,799 91,214 95,370 Source: World Bank Debtor Reporting System. Appendix B. IFC FDI Projects Estimated IFC Country of Largest foreign Total foreign Commitment project cost IFC loan equity largest foreign direct investor investor companya Country Sector Fyb (IJS$m) (IJS$m) (US$m) investor equity (okc) equity (%d) Bristol Mexico Transportation equipment 1958 1.4 0.5 Canada 83 83 Mantos Blancos* Chile Nonferrous metals - copper 1958 18.6 3.1 Brazil 94 94 Olinkraft Brazil Market pulp 1958 3.8 1.2 United States 100 100 Perfect Circle Mexico Electrical machinery 1958 1.4 0.6 United States 17 17 Willys Brasil Brazil Auto manufacturing 1958 22.0 2.5 United States 45 45 Mineira Cement Brazil Cement manufacturing 1959 7.0 1.2 Romania 80 100 BID-BIG Chile Cemnent manufacturing 1960 5.0 1.2 United States 13 25 Durisol Peru Cement manufacturing 1960 0.8 0.3 Switzerland 25 25 Fertilizantes Peru Fertilizers 1960 1 2.9 1.8 Italy 26 26 Kilombero Tanzania Processing of edible crops - sugar 1960 8.0 4.7 Netherlands 20 20 Diablitos Venezuela Processing of edible crops - sugar 1961 1.0 0.5 United States 100 100 Engranajes Argentina Auto components 1961 72.0 1.2 Switzerland 100 100 Envases Colombia industrial metal products 1961 2.8 0.5 NA 43 43 Jamaica Pre-Mix Jamaica Cement manufacturing 1961 0.3 0.2 United States 72 72 KSB Pumps India Electrical machinery 1961 0.6 0.2 Germany 58 58 Morfeo Colombia Furniture, other wood products 1961 0.5 0.2 0.0 United States 25 50 Aevol Greece Fertilizers 1962 1.3 0.6 NA 77 77 FEMSA Spain Auto components 1962 3.7 0.9 0.5 Italy 80 80 Pasa Argentina Oil refining - carbon black 1962 72.0 3.1 United States 24 100 NPK-Engrais Tunisia Fertilizers 1963 14.0 1.2 1.2 Sweden 58 75 Precision India India Electrical machinery 1963 4.8 0.3 0.4 United States 28 28 Arewa Textiles Nigeria Primary textile operations 1964 4.5 0.1 0.3 Japan 60 60 MUSCO India Integrated steel works 1964 1 3.7 2.2 1.0 France 17 17 Dire Dawa Ethiopia Primary textile operations 1965 5.4 0.7 1.0 Japan 15 30 Packages Pakistan Paper manufacturing 1965 12.7 1.2 0.8 Sweden 20 20 Ethiopian Pulp Ethiopia Market pulp 1966 5.4 1.9 United States 24 24 Tasek Malaysia Cement manufacturing 1966 4.0 0.8 0.3 Singapore 32 53 Titan Cement Greece Cement manufacturing 1966 7.5 0.0 NA 45 45 Enka* Colombia Primary textile operations 1967 1 5.1 1.0 Netherlands 48 48 India Explosive India Fertilizers 1967 82.5 7.4 2.9 United Kingdom 51 51 KHP Kenya City and business hotel 1967 6.7 1.6 0.6 United States 44 44 SIES Senegal Fertilizers 1967 12.4 1.7 1.0 Germany 11 11 Fabritex Nicaragua Primary textile operations 1968 9.2 0.S 0.6 Colombia 25 25 Malayawata Malaysia Integrated steel works 1968 26.9 1.0 1.0 Japan 40 40 SOMIMA Mauritania Nonferrous metals - copper 1968 59.8 9.7 0.7 NA 34 45 COPINO Honduras Paper manufacturing 1969 0.1 0.0 Canada 51 51 Dalmine Argentina Steel, pipe and tube manu. 1969 6.0 0.8 NA 56 78 Dawood Pakistan Fertilizers 1969 78.2 1.0 2.9 United States 40 40 Hoteles El Salvador City and business hotel 1969 3.7 0.6 0.2 United States 16 16 Pegasus Jamaica City and business hotel 1969 8.6 1.3 0.7 United Kingdom 36 53 Zuari Agro India Fertilizers 1969 70.0 11.0 3.7 United States 36 36 ADG Greece Nonferrous metals - aluminum 1970 29.4 1.5 3.4 France 35 35 India-Malaysia Malaysia Primary textile operations 1970 5.9 1.3 0.2 India 40 40 Panafrican Kenya Paper manufacturing 1970 35.0 7.9 3.6 India 33 33 PICOP Philippines Paper manufacturing 1970 68.6 0.8 United States 13 13 Pro-Hoteles Colombia City and business hotel 1970 4.2 0.8 0.2 United States 23 23 Sagasca Chile Nonferrous metals - copper 1970 32.5 10.3 0.5 United States 59 59 Viking Turkey Paper manufacturing 1970 9.2 2.5 0.6 Denmark 27 27 CELMEX Mexico Primary textile operations 1971 61.3 8.0 United States 40 40 Cibinong Indonesia Cement manufacturing 1971 26.6 7.6 2.0 NA 51 51 Appendix B (continued) ~ ~~~~~~~~~~~~Estimated IFC Country of Largest foreign Total foreign Commitment project cost IFC loan equity largest foreign direct investor investor Companya Country Sector Fyb (US$m) (US$m) (US$m) investor equity (%c) equity (%d) Kabelin Indonesia Electrical machinery 1971 5 9 1.8 0.4 Netherlands 61 61 Primatexco Indonesia Primnary textile operations 1971 7.0 1.4 0.5 Japan 33 60 Rio Grande Brazil Market pulp 1 971 76.1 4.9 Norway 31 31 Unitex Indonesia Primary textile operations 1971 11.0 0.8 0.8 Japan 35 71 Bata Shoe ZA Zambia Shoes/leather 1972 2.0 0.S 0.2 Canada 70 100 Bud Senegal Senegal Inedible crops - horticultural products 1 972 0.3 0.1 Canada 20 20 CIMINAS Brazil Cement manufacturing 1972 46 8 4.4 3.2 Switzerland 31 62 Daralon Indonesia Primnary textile operations 1972 16.7 3 4 1 1 NA 50 50 Fap-Famos Form. Yugoslavia Auto manufacturing 1972 81 4 1 3.2 2.6 Germany 12 12 Promnotora Pape] Mexico Paper manufacturing 1972 0.2 0.0 Canada 33 33 Akdeniz Turkey City and business hotel 1973 4.1 0 3 0.3 Italy 67 67 CCSIGUA* Brazil Integrated steel works 1973 43.1 2.0 2.0 Germany 38 38 Cyprus Cement* Cyprus Cement manufacturing 1973 11.7 1 7 0.5 Switzerland 28 28 Funtua Nigeria Edible crops - veg oil 1973 3.3 1.1 United Kingdom 19 19 Iran Carbon Iran Oil refining - carbon black 1973 10.6 2.3 0.4 United States 50 50 Jakarta Hotel Indonesia City and business hotel 1973 27.6 4.0 0.4 United States 11 11 Rym Hotel Tunisia City and business hotel 1973 11.5 1.6 0.3 Thailand 40 40 Veracruz Mexico Cement manufacturing 1973 23.9 6.0 Switzerland 20 20 Cementos Boyaca Colombia Cement manufacturing 1974 7.1 1.5 Switzerland 19 19 Cementos Nacion Doin. Rep. Cement manufacturing 1974 34.5 6.0 1.5 United States 25 25 FILSYN Philippines Primary tExtile operations 1974 7.5 1.5 Japan 35 35 Jordan Ceramic* Jordan Glazed ceramic tiles 1974 7.6 1.4 0 2 Germany 14 14 Kamaltex Indonesia Primary textile operations 1974 7.5 1.9 0.6 India 53 53 Monsanto Pan Indonesia Appliances/utensils 1974 3.3 0.9 NA 80 80 Nigalex Nigeria Nonferrous metals -aluminum 1974 4.0 1.0 0.3 Switzerland 25 51 o Rhodia-Ster Brazil Nonferrous metals - nickel 1974 100.0 1 5.0 Canada 100 100 CD Bata Cameroon Cameroon ShoesAeather 1 975 5.2 0.4 France 15 15 BNE Lebanon Housing/mortgage bank 1975 6.6 1.3 NA 25 25 Capuava* Brazil Oil refining - carbon black 1975 11.0 2.5 1.1 United States 49 49 Finap Paraguay Tree farm ng 1975 19.5 4.4 1.0 Argentina 13 13 Hellenic Food Greece Processing of edible crops 1975 4. 1 1 .0 0.1 United States 50 50 Mexinox* Mexico Integrated steel works 1975 83.6 12 0 2 8 France 40 40 PPIC Philippines Primary textile operations 1975 21.3 7.0 Japan 20 35 Valinvenca Venezuela Investment bank 1975 2.3 0.4 United States 25 25 Arab Ceramic Egypt Glazed ceramic tiles 1976 18.7 3.2 0.9 Lebanon 15 15 CTM Sudan Primary textile operations 1976 30.0 8.7 1.3 Pakistan 12 12 David Whitehead Malawi Primary textile operations 1976 12.4 6.0 United Kingdom 51 51 Philagro* Philippines Edible crops - veg oil 1976 6.6 2 7 0.2 India 21 42 SORWATHE Rwanda Edible crops - coffee cocoa tea 1976 1.6 0.5 United States 40 40 Cyprus Pipes Cyprus Cement manufacturing 1977 3.4 0 5 0 2 Switzerland 15 15 Dwangwa Sugar Malawi Processing of edible crops - sugar 1977 64.9 11.3 United Kingdom 31 31 FMB Productos* Brazil Auto parts foundry 1977 205.4 20.0 Italy 59 59 Rio Norte* Brazil Nonferrous metals - alumninum 1977 330.0 1 5.0 Canada 19 19 SAFACAM Cameroon Edible crops - palm 1977 5.6 0.8 France 67 67 SOTEMA Madagascar Primnary textile operations 1977 38.2 11.0 0 3 Germany 42 42 La Cemento* Ecuador cement manufacturing 1978 55.0 12.0 0.8 Switzerland 44 44 MOLANDINO Bolivia Processing of edible crops - grain 1978 7 9 1.3 Uruguay 15 15 Nile Clothing Egypt Primary textile operations 1978 2.7 0.4 0 2 United Kingdom 28 28 Scott Paper* Costa Rica Paper manuifacturing 1978 12.0 2.5 United States 50 50 TEMEX* Mexico Organic chemicals 1978 99.1 1 9.0 United States 10 10 Alpesca* Argentina Livestock - aquaculture 1979 42.7 5.2 0.5 Spain 41 41 Appendix B (continued) ~ ~~~~~~~~~~~~Estimated IFC Country of Largest foreign Total foreign Commitment project cost IFC loan equity largest foreign direct investor investor Companya Country Sector Fyb (US$m) (US$m) (UIS$m) investor equity (%c) equity Wad) Alucarmt Cameroon Nonferrous metals - aluminum 1979 120.0 7.0 0.9 France 23 23 Astra Fish Uruguay Processing of livestock - fish 1979 21.6 7.7 0.9 Canada 20 20 Attock Refinery Pakistan Oil refining processes 1979 31.6 7.5 0.9 United Kingdom 53 53 Bangkok Glass* Thailand Industrial glass 1979 26.5 4.9 0.2 Germany 15 15 CONDUMONT Mexico Electronic, telecom, precision equip. 1979 36.4 5.0 Canada 41 41 Highspeed* Bangladesh Transportation equipment 1979 6.3 1.2 0.4 Japan 20 20 JSC Jordan Securities market institution 1979 6.6 0.7 Kuwait 38 38 Maricultura Cotta Rica Livestock - aquaculture 1979 10.0 1 4 0.7 United States 1 1 1 1 Metal Products,~ Tanzania Appliances/utensils 1979 5.9 1.3 0.2 United Kingdom 50 50 Pak Ollfields Pakistan Oil/gas exploration 1979 52.9 7.0 08 United Kingdom 54 54 SOVOLPLAS Burkina Faso Organic chemnicals 1979 2.3 0.4 0.1 NA 37 37 Volvo do Brasil Brazil Auto manufacturing 1979 124.0 10.0 4.1 Sweden 62 62 Zaire Gulf Congo, Dem Rep. of Engineering service 1979 33.0 4.1 United States 50 50 Bata Malgache Madagascar Shoes/leather 1980 5.2 1.3 Canada 65 65 indo-American Indonesia Appliances/utensils 1980 26.0 5.1 0.9 Netherlands 28 43 Ipiranga (Polisul) Brazil Organic chemicals 1980 110.0 1 5.0 5.3 Germany 33 33 Ismailia Fish Egypt Livestock - aquaculture 1980 9.7 1.9 0.6 Saudi Arabia 19 19 Minera Real Mexico Nonferrous metals - zinc 1980 146.9 30.0 Canada 34 34 MSO C6te dIlvoire Processing of edible crops - grain 1980 14.0 2.9 0.4 France 22 22 Novotel SE Senegal City and business hotel 1980 18.8 3.0 France 20 20 NTM Nigeria Primary textile operations 1980 27.7 8.1 0.7 NA 34 34 Papan Indonesia Housing/mortgage bank 1980 16.0 4.0 1.~2 Netherlands 15 15 PASAR* Philippines Nonferrous metals - copper 1980 402.0 5.0 Japan 16 16 a Resistol Mexico Inte-grated chem./petro operations 1980 45.0 8.0 United States 39 39 Semen Andalas Indonesia Cement manufacturing 1980 200.0 28.0 5.0 United Kingdom 26 40 SERACEM Sierra Leone Cement manufacturing 1980 82 2.1 France 40 40 Sivengt COte dIlvoire Fertilizers 1980 28.1 5 1 1.3 Germany 14 14 Sudan Cement Sudan Cement manufacturing 1980 1.0 0.2 Spain 33 33 Surinvest Uruguay Merchant bank 1980 13.3 10.0 0.6 United Kingdomn 20 20 VIPLAMEX* Mexico Industrial glass 1980 160.1 1 5.0 United Kingdom 35 35 ZCCM Zambia Nonferrous metals - copper 1980 163.8 20.0 South Africa 40 40 Coromandel India Cement manufacturing 1981 98.8 1 5.9 United States 25 47 EHESA Paraguay City and business hotel 1981 4.8 0.9 0.3 Brazil 34 34 Habib Arkady Pakistan Processing of edible crops - sugar 1981 13.4 3.2 0.2 United States 20 40 Lanka Hotels Sri Lanka Resort hotel 1981 35.5 8.2 0.7 India 37 37 Somali Molasses Somalia Agribusiness services 1981 1.5 0.4 United Kingdom 19 19 Taihan Bulk Korea, Rep. of Transport infrastructure 1981 27.6 3.S 2.5 United States 53 53 Toachi Ecuador Nonferrous metals - copper 1981 5.2 1.0 0.3 Venezuela 28 77 Asbestos Cement Pakistan Cement manufacturing 1982 15.8 4.0 Luxembourg 40 40 Bamburi Cement Kenya Cement manufacturing 1982 24.7 4.4 United Kingdom 37 73 ICS* Senegal Fertilizers 1982 330.1 25.0 COte dIlvoire 14 14 ITW Signode India Integrated steel works 1982 8.8 2.4 United States 39 67 Luxor Hotel Egypt Resort hotel 1982 25.4 4.4 0.7 Switzerland 11 11 Moulins Sahel Niger Processing of edible crops - grain 1982 8.1 2.0 0.2 Benin 33 49 NDC-Guthrie* Philippines Edible crops - palm 1982 42.6 1 1.0 United Kingdom 40 40 Nile Petroleum Sudan Oil/gas transport 1982 1.5 0.3 United States 40 40 SIKA Mali Edible crops - veg oil 1982 9.2 1,8 0.5 NA 16 27 Aredor* Guinea Precious metals/minerals - diamonds 1983 95.7 13.6 1.2 Australia 50 50 Dome Cyprus Resort hotel 1983 9.2 1.8 0.3 France 18 18 Matas Costa Rica Inedible crops - horticultural products 1983 10.2 1.5 United States 100 100 Nepal Magnesite Nepal Industrial minerals/ores 1983 24.9 5.0 India 25 25 Appendix B (continued) Estimated IFC Country of Largest foreign Total foreign Commitment project cost IFC loan equity largest foreign direct investor investor Companya Country Sector Fyb (lJS$m) (IJS$rn) (U)S$m) investor equity (%c) equity fo/d) Nord-Sud Congo, Dem. Rep. of Nonferrous metals - aluminumT 1983 3.5 0.2 Switzerland 20 20 Sea Minerals Thailand Nonferrous metals - tin 1983 3.8 0 6 Malaysia 16 33 Tetra Pak Converterst Kenya Paper manufacturing 1983 10.6 2.2 0.4 Thailand 63 63 Carbones Colombia Coal mining 1984 51.6 10.2 1 6 United Kingdom 31 31 CFSC Barbados Securities market institution 1984 25.0 0 3 Canada 16 52 Jamaica Flour Jamaica Processing of edible crops - grain 1984 20.6 5 0 United States 31 42 Kombo Beach Gambia, The Resort hotel 1984 11.7 2.8 Sweden 1 7 34 Metalsat Mexico Auto components 1 984 35.2 3.0 1.4 United States 40 40 Nossi-Bet Madagascar Livestock - aquaculture 1984 10.8 2.6 0.1 Canada 26 26 TAMTECO Uganda Edible crops - coffee cocoa tea 1984 8 8 1.1 United Kingdom 49 49 ZHPt Zambia City and business hotel 1 984 30.1 7.5 United States 20 20 Acoje Philippines Industrial minerals/ores 1985 1 0 0 0.1 Austria 20 20 Amboni Tanzania inedible crops - natural fibers 1985 12.7 4.4 NA 88 88 Ashanti Goldt Ghana Precious metals/minerals - gold 1985 161.4 27.5 United Kingdom 45 45 Bata Shoe BD Bangladesh Shoes/leather 1985 1 3.0 3.0 0 5 Canada 70 70 Bihar Sponget India Iron manufacturing 1985 62.7 15.2 0 6 Germany I11 1 1 CIB Congo, Rep. of Tree farmning 1985 11.0 1.3 Germany 75 100 Ferme Suisse Cameroon Processing of edible crops - palm oil 1985 9 7 2.0 0 6 France 51 51 Fluobart Tunisia Industrial minerals/ores 1 985 6.3 0.2 Jordan 39 39 Grands Hotels Congo, Dem, Rep. of City and business hotel 1985 379 1 5.0 United States 50 50 Guangzhou Auto China Auto manufacturing 1985 79.5 15.0 3.2 France 22 22 Proteisont Mexico Edible crops - veg oil 1985 11 2 2.0 0.8 Israel 25 25 SOTEXKI' Congo, Dem, Rep. of Primary textile operations 1985 1 7.4 8.5 0 6 Switzerland 16 29 Tiger Battery' Nigeria Appliances/utensils 1985 12.0 28 Denmark 28 28 Uganda Teat Uganda Processing of edible crops - coffee, tea 1985 9.4 2.8 United Kingdom 49 49 African Seafood Senegal Processing of livestock - fish 1986 12.0 3.3 0.8 Denmark 17 17 Alumn Sulphatet Egypt Inorganic chemicals 1986 16.5 0.6 Sweden 25 25 Bajaj Tempo India Auto manufacturing 1986 52.6 1 5.1 Germany 26 26 Cape Horn Chile Organic chemicals 1986 298.0 50.0 5.0 United States 76 76 Capos Limitedt Fiji Resort hotel 1986 27.6 8.8 United States 29 100 Chucuri Oil Colombia Gil/gas exploration 1986 33 0 5.0 Canada 25 50 CICAM Cameroon Primary textile operations 1986 6.8 6.5 France 35 35 COTONAt Madagascar Primary textile operations 1986 17 2 9.3 0.2 Luxembourg 28 28 FEP Kenya City and business hotel 1986 13 8 3.7 NA 40 40 Issa Nicholas Grenada Resort hotel 1986 16.7 60 Trinidad and Tobago 80 100 Masbhumi Thailand Precious metals/minerals - gold 1986 3 7 0.0 Canada 30 30 Pure Foodst Philippines Processing of livestock - abattoir, meat 1986 4.7 1.4 United States 14 14 Silkar Turizm Turkey Resort hotel 1986 16.1 5.8 SWitZerland 48 48 SITEX Tunisia Primary textile operations 1986 202 5.0 3.2 United Kingdom 44 44 Western Agri Paraguay Edible crops - diversified edible crops 1986 2.5 0.8 United States 25 s0 Yemen Hunt Gilt Yemen, Rep of Oil/gas production 1986 50 3 9.0 United States 37 62 Ailee Seychelles Resort hotel 1987 40.8 10.5 India 36 77 BICI-GUIt Guinea Commercial bank 1987 16 1 1.0 France 15 15 CBIt Congo, Rep. of Tree farming 1987 6.4 1.9 0.3 United Stases 41 41 Comete Tunisia Engineering service 1987 0.3 0.0 Canada 45 45 Fiji Bank Fiji Merchant bank 1 987 1 7.7 2.0 0.3 Australia 30 30 Fiji Forest Fiji Tree farming 1987 13 3 2.0 1.6 Australia 49 49 Gonfreville Cdte d'Ivoire Primary textile operations 1 987 21.3 1 2.0 France 10 10 Granjas Marinast Honduras Livestock - aquaculture 1987 8 1 0.6 United States 35 35 Hero Honda India Motor bicycles 1987 21.9 7 7 Japan 26 26 Hidra Oilt Argentina Oil/gas production 1987 470 0 22.5 France 38 38 Appendix B (continued) ~ ~~~~~~~~~~~~Estimated IFC Country of Largest foreign Total foreign Commitment project cost IFC loan equity largest foreign direct investor investor Companya Country Sector Fyb (IJS$m) (UJS$m) (IJS$m) investor equity (%c) equity (%d) Keta Oil Ghana Oil/gas exploration 1987 30-1 4.5 United States 85 85 LOMACO Mozambique Edible crops - diversified edible crops 1987 1 5.5 2.7 United Kingdom 51 51 NEW Nigeria Auto components 1987 20.0 1 1.1 India 40 40 Pan Atlantic Togo Primary textile operations 1987 29.7 7 0 1.1 United States 91 91 REIT Tunisia Non-wood housing products 1987 6.5 1.5 0.4 Italy 51 51 Sigmar Guinea Quarried construction materials 1987 34.7 0.1 France 60 95 SILAC Cameroon Processing of livestock - dairy 1987 9.6 2.3 0.6 Belgium 1 9 44 Socota Textile Mauritius Primary textile operations 1987 22.1 5.0 1.0 Luxembourg 71 71 T&C Properties Barbados Resort hotel 1987 5.0 1 3 NA 20 20 Thatta Pakistan Oil/gas exploration 1987 16.9 4.3 Netherlands 50 50 Transamerican* Dom. Rep. Resort hotel 1987 24.0 6.0 United States 33 100 TRINGEN Trin. & Tobago Fertilizers 1987 265.0 40.0 United States 49 49 Unicbank Hungary Commercial bank 1987 20.0 3.2 Austria 30 30 Viphya Plywoods* Malawi industrial wood products 1987 30.4 3.9 0.5 NA 37 37 Anam Korea, Rep. of Electronic, telecom, precision equip. 1988 88.3 15S.7 United States 27 27 Aurifere* Guinea Precious metals/minerals - gold 1988 27.9 8.3 United Kingdom S1 51 Bechtel Egypt Egypt Engineering service 1988 500.0 0.1 United States 51 51 CALICA Mexico Quarried construction materials 1988 149.5 37.0 United States 50 50 China Bicycles* China Bicycles 1988 17.7 5.0 Hong Kong, China 33 67 Chirete Argentina Oil/gas exploration 1988 33.0 5.2 Australia 45 45 Comnarit* Mormcco industrial glass 1988 1 79.5 40.0 5.0 Brazil 50 98 Ducrms Togo Diversified food manufacturing 1988 4.3 1.4 France 65 65 Dunlop* Nigeria Auto tires 1988 39.1 1 2.5 United Kingdom 37 37 GKN Invel India Auto components 1988 14.2 1.1 Germany 40 40 W Glass Wool* Hungary Non-wood housing products 1988 20.4 3.4 1.4 Japan 13 26 Gwembe Zambia Inedible crops - natural fibers 1988 13.5 3.7 0.8 United Kingdom 53 53 HMC Polymers Thailand Organic chemicals 1988 82.8 1 5.0 1.5 United States 45 45 LTPO* Liberia industrial wood products 1988 25.9 8.5 United Kingdom 100 100 Manulife Indonesia Insurance company 1988 4.0 0.3 Canada 51 51 MBR Brazil iron ore mining 1988 82.0 20.0 Japan 25 25 Meleiha Oil* Egypt Oil/gas production 1988 250.9 9.2 NA 55 55 Mvonterado Indonesia Precious metals/minerals - gold 1988 1 7.0 3.5 2.0 United Kingdom 65 65 Phoenix Resource* Egypt Oil/gas exploration 1988 97.5 20.0 Spain 50 90 Prestige Cameroon Beverage manufacturing 1988 7.8 2.7 0.3 France 12 12 PT Bali* Indonesia Resort hotel 1988 28 1 9.3 France 75 75 SITER Tunisia Primary textile operations 1988 13.8 2.9 2.1 France 25 25 SORWAL Rwanda Furniture, other wood products 1988 8.5 0.6 0.2 Sweden 14 14 SPNP Carneroon Edible crops - fruits 1988 11.6 1.9 0.4 France 45 45 STS Togo Bar, rod & flat steel plants 1988 2.0 0.8 NA 47 47 Utexafrica Congo, Dem. Rep. of Primary textile operations 1988 46.5 13.5 Belgium 92 92 Xai Xai Mozambique Oil/gas exploration 1988 31.0 7.8 United Kingdom 75 75 AG&P Philippines industrial equipment 1989 75.0 Japan 20 20 Chihuidos Argentina Oil/gas exploration 1989 32.4 5.0 United States 39 56 Coats lplik* Turkey Primary textile operations 1989 1 5.1 7.7 United Kingdom 75 75 Comnilog* Gabon Transport infrastructure 1989 80.4 32.0 United States 36 36 Crown Elec* China Appliances/utensils 1989 62.0 15S.0 Japan 90 90 Dunastyr* Hungary Organic chemicals 1989 72.2 14.2 3.8 Italy 35 35 Dusa* Turkey Organic chemicals 1989 75.6 1 7.0 Canada 50 50 ELUMA Brazil Nonferrous semi-finished products 1989 83.2 16.4 Canada 19 19 Escondida Chile Nonferrous metals - copper 1989 996.1 71.3 15.0 Australia 58 88 Kiris Turkey Resort hotel 1989 34.3 12.2 Switzerland 35 55 Appendix B (continued) ~ ~~~~~~~~~~~~Estimated IFC Country of Largest foreign Total foreign Commitment project cost IFC loan equity largest foreign direct investor investor Companya Country Sector Fyb WUSWm (US$m) (US$m) investor equity (%c) equity (%d) Masstock Zambia Edible crops - wheat 1 989 44.2 8 7 Ireland 47 47 OPCC)* Venezuela Iron ore mnining 1 989 11 5.0 37 4 Japan 55 86 Peroxythai Thailand Inorganic chemicals 1989 46.2 10.7 United Kingdom 25 49 Polimar Mexico Fine chemnicals and derivatives 1989 52.5 14.5 United States 50 50 Red Sea Ethiopia Oil/gas exploration 1 989 31.0 7.8 United Kingdom 75 75 Sarivilile Turkey Resort hotel 1989 20.1 2.7 2.2 Luxembourg 33 33 Shell Gabon Gabon Oil/gas production 1989 395.0 50.0 United Kingdom! Netherlands 65 65 Shenzhen Solar, China Electrical machinery 1989 10.2 2.0 1 0 United States 40 40 \TM India Computer applications/software 1989 3.6 0.2 United States 40 S1 Afcott* Nigeria Processing of edible crops - veg oil 1990 1 7.3 4.5 NA 40 40 Bogosu Ghana Precious metals/minerals - gold 1990 86.0 18.5 0.5 Netherlands 63 63 CELPACt Chile Market pulp 1990 586.6 40.0 10.0 United States 47 47 COMSUR Bolivia Nonferrous metals - zinc 1990 26.1 7.0 3.0 Bolivia 100 100 Condumex Mexico Diversified goods 1990 128.0 35.0 Italy 28 28 Conrad* Turkey City and business hotel 1990 93.0 21.0 4.0 United States 40 40 Elf Gabon Gabon Oil/gas production 1990 352.0 10.0 France 54 54 F S P (Kamelya) Turkey Resort hotel 1990 43.0 12.2 Spain 20 20 Iduapriem* Ghana Precious metals/minerals - gold 1990 11.0 3.0 Australia 63 63 Indelpro Mexico Organic chemicals 1990 110.0 27.0 United States 49 49 Mersin Turkey City and business hotel 1990 25.0 8.5 NA 40 40 Pak Suzuki Motor* Pakistan Auto manufacturing 1990 87 5 1 8.6 Japan 25 25 PT Indo-Rama Indonesia Primary textile operations 1990 74.0 12.0 United Kingdom 58 58 Siam Asahi Thailand Appliances/utensils 1990 334.5 8.3 Japan 63 63 Simplot Turkey Processing of edible crops 1990 47.3 94 United States 40 40 Tetra Pak HUN Hungary Paper manufacturing 1990 48.4 7.4 3.2 Sweden 60 60 TIL* Mauritius Garment manufacturing 1990 7.6 3 1 Hong Kong, China 100 100 t Togotex* Togo Primary textile operations 1990 22.7 1 7 Hong Kong, China 26 26 UCAL* India Auto comnponents 1990 7.5 0.6 Japan 26 26 Wahome Steel Ghana tar, rod & flat steel plants 1990 8.3 3.2 Taiwan, China 57 95 Adwya* Tunisia Pharmaceuticals 1991 0.6 0.1 Canada 17 17 Al Bardi Egypt Paper manufacturing 1991 27 5 6.2 Jordan 45 90 Al-Hikma (PorI Portugal Pharmaceuticals 1991 8 6 2.0 Jordan 73 73 Apasco* Mexico Cement mnanufacturing 1991 166.0 20 0 Switzerland 60 60 Avantex Mill* Philippines Primary textile operations 1991 51.0 11.3 2.3 Taiwan, China 55 55 Bermejo Bolivia Oil/gas production 1991 39.0 40 5.9 Argentina 75 75 Best Chemicals* Philippines Organic chemicals 1991 33.0 6 5 2 3 Korea, Republic of 90 90 Bristol Hotel Poland City and business hotel 1991 36.2 107 United Kingdom 55 55 Club St. Lucia*~ Saint Lucia Resort hotel 1991 10 0 3.7 United Kingdom 100 100 CTC* Chile Telecoms 1991 248.0 80.0 Spain 44 44 ENGEPOL Brazil Industrial rubber/plastic 1991 11.5 3.5 Chile 40 40 ENV Venezuela Inorganic chemicals 1991 52 3 143 Uniteo States 20 40 Fmnantna Portugal Merchant bank 1991 23.5 2 6 France 16 16 Intl Bank Poland Polano Commercial hank 1991 20.0 3.2 Netherlands 18 54 Journeys End Belize Resort hotel 1991 3 0 1.0 NA 29 47 Magyar Suzuki* Hungary Auto manufacturing 1991 234 9 32 2 6.5 Japan 40 51 Makati Hotel' Philippines City and business hotel 1991 1 18 0 29.5 Hong Kong, China 25 35 MORAK* Mauritan a Precious metals/minerals - goldi 1991 17 5 34 0.8 United States 43 43 Navotas* Philippines Power generat on and transmission 1991 41 0 1 0.0 1 1 Hong Kong, China 60 60 NMBB Hungary Investment bank 1991 160 1 5 Japan 51 51 ODC* Colornibia Oil/gas trans. pipelinie 1991 321 0 350 Urriteo Kingdom! Netherlands 34 34 Pelican Gambia, The Processing of livestock - fish 1991 2 6 1 1 Sweden 70 70 Appendix B (continued) ~ ~~~~~~~~~~~~Estimated IFC Country of Largest foreign Total foreign Commitment project cost IFC loan equity largest foreign direct investor investor Companya Country Sector Fyb (US$m) (US$m) (UIS$m) investor equity (%c) equity (%d) Petrocel Mexico Organic chemicals 1991 101.6 32.0 United States 33 33 Pralcal Venezuela Organic chemicals 1991 142.6 30.8 8.6 United States 25 25 PT Agro Muko Indonesia Processing of edible crops - palm oil 1991 54.2 10.5 2.2 Belgium 55 55 SDC Ghana Securities market institution 1991 1.7 0.2 United Kingdom 20 20 SOMOTEX Tunisia Primary textile operations 1991 1 7.4 4.4 1.2 Italy 46 46 Alcatel Romania Telecoms 1992 18.0 5.8 0.7 France 51 51 Bissau Pesca Guinea-Bissau Livestock - aquaculture 1992 1.2 0.2 Canada 58 58 Block KG-OS-IV India Oil/gas exploration 1992 32.7 8.2 United Kingdom 42 75 BNI* Madagascar Commercial bank 1 992 26 0 2 6 France 51 51 CHEMAGEV* Poland Construction/real estate 1992 14.9 3 0 1.1 United States 25 25 Ciments du Maroc Morocco Cement manufacturing 1992 97.8 17.7 France 60 60 CINOUCA* Morocco Cement manufacturing 1992 88.9 1 3.2 France 27 27 DTC Dom. Rep. Resort hotel 1992 40.3 10.0 Spain 85 85 Dynamic Textile Bangladesh Primary textile operations 1992 11.5 2 5 Canada 31 31 ELB0* Turkey Appliances/utensils 1992 77.6 19.3 Germany 50 50 FIIB Pakistan Merchant bank 1992 6.0 0.9 United States 30 30 GHANAL Ghana Nonferrous metals - aluminum 1992 1.5 04 NA 80 80 Miniere Bougrine Tunisia Nonferrous metals -zinc 1992 74.2 140 2.3 Canada 45 45 Minproc Bolivia Bolivia Nonferrous metals - zinc 1992 3.6 0.3 0.7 United States 79 79 Mokra Czech Rep. Cement manufacturing 1992 142.3 1 7.2 Belgium 61 61 Pecten Cameroon Cameroon Oil/gas production 1992 123.0 30.0 United States 80 80 PETROZIM Zimbabwe Oil/gas transport 1992 66.7 1 6.7 United Kingdom 50 50 Philips Poland' Poland Appliances/utensils 1992 60 0 1 5.0 Netherlands 85 85 Pioneer Egypt Egypt Processing of edible crops - veg oil 1992 1 7.0 1.2 United States 51 51 LM PT Bakrie Kasei Indonesia Organic chemicals 1992 335.1 30.0 9.6 Japan 56 56 PT Indaci Indonesia Primary textile operations 1992 23.0 4.0 1.8 Japan 51 51 PT Swadharma Indonesia City and business hotel 1992 177.0 35,0 Hong Kong, China 25 25 Serena Beach Egypt Resort hotel 1992 23.5 7.5 1.2 Poland 33 57 Shin Ho Paper Thailand Paper manufacturing 1992 120.0 22.0 6.0 Korea, Republic of 29 29 Sierra Rutile Sierra Leone industrial minerals/ores 1992 95.5 1 5.0 United States 100 100 SKF Bearings* India Electrical machinery 1992 80.6 11.5 Sweden 51 51 TELECEL* Congo, Dem. Rep. of Telecoms 1992 21 4 6.0 United States 45 45 Westel Hungary Telecoms 1992 82.0 1 50 United States 49 49 APEX Colombia Securities market institution 1993 5.5 0.9 Mexico 21 21 AQUALMA Madagascar Processing of livestock - shrimp 1993 19.0 1.9 Luxembourg 1 5 1 5 BECOL Belize Power generation and transmission 1 993 59.4 1 5.0 United States 95 95 Block Cl-il1 C6te dIlvoire Oil/gas production 1993 4S.5 11.4 United States 15 1 5 BSJS Pakistan Securities market institution 1993 20 0.9 United States 30 30 C.S. Cabot Spol.* Czech Rep. Oil refining - carbon black 1 993 87.1 20.3 United States 52 52 Carbon Black-EGT~ Egypt Oil refining - carbon black 1 993 40.0 7.0 1.5 Indonesia 36 51 Cayeli Bakir* Turkey Nonferrous metals - copper 1993 15S4.5 30.0 Canada 48 48 CDCPL Pakistan Securities market institution 1993 2 5 0.3 United States 20 20 GENEX Bolivia Inorganic chemicals 1993 8.5 2.9 Argentina 92 92 Ghim Li Fashion Fiji Garment manufacturing 1993 7.0 1.7 Singapore 70 100 Helios Algeria Inorganic chemicals 1993 96.2 1 0.0 France 49 49 Hotel Flamenco Dom. Rep. Resort hotel 1993 26.5 6.8 Spain 100 100 Huta Warszawa Poland Integrated steel works 1993 299.0 38 7 4.8 Italy 42 42 Jose Methanol Venezuela Organic chemicals 1993 340.0 37.5 6.8 Japan 24 47 Jubilee Uganda Insurance company 1993 0.4 0.1 Kenya 35 35 Mactan Hotel* Philippines Resort hotel 1 993 48.0 1 2.0 Hong Kong, China 22 36 Malteria Pampa Argentina Processing of edible crops - grain 1993 42.0 12.0 Brazil 54 54 Appendix B (continued) ~ ~~~~~~~~~~~~Estimated IFC Country of Largest foreign Total foreign Co mmitment project cost IFC loan equity largest foreign direct investor investor Company4 Country Sector FYb (UIS$m) (US$m) (IJS$m) investor equity (%c) equity (o/d) Millicom Costa Rica Telecoms 1993 11.0 2.5 1.0 Luxembourg 75 75 Mindanao Power Philippines Power generation and transmission 1993 103.0 12.5 4.5 Japan 1 5 29 Pagbilao Philippines Power generation and transmission 1993 888.0 60.0 10.0 Hong Kong, China 87 87 Pilipinas Shell Philippines Oil refining - other 1993 667.0 50.0 United Kingdom/ Netherlands 68 68 Polana Hotel Mozambique City and business hotel 1993 16.5 3.5 South Africa 33 33 PT Viscose* Indonesia Primary textile operations 1993 92.0 20.0 Austria 42 81 PTO Limited Seychelles Tourism services 1993 9.6 3.8 South Africa 70 70 Puerto Quetzal*' Guatemala Power generation and transmission 1993 92.0 20.0 United States 65 65 Quellaveco Peru Nonferrous metals - copper 1993 31.0 6.2 Chile 80 80 Sandoglass Poland Industrial glass 1993 1 71.5 36 4 8.3 United Kingdom 40 40 Shenzhen PCCP China Cement manufacturing 1993 20.0 4.0 1.0 Hong Kong, China 40 40 Triangle Zimbabwe Processing of edible crops - sugar 1993 28.4 7.0 South Africa 100 100 Vigua Guatemala Industrial glass 1993 23.5 11.0 Mexico 49 75 Yanacocha Peru Precious metals/minerals - gold 1993 45.0 1 2.3 0.3 United States 38 38 Yantai Cement China Cement manufacturing 1993 122.7 28.7 2.0 Japan 39 59 ABN AMRO KazakstanKazakhstan Commercial bank 1994 10.0 2.0 Netherlands 51 51 Albadomu Malata Hungary Processing of edible crops - sugar 1994 19.9 5.4 2.0 Germany 51 51 Autokola Czech Rep. Auto components 1994 63.0 1 6.4 United States 45 45 AYTAC Turkey Processing of livestock - abattoir, meat 1994 75.3 8.0 2.0 Belgium 84 84 BACELL Brazil Market pulp 1994 200.9 14.0 10.7 Austria 37 37 Basic Petroleum Guatemala OiL/gas production 1994 33.0 10.0 4.0 NA 33 33 BGN Argentina Commercial bank 1994 1 5.0 1 5.0 Switzerland 12 12 BONA Poland Processing of livestock - dairy 1994 5.1 2.0 United States 75 75 Bumrungrad Thailand Hospital/clinic 1994 111.0 25.0 2.2 United States 40 40 Ciments Guinee Guinea Cement manufacturing 1994 7.0 1.5 Belgium 51 51 Cmrcl Intl Bank Egypt Commercial bank 1994 100.0 1 5.6 Kenya 44 44 Crescent Greenwd Pakistan Garment manufacturing 1994 77.0 1 6.1 3.1 United States 32 32 EDENOR Argentina Power generation and transmission 1994 402.4 45.0 France 25 50 FILTISAC C6te dilvoire Industrial packaging 1994 10.8 1.1 Switzerland 46 46 GAVEA Brazil City and business hotel 1994 55.7 1 6.8 United States 31 31 GHACEM Ghana Cement manufacturing 1994 7.0 3.0 Norway 60 60 GIDESA Mexico Organic chemicals 1994 107.2 1 5.0 8.0 United States 22 22 GOTM Mexico Transport infrastructure 1994 14.5 4.0 2.0 Japan 37 37 Hanoi Metropole Vietnam City and business hotel 1994 34.7 8.5 France 29 42 Indo Rama India Primary textile operations 1994 205.4 35.0 9.8 Indonesia 32 32 Kunda Tsement Estonia Cement manufacturing 1994 43 5 6.0 4.0 Norway 46 46 Lanka Cellular Sri Lanka Telecoms 1994 13.6 1 4 Singapore 76 76 MaFra Czech Rep. Printing/publishing 1994 39.2 14.2 France 96 96 MASISA Argentina Industrial wood products 1994 56.2 11.0O Chile 100 100 PACRA Pakistan Credit rating agency 1994 1.0 0.2 United Kingdom 40 40 PapaTel Hungary Telecoms 1994 14.4 0.5 United States 27 27 Polar Lights Russian Fed. OiL/gas production 1994 340.0 60.0 United States 50 50 PPMs Opole Poland Processing of livestock - abattoir, meat 1994 18.0 5.2 1.0 Austria 83 83 PT Saripuri Indonesia City and business hotel 1994 68.0 8.0 3.6 Hong Kong, China 11 1 1 Quilmes Argentina Processing of edible crops - sugar 1994 45.0 1 5.0 Netherlands iS 15 SIEROMCO Sierra Leone Nonferrous metals - aluminum 1994 26.8 8.0 Switzerland 100 100 SOMISY Mali Precious metals/minerals - gold 1994 122.6 25.5 1.4 United States 70 70 Star Petroleum Thailand Oil refining - other 1994 1,850.0 100.0 United States 64 64 TELEMOVIL El Salvador Telecoms 1994 7.1 1.7 0.2 Luxemnbourg 55 55 TUNTEX Thailand Organic chemicals 1994 355.0 20.0 4.9 China 17 17 Vetropack Czech Rep. Industrial glass 1994 48.0 18.7 Austria 51 51 Appendix B (continued) ~ ~~~~~~~~~~Estimated IFC Country of Largest foreign Total foreign Commitment project cost IFC loan equity largest foreign direct investor investor Companya Country Sector Fyb (LIS$m) (US$m) (IJS$m) investor equity (%c) equity (%d) Yacylec Argentina Power generation and transmission 1994 134.7 20.0 0.0 Canada 25 38 ZZZ PNG Cannery Pap. New Guin. Processing of livestock - fish 1994 55.0 12.0 1.0 United States 66 66 A.0. Volga Russian Fed. Paper manufacturing 1995 371.0 30.0 11.0 Germany 36 36 AES Lal Pir Pakistan Power generation and transmission 1995 361.0 40.0 9.5 United States 90 90 Aguas Argentina Water and waste utilities 1995 381.0 38.0 7.0 France 25 36 Banco Roberts Argentina Commercial bank 1995 120.0 20.0 United Kingdom 30 30 Baria Serece Prt Vietnam Transport infrastructure 1995 10.0 3.0 France 27 60 Beronit Czech Rep. Quarried construction materials 1995 14.9 5.0 Denmark 41 41 Borcelik Turkey Steel re-rolling mills 1995 196.3 25.0 7.0 France 24 40 Centurion Bank India Commercial bank 1995 44.0 3.9 Singapore 20 20 CIPREL C6te dilvoire Power generation and transmission 1995 70.0 18.2 1.0 France 90 90 Clovergem Celtel Uganda Telecoms 1995 16.0 5.0 0.6 United Kingdom 37 79 CTAPV Mexico Water and waste utilities 1995 33.2 7.3 United Kingdom 44 44 Dalian Glass China Industrial glass 1995 134.0 30.5 2.4 Hong Kong, China 60 60 Elf Congo Congo, Rep. of Oil/gas production 1995 1,635.8 50.0 France 75 75 Globi Retailing Poland Wholesale/retail trade 1995 56.7 10.0 Belgium 64 64 Indo-Jordan Jordan Fertilizers 1995 170.0 30.0 India 52 52 Intercell Poland Paper manufacturing 1995 55.0 11.0 7.0 Sweden 15 26 Intl Hotels-Ken Kenya City and business hotel 1995 12.0 6.0 United Kingdom 24 43 iSIC India Securities market institution 1995 3.2 0.3 Hong Kong, China 40 40 Kohinoor Pakistan Power generation and transmission 1995 138.0 25.0 6.3 Japan 20 20 Kumtor Gold Kyrgyz Rep. Precious metals/minerals - gold 1995 355.0 40.0 Canada 33 33 Kwidzyn Poland Paper manufacturing 1995 164.8 24.0 France 64 64 o Laborex C6te dilvoire Wholesale/retail trade 1995 6.6 3.1 France 35 35 ' ~ Lattelekom SIA Latvia Telecoms 1995 220.1 5.4 13.7 Denmark 30 30 Maghreb IM Bank Tunisia Merchant bank 1995 3.2 0.3 France 40 40 Nahuelsat Argentina Telecoms 1995 240.0 30.0 5.0 Germany 11 11 Nantong Wanfu China Livestock - aquaculture 1995 30.0 6.5 2.8 Japan 80 80 Nesky Poland Auto components 1995 13.3 1.6 0.5 United States 77 77 Para Pigmentos Brazil Industrial mineralstores 1995 183.0 30.0 9.0 Japan 18 18 Pescanova Namibia Processing of livestock - fish 1995 13.5 6.5 Spain 100 100 PPL* Pakistan Oil/gas production 1995 72.5 25.0 United Kingdom 64 64 PT Bakrie Kasei Indonesia Organic chemicals 1995 210.0 30.0 3.0 Japan 51 51 PT Bakrie Pet Indonesia Organic chemicals 1995 68.9 12.0 2.0 Japan 51 65 PT Citimas Captl Indonesia Asset securitization institution 1995 9.1 2.6 Singapore 23 53 RTDC Russian Fed. Telecoms 1995 40.0 7.5 United States 71 71 Rudus Oy Estonia Cement manufacturing 1995 7.3 1.5 Finland 60 60 Russia Registry Russian Fed. Secunties market institution 1995 10.0 1.5 United States 30 30 SEMOS Mali Precious metals/minerals - gold 1995 246.2 35.0 4.8 Germany 38 76 SGHI Guinea City and business hotel 1995 16.0 3.7 0.6 France 33 33 Smith-Enron Dom. Rep. Power generation and transmission 1995 200.0 32.3 United States 50 100 Sprint Polska Poland Telecoms 1995 165.0 25.0 7.0 United States 25 25 Sumperk Czech Rep. Quarried construction materials 1995 18.2 5.6 Denmark 75 75 Tanzania Brewery Tanzania Beverage manufacturing 1995 87.2 11.0 6.0 Netherlands 72 72 United Power Crp Oman Power generation and transmission 1995 235.7 15.0 4.0 Belgium 30 30 Vasyugan Russian Fed. Oil/gas production 1995 37.1 9.0 Canada 50 50 Vinythai Thailand Organic chemicals 1995 406.0 45.0 Belgium 49 49 Westel 900* Hungary Telecoms 1995 185.0 35.0 4.0 United States 42 42 ABN AMRO Uzbek Uzbekistan Commercial bank 1996 10.0 1.0 Netherlands 50 50 AES Pak Gen Pakistan Power generation and transmission 1996 340.0 20.0 9.5 United States 99 99 Alpha Cement Russian Fed. Cement manufacturing 1996 191.9 13.3 Switzerland 27 27 Appendix B (continued) ~ ~~~~~~~~~~~Estimated IF Country of Largest foreign Total foreign Commitment project cost IFC loan equity largest foreign direct investor investor Companya Country Sector Fyb (US$m) (US$m) (LJS$m) investor equity (%c) equity (%d) Amantaytau Gold Uzbekistan Precious metals/minerals - gold 1996 6.4 0.9 United Kingdom 35 35 Ante Chastanet Saint Lucia Resort hotel 1996 1 5.4 6 2 Canada 100 100 APIB W. Bank & Gaza Multipurpose bank 1996 45.0 3 8 Jordan 51 51 Bereby Finances COte dIlvoire Inedible crops - natural fibers 1996 22.0 3 0 Belgium 64 64 Brahma - ARG Argentina Beverage manufacturing 1996 119.2 1 8.5 Brazil 51 100 Caribbean Ispat Trin. & Tobago Integrated steel works 1996 142 4 27 4 India 100 100 Consorcio Aerop. Uruguay Transport infrastructure 1996 31 0 8.0 United Kingdom 41 41 Crescent Chem Pakistan Primary textile operations 1996 106.4 15 0 5.0 Japan 12 12 Depsona Z.A.O. Russian Fed. Processing of edible crops 1996 1 9.4 6.8 1.5 Italy 29 41 Dupont Suzhou. China Primary textile operations 1996 124.4 24 9 3.8 Japan 17 30 Engen Congo Congo, Rep. of Oil/gas production 1996 99.8 41.2 2.9 South Africa 56 56 Eurafrican Bank Tanzania Commercial bank 1996 9.0 3.0 0.7 Belgium 30 30 FTG C6te dilvoire Primary textile operations 1996 1.9 France 11 11 Gaspol Poland Transport infrastructure 1996 60 0 20 0 5.0 Netherlands 62 62 Gui Ahmed Pakistan Power generation and transmission 1996 1 38.0 27.0 4.1 Japan 20 20 GVK India Power generation and transmission 1996 290.7 40.0 8.3 United States 1 9 1 9 Hlimal Power Nepal Power generation and transmission 1996 125.7 31.0 Norway 58 58 Jordan Telephone Jordan Telecorms 1996 85.0 15S.0 3.0 United States 25 25 Le Meridien Port Vanuatu Resort hotel 1996 13.7 5.5 Singapore 100 100 Lrteksas Lithuania Primary textile operations 1996 27.2 10.0 1 0 Germnany 66 66 Mallory Brazil Appliances./utensils 1996 32.1 80 4.0 United States 38 38 Morn.Star Cement Vietnam Cement manufacturing 1996 309.0 30.0 Switzerland 65 65 Nanjing Kumho China Auto tires 1996 119.2 1 6.0 3.8 Korea, Republic of 20 51 NEMAK Mexico Auto components 1996 90 2 30.0 United States 20 40 Orix Finance Pakistan Investment bank 1996 6.4 0.6 Japan 20 20 o- Rain Calcining India Oil refining - petroleum coke 1996 94.2 1 9.3 54 United States 20 20 00 Savvinskaya Russian Fed. Construction/real estate 1996 30.4 7.7 Japan 70 70 SET Venezuela Securities market institution 1996 5.5 0 5 United States 11 11 Sual Power Philippines Power generation and transmission 1996 1,402.4 30.0 Hong Kong, China 92 97 Terminal 6 Argentina Transport infrastructure 1996 19.8 10.5 Brazil 22 22 Terminales Port. Argentina Transport infrastructure 1996 50 3 10 0 2.0 United States 17 17 Tosac Hotel Vietnam City and business hotel 1996 11.9 3.4 Singapore 68 68 Tourane Hotel Vietnam City and business hotel 1996 23.7 8.3 Australia 70 70 Uch Power Pakistan Power generation and transmission 1996 630.0 United Kingdom 40 89 Weihai Weidongri China Diversified food manufacturing 1996 20 0 5.0 Korea, Republic of 25 75 Agrocapital Ecuador Inedible crops - horticultural products 1997 14.0 3.5 United States 50 50 Aminex TUN Tunisia Oil/gas production 1997 7.2 0 6 Russian Federation 22 22 Asia Power Sri Lanka Power generation and transmission 1997 62.5 10 0 2.3 United Kingdom 32 50 Baltic Malt Poland Processing of edible crops - grain 1997 27.5 6.9 2 0 Germany 50 50 Beijing Hormel China Diversified food manufacturing 1997 17 5 5 0 0.5 United States 49 49 Caju Mocita Mozambique Diversified food manufacturing 1997 10 6 3.0 South Africa 75 87 COMSIGUA Venezuela Iron manufacturing 1997 262.3 35.0 10.0 Japan 39 54 DATEL Tanzania Telecoms 1997 10.0 2.3 0 5 France 36 36 Demirbank Kyrgyz Kyrgyz Republic Commercial bank 1997 6 0 0.3 Turkey 60 60 ECHMB [AC Region Housing/mortgage bank 1997 14.8 0.4 Trinidad and Tobago 20 20 Elcoteq Tallinn tstonia Electronic, telecom, precision equip. 1997 40.6 7.7 Finland 67 67 Eldor Turkey Electronic, telecom, precision equip. 1997 1 5.4 6.0 Italy 100 100 Engro Paktank Pakistan Fertilizers 1997 65.0 12.0 Netherlands 50 50 ERU Hungaria Hungary Processing of livestock - dairy 1997 7.4 2.5 Netherlands 100 100 Fairyoung Ports China Transport infrastructure 1997 S.0 5.0 Hong Kong, China 44 44 Foremost Dairy Vietnam Processing of livestock - dairy 1997 30.0 6 0 Netherlands 70 70 Appendix B (continued) Estimated IFC Country of Largest foreign Total foreign Commitment project cost IFC loan equity largest foreign direct investor investor Companya Country Sector Fyb (US$m) (US$m) (US$m) investor equity (%c) equity (%d) Guipeba Argentina Processing of edible crops - veg oil 1997 5.0 1.5 Brazil 100 100 IHP Tanzania Construction/real estate 1997 9.0 1.7 0.6 Japan 34 54 Jam Energy Prtnr Jamaica Power generation and transmission 1997 98.0 22.0 1.9 United States 38 58 Jingyang China Cement manufacturing 1997 265.0 40.0 Singapore 95 95 Kladno Czech Rep. Power generation and transmisson 1997 375.0 57.2 United States 43 85 MGDK Egypt Inorganicchemicals 1997 24.9 1.5 Germany 45 45 Norgips Poland Quarried construction materials 1997 52.0 11.1 Norway 67 67 Owens Corn ng India Industrial glass 1997 102.2 25.0 United States 40 40 Packages Lanka Sri Lanka Paper products 1997 9.3 1.1 Pakistan 30 30 Pam Bank Poland Housing/mortgage bank 1997 35.0 15.0 United States 50 50 Promigas Colombia Oil/gas transport 1997 57.5 10.0 United States 39 39 Proyectos Colombia Transport infrastructure 1997 100.0 10 0 5.0 Spain 20 20 PT Gleneagles Indonesia Hospital/clinic 1997 47.9 11 9 Singapore 30 30 PT Pramindo Ikat Indonesia Telecoms 1997 624 2 50.0 7.4 France 35 35 Refimet Chile Nonferrous metals - copper 1997 97 0 15.0 Canada 33 33 SEF ABN AMRO Kazakhstan Securities market institution 1997 0.1 0.0 Netherlands 51 51 SEM Hotel Vietnam, Socialist Rep. City and business hotel 1997 81.5 13.1 France 58 75 SMH Glass Co Vietnam, Socialist Rep. Industrial glass 1997 32.0 10.0 Philippines 65 65 Sucre de Bourbon Vietnam, Socialist Rep. Processing of edible crops - sugar 1997 95.0 22.0 France 70 70 Suzhou PVC China Organic chemicals 1997 64.7 22.0 2.5 Norway 32 75 Telecel Bolivia Bolivia Telecoms 1997 64.7 15.0 Luxembourg 90 90 Tianjin Kumho China Auto tires 1997 93.2 11.2 Korea, Republic of 95 95 TOFTAN Estonia Tree farming 1997 12.0 2.0 Finland 42 42 O Transconor Argentina Oil/gas transport 1997 402.1 42.5 United States 25 39 uo UA-IARD Cote d'lvoire Insurance company 1997 3.0 0.3 France 63 63 Vereinsbank Riga Latvia Commercial bank 1997 6.8 1.8 Germany 55 75 Vika Wood Latvia Tree farming 1997 19.0 4.0 Sweden 61 80 Vimaflour Vietnam Processing of edible crops - grain 1997 26.0 8.0 Malaysia 70 70 Zeravshan Gold Tajikistan Precious metals/minerals - gold 1997 127.0 6.3 1.2 United Kingdom 44 44 NA Not on record Notes: 'Projects examined in detail (see Box 5.2 in Chapter 5). a Non-bankfinancial institutions (NBFis) such as developmentfinance companies, tradefinance companies,factoring/discount houses, NBFI credit lines as well as portfolio, venture capital, andpensionjunds have not been included in this study. b Year offirstFC commitment alongside of FDI (fiscalyear July 1 -June 30). c For this study, a project is classified as FDl when there is at least oneforeign private investor (other than vehiclesforportfolio investment) with an equity stakegreater than 1 Opercent at the time of initial IFC investment. d Foreign direct investor equity as a percent of total equity. Appendix B (continued) Summary Nuniber of companies Total project cost (1996 US$ billiona) 195879 -19 9 1990497 Total Region 1958-79 198 98g 1990-97 Total 16 24 52 92 East Asia and Pacific 943 1,484 11,248 13,675 10 9 68 87 Eastern Europe and Central Asia 545 313 5,635 6,493 47 30 63 140 Latin America and Caribbean 4,380 4,954 8,623 17,956 8 13 18 39 Middle East and North Africa 171 1,367 1,312 2,850 10 13 29 52 South Asia 1,505 561 3,613 5,679 23 60 45 128 Sub-Saharan Africa 1,198 2,866 4,976 9,040 114 149 275 538 Total 8,742 11,545 35,407 55,694 Number of companies Total project cost (1996 US$ billiona) 1958-79 1980-89 1990-97 Total Sector 1958-79 1980-89 1990-97 Total 16 8 16 40 Construction materials 734 906 2,206 3,846 2 9 18 29 Chemicals 133 1,238 2,699 4,070 CD 7 3 2 12 Fertilizers and agricultral chemicals 1,370 764 235 2,370 3 7 31 41 Financial services 23 139 604 767 13 26 31 70 Food and agribusiness 292 392 1,139 1,823 7 18 24 49 Hotels and tourism 190 461 1,141 1,793 1 3 7 11 Industrial and consumer services 36 561 280 876 0 3 52 55 Infrastructure 0 133 10,062 10,195 13 13 17 43 Manufacturing 179 762 1,607 2,548 1 13 13 27 Mining and extraction of fuel minerals 57 2,095 3,816 5,968 13 21 24 58 Mining and extraction of metals/ores 2,414 3,048 3,937 9,400 6 7 8 21 Motor vehicles and components 1,177 361 1,043 2,581 4 0 5 9 Oil refining 375 0 2,879 3,254 16 11 15 42 Textiles 813 454 1,685 2,952 12 7 12 31 Timber, pulp, and paper 949 229 2,072 3,251 114 149 275 538 Total 8,742 11,545 35,407 55,694 a Real values were used in summary tables to provide a more accurate picture of trends over time. Appendix C FIAS Advisory Projects Country Fiscal year Type of project Description ASIA AND THE PACIFIC ASEAN 1990 Investment policy, FIAS prepared a study of investment incentives and destructive incentives competition for FDI in ASEAN and the implications for harmonization and cooperation. ASEAN 1988 Investment policy FIAS provided suggestions on incentive harmonization for the ASEAN member states at the Secretariat's request. Bangladesh 1993 Diagnostic FIAS examined the policy, regulatory and incentive regime affecting private investment and made recommendations for improvements. Bangladesh 1993 Institutions FIAS provided assistance to the Board of Investment on organizational structure and functions, operating procedures, personnel policy and establishing a framework for investment promotion through the production of promotional materials. Bangladesh 1990 Institutions FIAS assisted in strengthening the institutional capacity of the Board of Investment. Bangladesh 1990 Diagnostic update FIAS updated its 1988 diagnostic review at the Government's request. Bangladesh 1988 Diagnostic FIAS conducted a diagnostic review of the obstacles to increased flows of foreign direct investment. Cambodia 1997 Institutions FIAS assisted in developing a system for monitoring investment incentives granted to foreign investors. Cambodia 1994 Investment policy, FIAS helped in the preparation of a new foreign investment law. laws China 1997 Institutions FIAS reviewed the existing foreign direct investment data sources, definition and classification, and made recommendations to strengthen the foreign direct investment data statistical system. China 1997 Investment policy FIAS assisted in the preparation of new regulations on the treatment of branches of foreign firms. China 1996 Promotion strategy, FIAS drafted a report on the relationship between investment Sichuan province environment and investment promotion in the Sichuan Province, and helped organize a Roundtable in Chengdu on the same subject for the benefit of Provincial authorities. China 1996 Implementation, FIAS assisted in finalizing new regulations governing the BOT BOT approval procedures, bidding documents, and model contracts. China 1995 Sector, FIAS reviewed the policy implications of promoting foreign direct infrastructure investment in the infrastructure sector. China 1994 Investment policy, FIAS conducted a review of screening and approval procedures. screening/approval China 1992 Investment policy, FIAS conducted a review of the foreign investment environment. survey Country Fiscal year Type of project Description China 1989 Investment policy FIAS provided advice on reconciling the conflicting objectives of the joint-ventures foreign exchange balance requirements and the desire to increase flows of FDI. China 1987 Diagnostic FIAS, with the World Bank, prepared a diagnostic review of the (with World Bank) foreign investment climate. China 1987 Investment policy FIAS assisted in the preparation of a new contractual joint venture law. China 1986 Seminar FIAS conducted a seminar in Beijing for senior Chinese officials involved in the planning, approval and monitoring of FDI. Fiji 1994 Investment policy, FIAS reviewed the institutional arrangements for foreign direct institutions investment and assisted in the preparation of a new investment act. Fiji 1994 Investment policy, FIAS conducted an examination of the incentives framework. incentives Greater Mekong 1996 Institutions, FIAS assisted in the first meeting of promotion agencies and helped Subregion promotion strategy them in conceptualizing the nature and the scope of their regional cooperation. India 1993 Diagnostic, FIAS conducted a comparative assessment of foreign investment promotion policies and assisted in the formulation of a foreign investment promotional strategy. Indonesia 1996 Investment policy, FIAS reviewed the policy aspects of developing backward linkages backward between foreign and domestic firms. linkages II Indonesia 1996 Institutions, FIAS reviewed the existing FDI data sources, definition and FDI database classification, and the inter-agency collaboration, making recommendations to improve data collection, quality, coverage, and consistency. Indonesia 1995 Investment policy FIAS conducted an extensive survey on further liberalization of ownership and control restrictions. Indonesia 1995 Investmnent policy, FIAS reviewed the policy aspects of developing backward linkages backward linkages between foreign and domestic firms. Indonesia 1991 Institutions FIAS assisted in the formulation of an investment promotion strategy and, more specifically, the roles of the national and regional investment institutions in that strategy. Indonesia 1990 Promotion FIAS reviewed policy and regulatory impediments to foreign investment in the agricultural sector with the intent of increasing such investment. Indonesia 1989 Sector, agriculture FIAS conducted a review of impediments to foreign direct investment in the agricultural sector. Indonesia 1988 Diagnostic FIAS reviewed the regulatory framework for foreign investment. (with World Bank) Kiribati 1997 Diagnostic FIAS conducted a diagnostic review of the investment climate. Lao, PDR 1992 Investment policy, FIAS reviewed the feasibility of an Export Processing Zone to EPZ promote foreign direct investment. Malaysia 1994 Institutions FIAS helped the Industrial Development Authority to strengthen its promotional and facilitation functions. Malaysia 1992 Investment FIAS helped the Industrial Development Authority design a system monitoring to monitor foreign direct investment. Malaysia 1992 Investment policy, FIAS conducted a comparative assessment of the investment incentives incentive system. Malaysia 1988 Institutions FIAS assisted the Ministry of Trade and Industry officials to improve techniques for the economic evaluation of foreign investment proposals. Maldives 1994 Diagnostic FIAS conducted a diagnostic study of the investment climate. Marshall Islands 1996 Diagnostic FIAS conducted a diagnostic review of the investment climate. Micronesia, 1997 Implementation FIAS assisted in the implementation of earlier recommendations for Federated States of a revised legal framework to attract foreign investmcnt. 112 Country Fiscal year Type of project Description Micronesia 1995 Investment policy FIAS focused on the appropriate legislative framework to attract foreign direct investment. Mongolia 1997 Promotion strategy FIAS drafted a report and organized a Roundtable on the relationship between investment environment and investment promotion. Mongolia 1997 Investment policy, FIAS helped in the revision of the investment law. law Mongolia 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Nepal 1997 Investment policy, FIAS reviewed the incentives regime and the legal framework for incentives foreign investment. Nepal 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Papua-New 1989 Investment policy, FIAS prepared a revision of the investment law. Guinea law Philippines 1997 Sector, FIAS reviewed the policy implications of promoting foreign direct infrastructure investment in the infrastructure sector. Philippines 1996 Institutions FIAS helped define an institutional framework and strategy for investment promotion. Philippines 1995 Investment policy, FIAS reviewed the policy aspects of developing backward linkages backward between foreign and domestic firms. linkages II Philippines 1992 Institutions FIAS assisted in the reorientation of the Board of Investments from regulation to promotion of investment. Philippines 1992 Investment policy, FIAS conducted a study designed to identify opportunities for, and backward linkages impediments to, backward linkages between foreign and local firms. Philippines 1991 Promotion strategy FIAS assisted in the preparation of a new investment promotion strategy. Philippines 1990 Institutions, FIAS provided recommendations for improvements to the FDI FDI database database. Philippines 1989 Investment policy, FIAS helped the Central Bank assess whether the country should swaps resume its debt-equity swaps program. Philippines 1988 Sector, agriculture FIAS helped the Department of Agriculture and Food determine how policy and institutional changes could stimulate domestic and foreign private investment to help reduce post-harvest losses of grains. Solomon Islands 1997 Investment policy, FIAS conducted a review of the investment law. law Sri Lanka 1993 Promotion strategy FIAS assisted in the development of an investment promotion strategy. Sri Lanka 1991 Institutions FIAS assisted in the development of a new institutional and procedural framework to attract foreign direct investment. Sri Lanka 1991 Diagnostic FIAS assisted in the preparation of an investment policy and institutional framework for foreign direct investment. Thailand 1995 Promotion strategy FIAS prepared a framework for a promotion strategy for the Eastern Seaboard region. Thailand 1992 Investment policy, FIAS conducted a study designed to identify opportunities for, and backward linkages impediments to, backward linkages between foreign and local firms. Thailand 1990 Investment policy FIAS reviewed backward linkage experience of selected countries and their relevance in Thailand. Thailand 1988 Investment policy, FIAS reviewed Thailand's investment policy and incentives strategy incentives in light of the objectives in the Sixth National Economic and Social Plan. Tonga 1996 Diagnostic FIAS conducted a diagnostic review of the investment climate. Vanuatu 1996 Investment policy FIAS assisted in the preparation of a documented foreign investment policy. Vietnam 1996 Sector, FIAS reviewed the country's experience in attracting and infrastructure implementing FDI into infrastructure projects and evaluated obstacles to increasing such FDI in Vietnam, 113 Country Fiscal year Type of project Description Vietnam 1995 Investment policy FIAS reviewed the policy implications of promoting foreign direct investment in the infrastructure sector. Vietnam 1994 Investment policy, FIAS assisted in improving coordination of approval procedures and approval/ promotional activities. promotion Vietnam 1993 Investment policy, FIAS conducted a study on the role of bilateral, regional and multi- laws lateral legal instruments to encourage foreign direct investment. Vietnam 1991 Investment policy FIAS was requested to establish priorities for legal reforms to encourage and accelerate the flow of foreign direct investment. Western Samoa 1995 Investment policy, FIAS reviewed the investment incentives regime. incentives Western Samoa 1992 Diagnostic FIAS conducted a diagnostic review of the investment climate. CENTRAL ASIA, MIDDLE EAST AND NORTH AFRICA Algeria 1992 Diagnostic FIAS conducted a diagnostic review of the investment climate. Egypt 1994 Investment policy, FIAS, in conjunction with IFC's Economics Department, completed backward linkages a study on ways to facilitate linkages between foreign and local firms. Egypt 1991 Diagnostic FIAS conducted a diagnostic review of the investment climate. Jordan 1995 Implementation FIAS provided assistance in implementing earlier advice on the investment law and structure of the promotion agency. Jordan 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Kazakhstan 1995 Diagnostic FIAS conducted a survey of multinational companies on the foreign investment environment in the country and assisted the government in revising the foreign investment law. Kyrgyz Republic 1997 Diagnostic II FIAS conducted a second review of the environment for foreign direct investment, with emphasis on administrative and legal barriers, and the way to structure a promotion agency. Kyrgyz Republic 1995 Diagnostic FIAS conducted a diagnostic study of the investment climate. Lebanon 1994 Diagnostic FIAS conducted a diagnostic study of the investment climate. Morocco 1995 Institutions, FIAS conducted a competitiveness study of selected manufacturing promotion strategy sectors and assisted in the design of an investment promotion strategy. Morocco 1991 Investment policy, FIAS reviewed administrative procedures and developed a foreign promotion investment promotion strategy. Oman 1994 Institutions FIAS assisted in the establishment of an investment promotion unit in the Ministry of Industry and Commerce. Pakistan 1994 Institutions FIAS completed a comprehensive technical assistance program by advising the newly established Pakistan Investment Board on investment facilitation. Pakistan 1994 Promotion strategy FIAS assisted in the development of a promotion strategy. Pakistan 1993 Institutions FIAS developed a strategy to strengthen the Pakistan Investment Board. Pakistan 1992 Diagnostic FIAS conducted a diagnostic study of the investment climate. Pakistan 1990 Diagnostic FIAS reviewed the role of government in attracting foreign direct (with World Bank) investment. Saudi Arabia 1991 Diagnostic FIAS conducted a diagnostic study of the investment climate. Tunisia 1996 Implementation FIAS assisted in implementing earlier recommendations for the establishment of a new investment promotion institution. Tunisia 1995 Institutions, FIAS conducted a competitiveness study of selected manufacturing promotion strategy sectors and assisted in the design of an investment promotion strategy. Tunisia 1992 Promotion strategy FIAS developed a foreign investment promotion strategy. LUMA 1996 Investment policy, FIAS conducted a study on the desirability and feasibility of incentives harmonization of investment incentives among countries constituting the UMA (Algeria, Libya, Mauritania, and Tunisia). United Arab 1993 Diagnostic FIAS conducted a diagnostic study of the investment climate. Emirates 114 Country Fiscal year Type of project Description Uzbekistan 1997 Diagnostic FIAS conducted a diagnostic review of foreign direct investment environment. West Bank 1997 Investment policy FIAS provided assistance in developing the basic regulatory and and Gaza institutional framework for private sector activities. West Bank 1996 Implementation FIAS provided assistance in revising a draft investment law based on and Gaza its earlier recommendations. West Bank 1995 Diagnostic FIAS reviewed the policy and legal framework for foreign direct and Gaza investment. Yemen 1997 Diagnostic FIAS conducted a diagnostic review of the investment climate and an investor survey identifying major impediments to foreign direct investment. Yemen 1992 Institutions FIAS conducted a study on the structure and operations of the General Investment Authority and made recommendations. EUROPE Belarus 1996 Diagnostic FIAS conducted a diagnostic review of the investment climate. Bulgaria 1996 Investment policy FIAS conducted a review of impediments to the formation of joint ventures between foreign investors and Bulgarian state enterprises. Bulgaria 1994 Diagnostic FIAS conducted a diagnostic study of the investment climate. Central and 1992 Investment FIAS prepared a report on the impact that EEC corporate income Eastern Europe promotion tax regimes have on the profitability of foreign investments in five taxation EEC countries. The results were presented in a workshop sponsored by FIAS at the UNIDO Center in Vienna. Croatia 1997 Institutions FHAS helped in the development of the mandate, organizational structure, and the work program of the investment promotion agency. Croatia 1996 Investment policy FIAS provided assistance in drafting an investment policy statement. Croatia 1995 Diagnostic FIAS reviewed the legal and regulatory environment for foreign investment and helped develop an institutional framework for investment promotion. Czechoslovakia 1991 Diagnostic FIAS conducted a diagnostic study of the investment climate. (with World Bank) Czechoslovakia 1991 Investment policy, FIAS reviewed the legal framework for foreign investment and the institutions investment promotion agencies and made recommendations. Estonia 1997 Diagnostic II FIAS conducted a diagnostic review of the investment climate. Estonia 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Georgia 1997 Investment policy, FIAS reviewed the draft of a new foreign direct investment law. law Georgia 1997 Institutions FIAS provided advice on the structure, design and strategy of an investment promotion agency. Georgia 1996 Diagnostic FIAS conducted a diagnostic review of the investment climate. Hungary 1991 Investment policy, FIAS conducted a review of screening and approval procedures, laws taxation and the legal framework for foreign investment. Hungary 1990 Diagnostic FIAS reviewed incentives, screening and the role of foreign direct investment in the privatization of state-owned enterprises. Latvia 1996 Investment policy FIAS reviewed policies and procedures affecting FDI, as well as the ongoing privatization program, from the strategic investors' point of view. Latvia 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Lithuania 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Poland 1990 Diagnostic, FIAS conducted a diagnostic study of the investment climate and institutions prepared a review of the role and organization of the Foreign Investment Agency. Romania 1991 Diagnostic FIAS conducted a diagnostic review of the investment climate. 115 Country Fiscal year Type of project Description Russian 1997 Diagnostic FIAS conducted a review of the investment climate in Novgorod Federation Oblast in Russia. Russian 1994 Investment policy, FIAS advised on amendments to Russia's Foreign Investment Law. Federation law Russian 1993 Institutions FIAS developed a technical assistance proposal for the promotion Federation and regulation of foreign direct investment. Russian 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Federation Slovakia 1994 Diagnostic FIAS conducted a diagnostic study of the investment climate. Ukraine 1994 Diagnostic FIAS conducted a diagnostic study of the investment climate. Yugoslavia 1990 Investment policy, FIAS assisted in the design of regulations and procedures to swaps implement a debt-equity swap program. Yugoslavia 1989 Investment policy FIAS prepared a review of obstacles to increased flows of foreign investment and commented on the draft of the new foreign investment law. LATIN AMERICA AND THE CARIBBEAN Argentina 1994 Institutions FIAS assisted in the institutional development of the Investment Promotion Agency. Bahamas 1993 Investment policy Following the diagnosis of policy issues in FY92, FIAS helped the Government draft an Investment Policy Statement. Bahamas 1992 Investment policy, FIAS reviewed the screening and approval procedures for investment institutions applications, with special attention to the regulatory and institutional dimensions of the process. Bolivia 1996 Implementation FIAS assisted in implementing earlier recommendations for the creation of a new investment promotion institution. Bolivia 1995 Institutions FIAS assisted in the institutional development of the Investment Promotion Agency. Brazil 1996 Institutions FIAS developed a proposal for the creation of a national-level institution to promote inward FDI. Costa Rica 1997 Investment policy FIAS assisted in developing a national strategy for strengthening the country's electronics sector. Dominican 1994 Investment policy, FIAS reviewed the legal framework for foreign investment and Republic laws made recommendations on formulating a promotion strategy. El Salvador 1997 Investment policy FIAS assisted in drafting a new investment law. El Salvador 1997 Institutions, FIAS assisted in strengthening the role of the investment agency promotion strategy and developing a national promotion strategy. El Salvador 1994 Investment policy, FIAS prepared a report on legal obstacles to lending to private laws firms, including foreign investors. El Salvador 1993 Investment policy, FIAS reviewed the approval procedures and regulation of private institutions investment and suggested recommendations for the reform of the investment bureaucracy. Guyana 1995 Diagnostic FIAS reviewed policies impeding foreign direct investment and helped the national investment authority to develop its institutional capacity. Honduras 1992 Investment policy, FIAS examined the investment climate and the legal framework for laws foreign investment and made recommendations for reforming the legal structure for foreign investments. Mexico 1996 Investment policy FIAS reviewed the policy and institutional aspects of increasing backward linkages between foreign and domestic firms. Panama 1996 Institutions HAS assisted in developing the structure and defining the functions of a new investment promotion agency. Paraguay 1996 Institutions, FIAS assisted in developing a strategy and a three-year business promotion strategy plan for the investment promotion agency. Paraguay 1995 Investment policy FIAS helped the cabinet to prepare an Investment Policy Statement. Paraguay 1994 Promotion strategy FIAS helped in the development of legal, policy and institutional changes, after identifying the opportunities for foreign investment. 116 Country Fiscal year Type of project Description Paraguay 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Peru 1995 Institutions FIAS helped in the development of institutional capacities for promoting foreign investment. St. Lucia 1997 Institutiolns FIAS assisted in defining an institutional framework and exploring strategic options for investment promotion. Trinidad 1996 Investment policy FIAS conducted a detailed study emphasizing the implementation and Tobago of previously recommended reforms in incentive regime, foreign investment law, and entry procedures and restrictions. Trinidad 1995 Investment policy FIAS reviewed the corporate taxation system. and Tobago Trinidad 1994 Diagnostic FIAS conducted a diagnostic study of the investment climate. and Tobago Uruguay 1991 Diagnostic FIAS conducted a diagnostic review of the investment climate. Venezuela 1995 Implementation, FIAS reviewed the functioning of the promotion agency. institutions Venezuela 1993 Promotion strategy FIAS assisted the National Investment Promotion Council (CONAPRI) to develop a comprehensive strategy for promoting foreign investment. Venezuela 1991 Promotion strategy FIAS provided assistance to the National Investment Promotion Council in formulating a promotion strategy. SUB-SAHARAN AFRICA Angola 1992 Diagnostic FIAS conducted a diagnostic study of the investment climate. Benin 1992 Diagnostic FIAS conducted a diagnostic study of the investment climate. Burkina Faso 1992 Diagnostic FIAS conducted a diagnostic study of the investment climate. Cameroon 1995 Diagnostic FIAS conducted a diagnostic study of the investment climate. Cameroon 1990 Investment policy FIAS assisted in the revision of the investment code. Cameroon 1990 Diagnostic FIAS prepared a diagnostic review of the investment climate. Cape Verde 1995 Institutions FIAS assisted in the evaluation of the investment promotion agency. Congo, Republic of 1991 Diagnostic FIAS conducted a diagnostic study of the investment climate. C6te d'Ivoire 1993 Institutions FIAS conducted an evaluation of procedures used to implement the Investment Code of 1984. Equatorial Guinea 1993 Investment policy, FIAS assisted the government in drafting a new foreign investment regulations lawv in FY1992 and was subsequently asked to help draft imple- menting regulations. Equatorial Guinea 1992 Investment policy, FIAS assisted the government in drafting a new foreign investment investment code law. Ethiopia 1997 Diagnostic FIAS reviewed the investment climate and the approval process for foreign direct investment. Gambia 1995 Diagnostic FIAS conducted a diagnostic study of the investment climate. Ghana 1996 Promotion strategy FIAS assisted in the development of a strategic plan for investment promotion. Ghana 1995 Investment policy, FIAS conducted a regulatory review of barriers to FDI. barriers Ghana 1994 Institutions FIAS helped in the restructuring of the investment institution. Ghana 1993 Investment policy, FIAS helped the government formulate a new set of investment investment code incentives that would be administered automatically through the tax system and helped redefine the internal structure and functions of the Ghana Investment Center following the changes. Ghana 1987 Institutions FIAS provided assistance to the Ghana Investment Center in implementing the country's 1985 investment code, focusing primarily on organization and management. Guinea 1996 Investment policy FIAS assisted in the implementation of its earlier advice on improvements to the investment code. Guinea 1989 Diagnostic FIAS undertook a diagnostic review of the investment climate. Guinea-Bissau 1991 Investment policy FIAS assisted in the revision of a new investment code. 117 Country Fiscal year Type of project Description Kenya 1992 Investment policy, FIAS conducted a study on the environment for backward linkages backward linkages in Kenya, focusing on policy and administrative issues. Kenya 1991 Investment policy FIAS assisted in the preparation of an investment policy statement. Kenya 1991 Promotion strategy FIAS assisted in the preparation of an investment promotion strategy. Kenya 1990 Investment policy FIAS conducted a seminar in Washington for Kenya's Ministry of Finance and the Investment Promotion Center for the preparation of an investment policy statement. Kenya 1988 Diagnostic FIAS conducted a diagnostic review of the investment climate. Lesotho 1997 Investment policy FIAS conducted a detailed review of administrative barriers to private investment, as well as the investment legislation. Lesotho 1991 Promotion strategy FIAS assisted in the preparation of an investment promotion strategy. Lesotho 1990 Diagnostic FIAS prepared a diagnostic review of the investment climate. Madagascar 1992 Promotion FIAS developed a strategic plan for investment promotion following an earlier diagnostic study of the investment climate. Madagascar 1990 Investment policy FIAS assisted in the revision of the 1985 investment code and the preparation of a draft of new legislation for the creation of export- processing zones. Madagascar 1989 Diagnostic FIAS undertook a diagnostic review of the investment climate. Malawi 1995 Promotion strategy FIAS assisted in the design of an investment promotion strategy. Malawi 1994 Institutions FIAS installed the software developed for foreign investment Investor tracking tracking in the investment promotion agency. software Malawi 1992 Investment policy, FIAS assisted the government in redefining its approach to private investment code investment through deregulation, a new approach to investor servicing through the creation of an IPA, an Investment Policy Statement and, inter alia, an Investor's Guide. Malawi 1991 Diagnostic FIAS conducted a diagnostic review of the investment climate and assisted in the preparation of an investment policy statement, investor's guide and statute establishing an investment promotion agency. Mali 1997 Institutions FIAS assisted in developing the capacity of the investment promotion institution. Mali 1992 Diagnostic FIAS prepared a study in which previously identified obstacles to investment would be compiled in a single document. This study helped provide background material to a revision of the investment code. Mauritania 1996 Investment policy, FIAS developed detailed recommendations for the short term barriers improvements in the investment environment. Mauritania 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Mozambique 1996 Investment policy, FIAS conducted a detailed review of specific barriers to private barriers investment. Mozambique 1994 Institutions FIAS assisted in the institutional development of the investment promotion agency. Mozambique 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Mozambique 1991 Investment policy, FIAS conducted a review of the debt equity conversion program. swaps Namibia 1997 Investment policy, FIAS recommended strategies for improving the investment incentives incentives framework. Namibia 1996 Investment policy, FIAS conducted a detailed review of specific barriers to private barriers investment. Namibia 1996 Investment policy, FIAS conducted a review of the investment incentives regime. incentives Namibia 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Namibia 1992 Investment policy, FIAS helped develop a new Investment Promotion Act. investment code 118 Country Fiscal year Type of project Description Senegal 1996 Investment policy FIAS reviewed the investment incentives and the EPZ regime as well as custom procedures affecting foreign direct investment. Senegal 1994 Investment policy, FIAS assisted in the rationalization of the investment incentive incentives framework. Senegal 1989 Sector, agriculture FIAS helped formulate a promotion strategy for foreign investment in the Senegal River Basin. Sierra Leone 1997 Investment policy, FIAS reviewed the foreign investment law. law Sudan 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Swaziland 1997 Investment policy FIAS reviewed the investment legislation. Swaziland 1994 Diagnostic HAS conducted a diagnostic study of the investment climate. Tanzania 1993 Investment Policy, FIAS reviewed policies to encourage foreign direct investment with swaps/forex special attention to exchange controls and debt-equity swaps. Togo 1990 Promotion strategy FIAS helped to develop a short to medium term strategic plan for foreign investment promotion. Togo 1989 Investment policy FIAS assisted in the revision of the investment code and the preparation of implementing regulations. Uganda 1997 Investment policy, FIAS conducted a detailed review of administrative barriers to barriers private investment. Uganda 1995 Institutions, FIAS installed the software developed for foreign investment investor tracking tracking in the Investment Promotion Agency. software Uganda 1990 Diagnostic FIAS prepared a diagnostic review of the investment climate. Zambia 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Zambia 1993 Investment policy, FIAS conducted a diagnostic study of the investment environment investment code and proposed amendments to the existing Investment Act. Zimbabwe 1997 Sector, FIAS completed the work on improving the policy environment for infrastructure private investment in infrastructure. Zimbabwe 1995 Promotion strategy FIAS organized a series of corporate planning workshops to facilitate the preparation of a strategic plan for investment promotion. Zimbabwe 1994 Institutions FIAS assisted in the institutional development of the investment promotion agency. Zimbabwe 1994 Institutions FIAS assisted the Investment Center in the preparation of a policy initiative paper. Zimbabwe 1993 Diagnostic FIAS conducted a diagnostic review of the investment climate. Zimbabwe 1990 Diagnostic FIAS prepared a diagnostic review of the investment climate. ASEAN Association of South East Asian Nations BOT Build Operate Transfer EPZ Export Processing Zone FIAS Foreign InvestmentAdvisory Service UMA Union du Maghreb Arabe 119 I FOREIGN DIRECT INVESTMENT FOREIGN DIRECT INVESTMENT (FDI) HAS BEEN SOARING IN RECENT YEARS. THIS GROWTH HAS BEEN FED BY THE INCREASINGLY CLOSE INTEGRATION OF NATIONAL ECONOMIES, DRIVEN BY WORLDWIDE COMPETI- TIVE PRESSURES, ECONOMIC LIBERALIZATION, AND THE OPENING UP OF NEW AREAS FOR INVESTMENT. DEVELOPING COUNTRIES HAVE PARTICIPATED IN THE GROWTH OF INFLOWS AND, IN AN INCREASING NUM- BER OF CASES, HAVE ALSO BEEN THE SOURCE OF OUTFLOWS. SINCE ITS FORMATION IN 1956, THE INTERNATIONAL FINANCE CORPORATION (IFC) HAS PROMOTED THE PRIVATE SECTOR IN ITS MEMBER DEVELOPING COUNTRIES THROUGH LOAN AND EQUITY FINANCE AND ADVI- SORY SERVICES. MUCH OF THE CORPORATION'S ACTIVITIES HAVE FOCUSED ON SUPPORTING THE GROWTH OF DOMESTIC PRIVATE INVESTMENT, BOTH THROUGH DIRECT SUPPORT OF LOCAL ENTREPRENEURS AS WELL AS THROUGH DEVELOPMENT OF DOMESTIC CAPITAL MARKETS, BUT ENCOURAGEMENT OF FDI HAS BEEN A KEY COMPLEMENTARY OBJECTIVE. IN THE PAST FOUR DECADES, THE CORPORATION HAS INVESTED IN MORE THAN 500 COMPANIES THAT HAVE FOREIGN INVESTORS, PROVIDING IT WITH A UNIQUE INSIGHT INTO THE STRUC- TURING OF SUCH PROJECTS. IN 1985, IFC FOUNDED THE FOREIGN INVESTMENT ADVISORY SERVICE (FIAS), WHICH HAS CONDUCTED MORE THAN 230 ADVISORY ASSIGNMENTS IN 100 COUNTRIES, GAINING IN THE PROCESS A DETAILED INSIGHT INTO THE NATURE OF POLICY AND REGULATORY IMPEDIMENTS TO FOREIGN INVESTMENT IN DEVELOPING COUNTRIES. THE INCREASING VOLUME OF FDI FLOWS DOES NOT MEAN THAT THEY ARE EASY TO ATTRACT. THEY REMAIN CONCENTRATED IN A RELATIVE FEW OF THE EMERGING MARKETS. MOREOVER, FOR MANY DEVELOPING COUNTRIES, FDI FLOWS STILL PLAY A MINOR ROLE IN THEIR ECONOMIC GROWTH. APPROPRIATE POLICIES REMAIN THE KEY TO CAPTURING FOREIGN INVESTOR INTEREST. THE GOOD NEWS IS THAT THE DIFFICULTIES ARE SURMOUNTABLE, AND WITH SOUND POLICIES, EVEN COUNTRIES CURRENTLY CONSIDERED RISKY IN THE MARKETS CAN ATTRACT FDI. HOWEVER, POSITIVE INFLOWS OF FDI DO NOT ALWAYS GUARANTEE ECO- NOMIC BENEFITS. APPROPRIATE POLICIES TO PROMOTE OPEN AND COMPETITIVE MARKETS ARE ESSENTIAL TO ENSURE THAT HOST COUNTRIES RECEIVE THE FULL BENEFITS OF FDI. FOREIGN DIRECT INVESTMENT ARTICULATES THE LESSONS OF IFC's EXPERIENCE IN THIS AREA AND EXPLORES INTERACTIONS BETWEEN POLICY FRAMEWORKS AND THE VOLUME AND STRUCTURE OF FDI. THE STUDY ILLUSTRATES IFC'S DEVELOPMENT IMPACT THROUGH PROMOTION OF SUCCESSFUL PROJECT STRUC- TURES AND REGULATORY CHANGES IN THIS FIELD IN ITS DEVELOPING MEMBER COUNTRIES. THE REPORT IS ONE OF A SET OF PUBLICATIONS ON PRIVATE SECTOR DEVELOPMENT THAT IFC IS RELEASING IN ITS LESSONS OF EXPERIENCE SERIES. OTHER PUBLICATIONS IN THIS SERIES INCLUDE REVIEWS OF IFC'S EXPERIENCE IN EMERGING MARKETS WITH PRIVATIZATION, INVESTMENT FUNDS, LEASING, AND FINANCING PRIVATE INFRASTRUCTURE. ISBN 0-8213-4050-6