Business Environment Reform and Investment Promotion and Facilitation: Rapid Evidence Assessment, DFID, October 2015
|Funding agency(ies)||Department for International Development (DFID)|
|Date completed||August 2015|
This rapid evidence assessment (REA) seeks to answer the following question: What is the evidence on links between business environment reform (BER) and investment, and what is the effectiveness of linking business environment reforms and investment
Evidence for the research question was examined in two parts, based upon a conceptual
framework presented in the report: (1) the impact of BER on investment, and (2) the
effectiveness of linking BER and investment facilitation and promotion services
The assessment identified an initial group of 129 studies, which were reviewed to determine each study type and its relevance to the research question. Overall, the strength of the evidence linking BER with increases in firm investment was judged to be ‘Medium’, based on the number, quality and consistency of the evidence found. Beyond the firm-level effect of BER, it was more difficult to demonstrate a connection between increased firm investment and broader economic impacts. While increasing firm-level investments are expected to contribute to broader economic growth, there are many other factors at play here, making it difficult to claim a direct and consistent effect.
There was no evidence found that directly addressed the research question concerning the effectiveness of linking BER and investment facilitation and promotion. However, 11 studies were found with evidence on the elements that contribute to this link. A sound business environment (BE) is important for attracting inward private investment.
The evidence suggests that the following interventions are likely to increase investment
- Improving the general BE: improving the BE to make it more conducive to private investment is a critical element for increasing investment;
- Improving tax administration: a streamlined tax system can increase the number of firms in the formal economy, facilitate investment, widen the tax base, and rationalise a company’s tax compliance cost;
- Supporting reforms that focus on the needs of poor, informal business: the formalisation of informal firms is critical to growth in investment levels (e.g., access
to finance and business services);
- Improving access to markets: markets remain the number one factor guiding investment decisions;
- Developing an integrated framework for investment-oriented reforms: BER affects a wide range of stakeholders in positive and negative ways, and it is important to understand the political economy of these processes and to integrate these into reform design;
- Bridging the gap between the need for reform and current investor needs: while a poor BE is the reality on the ground in many developing economies, investment promotion and facilitation services are needed to help bridge the gap between the future need for reform and the current needs of investors.
- Establishing one-stop-shops: these facilities create a useful mechanism for helping investors navigate the bureaucracy and can be used to stimulate reform efforts.
Similarly, the evidence suggests that the following interventions are not likely to increase investment levels:
- Marketing efforts that are disconnected to investment conditions: a poor BE undermines investment promotion efforts and while IPAs can provide support and facilitation services to help guide investors through the legal and regulatory challenges they may face, in the long-term investors will be disinclined to continue;
- Applying a one-size fits all approach: the impact of reform varies based on a number of factors, including the size of the firm, whether it is formal or informal, its location (i.e., urban compared with rural locations), education levels, and access to finance;
- Failing to deal with corruption: reforms that do not address the scourge of corruption will be insufficient to producing higher levels of private foreign investment.