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    19-Jul-2022

Incentives and investment - By YUSUF MANSUR, Jordan News

 

 

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.
 
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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