This chapter addresses one of the policy areas covered in the Policy Framework for Investment within the context of the OECD Initiative on Investment for Development – investment policy. The purpose of this chapter is to examine how investment policy contributes to an environment that is attractive to investors and that enhances the benefits of investment to societies. It serves as background documentation for the investment chapter of the Policy Framework for Investment.

Although domestic firms are by far the largest investors in developing and transition economies, foreign investors are often particularly sought after for their technology, skills and expertise and for their access to international markets. Most governments, including sometimes at the sub-national level, now actively promote foreign investment through agencies mandated to this effect and offer a range of inducements to link multinational enterprises (MNEs) more closely to the local economy. The traditional aims of foreign direct investment (FDI) policy in terms of employment, exports and, to a lesser extent, import substitution still exist, but the overall emphasis in now much more on the contribution of foreign MNEs to the overall development and competitiveness of the local business sector.

A country’s trade policy influences both domestic and foreign investment and is important for any development strategy. Investment has long been recognised as a key ingredient to economic growth and development. This chapter explores how trade policy can: - Encourage investment – both domestic and foreign. When appropriate, foreign direct investment (FDI) is the focus. The positive role of FDI for development has been recently stressed by the Monterrey Consensus. Trade policy is one of the main determinants of foreign firms in their investment decisions. - Maximise the contribution of investment to development growth, in particular in the context of trade policy by encouraging technology transfers and other linkages that induce growth. 

Competition policy has come to play an increasingly important role within the context of the global development agenda. For example, the Monterrey Consensus, the values and objectives of which underpin the Policy Framework for Investment, emphasised “the promotion of a competitive environment” in order to allow “businesses, both domestic and international, to operate efficiently and profitably and with maximum development impact” (paragraph 21). The Monterrey Consensus also called on members of the WTO to implement the commitments made in the Doha Development Declaration, which recognised “the needs of developing and least-developed countries for enhanced support for technical assistance and capacity building in [the area of competition policy], including policy analysis and development” (paragraphs 23-25).1 Work undertaken at the OECD, UNCTAD, the World Bank and the WTO, among others, has underscored the relevance of competition policy from a development perspective. Furthermore, developing countries have been adopting competition laws and policies in ever-increasing numbers, pointing to benefits that these would seem to associate with doing so. While approximately 27 developing countries adopted some form of competition law during the 1990s,2 an additional 35 were in the process of implementing competition laws as of February 2004.

A country’s tax regime is a key policy instrument that may negatively or positively influence investment. Imposing a tax burden that is high relative to benefits realised from public programmes in support of business and high relative to tax burdens levied in other competing locations, may discourage investment, particularly where location-specific profit opportunities are limited or profit margins are thin. In addition, the host country tax burden is a function of not only statutory tax provisions but also of compliance costs. A poorly designed tax system (covering laws, regulations and administration) may discourage capital investment where the rules and their application are non-transparent, or overly-complex, or unpredictable, adding to project costs and uncertainty over net profitability. Systems that leave excessive administrative discretion in the hands of officials in assigning tax relief tend to invite corruption and undermine good governance objectives fundamental to securing an attractive investment environment. Policy makers are therefore encouraged to ensure that their tax system is one that imposes an acceptable tax burden that can be accurately determined, keeps tax compliance and tax administration costs in check and addresses rather than contributes to project risk.

This paper addresses corporate governance1 as one of the policy areas for inclusion in the Policy Framework for Investment (PFI) under the OECD Initiative on Investment for Development. It provides background both on the relationship between corporate governance and a sound investment environment, and on some of the key corporate governance issues that policy makers should consider in this context. This document will serve as the basis for one of the ten policy chapters to be developed for inclusion in the Policy Framework for Investment, each setting out key questions and issues for policy-makers’ consideration in the context of promoting an environment that is attractive to domestic and foreign investors and that enhances the benefits of investment to society.2 Importantly, the questions presented in this report are not intended and should not be seen as a substitute for the work by the OECD Steering Group on Corporate Governance to develop a methodology for assessing the implementation of the OECD Principles of Corporate Governance.

Governments can use a broad range of public policies to promote recognised concepts and principles for responsible business conduct, such as those recommended in the OECD Guidelines for Multinational Enterprises. These policies help attract investments and enhance their contribution to sustainable development. This background document looks at how governments can work to help companies to ensure that their operations “are in harmony with government policies, to strengthen the basis of mutual confidence between enterprises and the societies in which they operate … and to enhance [their] contribution to sustainable development”.

This chapter deals with how human resource development policies can contribute to an environment that is attractive to domestic and foreign investors and can enhance the benefits of investment to society. The chapter serves as background documentation to the PFI checklist and annotations dealing with human resource development (HRD).

Well functioning financial markets and good infrastructure promotes investment by connecting firms to their customers and suppliers and helping them to take advantage of modern production techniques and organisational structures. Conversely, inadequacies in infrastructure and financial services create barriers to opportunities and increase costs for all firms, from rural micro-entrepreneurs to multinational enterprises. By impeding new entry into markets (by either domestic or foreign firms), these inadequacies also limit competition, thus dulling incentives to innovate and to improve productivity.

The debate on the links between public governance, investment and development has taken on greater urgency as the interconnectedness of economies intensifies. Investment decisions of citizens and foreigners are directly influenced by their understanding of how public policies and laws are formulated and enforced. Just as there is no single model for good public governance in developed countries, there is no single model with fixed stages of transformation for developing countries. Nevertheless, there are commonly accepted standards of public governance to assist governments in assuming their roles effectively.