The WTO's FDI challenge

NEW YORK — Every country is eager to attract foreign direct investment (FDI) — and for good reason. FDI facilitates capital inflows, creates jobs, drives skills development and facilitates technology transfers, accelerating economic growth and enabling recipient countries to access global markets.

But global competition for FDI is fierce. To attract it, governments around the world have liberalised their foreign-investment policies, established investment-promotion agencies, and provided multinational firms with numerous incentives. Now, the World Trade Organisation (WTO) is on the verge of introducing a new mechanism to facilitate FDI flows: the Investment Facilitation for Development Agreement (IFDA).

The concept of an investment-facilitation mechanism was first proposed in 2015. After years of preparations, WTO members began negotiations in September 2020, with developing countries taking the lead. More than 120 member countries endorsed the IFDA’s text in November 2023, an accelerated timeline underscoring developing countries’ urgent need to attract FDI to achieve the Sustainable Development Goals (SDGs).

Modelled after the WTO’s Trade Facilitation Agreement, the IFDA aims to provide developing countries with practical tools to improve their business climate and facilitate FDI inflows.

The principal determinants of FDI can be broken down into three main categories. The first includes crucial economic factors, such as the size of the domestic market, the pace of GDP growth, and the quality of local infrastructure. The second category comprises legislation and regulation, which must be sufficiently permissive to attract foreign firms while also protecting host countries’ development interests. The third category comprises efforts to promote investment opportunities and support international investors in managing their projects.

While improving economic conditions is often a long-term process, making the regulatory framework more efficient and strengthening investment promotion, the two FDI determinants that the IFDA aims to address, can be done relatively quickly. Crucially, the IFDA avoids sensitive issues like market access, protection and investor-state dispute settlement procedures. Instead, it focuses on four key areas: transparency, administrative procedures, domestic regulation and sustainability. To improve transparency, for example, the agreement encourages participating countries to create a single information portal through which to publish FDI-related laws and regulations. This would make the information easily accessible to stakeholders and potential investors.

The IFDA offers tools to streamline and expedite specific administrative procedures, such as regulatory-authorisation processes, appeals and periodic reviews. It encourages cooperation among competent domestic authorities and establishes a global forum to promote best practices, thereby fostering cross-border cooperation. To encourage sustainable investment and help developing economies achieve the SDGs, the IFDA includes provisions focused on responsible business conduct and anti-corruption measures.

Moreover, the IFDA offers flexibility to developing countries, enabling them to determine the pace at which they implement reforms, extend implementation deadlines, request grace periods and access technical assistance, thereby accommodating their unique circumstances and needs. By adopting the IFDA, participating governments signal their commitment to pursuing domestic reforms and to increasing their attractiveness as an investment location.

But developing economies, particularly the world’s poorest countries, require international support to achieve these objectives. To this end, the IFDA includes a needs-assessment mechanism designed to identify and offer the required technical assistance. Several countries, including Dominica, Ecuador and Grenada, have already begun this process with the support of the United Nations International Trade Centre and the Inter-American Development Bank. Given that the IFDA would provide participating governments with significant competitive advantages, WTO members that have yet to join it should do so.

While the negotiations for the IFDA have concluded, a critical step remains: integrating the agreement into the WTO rulebook. This requires unanimous consent from all 164 WTO members. But since the IFDA does not impose any obligations on non-participants, while enabling them to benefit from the investment-facilitation measures implemented by participating countries, there are no substantive reasons to oppose the agreement’s adoption.

Consequently, the WTO can and should endorse the IFDA at the organisation’s Ministerial Meeting in Abu Dhabi on February 26-29. Member countries must seize this opportunity to adopt an instrument offering a broad range of practical and effective tools to help countries attract FDI and foster sustainable development.

The IFDA also represents a crucial test for the WTO. Can the global trade body meet the expectations of a majority of its members, particularly developing countries? Can it operate effectively at a time when the multilateral order is under increasing strain? The meeting in Abu Dhabi will provide answers to these questions, for better or worse.

Karl P. Sauvant is a senior fellow at the Columbia Centre on Sustainable Investment at Columbia University. Copyright: Project Syndicate, 2024. www.project-syndicate.org