A plurilateral agreement has been reached at the World Trade Organization (WTO) after three years of negotiations to help facilitate more foreign direct investment (FDI) into developing countries at a time of rising protectionism and downward pressure on cross-border capital flows.

The Investment Facilitation for Development (IFD) agreement aims to improve the global investment climate and promote cross-border cooperation on FDI facilitation to help foster sustainable development. Negotiations over the draft text of the agreement were concluded on July 6, effectively paving the way for the more than 110 signatory countries to begin implementation of its provisions. IFD participants will have to approve a final version of the text by October 2023. 

"The proposed IFD Agreement would not just help WTO members attract and retain more investment, but also higher-quality investment," director general Ngozi Okonjo-Iweala said on July 6. 

The agreement focuses on several areas that could help increase FDI flows to developing countries, including boosting transparency of countries’ investment measures and streamlining administrative practices. A 2017 World Bank survey of 754 multinational investors in developing countries found that 82% of them rate transparency and predictability of public agencies’ conduct as important to where they invest.

“The agreement has a real possibility to improve things on the ground,” says Alexandre de Crombrugghe, an OECD economist leading the global work on investment promotion and facilitation. He adds that it demonstrates a “recognition” of the role investment must play in addressing global challenges, including inequality and climate change.

These efforts come at a time of subdued global investment activity and rising protectionism. Unctad data shows that international investment flows — which includes greenfield FDI, mergers and acquisitions and project finance — declined by 12% last year.

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“We are in an ambiguous environment, where on the one hand [countries] are more suspicious about FDI, but at the same time there is also recognition that we need investment,” says Mr de Crombrugghe.

FDI into the least developed countries was even more constrained in 2022, falling by 16% to just $22bn, equivalent to less than 2% of global gross domestic product.

A crucial point of success for the IFD agreement was its exclusion of common points of contention between countries around market access, investor-state dispute settlement and protectionism.

Karl Sauvant, a resident senior fellow at Columbia University’s Center on Sustainable Investment, highlights one of the key achievements is that developing countries will get ‘special and differential treatment’.

“This means each country develops the pace at which the agreement is implemented with some flexibility,” he says. The agreement also aims to promote sustainable investment and address severe constraints facing developing countries in their efforts to attract FDI by offering technical assistance and capacity building.

Mr Sauvant says this will be “extremely important” for developing countries to get up to speed with the best practices used for investment facilitation, but cautions that the success of the initiative will depend on implementation: “The proof of the pudding is in the eating”.

A 2021 study by the German Institute of Development and Sustainability estimated that the removal of investment barriers through the IFD agreement could bring global welfare gains of between 0.56% and 1.74%.