By Michael Caracache

In an increasingly interconnected world, foreign direct investment (FDI) stands out as a powerful engine for economic growth and development. Governments worldwide are in a race to attract FDI, aiming not just for significant capital inflows but also for the accompanying benefits such as technological advancements, innovation, and knowledge transfer. The recently published report, "Leveraging FDI to Catalyze Economic Development," serves as a comprehensive blueprint for unlocking the potential of FDI.

Understanding the Significance of FDI

FDI involves investments from a foreign entity into a business or corporation in another country, establishing a lasting interest. These investments can take various forms, including mergers and acquisitions, joint ventures, and greenfield or brownfield investments. Numerous economic, social, and political factors shape the global landscape of FDI. In recent years, fluctuations in FDI inflows have been influenced by the pandemic, political unrest, and rising commodity prices. Despite these challenges, FDI remains a crucial tool for economic development.

Governments are increasingly aware of the need to create conducive environments for FDI. They are developing long-term investment attraction strategies, introducing incentives, and establishing dedicated entities to oversee and facilitate foreign investments. This proactive approach is vital for attracting and retaining foreign investments, which bring along numerous direct and indirect benefits .

FDI drives economic growth but has various and multiple benefits that are considered both direct and induced:

These various benefits listed above underscore why governments globally are increasingly keen to attract FDI.

The report identifies three critical components for attracting and maintaining FDI:

1. Strategic Direction and Vision: The first step is developing a dedicated FDI strategy with clear objectives. This involves identifying the purpose of FDI attraction, the desired benefits, target sectors and geographies, and potential source countries for investment. For example, Saudi Arabia's National Investment Strategy aims to grow investments across prioritized sectors, setting an FDI target of USD 103 billion by 2030.
2. Investment Enablers: Governments must focus efforts and resources on two elements that directly influence investment decisions, namely creating an investment-enabling environment, and deploying investment-enabling mechanisms. The former requires governments to ensure political stability, regulatory quality, economic stability, and infrastructure development. Investment-enabling mechanisms drive governments to deploy monetary incentives such as tax breaks and subsidies, as well asl non-monetary support like the provision of legal and tax advisory services.
3. Robust Governance: Effective strategy implementation requires a whole-of-government approach involving various parties that collaborate to deliver the strategy and achieve desired outcomes. Governments must establish robust governance models to oversee strategy execution, including national committees, central authorities, investment promotion agencies, and advisory councils.

FDI is increasingly becoming a cornerstone of national development strategies. Governments, particularly in the GCC, are directing significant efforts toward ensuring investment attraction and retention to drive economic growth. The three-pronged approach outlined in the report—strategic direction and vision, investment enablers, and robust governance—has proven effective in fostering FDI growth and sustainability.

To fully leverage FDI for economic development, governments must craft investment strategies with clear targets, foster an investment-friendly environment, and implement robust governance frameworks. This comprehensive approach will create the foundation needed to attract and bolster FDI, ensuring sustained economic growth and development.

Today, more than ever before, it is time for governments to unlock the potential of FDI and drive economic growth with actionable insights. For a deeper dive around FDI attraction, we invite you to download the full report.