Over the past three decades, countries
have been increasingly liberalizing their outlook toward foreign direct
investment (FDI), arguably to raise employment, or exports, or tax revenues, or
knowledge-intensive production (through either direct or spill-over
contributions to host countries’ private sector). Jordan is no exception. It is
currently in the discussion phase of a new draft investment law.
اضافة اعلان
Many factors may contribute to attracting FDI into a
country. The most important ones are usually the market size, the real income
levels, and the potential for growth. Other factors are the level of skills in
the host economy, the availability of infrastructure, clusters and other
structures that facilitate the efficient specialization of production, trade
policies, and political and macroeconomic stability.
Depending on the product and investment structure or
type, some factors may acquire more importance than others. In the Middle East
and North Africa, one major deterrent to FDI inflows has been the unilateral
decision-making process — decisions that are made in a non-institutional manner
and that tend to depend on the whims and taste of an individual rather than on
well-established and observed policies, institutions, and procedures.
Jordan falls short in the market size and economic
growth categories. Skill levels and infrastructure are about average, as the
country has been exporting its best talent to the Gulf countries for decades,
and its infrastructure still lacks a modernized public transport system. As for
energy and internet costs, they are considered high.
In terms of macroeconomic and political stability,
Jordan has not had an economic crisis since 1989, and has not had an internal
or external conflict for over half a century. Therefore, it is a regional
winner in this respect. However, it does tend to change its economic laws
frequently. For example, it has introduced a new investment law every 4.4 years
over the past 70 years. Therefore, in order to be competitive in terms of
investment attractiveness, Jordan must provide well-studied and analyzed
incentives.
The dominant view around the world is that the most successful incentives are those which reduce investment risks and lower the cost of production.
However, no discussion about incentives is straight
forward, and should be multidimensional as, among other things, incentives come
in a variety of forms. They could be fiscal incentives, such as lower taxes,
financial incentives, such as grants and preferential loans, and incentives
like market preferences, monopoly rights, land grants, etc. The types of
incentives depend on the strategic goals of the host country, which may be
enhancing innovation and creativity, enhancing competitiveness, and achieving
sustainable development.
The dominant view around the world is that the most
successful incentives are those which reduce investment risks and lower the
cost of production.
Small, low-growth economies may need to provide many
more incentives than large ones to attract FDI. Empirical evidence suggests
that incentives play a positive, albeit limited, role in attracting FDI. Market
characteristics, relative production costs, and resource availability tend to
better explain the existing cross-country variations in FDI inflows.
Furthermore, to further complicate the role of incentives, a foreign investment
that does not differ from a local one can hardly justify the provision of an
incentive. Having said this, the situation may still warrant providing
incentives if the unemployment rate is high in the host country and the policy
makers wish to lower it (as in the case of Jordan).
The current draft of the investment promotion law
contains many inconsistencies and flaws. For example, the term “large
investor”, in the draft, is flawed in many ways. First, the reference should
have been to “investment”, not “investor”, because even though the investor may
be a billionaire, his/her investment in Jordan could be small. Second, it is
not only the size of the investment that matters, but also its contribution to
boosting knowledge and creating complex products, or to employment, or
geographical incidence (poor underdeveloped rural area versus an urban center),
or a mix of all three.
It is incomprehensible that an investment governance
framework would provide the same incentive(s) to a garment factory as it would
to a semiconductor research or production facility.
There is much more to be said about the current
draft law. Let us hope that the coming days may usher in a learned, in-depth,
well-researched, and benchmarked analysis and debate.
Yusuf Mansur is CEO of the Envision Consulting Group and
former minister of state for economic affairs.
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