One of the key drivers of productivity is investment, which carries with it new technologies and new ideas that contribute to higher productivity and growth. My conviction that higher productivity drives development is at the heart of my insistence on the urgent need for a new paradigm for development, built not on the rejection of the current one, but on the realisation that its chief elements – macroeconomic stability; trade liberalisation and good governance – have not been sufficient to bring about productivity gains that translate into social benefits.

Under the current paradigm, developing countries, because of their capital shortage, are supposed to have a higher rate of return on capital and thus attract capital inflows leading to convergence in capital and output per person across countries. Therefore, the advice given to developing countries has been primarily to remove barriers to FDI, and prosperity will follow. But for most countries that have heeded these calls to stabilise, liberalise and privatise, this has not happened. They have seen very little response in terms of FDI flows and have watched their economies fall further behind.

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Investment promotion

This reality shapes the UNIDO approach to investment promotion. It recognises that for many developing countries, especially least developed countries, it is critical that investment promotion activities are geared to productivity enhancement.

UNIDO’s programmes, that build capacities in developing countries to assist private enterprises partner with FDI, bring together all of the organisation’s core competencies: the promotion of investment; technology diffusion; trade capacity building; industry’s environmental management; renewable energy and private sector development – with focus in agro-industry. UNIDO also has a network of 13 Investment and Technology Promotion Offices located in capital exporting countries. These offices are exclusively dedicated to partnering companies from their host countries with those from developing countries.

Functioning market

Our investment promotion activities recognise that the highly developed institutional infrastructure that exists in industrialised countries to support market forces is fundamental to the proper functioning of the market. Such market-supporting institutions provide accurate public information and set standards that allow market agents to assign resources more efficiently.

In developing countries, these institutions are very weak or do not exist, which entails that many market failures are unaddressed. UNIDO is therefore promoting acceptance in the international community of the need to bridge this gap and provide those public goods in developing countries that are required to make up for shortcomings in the functioning of markets. Particular emphasis needs to be put on institutional arrangements and capacity building for generating public information to facilitate more efficient markets and innovative financial instruments that can diffuse perceived risk and reduce transaction costs through greater transparency.

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Examples of ways this can be addressed are bodies specialised in: qualifying risk levels of individual companies; benchmarking the competitiveness of sub-sectors at country level; and issuing publicly tradable securities on the basis of a pool of selected companies. The latter is one of a number of ways to reduce perceived risks through innovative portfolio instruments. Such instruments can connect local investment opportunities to international financial markets by pooling the high risk of individual projects and diffusing it through different categories of institutional and individual investors.

The links established with international markets through these instruments can impose greater discipline and transparency and bring more liquidity. As they mature, more robust channels like stock markets can flourish, beckoning greater amounts of capital into the local market. As a result, the national market becomes less risky and more dynamic from the perspective of FDI.

Private partners

Addressing these issues is not the province of UNIDO alone. In developing these new financial instruments and mechanisms we will need to work more with private sector investors, global corporations and investment banks, in association with sister multilateral organisations such as the International Finance Corporation of the World Bank Group.

However, it should be re-emphasised that setting up an infrastructure to facilitate or promote the flow of FDI and portfolio investments must be matched with equal or greater attention to strengthening and supporting domestic companies.

Round table response

During the Industrial Development Forum on Industry and the Millennium Development Goals (MDGs) at UNIDO’s General Conference in December, several topical Round Tables were organised. The objective of these Round Tables was to stimulate debate on development issues and at the same time refine UNIDO’s technical cooperation and increase the impact on poverty alleviation.

At the Round Table on promoting FDI, the point was stressed, especially by the large transnational companies that invest in Africa, that the development of local skills and the presence of local companies that can complement them was a major decision criteria for them in selecting investment sites. Conditions of investment, tax rates, support services, incentives, etc, would then factor into the final selection from possible candidate sites.

In his keynote speech, Professor Buckley of Leeds University (see Think Tank, page 78) detailed how transnational corporations (TNCs) organise their global financing, production and distribution to highlight how and on what basis they select individual country locations for their various activities. His analysis showed that to cope with volatility and consequent risk, TNCs build flexibility into their operations through their location and ownership strategies. To avoid being locked into problematic locations TNCs will not concentrate a key resource in a single country.

Local presence

With regard to ownership strategy, the TNCs increasingly seek local enterprises to partner with rather than sink fresh capital into risky locations, especially under the present conditions of over capacity in many sectors. In a sense, this approach reduces their risk by offering them an “option” that can be exercised through full ownership if and when warranted.

This clearly indicates that in order to be able to penetrate and exploit the global value chains and internal and external trading channels of TNCs, developing countries need to operationally insert their manufacturing sectors into those linkages. Naturally, their ability to do so is dependent on the strength of their domestic enterprises.

Our Round Table on promoting investment clearly showed that to be successful, investment promotion must encompass the strengthening of local productive capacities. It also shows that to successfully promote inward FDI, developing countries have to go beyond simply trying to attract international companies by providing information on local conditions and incentives, beyond even singling out individual TNCs and trying to link their corporate strategies to local opportunities.

This, in fact, is the approach that UNIDO takes. For example, our rationale in establishing the Africa Investment Promotion Agency Network (AfrIPANet) – www.unido.org/afripanet – and working with its 15 member countries is to develop their capacities to support the private sector. Within each country, the IPA acts as a hub linking all national institutions that play a role in upgrading enterprises. These agencies also realise that they are not in a position to apply international best practices to investment promotion. Instead, they develop strategies that are appropriate to their resources. This includes generating public information and analysis through surveys, sector competitiveness benchmarking and company profiles.

Establishing the Network was the best way to use the limited resources of African IPAs to develop strategies that best fit their conditions and at the same time have a platform to promote not only individual countries but also Africa as a region.

Resource constraints

UNIDO faces resource constraints. During the last six years, we have restructured operations, achieving very encouraging results by following a corporate strategy of “productivity enhancement for social advancement” that stresses the role of industrial development as a tool to achieve and sustain social progress.

In terms of the Millennium Development Goals, social progress means reducing the number of people living on less than $1 a day to half the 1990 level by 2015, along with improvement in other measures of non-income poverty, such as those relating to health, education and gender. Achieving this will require a joint effort by the international community – not just the development community.

Just as firms in developing countries have to enhance their capabilities to join in global value chains, UNIDO has to further define its interventions and join hands with partners in the UN system, the development community and the private sector.

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