Even as the government awaits India’s rank in World Bank’s latest Doing Business report, another study from the bank shows easier regulatory regime is not all that matters to foreign investors.
Ease of doing business: What foreign investors really want?
While the government eagerly awaits India’s ranking in the latest Doing Business report of the World Bank to be released on Tuesday, another study by the bank released earlier this month shows easier regulatory regime is not all that matters to foreign investors while they decide to invest abroad.
In the latest Global Investment Competitiveness report, titled “Foreign Investor Perspectives and Policy Implications”, the World Bank said investors consider a broad range of factors in their decision to invest, including domestic market size, macroeconomic stability and a favourable exchange rate, labour force talent and skills, and physical infrastructure.
However, political stability and security remain at the top of the mind of foreign investors, with 50% holding it to be critically important, while only 2% of the surveyed saying it is not at all important.
The World Bank said political risks are wide-ranging and include expropriation, transfer and convertibility restrictions, breach of contracts, unpredictable and arbitrary actions, discrimination and the absence of regulatory transparency. “Loss of investment and the associated damage to long-term harmonious relations with a promising investor can have a debilitating impact on a developing country,” the report said.
Large domestic market size comes second with 42% respondents holding it to be critically important, while only 4% term it as not important at all.
Legal and regulatory environment, based on which the Doing Business survey ranks countries, comes third with 40% respondents saying it is critically important, while only 2% say it is not important at all. India is targeting an ambitious 40-notch jump in the World Bank’s Doing Business survey this year. Last year, its rank rose by just one place to 130 in the survey that measured the ease of doing business in 190 countries. According to an output-outcome framework document prepared by the government, India wants to reach the 90th rank in 2017-18 and 30th by 2020.
Other critically important considerations in the minds of foreign investors are macro-economic stability and favourable exchange rate (34%), available talent and skill of labour (28%), good physical infrastructure (25%), low tax rates (19%), low cost of labour and inputs (18%), financing in the domestic market (16%) and access to land or real estate (14%).
The survey results could have several lessons for Indian policymakers like the over-emphasis on tax incentives to attract foreign investors.
The World Bank report says while incentives may be a more important part of the value proposition to efficiency-seeking investors, they are not a sufficient condition for FDI (foreign direct investment) entry, as efficiency-seeking FDI tends to concentrate geographically in relatively few locations despite the broad availability of incentives.
“By targeting incentives toward those investors most likely to respond to them, developing countries can reduce unnecessary tax losses resulting from incentives granted to firms that would have invested anyway. This requires a thorough understanding of the type and motivation for FDI in the country, as well as measurable policy objectives. At the same time, improvements in the design, transparency, and administration of incentives can help reduce indirect costs and unintended consequences including economic distortions, red tape, and corruption,” it added.
If fundamental elements at the country level are lacking, investors are unlikely to respond to even the most generous incentive packages or such incentives may only attract unviable investments, the World Bank said. “Governments can reduce risks to private investors through a policy and institutional framework that supports an enabling business climate and ensures good governance,” the report said.