The term ‘investment’ is widely used in our day to day lives, but only a few have really understood it. The term has a wide stratum; right from personal investments to global investments, it has the same amount of impact. To understand the importance of investment in global, we must first understand the term ‘Foreign Direct Investment.’ At the beginning of the 1990s, following the fall of the iron curtain global FDI experienced a decade of slow but steady increase. The 1990s saw the acceleration of globalization and outsourcing activities, especially by western multinationals where FDI in developing countries with low labor cost played a vital role. FDI had a different impact both in developed and developing countries. FDI flows were dominated by developed economies while developing countries played a negligible role in terms of outflow.
In the early 2000s, after reaching a preliminary peak in 2000, both FDI outflow and inflow were set on a downward spiral by the burst of the dotcom bubble. Shortly before the outbreak of the Global Financial Crisis, it recovered and reached exceptional heights in 2007. Developing countries, especially China played a more important role as outward investors from 2003 onwards. The firms in China pursued opportunities in global markets by pushing their own internationalization process. Global Financial Crisis in 2008/2009 and followed by the Euro crisis in 2010, the developed countries’ FDI outflows and inflows experienced more ups and downs than the two decades before. This didn’t affect developing countries to further pursue FDI resulting they continued to grow. Furthermore, the gap between inflows to developing and developed countries gradually reduced. For the first time, in 2014 and 2018, developing economies received more FDI than developed countries did.
Private Sector Creating a Better Economy
FDI is the gateway to the global economy. According to the world investment report 2018, many countries continued policy efforts aimed at attracting FDI. In 2017, 65 countries and economies adopted at least 126 investment policy measures, of which 84 percent were favorable to investors. The private sector plays a vital role in running the whole FDI scenario. Over the last three decades, the private sector has been constantly playing an important role in leading economic growth, the creation of ample job opportunities, and reducing poverty from all over the world. FDI allowed collaboration of global markets and enhanced private sector competitiveness which contributed towards unparalleled growth in many developing and developed economies such as China, Vietnam, and Costa Rica. However, the road towards the development of global economies is yet to be traveled. This is letting the government turn towards the World Bank for further aid and advice on the internal as well as external policies. This will further enable them to connect to the foreign as well as domestic private sector, allowing them to generate cross border trade and develop investment patterns. Yet, companies need a steady and foreseeable economic environment in order to increase their investment activities. If the favorable condition is not provided, companies may hold or even postpone their investment decision.
Understanding Investment Climate
To further understand the global market, it is equally important to understand the term ‘Investment Climate.’ According to the definition provided by Investopedia, Investment climate refers to the economic, financial, and socio-political conditions in a country that affect whether individuals, banks, and institutions are willing to lend money and acquire a stake (invest) in the businesses operating there. Hence, it is affected by many factors such as poverty, crime, national security, political instability, and the list goes on.
In any developing country, private sector growth plays an important role in growing and creating multiple job opportunities which results in the increasing in the circulation of monetary funds in the economy. But this private sector growth is affected by many factors that can be categorized under the head of ‘investment climate.’ Depending upon the different economic, the investment climate is further classified into two categories; favorable and unfavorable investment climate.
Underdeveloped Economies Facing Unfavorable Investment Climate
Most of the underdeveloped economies face unfavorable investment climates which are one of the many burdens with other drawbacks. To remove these burdens, regulatory reforms set by the government should be streamlined in a way that supports all the private sectors. Furthermore, governance and nonprofit organizations play a key role to improve the investment climate and promote economic development in the underdevelopment economy. Governance can further be differentiated as political governance, economic governance, and corporate governance. All these three plays a vital role in running the economy smoothly. To further understand the country’s economy, it is important to understand all these types of governance and its workings.
To prepare a more comfortable and favorable investment climate for any individuals, banks, and institutions, it is important to gain their trust that will lead them to have a reasonable expectation for favorable conditions allowing them to invest, thrive and expand. Additionally, irrespective of these conditions, some investors are still willing to take the risk and volatility associated with investing in an unfavorable climate as the potential that the higher risk will be rewarded with high returns.
Regulation Deciding the Pace of the Economy
Gaining trust in the investment climate cannot be established in the places where the state does not provide certain essential public business infrastructures such as sound regulation, market-supporting laws that are implemented fairly by honest and well-trained judges and a transparent procurement system. In short, the private sector needs an effective, enabling the state to function efficiently and fairly. A proper set of rules and regulations need to maintain between state and private sector. There should also be a creation of common ground where both can have constructive dialogue.
There is no hidden fact that institutions, especially regulatory institutions decide the whole pace and quality of economic growth. The generation of jobs and the creation of incomes are the two key factors for the improvement of the business and climate. Furthermore, it is shown that if there are fewer, cheaper and simpler regulations, firms present in the region will flourish and will be more efficient in many aspects of doing business.
World Bank Group (DB) Project
For example, the World Bank Group (DB) project offers a consistent yardstick for comparing countries on regulation as seen from the firm’s private point of view. But the quality of business climate is also measured by the quality of labor skills, infrastructure, competitive prices and other determinants, and outcomes of investment and profitability. Doing Business (DB) has often sparked constructive debate among country authorities and business interests about ways of making the regulation simpler and lighter on firms. In forthcoming years, regulatory actions will become increasingly important as countries address challenges such as migration, health, and climate change. It will be crucial to emphasize both the need for efficiency in the implementation of regulation and the benefits that good regulation can bring.
Appropriate Framework for Firms to Grow
With continuous growth in economics all around the world, it is equally important to shift focus towards more sustainable development which will further enhance strong business and improve the investment climate. Secondly, an appropriate framework for regulation and governance for a firm should be set up, allowing them to survive in the market and also will help them to act responsibly. Lastly, there should also be regulation of the environment where the government must provide balanced regulation safeguarding the overall interest of the nation as well as supporting the business environment. Once these frameworks are in place, the government can work towards providing more sustainable business by encouraging them rather than pressurizing them. Positively, we can also see more and more companies are working towards CRS activities. As the firms are involved in CSR activities, it is resulting in better output with an increase in goodwill value.