1. Improving the Investment Climate
2005
Knowledge Economy Forum
Improving the Investment Climate
Warrick Smith
World Bank

2. The investment climate
Investment and productivity improvements are the main sources of long-term growth.
Source: WDR05, drawing on Bosworth & Collins
The investment climate shapes the opportunities and incentives for firms to invest and improve their productivity
Government policies and behaviors play central role.

3. A better investment climate for everyone
Better for society as a whole, not just firms
Better for firms of all types.
World Development Report 2005 draws on new data:
Surveys of 30,000 firms in 53 developing and transition economies.
Doing Business database, covering >140 countries

4. Risks, costs, & barriers to competition
Relevant government policies and behaviors cover a broad field – but firms evaluate as part of a package.
Stability & security
Regulation & taxation
Finance & infrastructure
Workers &
labor markets
Governance
Risks
Costs
Barriers to competition

5. Policy-related risks
The dominant concern of firms in developing and transition economies.
Improving policy predictability alone can increase likelihood of investment by over 30%.

6. Risks: Perceptions vary across countries
Interpretation of regulation is unpredictable
Lack confidence in courts to protect their property rights
Percent of firms – IC Surveys
Percent of firms – IC Surveys

7. Policy-related costs Taxes are rarely the biggest cost burden.
Source: IC Surveys

8. Costs: Regulatory burdens
Registering a new business
Enforcing a contract
Days – DB Database
Days – DB Database

9. Costs: Regulatory burdens (2)
Registering property
Resolving insolvency
Days – DB Database
Years – DB Database

10. Costs: Labor market regulation
Rigidity of employment index
Employment protection rules
Index – DB Database
WDR05 & Scarpetta

11. Costs: Some other dimensions
Time dealing with officials
Report paying bribes
Percent of management time – IC Surveys
Percent of firms – IC Surveys

12. Policy-related barriers to competition
Weaken incentives to innovate and boost productivity.
More competitive pressure, more innovation

13. Variations within countries & across firms
Conditions vary within countries
Smaller firms often suffer most 25 50 75
Have a loan from a formal financial institution
Confident that courts will uphold property rights
Believe regulations will be interpreted consistently
Percent of firms
Large
Medium
Small
Informal
China

14. More than changes in formal policies?
Corruption & rent-seeking
Credibility gaps
Public trust & support
Fit with local conditions

15. Regulation and corruption
More red-tape, more corruption
Source: WDR05.

16. Influential firms… …enjoy a better investment climate…
…but innovate less.
Source: WDR05, drawing on IC Surveys

17. Focus on delivering the basics
Benefit all firms and activities in the economy
Stability and security
Peace and macroeconomic stability are fundamental.
Secure property rights link effort to reward.
Regulation and taxation
Balancing social goals.
Big opportunities to improve both without sacrificing other goals.
Finance and infrastructure
Traditional approaches have poor track-record.
Improve investment climate for service providers.
Workers and labor markets
Skilled and healthy workforce.
Regulate to benefit all workers.
Help workers cope with change.

18. Private participation in infrastructure
Over 2,700 PPI projects in developing & transition economies since 1990.
Many outstanding successes.
Private investment flows have fallen from their peak.
Many projects renegotiated.
About 6% of projects cancelled or in distress.
Source: WDR05, drawing WB PPI Database

19. Going beyond the basics?
Selective interventions
Many rationales, but no sure-fire strategies.
Two underlying challenges:
Identifying activities with strong potential for future growth in an increasingly dynamic and competitive world.
Governance, including capture by beneficiary firms.
Not a substitute for broader improvements
Often miss promising activities.
Can be a distraction from broader progress.
Create distortions and can go spectacularly wrong.
Approach with caution…
Clear objective and rationale
Maintain discipline
Be transparent
Review schemes regularly.

20. Persistence, not perfection, is the key
No country has a perfect investment climate.
Key constraints vary across & with countries.
Sustain a process of ongoing improvements.
Public communication
Consultation bodies
Mechanisms to review existing constraints
Processes to review new regulatory proposals.

21. Improving the Investment Climate
2005
Knowledge Economy Forum
Improving the Investment Climate
Warrick Smith
World Bank