The Role of Joint Ventures and Investment Authorities

Foreign Direct Investment

The Role of Joint Ventures and Investment Authorities

Dale Weigel

Manager

Foreign Investment Advisory Service, IFC/MIGA

        

          Dr. Abdulaziz Aldukheil 1990

I. INTRODUCTION

1.      This paper will discuss the policies that require foreign investors to enter into joint ventures with local firms, and the institutions used by host countries to promote, screen and service foreign direct investments (FDI). These are related topics because the kinds of institutions that host countries need to put in place to deal with foreign investors will depend on the policies they are trying to implement. If the host country does not intend to screen foreign investors, or require them to enter into joint ventures with local investors, there may be no need to establish a procedure or an institution to deal with foreign investment. Brazil, for example, has had a very open attitude toward FDI, and therefore has not established a specific institution to regulate an investment approval process.

2.      Joint venture policies and investment authorities are specific aspects of the panoply of policies and institutions that regulate foreign direct investment in most developing countries. These investment policies and the institutions that administer them, should be consistent with the objectives the host country hopes to achieve through the use of foreign direct investment. For example, if direct investment is expected to increase the country's exports, then policies at all levels must make exports attractive. If a country wants foreign investors to participate in a broad range of activities, then macro-economic policies, as well as'specific policies affecting foreign investors, must be directed toward this end. Policies inconsistent with the objectives and inherent characteristics of a country result in frustration both for the country and for the foreign investor. Likewise, the objectives of policies may be frustrated by institutions that are not consistent with those policies.

3.      That governments of developing countries have had a wide range of objectives, policies and institutions governing foreign direct investment

is suggested by Table 1.¹ The wide variation in the stock of foreign direct investment in relation to GDP among the 22 developing countries shown in the table reflects not only differences in investment opportunities, but also differences in their objectives, and their success in translating objectives into effective policies and institutions. Some countries have not wanted much foreign direct investment (e.g., India). Others have wanted it (e.g., Yugoslavia), but have not been successful in formulating policies, or establishing institutions to get the amount or type of investment desired. Still others (e.g., Korea) have envisioned a limited role for foreign direct investment, but have been reasonably successful in putting appropriate policies and institutions in place to achieve these objectives.

TABLE 1

The Stock of Foreign Private Investment in Relation to GDP

(Data for 1979)

Singapore	19%
Malaysia	15%
Kenya	9%
Costa Rica	8%
Chile	7%
Brazil	7%
Ghana	6%
Cote d'Ivoire	6%
Philippines	6%
Argentina	5%
Colombia	5%
Mexico	5%
Pakistan	4%
Korea	3%
Morocco	2%
India	2%
Thailand	2%
Nigeria	1%
Egypt	1%
Algeria	I%
Turkey	I%
Yugoslavia	1%

Source: OECD, Development Cooperation Review;

World Bank, World Bank Atlas, 1981.

Table 1 is taken from Dale Weigel "Investment in LDC's, the Dabate Continues", The Columbia Journal of World Business, Vol. XXIII Number 1, Spring 1988, pages 5-9.

4.      The remainder of this paper discusses a particular set of policies--those to require joint ventures between foreign and local investors--and alternative institutional arrangements to administer investment policies. In the course of this discussion, it will be helpful to bear in mind that these policies and institutions should be evaluated in the broader context of the possibilities for foreign investment as well as the objectives of the host country in relation to such investment.

II. POLICIES REQUIRING JOINT VENTURES

5.      Among developing country governments, and the international development community, it is almost taken as an axiom that joint ventures between foreign and local firms are more beneficial to the host country than are wholly owned foreign-owned ventures. International development institutions act on this belief and actively encourage joint ventures. IFC, for example, has a policy of helping to finance projects involving foreign investors only when a substantial local partner is involved in the project as well.

6.      Many developing countries introduced measures to require joint ventures and other ownership restrictions during the late 1960s and 1970s. Some countries also introduced provisions that required foreign firms to divest shares to local owners over a specific period of time. The phase­out provisions of Decision 24 of the Andean Common Market were the most famous divestment requirements, but similar measures were introduced in other countries such as Indonesia and Malaysia in Asia.

7.      These restrictive provisions were aided and abetted by the increasing availability of foreign loans to developing countries in the 1970s. With increasing availability of loans, there was both increased desire, and the ability to "unbundle" the package of capital, technology and management-that is direct investment. With capital being available at low, and sometimes negative interest rates, developing countries tried to get foreign firms to provide the complementary technology and management skills in "new forms" of investment with reduced ownership and reduced control of the resulting ventures.

A. Host Country Views of Joint Ventures

8.      There are a number of reasons why developing countries have favored joint ventures when foreign direct investment is allowed at all. One is simply a desire to protect sovereignty: to assure that foreign firms will not control key decisions in the economy. This desire is particularly strong in countries that have recently gained their political independence.

9.    In addition, it is thought that joint ventures are a good way to encourage transfer of technology and to train local business people in the operation of a modern firm. By being a part of a joint venture with  foreign partners, it is expected that Local engineers and managers will learn from their foreign counterparts. (It is curious in this context that many countries that require joint ventures also restrict the numbers of foreign managers and technical people who can be employed).

10.     Another rationale for forcing joint ventures is more complex--they are viewed as a way in which the local economy can participate in what are thought to be monopoly profits of multinational firms operating in the host country. It is recognized in this context that most firms making international investments are large and operate in oligopolistic industries. These firms have certain skills and technologies that are the basis of their size and profits. Developing countries think that by forcing these firms to enter into joint ventures, they will be able to capture some of these "monopoly" profits for the country, either for the government or for local investors who are in the joint venture.

11.     Most, if not all, developing countries prohibit foreign investment in some sectors, and require joint ventures in others. For example, Appendix A shows the ownership restrictions of the ASEAN countries, a group that is generally regarded as f011owing liberal policies toward foreign investors.

12.     There is a wide variation in the ownership restrictions imposed by Arab countries. A recent study has ranked the degree of restrictiveness of these measures, as shown in the following table.²                                                    A value of 1 denotes

very stringent restrictions on ownership (e.g., Burma), while 5 indicates very liberal ownership policies (e.g. Singapore). While it is possible to take issue with these rankings, they reflect how an outside observer views ownership policies of Arab countries in relation to those of other developing countries at the time the study was completed.

Table 2

Foreign Ownership Restrictions -

Rankings of Arab Countries a/

Algeria	2	Kuwait	3	Sudan'	5
Egypt	4	Libya	2	Syria	2
Iraq	1	Morocco	5	Tunisia	5
Jordan	2	Saudi Arabia	3

1/ 1 - very restrictive

5 - very liberal

² Frost and Sullivan Inc., Measurement of the Investment Climate for International Business. (A study conducted for the U.S. Agency for International Development, 1988). •

B. Foreign Investors' Views of Joint Ventures

13.   Multinational enterprises also see benefits in joint ventures, and voluntarily enter into them in some circumstances. This is a trend in developed countries, where even the largest firms are seeking alliances to develop technology, enter markets, and improve production techniques. In developing countries, some firms enter into joint ventures voluntarily with local firms to incorporate their knowledge of managing the local labor force, the market, and to help in interactions with the government.

14.     Involuntary joint ventures, however, are viewed by foreign investors as a major disincentive to investment. A recent survey of 300 of the largest U.S. multinational corporations has shown that 65% of these firms view ownership restrictions as being a critical negative factor in assessing the viability of an investment. (Cynthia Day Wallace, FOREIGN DIRECT INVESTMENTS IN THE THIRD WORLD: U.S. CORPORATIONS AND GOVERNMENT POLICY, Washington, Center for Strategic and International Studies, 1989). Econometric evidence also shows the negative impact of ownership restrictions on investment decisions.³ That developing countries appreciate the disincentive effect of ownership restrictions is shown by their actions--almost without exception, when they decide that they want to encourage more foreign investment, one of the first things they do is to liberalize their ownership restrictions.

C. Liberalizing Ownership Restrictions

15. Developing countries in ever greater numbers have been liberalizing ownership restrictions in the 1980s. Since 1982 the Andean Pact countries have taken back the power to conduct their own negotiations with foreign investors, and in many of these countries, the ownership phase out requirements of decision 24 have been modified or dropped. In Indonesia, initial foreign ownership percentages have been increased, phase-out periods have been extended and, in some industries they have been eliminated altogether. Malaysia has relaxed its laws requiring progressive increase in ownership by ethnic Malays. Many African countries have opened up a larger number of sectors to foreign investors, as has Korea.⁴ Most striking, a number of socialist countries which had previously excluded foreign direct investment altogether, now encourage it. In fact, recent laws passed in Hungary, Poland, and Yugoslavia, are among the most liberal in the developing world, allowing wholly owned foreign ventures in a wide

3 Ben Gomes-Casseres "MNC Ownership Preferences and Host Government Restrictions". An Integrated Approach (Harvard Business School, August 1988).

4 See Sheila Page "Developing Country Attitudes Towards Foreign Investment", in Cable and Persaud ed. Developing With Foreign Investment  (Commonwealth Secretariat 1987, published by Croom Helm, UK), pp 28-43.

Range of circumstances. China has taken the unusual step of setting a minimum share that the foreign investor has to provide.

16.    

In May, 1989, Mexico was the most recent country to announce a liberalization of its ownership policies. These policies previously had required foreign investors to enter joint ventures and take a minority position in ventures with Mexican firms. The liberalized Mexican policies, like those in many other countries, allow foreign investors to have a majority in export-oriented ventures, those bringing advanced technology, and those investing outside the more developed regions.⁵

17.    There are several reasons for this historic change in the policies of so many developing countries. One is their need to encourage foreign capital inflows of all types after the world-wide recession of 1980-82 and the world debt crisis both increased the need for, and reduced the supply of foreign resources. The trend toward liberalization, however, began before the debt crisis, and may also reflect a disenchantment with the supposed benefits of joint ventures. There is evidence, for example, that forced joint ventures are less efficient than majority or wholly owned firms in the same industry.⁶ Moreover, if forced joint ventures allow greater local participation in monopoly profits of foreign firms, it is usually only a few privileged individuals who participate, not the society as a whole. Finally, the usefulness of joint ventures as a vehicle for technology and managerial transfer will depend on the capabilities of the local partners. The more capable they are, the more transfer will occur. On the other hand, the more capable the local partner, the less need there will be to force a joint venture--they will be undertaken voluntarily.

18.    We can conclude that developing countries are reexamining the role of forced joint ventures between foreign and local investors. The trend is clear--to increasingly allow foreign and local firms to make their own arrangements.

19.    This is a trend that should be encouraged. Many of the reasons for ownership restrictions have been lost in history while the costs of ownership restrictions in terms of loss in investment have become clearer. If sovereignty is an issue, it can be dealt with by the use of government power to regulate, tax, exclude undesirable investment, and prosecute

⁵ This is just the latest turn in Mexican policies, which were relatively liberal in the 1950s and 1960s. In 1973, perhaps reflecting increasing availability of resources from other sources, a new foreign investment law made ownership restrictions more stringent. That law remains in force but its administration has been liberalized.

⁶           A study of the efficiency of Mexican firms done by the World Bank

shows that firms with minority foreign shares in most industries were less efficient than wholly owned Mexican firms and majority owned foreign firms. Majority owned foreign firms in turn, were more efficient than wholly owned domestic firms in most of the industries where both types operated.

Abuse. Virtually all OECD countries follow this approach. More developing countries are doing so as they realize that requiring joint ventures does not bring the control they hoped for, and as they gain increasing confidence in their ability to exercise normal government power in relation to foreign investors.

III. THE ROLE OF INVESTMENT AUTHORITIES

20.    The trend toward liberalizing ownership restrictions is only one aspect of a more general trend of liberalization of foreign investment regulation in developing countries. Moreover, developing countries are increasingly focusing on the need to actively promote foreign direct investment in order to increase the flow of foreign capital, technology, management, and access to foreign markets that they deem to be essential for their development.

21.    It is in the context of these changing policies that developing countries are reconsidering the nature and functions of the institutions that deal with foreign investors. These institutions have typically had a number of functions, including screening and monitoring on the one hand, and promoting and providing services to investors on the other. Developing (and developed) countries have tried a wide range of institutional arrangements to carry out these functions, sometimes combining all of the functions in one institution, and at other times dispersing them to several organizations. Individual activities, such a screening, have also been handled in different ways, in some cases being centralized in a single organization, and in other cases being decentralized in various ways to existing government departments and ministries. This section describes same of the alternative approaches to the screening of foreign investment, and then considers whether it is desirable to combine the screening and promotion functions.

A. Organization of Screening

22.    Developing countries screen and monitor foreign investment in order to try to assure that it both conforms to establish policies, such as those on ownership discussed above, and contributes to the achievement of development objectives. Screening thus is meant to keep out those investments that would not benefit the host country, such as inefficient firms that benefit from high levels of protection.

23.    A wide range of organizational approaches are used by governments to carry out the screening function. Some countries have not coordinated their policies and insist that investors deal with a whole network of government agencies. Others have sought to coordinate government policies by establishing some kind of a central authority to screen and evaluate foreign direct investment, to negotiate transactions with foreign investors on behalf of the government and to monitor their activities.⁷ In some cases, this centralization applies only to projects in certain zones, such as export-processing zones, or in specific sectors. Other countries have entrusted this regulatory function to an already existing government miniscry.⁸

Absence of a comprehensive institutional structure

24.    Some countries have no comprehensive institutions for screening and monitoring foreign direct investment. Foreign investors are generally free to invest, with some exceptions which may be adopted from time to time reflecting the country's development priorities. The basic attitudes of these countries can be described by three characteristics: an essentially favorable disposition towards foreign direct investment; a system where treatment of foreign direct investment has been clear and fairly constant over time, but also flexibly and informally applied; and a set of sectoral priorities for foreign direct investment.

25.    Brazil_, is the example of a major host country without comprehensive foreign investment legislation and institutional infrastructure for screening of foreign investment proposals. No government approval is needed for foreign direct investment unless a foreign investor wants to take advantage of investment incentives (industrial or regional), and no government body evaluates foreign direct investment.⁹ A foreign investment must be registered by the Central Bank, which satisfies itself that the basic laws are complied with and that the value of the requested investment

⁷ Whatever approaches countries may take toward screening foreign direct investment in general, they tend to make special arrangements for investment in a sector of the economy that is of special importance to the country's development plans and objectives (e.g., petroleum industry).

⁸ Some central investment authorities are responsible for dealings with foreign investors (and domestic alike) only when such investors wish to avail themselves of investment incentives (e.g., the Board of Investment of Thailand), or when, regardless of incentives, foreign investment exceeds prescribed limits (e.g., the Board of Investments in the Philippines).

9 Foreign direct investment is excluded from several sectors (e.g., petroleum exploration, exploitation and refining, communications media, and most domestic transport). Furthermore, a significant part of the computer and associated industries have recently been reserved for domestic companies. It is also true that Brazil influences the decisions of investors through the use of incentives, and uses government regulations to preclude decisions, such as the establishment of major new investments in congested urban areas.is accurately stated.^1° Among the benefits of this approach is the greater predictability of the outcome of the approval process for both government and investor compared to the inevitably more ambiguous outcome associated with selective policies. Consequently, the potential costs for an investor considering entry are likely to be low. On the other hand, in the presence of large price distortions resulting from tariffs, subsidies, and limited competition, an "open door" policy, such as that followed by Brazil, may result in the entry of those investments that may not necessarily be economically desirable for the host country.

Decentralized mechanism

26.    Some countries adopt a decentralized screening process that is dispersed across several government ministries and agencies whose interests could be affected by an investment. Usually, the agencies participating in the screening have included ministries of finance, industry or trade, the central bank as well as other functional government bodies. This direct involvement of many government bodies and entities can have the advantage of bringing to bear the technical expertise necessary for evaluating proposals for a specific industry.      On the other hand, many of the

agencies and ministries involved in screening may have little technical knowledge or limited experience with a particular industry. Diffuse units operating autonomously may also have little ability to evaluate overall net benefits of foreign direct investment in light of larger policy objectives. Moreover, each agency involved in screening may be pursuing its own narrow objectives, and these may be inconsistent with each other, and with broader policy objectives.

27.    As a result of these. considerations, a decentralized approach is likely to be costly to the foreign investor because the period of negotiation is likely to be longer and the results unpredictable at the outset. The potential investor with only marginal interest may possibly go elsewhere, while other investors, responding to conflicting demands of approval agencies may reshape investments in ways that are inconsistent with broad national objectives.

Interministerial mechanism

28.    In recognition of the potential costs that a diffused decision-making process can impose on foreign direct investors, some host countries have developed interministerial mechanisms to coordinate the foreign investment approval process. Such coordination entails the creation of decision-making structures whose operations cut across the existing functional

¹⁰ Investments in mining, insurance, rural land and financial activities are treated separately. In these areas, prior governmental authorization is required before a foreign investment can be made.

Divisions of government and whose membership is comprised of representatives of affected government agencies.

29.    Many of the disadvantages associated with diffusion of the decision-making process may be overcome by coordinating bodies. Such entities provide a single focal point for foreign investors in all their dealings relating to a particular venture and avoid, to some extent at least, investors tramping from department to department in order to secure the necessary approvals. Coordinating mechanisms also can recognize the necessary link through planning, promotion, screening, approval and monitoring of ventures--they can ensure that what is being planned, for example, is reflected in the screening criteria, and what is being monitored reflects the key considerations which have arisen during the screening and approval process. Finally, coordinating mechanisms can allow a streamlining of decision making by avoiding the need to involve government agencies that are only peripherally concerned with a particular investment decision.

30.    Gaining these advantages may entail serious internal political costs, however, a participating ministry may feel its influence is diminished if it cooperates fully with a coordinating body. To preserve influence, politically powerful ministries may be tempted to send only low-level people to meetings and later impose their power over the investor administratively.

31.    As a result of such political considerations, the power of a coordinating agency in relation to individual board members can vary greatly from country to country. In some countries, coordinating bodies serve only as a clearinghouse for information, while the real power rests with individual Ministries. In other countries, a board may have final decision-making authority and truly serve as a one-stop agency, at least for the major negotiating issues. Coordinating boards may be dominated by one or a few members, or power may be diffused among all members. Whatever the specific span of control and authority of a coordinating agency, the existence of such an'agency in a country indicates that the government is attempting to emphasize foreign investment issues whether the government's interest lies in attracting or in controlling foreign investors.

32.    Interministerial bodies may either be permanent or ad hoc in nature. The National Commission on Foreign Investment in Mexico, the Board of Investment in Thailand and the Malaysian Industrial Development Authority are examples of permanent, interministerial bodies."

^yy The government bodies represented on the Board of Investment of Thailand are: Industry, Finance, Agriculture and Cooperatives, Commerce, Defense, Interior, Foreign Affairs, Judicial Council, Bank of Thailand, and the Industrial Finance Corporation of Thailand.

Centralized authority

33.    To overcome some of the costs associated with the operation of coordinating bodies, several countries have centralized the foreign investment decision process in a single government ministry of department or, in a case of a particular sector, have given screening authority to a state enterprise. In Korea, for example, approvals are handled by the Ministry of Finance, in Colombia by the National Planning Department, and in Yugoslavia by the Ministry of Foreign Economic Relations.

34.    Some countries, in order to take advantage of available technical expertise in a single industry, and to optimize organizational learning with regard to that industry, have delegated the screening of foreign investment proposals in that industry to specialized government agencies or state^-owned enterprises. In Indonesia, for example, foreign petroleum firms have dealt primarily with PERTAMINA, the national oil company. By contrast, in the Philippines, such negotiations are the province of the Ministry of Energy. In this way, the costs of negotiating and of interministerial conflict is likely to be reduced, while organizational learning is enhanced. However, while obtaining these benefits, certain costs are incurred. By delegating authority to state-owned enterprises

and other agencies that possess industry knowledge, many of the same shortcomings of diffuse decision making may be experienced; larger policy issues such as the net national benefit of investment and the spillover of negotiations on other investors will likely be ignored.

Delegation of centralized decision making

35.    The entry control function, regardless of the form it takes (diffused ministerial approach, single authority, interministerial bodies), is carried out in almost all cases by the central government authorities only. However, there are some exceptions to this general practice in the case of fully export-oriented projects. Export^-oriented firms can locate their plants in any of a number of countries that offer cheap production resources. In most cases, they need only inexpensive labor, sufficient infrastructure, and good transportation and communication facilities. Given this common perception, the competition for these "footloose" investors is usually quite intense. Fearful of losing the battle for such "investors, a number of countries have delegated powers to approve investments in export projects to authorities separate from the central investment agency. The goal is to create an organization that can act quickly and decisively, thereby increasing the attractiveness of the country to such investors.

36.    Accordingly, in some countries potential investors for export plants have had the option of investing in export processing zones. Not only do these zones offer infrastructure, but they generally are run by an organization that is fully vested with authority to reach agreements quickly with foreign investors. In the Philippines, for example, a firm producing wholly for export may choose to negotiate either with the Board of Investment or the Export Processing Zone Authority, or both, depending

upon where it seeks to locate and what incentives it seeks to enjoy. In Sri Lanka, the Greater Colombo Economic Commission Authority is the sole agency for approving any investment in the export processing zones. Indonesia is currently considering the establishment of four export processing zones and the creation of an Export Processing Zone Authority that will be relatively autonomous from the Capital Investment Coordinating Board of Indonesia.

37.      Sometimes, the authority for specific functional issues, such as taxation and investment incentives, may be delegated to regional governments. In Brazil, for example, investment located in one of the less-developed regions (North-East and the Amazon) can apply to regional agencies for specific regional ventures.

B. Selecting the Form of Investment Organization

38.      The preceding discussion illustrates the wide range of alternative institutional forms a host government can employ to screen foreign investment, and provides a basis for determining the most appropriate form in particular circumstances. It is in this context that centralized investment authorities, popularly known as one stop shops, can be evaluated. It is also possible to evaluate the desirability of combining the screening function with investment promotion and investment service activities.

The role of centralized investment authorities

39.      The main issue in selecting the most appropriate organizational form for investment screening is the extent to which decision making within the government can and should be centralized. The most important point to remember in this context is that there is no need to centralize investment decision making if there are liberal and automatic investment policies--there is no need for a central authority if,in fact; there are few decisions to be made. The example of Brazil discussed above is case in point, as is the practice in almost all OECD countries.

40.      Centralized investment authorities are useful to cut through a myriad of regulations. If there are relatively few regulations, or if decisions are based on transparent criteria, the role of an investment authority is much less apparent. Moreover, it needs to be remembered that central investment authorities can serve to block foreign investments just as easily as they can facilitate them. Some of the countries that have been the most active in restricting foreign investment have done so through the mechanism of an intransigent central investment authority. Such authorities, therefore, are not inherently facilitators of investment and, if that is the intent, their activities will have to be monitored carefully by the political authorities.

41.    A second point that has to be borne in mind when evaluating the feasibility of establishing a true centralized investment decision making authority is that the various parts of government that normally participate in these decisions will yield authority to a central body only reluctantly. It is for this reason that true one stop shops are very rare. These are found almost exclusively in small countries. Mast countries that claim to have a central investment authority in fact have a coordinating agency with limited decision making power. These bodies sometimes have difficulty in cutting through the investment regulations that were the reason for their establishment in the first place.

42.    Rather than establishing a compromise investment authority, it may be more productive to work on the investment policies, making them more transparent and less restrictive. In that way, the need for a central agency can be reduced, and a more decentralized mechanism might suffice.

Organizing for investment promotion

43.    The main task of a centralized investment authority may be investment promotion rather than investment screening. Investment promotion is an activity that demands a central focus to present the country to the foreign investment community. This is not an activity that can be easily decentralized either bureaucratically or geographically.

Investment promotion consists of three main activities:,

-country image building;

-investment generation;

-service to investors.

44.    A complete investment promotion program will contain all three elements, but the main focus will be given to one of the three at different stages in the life of the program. At an early stage, priority may be given to servicing existing foreign investors so that they will be happy and can serve as ambassadors for the country. As the program develops, greater attention will be given to country image building, assuming that the reality is consistent with the image that is being projected. Finally, the focus should shift to targeted investment generating activities.

45.    The organization that carries out the investment promotion program can be in the government, in the private sector (although supported by the government), or in between the two as a quasi-government organization. The most successful promotion organizations have been of the latter type, with links to government, but with freedom particularly in hiring and setting salaries to attract the kinds of aggressive marketing people who are usually found in the private sector.

Combining promotion and screening

46.      It is difficult to combine a vigorous screening organization with an aggressive promotion function. One or the other of these functions will dominate. If it is screening, the promotion function will most likely be neglected. On the other hand, if promotion dominates, the screening function is unlikely to be independent^--promoters are unlikely to be willing to see the fruits of their efforts rejected by the screening process.

47.      Screening and promotion have been successfully combined in a single central investment authority when liberal investment rules are in effect. In that case, foreign firms are relatively free to establish, and screening is carried out mainly to determine eligibility for investment incentives. Targets for investment promotion, however, are in a sense pre-screened, being selected for the contribution they can make to the development of the country. The promotion function dominates the investment organization, but screening criteria are taken into account in selecting targets for promotion.

48.      Countries approaching investment promotion in this way generally are considered to have investment authorities that are one stop shops. They provide a wide range of services to investors, grant incentives, as well as carrying out investment promotion. Good examples of such institutions are the Industrial Development Authority of Ireland, and the Economic Development Board of Singapore. These organizations flourish in countries with liberal policies toward foreign investment. They would be difficult to conceive in more restrictive environments.

III. CONCLUSION

49.     

This paper has suggested several conclusions that can be the subject of further discussion. The first is that the role of an investment authority is linked to the policy framework the authority is expected to administer. In many developing countries these policies are being changed to open more sectors to foreign investment and to allow greater involvement of foreign investors in individual enterprises. An increasing number of developing countries are abandoning requirements that foreign investors participate in joint ventures with local investors.

50.      These changes are taking place as developing countries have come to doubt the benefits of joint ventures, and have seen their costs. As they redefine their economic goals, and as they gain confidence in their ability to control the activities of foreign investors regardless of their share in the ownership of individual enterprises, developing countries see less value in earlier policies to require joint ventures.

51.      In these circumstances, investment authorities are becoming more concerned with promotion and allocation of incentives, and less with screening and control. It is difficult to contemplate the coexistence of

rigorous screening and promotion functions in the same organization. These functions require different types of people, and a different mentality.

52. The evolution of the single investment authority thus is predicated on a liberalization of investment policies that makes it possible to de-emphasize the screening function, and give greater attention to promotion. This is now the trend in many developing countries. The challenge faced by these countries, of course, is to put in place a general policy framework that encourages beneficial foreign investments, and to identify specific investments as targets for the promotion effort.

DWeigel:mr October 16, 1989

 

Source: Published in investment Policies in the Arab countries,

           By Said Naggar, IMF-Papers, 1990