Investment policy

Foreign direct investment (FDI) is defined as cross-border investment by a resident entity in one economy to obtain a lasting interest in an enterprise resident in another economy. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the direct investor on the management of the enterprise.¹⁵⁹ Ownership of at least 10 per cent of the voting power, representing the influence by the investor, is the primary criterion used.¹⁶⁰ Broadly, FDI includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intracompany loans."¹⁶¹ In a narrow sense, greenfield FDI refers just to building new products or services facilities.

FDI brings new capital, technology and know-how directly to a host country. The valuable role of FDI as an external source of financing for development is well established. The Addis Ababa Action Agenda has been recognized as a central means of implementing the 2030 Agenda for Sustainable Development. The main idea underlying FDI liberalization policies of many developing countries and the FDI promotion efforts of international donors, such as the World Bank and the IMF, is that FDI inflows foster economic growth. As FDI is a composite bundle of capital stocks, know-how, and technology, its impact on economic growth is expected to be manifold.¹⁶²

FDI can be an essential channel for the development of MSMEs under the right policy environment. Increased FDI inflows to a country can create several positive economic effects. FDI can affect labour and capital markets, trade patterns and economic growth. It is well known from the theory of host country effects of FDI that for FDI to occur, the MNE must have some firm-specific advantages compared to the enterprises in the host economy. These firm-specific advantages may result in technology transfer from the parent firm to its affiliate in the host country of investment and related spillover effects in the host economy by the business.

Within ASEAN, for example, there is a strong emphasis on MSME development in Malaysia and Thailand. The government efforts have been increased to link foreign firms with local suppliers. The growing number of SEZs along national borders, the Belt and Road Initiative and the Regional Economic and Comprehensive Partnership (RECP) Agreement are expected to stimulate intraregional FDI flows further.

Leveraging FDI for market access
Foreign Direct Investment (FDI) can serve as an additional funding source and an important channel for developing MSMEs. Although the benefits of FDI are well known, the magnitude of the potential effects are determined by a given country's economic characteristics and a host of other factors. FDI can have a direct impact on economic growth, income generation and job creation. Higher levels of FDI can also trigger increased levels of total trade of goods and services and various other linkages with the domestic economy, such as technology transfer, human capital formation, creation of new industries and greater integration into the world economy.

FDI can affect labour and capital markets, trade patterns and economic growth. It is well known that for FDI to occur, the MNE should have some competitive advantages compared to the enterprises in the host economy. These specific advantages can result in technology, and skills transfer from the parent firm to its affiliates, subsidiaries or suppliers (typically an MSME) in the host country of investment and other related spillover effects in the host economy.¹⁶³ Therefore, the inclusion of MSMEs in the supply chains of MNEs and their ensuing (indirect) involvement in exporting activity can lead to substantial diffusion of technology and further effective business models, thereby raising the international competitiveness of MSMEs.

The policy environment is crucial for attracting FDI, building local capacity, and anchoring investors by establishing deep linkages with the local economy. Regional and national policies also play an essential role in promoting and facilitating the outward internationalization of firms through investment. One such pathway for countries is via the development of SEZs.

Regulatory restrictions on FDI limit market access and limit the potential for linkages between foreign investors and local MSMEs. As such, they are reforming FDI restrictions that can serve to promote MNE-MSME ties. Increased FDI inflows to a country can create several positive economic effects. FDI can affect capital and labour markets, trade patterns and economic growth. These firm-specific advantages may result in technology transfer from the parent firm to its affiliates or subsidiaries in the host country and related spillover effects on domestic companies in the host economy.

Policy recommendations

• Increasing foreign investor access to the services sector
  Advancing FDI liberalization of services sectors can raise the productivity of manufacturing firms and create new opportunities for MSMEs to plug into RGVCs.
• Increasing foreign investor access to the services sector
  Advancing FDI liberalization of services sectors can raise the productivity of manufacturing firms and create new opportunities for MSMEs to plug into RGVCs.