By Dr. Jeffrey I. Kim
Last week I attended the 2017 Investment Promotion Agency (IPA) Best Practice Roundtable. The Roundtable was held in Washington, D.C., and was organized by SelectUSA. The participants shared their knowledge or experiences of FDI attraction and retention. At this meeting I explained the role of Korea's foreign investment ombudsman trying to retain foreign-invested companies by providing various after-care services.
SelectUSA helps companies of all sizes to find the necessary information and assists U.S. economic development organizations to compete globally for investments.
The striking lesson I have learned during the Roundtable was that not only the developing countries but also advanced countries desperately try to attract foreign business investment, including the U.S. But their strategy is a lot different than that of developing countries. Advanced countries try to emphasize the availability of factors conducive to investment regardless of whether they are local or foreign investors. By contrast, developing countries tend to provide discriminatory benefits or incentives for foreign companies.
Foreign business investors enter into a host country in various entities. For example, they come either as a multinational enterprise or a single-national company. From their standpoint, foreign business investors try to put their money in the most profitable place regardless of whether it is a developed or developing country.
Foreign companies choose a host country for various reasons. They want to make the most use of the favorable factors the host country has available. They include a huge consumer market, lower-cost production, access to abundant natural resources, profitable technology transfer, etc.
In general the regulatory environment in the advanced countries is conducive to starting and operating a business. More importantly their business culture encourages free enterprise and competition. More specific advantages that developed countries may have available are: a business-friendly climate, abundant natural resources, an expansive infrastructure network and efficient financial markets.
By contrast, developing countries tend to provide discriminatory incentives for foreign investors. They provide a variety of FDI incentives: (1) reduction or exemption of the local government's acquisition and property tax and of the central government's corporate tax; (2) cash grants provided to foreign businesses accompanying advanced technology; and (3) foreign investment zones designated to provide industrial site support. In spite of these incentives, however, their FDI policy is not always successful.
As part of the efforts to promote foreign investment from developed countries to developing countries and vice versa, the World Bank started publishing "Doing Business" annually 14 years ago. It ranks the ease of doing business for 190 countries. In "Doing Business 2017," New Zealand, Singapore, Denmark, Hong Kong, South Korea, Norway, the U.K., the U.S., Sweden and Macedonia are the top 10 countries. New Zealand ranks first and Macedonia 10th.
"Doing Business" measures aspects of regulations that enable or prevent private sector businesses from starting, operating and expanding. These regulations are measured using 11 indicator sets. They are: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contract, resolving insolvency and labor market regulations.
The 11 sets of "Doing Business" were determined by one of the World Bank's research teams. They used firm-level data gathered through extensive surveys. These surveys provided data regarding obstacles to business activities as reported by more than 130,000 firms in 139 economies.
While developed countries try to attract FDI by publicizing the various factors they can proudly present such as transparent and predictable legal standards, advanced technology and a pro-business environment, developing countries try to attract FDI by providing such incentives as tax support, cash grants and industrial site support.
In spite of all these incentives, however, foreign companies encounter numerous problems. These problems occur due to misunderstandings of the existing laws or misapplication of tax laws and environmental rules regardless of whether the host countries are advanced or developing. Foreign companies need after-care services so an ombudsman's service is needed in any country receiving FDI.
Nevertheless, every host government should bear in mind that pure business risks and market uncertainties always exist. It would be fair and just for investors to take on such risks and market uncertainties. So the host countries should not waste their resources by granting excessive benefits or incentives for foreign investment.
Dr. Jeffrey I. Kim is a foreign investment ombudsman, a state-appointed troubleshooter for investors and entrepreneurs from overseas. He earned a Ph.D. in economics from the University of Chicago and taught at the University of Colorado, Boulder, and at Sungkyunkwan University.
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SelectUSA helps companies of all sizes to find the necessary information and assists U.S. economic development organizations to compete globally for investments.
The striking lesson I have learned during the Roundtable was that not only the developing countries but also advanced countries desperately try to attract foreign business investment, including the U.S. But their strategy is a lot different than that of developing countries. Advanced countries try to emphasize the availability of factors conducive to investment regardless of whether they are local or foreign investors. By contrast, developing countries tend to provide discriminatory benefits or incentives for foreign companies.
Foreign business investors enter into a host country in various entities. For example, they come either as a multinational enterprise or a single-national company. From their standpoint, foreign business investors try to put their money in the most profitable place regardless of whether it is a developed or developing country.
Foreign companies choose a host country for various reasons. They want to make the most use of the favorable factors the host country has available. They include a huge consumer market, lower-cost production, access to abundant natural resources, profitable technology transfer, etc.
In general the regulatory environment in the advanced countries is conducive to starting and operating a business. More importantly their business culture encourages free enterprise and competition. More specific advantages that developed countries may have available are: a business-friendly climate, abundant natural resources, an expansive infrastructure network and efficient financial markets.
By contrast, developing countries tend to provide discriminatory incentives for foreign investors. They provide a variety of FDI incentives: (1) reduction or exemption of the local government's acquisition and property tax and of the central government's corporate tax; (2) cash grants provided to foreign businesses accompanying advanced technology; and (3) foreign investment zones designated to provide industrial site support. In spite of these incentives, however, their FDI policy is not always successful.
As part of the efforts to promote foreign investment from developed countries to developing countries and vice versa, the World Bank started publishing "Doing Business" annually 14 years ago. It ranks the ease of doing business for 190 countries. In "Doing Business 2017," New Zealand, Singapore, Denmark, Hong Kong, South Korea, Norway, the U.K., the U.S., Sweden and Macedonia are the top 10 countries. New Zealand ranks first and Macedonia 10th.
"Doing Business" measures aspects of regulations that enable or prevent private sector businesses from starting, operating and expanding. These regulations are measured using 11 indicator sets. They are: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contract, resolving insolvency and labor market regulations.
The 11 sets of "Doing Business" were determined by one of the World Bank's research teams. They used firm-level data gathered through extensive surveys. These surveys provided data regarding obstacles to business activities as reported by more than 130,000 firms in 139 economies.
While developed countries try to attract FDI by publicizing the various factors they can proudly present such as transparent and predictable legal standards, advanced technology and a pro-business environment, developing countries try to attract FDI by providing such incentives as tax support, cash grants and industrial site support.
In spite of all these incentives, however, foreign companies encounter numerous problems. These problems occur due to misunderstandings of the existing laws or misapplication of tax laws and environmental rules regardless of whether the host countries are advanced or developing. Foreign companies need after-care services so an ombudsman's service is needed in any country receiving FDI.
Nevertheless, every host government should bear in mind that pure business risks and market uncertainties always exist. It would be fair and just for investors to take on such risks and market uncertainties. So the host countries should not waste their resources by granting excessive benefits or incentives for foreign investment.
Dr. Jeffrey I. Kim is a foreign investment ombudsman, a state-appointed troubleshooter for investors and entrepreneurs from overseas. He earned a Ph.D. in economics from the University of Chicago and taught at the University of Colorado, Boulder, and at Sungkyunkwan University.
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