FDI policies for a better country

ATTRACTING Foreign Direct Investment (FDI) is a challenge for Sri Lanka at many levels. Not only does Sri Lanka have to vie for attention among 198 other countries, it also has a stack of constraints ranging from assuring long term macroeconomic stability to liberalising a cumbersome trade regime.

The points that can be discussed under this topic are many.

However what most policy makers seem to have overlooked is the simple fact that changes that are positive for everyone will also assist in the flow of FDI. For example many pundits caution against crowding out domestic investment for the sake of FDI. They insist that while a country should not be anti-FDI there is also increasing need to encourage local investors by having a level playing field. This means that the tax holidays and other incentives should also be given to local companies who are willing to expand since in the long run they can assure stronger export growth.

The flip side is that for local investors to grow the macroeconomic environment must be stable. For any kind of investment to take root the basics of good governance, liberalised trade regime and ease of doing business are important. FDI gives connection to markets, which is the most important point of attracting them in the first place. Companies that work with reputed brands from Victoria’s Secret to Nike have a ready market. On the other hand local businesses that are not given incentives cannot infuse technological innovations and progressive management structures since they lack resources. Also if they resort to domestic borrowing the risk of inflation and overheating of the economy is greater.

Having been placed 102 from 183 countries in the ease of doing business rankings published by the World Bank, Sri Lanka has to work hard to encourage international businesses to invest large scale. Whilst it is welcome that President Mahinda Rajapaksa has expressed the desire to move up to within top 30 in this ranking, credible macroeconomic management beyond the current International Monetary Fund (IMF) Standby Agreement is one aspect the government must focus on.

The other is expanding the limited transparency and regulatory environment. Reducing corruption, updating laws, strengthening the judicial system, limiting politicisation and converting State owned enterprises into profit making entities are key among these needs.

Sri Lanka is known to have one of the most complex trade regimes in the world. Exporters are severely hampered by unreliable logistics, mountains of paperwork and bureaucratic delays. Restructuring export channels so that ease of goods and services is possible while protecting the business community is important. These are not policies that are exclusively directed at FDI. In reality they can go a long way to expanding local exports and increasing investment.

Not differentiating between local and foreign direct investment will give an opportunity to Sri Lankan business to gain from peace. Since they are the people that have kept the economy growing during taxing war times it is only fair that they be included in the post-conflict boom. Moreover having more ground level knowledge they would be better equipped to invest in the north and east. Indeed from the indications so far it is local apparel and other companies that have moved large scale industries to these deprived regions.

Policies to attract FDI cannot be divided from general actions that will make life better for everyone.