A report by the World Bank has cited actual or perceived political risk as hindering inflow of Foreign Direct Investment (FDI) to several developing countries.
The findings show that around 25 per cent of all investments in developing economies either stop increasing or totally withdraw from host countries due to political risks.
The 41-page report which delved into strategies needed to maximise potential benefits of FDI for sustainable development of nations across the world was released at the Annual Investment Meeting in Dubai earlier this month.
The report shows the risks stem from adverse regulatory changes, breach of contract, expropriations and problems related to transfers and currency convertibility.
Roberto Echandi, World Bank Global Lead, Investment Policy and Promotion said political risks arising from these factors worry investors more than those generated by terrorism and war.
The report puts terrorism or civil unrest at the bottom of the list with political risks potentially driving investors to withdraw or cancel investments.
“In most countries, investors are dealing with a specific agency tasked with promoting investments while over 70 per cent of the problems they face are caused by other government agencies namely subnational ones or sector-specific regulatory authorities. That’s where the challenge is,” said Mr Echandi.
World Bank experts called for suitable investment policy frameworks and refined national strategies that strengthen investor confidence to help retain and expand FDI.
They argue that the lion’s share of the total annual FDI inflows are made by investors already established in the host country, making them the best investment promotion tools to attract new FDI as they tend to diversify theiroperations while at the same time evolving from lower value-added towards higher value-added activities.
According to the report, very few investors with specific objectives and plans will bear the risks associated with malfunctioning political, regulatory and legislative systems.
“A lot of countries traditionally have been thinking that attracting FDI means automatic benefits. But, investors go to a country thinking long-term. In some countries the governance changes occur every four or five years and so, investors tend to outlive governance,” said Mr Echandi, adding that developing countries spend millions of dollars attracting investment but fail to ensure high levels of investor protection and confidence.
Experts say without risk mitigation, many investments that are commercially profitable and economically attractive do not materialise.
The report did not go into details of specific countries. It only listed over 80 countries that would receive the bank’s support to frame their investment reform proposals.
Many developing countries are said to face difficulties in investment policy formulation, co-ordination and implementation, thus undermining their competitiveness and ability to attract investments.
“A common mistake that countries make is to create investment policies that are a reaction to the challenges posed by the type of investment they are already receiving. Instead, a state needs to identify opportunities that will generate more benefits from existing investments, and consider what other types of investment the country needs in order to develop,” reads the report.
The World Bank advised countries to put up Investment Reform Maps clearly tracking and resolving key regulatory issues and designing investor aftercare programmes if they are to retain and expand FDI.