When Risk is the “Norm”, What Can Investment Agencies Do to Drive Investment?

Productive private sector investment is an important component of competitiveness and growth strategies for developing countries. Attracting foreign direct investment, in particular, helps to link a country’s domestic economy to global value chains in key sectors. Countries thus decide to attract foreign investment by actively catering investors through an Investment Promotion Agency (IPA).

IPAs are most effective in communicating and promoting the conditions and opportunities a country has to offer, as well as providing support on the ground and guaranteeing the sustained development and growth of a project. While agencies can help persuade an investor by facilitating the necessary information and contacts to carry out an accurate assessment of the country, the reality is that the final investment decisions are made based on factors mostly outside of the agencies’ control. Investment attraction is really about creating the necessary conditions for companies to choose a destination for their ventures.

If a country wants to attract investment its first step is to is focus on creating a stable environment that reduces risks and unforeseen consequences of an investment decision. Most investors will choose the option they understand and perceive as more stable over the one that offers lower costs and perceived greater returns. It’s important to note that most decision-makers are investing their money and putting their jobs at stake when choosing a destination, so they’ll default to the conservative or generally accepted option over unknown or unpredictable ones.

This is especially important in the current context of Latin America where there has been heightened political turmoil and insecurity in the last two years, even in destinations traditionally considered “safer”. In an environment where risk has become the norm, those who distance themselves from these issues will have a greater chance to be successful in their investment attraction goals. While we recognize that many of these social conflicts are sometimes unpredictable, governments must focus on the underlying factors that determine risks for investors such as rule of law, regulatory predictability, and fiscal stability.

What Can IPAs Do To Influence Investment Flows

However, IPAs can play a key role for investors who are considering their country as a destination for their investment. According to the World Bank, outside of the aforementioned investment climate factors, other key drivers of investments are: 1) market size and tendency, 2) cost efficiencies, and 3) access to strategic assets and opportunities. IPAs help investors learn about and understand the conditions a country offers, and their work is especially disruptive in jurisdictions that aren’t well-positioned in investors’ top of mind and where information isn’t readily available. This is why carrying out marketing efforts to create awareness and later facilitating the investor’s evaluation of a destination can play a significant role in the decision-making process. Also, and especially based on the aforementioned factors related to the region’s instability, IPAs can play a decisive part in servicing investors by offering aftercare services to ensure a soft landing and efficient operations.

While the most attractive option is to offer a good investment climate in general, personalized aftercare services, however, more targeted, still offer an effective solution for investors and tend to highly motivate reinvestments in the country. Aftercare services are especially important considering the low success rates of proactive promotional efforts such as roadshows and investment forums. Another important factor that demonstrates the importance of aftercare services is that over 50% of global investment flows come from M&As or expansions from already established companies in a jurisdiction. In fact, 54% of global flows between 2017 and 2018 were in these forms.

Based on a study our firm carried out analyzing the 2012-2016 period in Nicaragua (FDI Perspectives 2018-2021, MECA Consulting, 2017), while the country was receiving one of the highest levels of Foreign Direct Investment in Latin American relative to the size of its GDP, we found that almost 90% of annual investment flows were originating from M&As and expansions from existing investors, while greenfields represented just over 10% of investment flows. This doesn’t mean that the country wasn’t attracting new investments; however, it shows the potentially high levels of investments that can come from companies that were already located in the country. These results emphasized the potential that the aftercare services offer.

Many IPAs focus their investment attraction efforts on proactive promotion. In our experience, the two most successful actions an agency can focus on are: 1) building capacity and information to provide an understanding of the investment conditions a country offers, and 2) supporting the successful establishment and operation of the companies that do decide to invest by providing effective aftercare services. An IPA’s capacity to attract investment is limited by outside forces. Having a capable IPA is part of the framework needed to provide an attractive climate and agencies need to focus on facilitating and servicing investors, which is where they can generate their greatest impact.