DFID commissioned original research to look at how country risk affects foreign investment decisions in fragile states: how investors think about risk, the differences in risk perceptions between firms, and what development partners could do about this. The findings and some recommendations are summarised in this briefing.
While overall “investment climate” reform strategies have their place, focus is needed to ensure countries can target appropriate investors. A short–medium term strategy for promoting investment in a specific FCAS should involve: realistic analysis of the most promising sectors and investment opportunities; identification of the foreign investors most likely to make such investments; proactive marketing to those firms; and training and technical support to ensure the necessary expertise in the relevant Government ministries so that they understand the concerns of potential and existing investors.
Subsidising credit for firms should be treated with some caution. While “buying down” risk may be a useful way of increasing investment in high-risk markets in the short-run, donors could waste money by subsidising investments that would have taken place anyway.
The regulatory and institutional environment was certainly a critical issue for firms considering investment, but an enabling environment means more than just business regulation: it includes market size (population, income levels, consumption), stability of the government (predictable and peaceful handovers of power), conflict risk, labour force (size of working-age population, education and skill levels, location) and infrastructure. Developing a broader understanding of these factors could be a useful area for future research.
Primrose, J.; Wagstaff, T. Policy Brief: multinational investor perspectives on fragile and conflict-affected state investments. DFID, London, UK (2014) 14 pp.