FDI and Good Governance

Global opportunity index 2015
The Global Opportunity index measures policies governments pursue to attract foreign direct investment (FDI) in addition to considering what other investors, and development agencies need to know before making large-scale, long-term capital commitments. In 2015, Singapore, Hong Kong, Finland and New Zealand achieved the highest scores ( Sri Lanka is at 67). The top 10 are primarily economically advanced countries with longstanding institutions and traditions of transparency. Malaysia is the only developing country in the top 10 and is particularly strong in the Rule of Law. Therefore, countries that invest in their infrastructure, suppress corruption, and maintain sound regulations and rule of law can claim important advantages.

The World Bank Group’s Country Partnership Strategy (CPS) for Sri Lanka for FY13-16 is to support Sri Lanka’s transition to a middle-income country. Key elements of this transition included boosting investment, including in human capital, realigning public spending and policy with the needs of a middle-income country, enhancing the role of the private sector, including the provision of an appropriate environment for increasing productivity and exports, and ensuring inclusive growth. Boosting investment and having an appropriate environment for inclusive growth would require a good governance framework of transparency and disclosure, reducing waste, unnecessary public spending, corruption and fraud.

Way back in the year 2000, the former US SEC Chairman Arthur Levitt said something important about the relationship between good corporate governance, transparency and disclosure, and the impact on FDI which will affect economic growth;
“If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere. All enterprises in that country – regardless of how steadfast a particular company’s practices may be suffer the consequences.”

Good governance structures reduce uncertainties for investors giving them more confidence about the country and the corporate and this helps in reducing any risk premium attached to an investment. Therefore, such corporates are able to lower capital costs. For countries and corporates to take advantage of such benefit, a good governance system in necessary.

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About surenraj

“Views expressed are my own”
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