How FDI Supports Sustainable Development

FDI QUALITIES: HOW INVESTMENT
SUPPORTS SUSTAINABLE DEVELOPMENT?

1. Background – OECD approach to investment policy reform:
– Policy Framework for Investment
– OECD Guidelines for Multinational Enterprises
2. Focus – New FDI Qualities Indicators
– How investment supports sustainable development?
3. Outlook – FDI Qualities Policy Framework
– Exploring institutional and policy solutions to maximise the role of
investment as a catalyst for sustainable development
2
Outline

1. BACKGROUND – OECD APPROACH TO
INVESTMENT POLICY REFORM
3

4
OECD Policy Framework for Investment
FAQ
A
Trade
Policy
Competition
Policy
Corporate
Governance
Responsible
Business
Conduct
Financial
Sector
Green
Growth
Private
Investment in
Infrastructure
Public
Governance
&
Corruption
Tax
Incentives
Human
Resource
Develop-
ment
Investment
Promotion
&
Facilitation
Investment
Policy
The PFI includes 12 policy areas, as well as a horizontal chapter on key aspects of
governance underpinning a good investment climate
An Investment Policy Review will include chapters on investment policy,
investment promotion and facilitation and responsible business conduct, as
well as policy areas selected by the government as a priority for reform

OECD Investment Policy Reviews
Southeast Asia
IPRs in 2018-20:
• Thailand
• Myanmar
• Indonesia
2009
2010
2014
Reviews are undertaken jointly by the OECD and
the government and based on the Policy
Framework for Investment
2013
2016
2017
2018
2018

• Goes beyond philanthropy (RBC vs. CSR) to include an
expectation that all enterprises make
• Most comprehensive and only government-backed
international instrument for promoting RBC
• Recommendations from governments to businesses operating
in or from 48 adhering countries
• Cover all major areas of business ethics
• Unique implementation mechanism: National Contact Point
• Endorsed by business, trade unions and
civil society organisations
• Incorporate expectation of supply chain
due diligence
6
OECD Guidelines for Multinational Enterprises
Responsible Business conduct (RBC) to ensure business operations are in harmony with government
policies; strengthen the basis of mutual confidence with society; help improve foreign investment
climate; and enhance contribution to sustainable development
Disclosure
Employment
&
Industrial
Relations
Human
Rights
Environment
Consumer
interests
Science &
Technology
Combating
Bribery, Bribe
Solicitation
and Extortion
CompetitionTaxation

More than ¾ of IIAs 2008-2013 and virtually all
since 2012
Responsible Business Conduct: Global Agenda
Global standards
Trade and
investment
Regional
commitments
Legislation and
domestic action
International
commitments

• Implementing Partners: OECD and ILO
• Duration: 2018-2020
• Partner Countries:
China Myanmar Philippines
Japan Thailand Viet Nam
• Focus: Providing Insight and Analysis; Supporting Policy Action; Boosting
Industry Capacity; Raising Awareness
Promoting responsible supply chains in Asia
EU funded under the EU Partnership Instrument

Development of a Survey on Investment Promotion
Agencies to allow for comparative data analysis;
developed by OECD and the Inter-American
Development Bank (IDB)
A tool for understanding the differences across
IPAs on several dimensions (e.g. structures,
resource allocation, functions & activities,
prioritization, evaluation, coordination)
Results provide a basis for evidence-based policy
recommendations and peer-to-peer dialogue
among IPAs
OECD Survey of Investment Promotion Agencies
More than 50 countries already
covered:
 32 OECD countries
 19 in Latin America and Caribbean
 8 in Middle East and North Africa
 13 in Eurasia (upcoming)
 2 ASEAN (Indonesia, Myanmar)
Mapping of APEC economies could
be planned for 2020.

Example of result: Varying mandates across IPAs
56% 56%
50%
44%
41%
31%
28%
25% 25%
19%
16%
13%
9% 9% 9% 9% 9%
3% 3%
13%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Source: OECD (2018), Mapping of Investment Promotion Agencies in OECD Countries.
Share of OECD IPAs reporting the mission as an official mandate

OECD
NON-OECD
APEC18*
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
Philippines
SaudiArabia
China
Indonesia
Thailand
Malaysia
China(2018)
Jordan
NewZealand
India
Myanmar
LaoPDR
Mexico
Russia
Tunisia
Iceland
Canada
Australia
BruneiDarussalam
Korea
VietNam
Ukraine
Israel
Myanmar(2018)
Kazakhstan
Austria
Egypt
Brazil
US
Norway
KyrgyzRepublic
Switzerland
Peru
Mongolia
Poland
Morocco
Turkey
Sweden
Chile
SouthAfrica
Cambodia
Japan
Italy
SlovakRepublic
Albania
CostaRica
Singapore
France
Ireland
Serbia
Belgium
UK
Denmark
Greece
Argentina
Hungary
Bosnia-Herzegovina
Montenegro
Colombia
Germany
NorthMacedonia
Spain
Latvia
Lithuania
Finland
Estonia
Netherlands
CzechRepublic
Romania
Slovenia
Portugal
Luxembourg
Kosovo*
OECD FDI Regulatory Restrictiveness Index, 2017 or latest (open=0; closed=1)
OECD FDI Regulatory Restrictiveness Index
*APEC18: excluding Chinese Taipei; Hong Kong, China; and Papua New Guinea (missing data)
Source: OECD
In terms of the main statutory barriers to
FDI:
• Economies worldwide have liberalised
substantially over time, with little
backtracking;
• But wide differences still exist
worldwide in terms of de jure
openness;
• APEC economies are, on average, more
restrictive than in other parts of the
world – particularly in services;
• Liberalisation can be both unilateral,
plurilateral or multilateral;
• But international commitments still
sometimes lag behind actual openness
on the ground

12
More restrictive economies tend to attract less FDI
More restrictive
R² = 0.1446
0
2
4
6
8
10
12
14
0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45
FDIinstocks,2017,currentUSdollarpercapita(log)
OECD FDI Regulatory Restrictiveness Index, 2017 (open=0; closed=1)
Mistura and Roulet (2019) show:
• A 10% FDI liberalisation as measured by the
Index could increase FDI inward stocks by
2.4% on average
• If the most restrictive economies were to
achieve OECD levels of average openness,
their FDI stocks could increase by up to 95%
• Foreign equity restrictions and screening
policies (excluding national security) are
found to significantly deter FDI
• The effect is estimated to be greater in the
services sector, partly reflecting the greater
relative incidence of restrictions
Based on an augmented gravity model with fixed effects for 60
countries, 1997-2016

2. FOCUS – NEW FDI QUALITIES
INDICATORS
13

14
Objectives of the FDI Qualities Initiative
Indicators
Launch Oct 2019, Roundtable on Investment and Sustainable
Development
• Benchmarking: How FDI relates to sustainability
outcomes? How to identify policy priorities
alongside the PFI assessment?
• Focus: productivity-innovation, skills, job quality,
gender and carbon footprint
• Contribution to strategic priorities: Support SDG
and financing for development agenda
• Limitations: Further country/region analysis
required to decode drivers of outcomes
Policy framework
Planned for OECD Ministerial 2021/22
• Focus: Policies to support progress towards
SDGs
• Complementary: Building on PFI, with tailor-
made options to advance specific policy
objectives; not prescriptive
• Approach: Collect examples of the institutional
setting and policy instruments used by
countries (database); discuss/evaluate
successes and failures
Sustainable development benefits of FDI are not a given:
Better align private sector incentives with public goals

15
Focus on SDG-based FDI qualities

16
Cluster Outcomes Country coverage
Productivity-
innovation
Labour productivity OECD and non-OECD
Labour productivity growth OECD and non-OECD
Product innovation (knowledge production) non-OECD (and limited OECD)
Process innovation (knowledge production) non-OECD (and limited OECD)
Patenting (knowledge production) OECD and non-OECD
R&D expenditures (knowledge input) OECD and non-OECD
Use of foreign technologies (knowledge input) non-OECD (and limited OECD)
Skills
Skill intensity OECD and non-OECD
Technical skill shortage/surplus non-OECD (and limited OECD)
On-the-job training OECD and non-OECD
Jobquality
Employment expansion OECD and non-OECD
Employment levels OECD and non-OECD
Wage inequality non-OECD (and limited OECD)
Wage levels OECD and non-OECD
Temporary employment non-OECD (and limited OECD)
Worker safety (injuries) OECD and non-OECD
Strikes OECD and non-OECD
Gender
Gender employment gap OECD and non-OECD
Gender wage gap OECD and non-OECD
Female top managers (women’s empowerment) non-OECD (and limited OECD)
Carbon
footprint
Carbon emissions OECD and non-OECD
Energy efficiency OECD and non-OECD
Renewable energy vs. fossil fuels OECD and non-OECD

17
FDI qualities indicators – a tool for country, regional
and global initiatives
Country-level:
• Included in ongoing IPRs (Egypt, Indonesia, Georgia, Myanmar, Thailand, and Uruguay)
• Core of a new series ‘FDI Qualities and Impacts’ (piloted for Ireland and possibly Chile)
Regional:
• MENA regional investment policy workshop on FDI qualities in Tunis (March 19)
• FDI qualities session at APEC capacity building workshop in Kuala Lumpur (June 19)
• FDI qualities capacity building at ASEAN Investment Policy workshop (September 19)
• FDI qualities assessment for Regional Investment Perspectives report for Eastern Partnership
countries to be completed in 2019 (and launched at Eurasia Forum, March 20)
Global:
• FDI qualities input for OECD Council on the 2030 Agenda in March 2019
• Presentation at the margins of WTO Structured Discussions on Investment Facilitation (June 19)
• FDI qualities as core theme at the High-Level Roundtable on Investment and Sustainable
Development (launch of FDI qualities indicators)

18
Example for Thailand: FDI contributes to industrial competitiveness,
with unclear or negative impact on inclusive and green growth
Is FDI concentrated in
manufacturing sectors with
higher sustainability
outcomes?
(yes if score > 0; no if score < 0)
Do foreign manufacturers
report higher sustainability
outcomes?
Source: OECD FDI Qualities Indicators
(preliminary); reference years 2016 (THA), 2015
(MYS); spread indicates confidence intervals;
analysis includes 16 manufacturing sectors

19
Example for Thailand and Malaysia: Varying direct sustainability
impact of foreign manufacturers across peers
Do foreign
manufacturers
report higher
sustainability
outcomes?
(yes if score > 0;
no if score < 0)
Thailand
Malaysia
Source: OECD FDI Qualities Indicators
(preliminary); reference years 2016 (THA),
2015 (MYS); spread indicates confidence
intervals; analysis includes 16 manufacturing
sectors

20
2a. How does FDI relate to greening
economies in APEC?
 FDI can affect carbon footprint through its impact on energy efficiency and
access to sustainable energy
 In most APEC economies, FDI prevails in industries with lower levels of CO2
emissions, both from combustion and from electricity use, and in sectors that
are more energy efficient (i.e. consume less electricity/heat); exceptions include fossil fuel
rich countries (e.g. Brunei Darussalam, Peru)
 Within manufacturing, FDI may not always be conducive for improvements in
energy efficiency: Foreign firms are sometimes found to be less energy efficient
than their domestic counterparts (e.g. Indonesia, Philippines, Russia) and/or FDI is observed in
sectors that are less energy efficient (e.g. Russia, Thailand)
 In most APEC economies, FDI flows in renewables relative to fossil fuels have
increased rapidly over 2003-17, but FDI stocks are still concentrated in fossil
fuels and the energy sector is still significantly polluting in terms of CO2
emissions

21
FDI is prevalently in sectors with lower emissions
from electricity use in APEC economies
Is FDI concentrated in sectors with lower CO2 emissions from electricity use?
Source: OECD FDI Qualities Indicators (preliminary); reference year = 2016; analysis includes approx. 20
manufacturing and services sectors
In most APEC countries, FDI is
concentrated in sectors with low
carbon intensity (from use of
electricity/heat)

22
FDI is often observed in sectors that consume less energy, but carbon
emissions in energy sector remain high in many APEC economies
Energy production
(i.e. electricity and heat
production) is more
carbon intensive
Foreign firms operate in more
energy efficient sectors
(i.e. in sectors with less electricity/heat
consumption per unit of output)
Foreign firms operate in less
energy efficient sectors
(i.e. in sectors with more electricity/heat
consumption per unit of output)
Energy production
production) is less
carbon intensive
In China, foreign firms
operate in energy
efficient sectors, but the
production of energy
remains carbon
intensive….
… while in New Zealand,
foreign firms also operate
in energy efficient
sectors, and the
production of energy is
relatively less carbon
intensive….
CO2emissionsfromenergyproduction(g/kWh)
In Peru, foreign firms
operate in energy
intensive sectors, but
the production of energy
has low carbon intensity
Source: OECD FDI Qualities
Indicators (preliminary); reference
year = 2016; analysis includes
approx. 20 manufacturing and
services sectors
Foreign = Baseline
OECD average

23
In manufacturing, FDI is not always associated with
greater energy efficiency
Foreign firms
operate in more
energy efficient
sectors
Foreign firms are more energy
efficient (i.e. consume less
energy per unit of output)
Foreign firms are less energy
efficient (i.e. consume more
energy per unit of output)
Foreign firms
operate in less
energy efficient
sectors
Foreign = Baseline
Foreign = Domestic
In Chile, foreign
manufacturers are more
energy efficient than
their domestic peers;
and foreign firms
operate in relatively
more energy efficient
manufacturing sectors
In India and the Philippines, foreign
manufacturers are less energy
efficient than their domestic peers
year = 2013-16; analysis includes
approx. 16 manufacturing

24
FDI in renewables relative to fossil fuels has
significantly increased in APEC economies
Source: OECD FDI Qualities Indicators (preliminary)
Share of renewables in total greenfield FDI flows in the energy sector

25
In some APEC economies, FDI stocks in energy sector are still
dominated by fossils; and the energy sector is significantly polluting
In China, Indonesia and Australia,
FDI in the energy sector is
dominated by fossil fuels; and the
energy sector is significantly
polluting
FDI stocks in the energy sector
is dominated by fossil fuels
FDI stocks in the energy sector
is dominated by renewables
year = 2016 and 2017
Energy production
production) is more
carbon intensive
Energy production
production) is less
carbon intensive

26
2b. Does FDI support productivity and
innovation in APEC economies?
 Foreign firms may contribute directly or indirectly (via spillovers) to productivity and
innovation capacity
 In some APEC economies, FDI is concentrated in productive and R&D intensive
manufacturing sectors; while in others it is concentrated in less productive and less R&D
intensive sectors  Need to unfold direct and indirect effects
 Potential positive direct impacts: Foreign manufacturers have a significant productivity
premium over domestic firms in most APEC economies
 Direct benefits are not a given: In PHL, foreign firms have no productivity premium over
domestic firms; in MYS, foreign firms are less productive than their domestic peers
 Potential indirect impacts: APEC economies generally benefit from significant domestic
sourcing of foreign affiliates; in THA, IDN, and PHL, more productive supplier industries
benefit most; and in PHL, spillovers are likely due to potentially strong absorptive capacities
of domestic firms (no productivity gap); in MEX, less productive industries benefit most and
productivity spillovers are less likely due to low absorptive capacities of domestic
manufacturers (significant productivity gap)

Foreign firms may contribute directly or indirectly to
productivity and innovation capacity:
1. Direct impact relates to FDI firms’ own activities and how they
contribute to sectoral and aggregate productivity, R&D intensity, etc.
2. Indirect impact (or spillover) relates to how FDI firms influence
outcomes of domestic companies (or other foreign MNEs) in host
countries through business linkages, competition/imitation effects,
or labour mobility.
27
Why care about FDI for productivity and innovation?

28
In some APEC economies, FDI is concentrated in
productive and R&D intensive sectors
more R&D intensive
manufacturing
sectors?
(yes if score > 0; no if
score < 0)
more productive
manufacturing
sectors?
score < 0)
Source: OECD FDI Qualities Indicators (preliminary);
reference years 2013-2017; analysis includes 16
manufacturing sectors

In most APEC economies, foreign manufacturers enjoy a
productivity premium
Source: OECD FDI Qualities Indicators (preliminary); reference years 2009-2017; spread indicates confidence
intervals; analysis includes 16 manufacturing sectors
Are foreign manufacturers more productive than their domestic peers?
Direct impact: Foreign firms have
significant productivity premium
Potential for spillovers: No
productivity gap between
foreign and domestic firms

30
FDI firms’ domestic sourcing benefits more productive industries in THA,
IDN and PHL; and less productive industries in MEX
Foreign manufacturers’ share of domestically purchased inputs
Foreign
manufacturers are
sourcing from more
productive supplier
industries
Foreign
manufacturers are
sourcing from less
productive supplier
industries
Potential for spillovers: Suppliers in
more productive sectors benefit from
FDI firms’ sourcing
Potential for spillovers:
Suppliers in less
productive sectors
benefit from FDI firms’
domestic sourcing
Source: OECD FDI Qualities Indicators (preliminary); reference years 2012-17; analysis includes 16 manufacturing sectors

31
2c. How FDI relates to labour market
outcomes in APEC economies?
 FDI can cause changes in the demand for labour, thereby affecting employment,
wages and the labour force composition (e.g. gender).
Selected results for APEC:
 Foreign manufacturers tend to pay higher wages than domestic peers; and the more they do so
the more productive they are
 Varying results for gender equality in employment and wages across APEC
 Foreign firms are less likely to have female top managers than domestic firms across APEC
 FDI can also have effects on wider labour market outcomes, such as on job
security due to the use of non-regular forms of work (e.g. temporary jobs) or on
occupational health and safety at work
Selected results for APEC:
 There is no difference in terms of job security between foreign and domestic firms across APEC
 Non-fatal injuries are observed more in FDI-intensive sectors

32
In most APEC economies, foreign manufacturers pay higher wages than
domestic peers; and the more they do so the more productive they are
Are foreign manufacturers paying
higher wages?
Foreign firms are
more productive
Foreign firms are
less productive
Foreign
firms pay
higher
wages
Foreign
firms pay
lower
wages
Foreign firms pay higher wages
than domestic peers
If foreign firms pay on average higher
wages relative to domestic firms, they are
on average also more productive

33
In some APEC economies, FDI is observed in sectors
with relatively lower female employment
sectors with higher
female employment?
score < 0)
What is the average
female employment
share?

34
In some APEC economies, FDI is concentrated in
sectors with larger gender wage gaps
sectors with better pay
for women (lower gender
wage gaps)?
score < 0)
What are women’s
monthly earnings
relative to men?
Source: OECD FDI Qualities Indicators (preliminary);
reference year = 2015; analysis includes approx. 20
manufacturing and services sectors

35
In APEC economies, foreign manufacturers are less likely to
have female top managers than domestic peers
Are foreign manufacturers more likely to have female top managers than
domestic peers?

36
Possible role of FDI on job security and safety at work
Are foreign manufacturers more likely
to provide permanent jobs?
 In many APEC economies, there is no difference in
terms of job security between foreign and
domestic firms
Is FDI concentrated in sectors with fewer
(non-fatal) injuries?
 In many APEC economies, non-fatal injuries are
observed more in FDI-intensive sectors

37
2d. Questions for discussion
 Do the FDI Qualities Indicators cover the most important areas
through which FDI can support sustainable development?
 Are the indicators useful for the identification of policy priorities in
the area of FDI and sustainable development? Why? Or why not?
 How does the diagnosis of selected FDI qualities in APEC resonate
with your own assessment of FDI’s role for sustainable
development in your economy?
 Which findings are unexpected? Which findings require
clarification?

3. TOWARDS AN FDI QUALITIES
POLICY FRAMEWORK
38

39
Objectives of the FDI Qualities Initiative
Indicators
Launch Oct 2019, Roundtable on Investment and Sustainable
Development
• Benchmarking: How FDI relates to sustainability
outcomes? How to identify policy priorities
alongside the PFI assessment?
• Focus: productivity-innovation, skills, job quality,
gender and carbon footprint
• Contribution to strategic priorities: Support SDG
and financing for development agenda
• Limitations: Further country/region analysis
required to decode drivers of outcomes
Policy framework
Planned for OECD Ministerial 2021/22
• Focus: Policies to support progress towards
SDGs
• Complementary: Building on PFI, with tailor-
made options to advance specific policy
objectives; not prescriptive
• Approach: Collect examples of the institutional
setting and policy instruments used by
countries (database); discuss/evaluate
successes and failures
Sustainable development benefits of FDI are not a given:
Better align private sector incentives with pubic goals

3A. SKELETON OF A POLICY
FRAMEWORK FOR PRODUCTIVITY
AND INNOVATION
40

41
What policy channels enhance FDI impacts on
productivity and innovation?

42
OECD IPAs regularly interact with innovation and
SME promotion agencies
Almost 70% of OECD IPAs interact
with innovation promotion agencies;
and more so than with other
agencies!
Almost 50% of OECD IPAs interact
with business development/SME
agencies!
Source: OECD-IDB Survey of IPAs (2017)
Frequencyofinteraction(thehigherthemorefrequent)
Share of OECD IPAs that interact with specific agency

43
Almost all OECD IPAs use innovation impact as a
prioritisation criteria of investment projects
Impact on innovation
Impact on national firms production
Impact on regional development
Criteria used for prioritisation of investment projects by OECD IPAs (in % of all OECD IPAs)

44
3b. Questions for discussion
 Does your agency have a mandate to enhance the role of
investment for any of the 5 sustainability clusters covered?
(They include productivity-innovation, skills, job quality, gender equality and greening of economy)
 What are the policies and instruments used to promote a given
sustainability area?
 To what extent policy measures are successful? What are the
challenges?
 To what extent is your agency interacting with other government
and non-government agencies to enhance FDI sustainability
impacts?

Martin Wermelinger
Project Manager/Economist –
Investment Policy Reviews, FDI
qualities
Martin.Wermelinger@oecd.org
TERIMA KASIH!
For further informationContact
Policy Framework for Investment
www.oecd.org/investment/pfi.htm
Investment Policy Reviews
www.oecd.org/investment/countryreviews.htm
MNE Guidelines
mneguidelines.oecd.org

How FDI Supports Sustainable Development

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