MODULE 1. Understanding the investment climate: European approach CO-FINANCED BY EUROPEAN UNION JEAN MONNET MODULES, project " Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Professor: PHD, Irina Umerova

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" What about investment climate? The economic and financial conditions in a country that affect whether individuals and businesses are willing to lend money and acquire a stake in the businesses operating there. Investment climate is affected by many factors, including: poverty, crime, infrastructure, workforce, national security, political instability, regime uncertainty, taxes, rule of law, property rights, government regulations, government transparency and government accountability.

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" An unfavorable investment climate is one of the many hindrances faced by underdeveloped nations. Regulatory reform is often a key component of removing the barriers to investment. A number of nonprofit organizations have been established for the purpose of improving the investment climate and spurring economic development in these countries. Also, some investors are willing to take on the high level of risk and volatility associated with investing in an unfavorable climate because of the potential that the high risk will be rewarded with high returns. What do know about unfavorable investment climate?

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Foreign Direct Investment for Development: Maximising Benefits, Minimising Costs Market size and growth prospects. Factors like market size, prospects for market growth, and the degree of development and per capita incomes of host countries are important determinants in the location decisions made by MNEs. Natural and human resource endowments. Cost and productivity of labour. Factor cost advantages and the availability of natural and human resources are a driving force behind FDI. Physical, financial and technological infrastructure. Differences in infrastructure, such as transportation, influence the FDI location decision. Besides highways, railways, ports and airports, the level of telecommunication services has gained increasing importance with the recent transformations in the information and telecommunications industries of the past decades. High local technological capabilities are an important factor for attracting FDI flows in high- value added activities.

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Openness to international trade and access to international markets. Economic reforms and open door policies and other efforts to promote trade – inter alia by conducting bilateral trade 3agreements and adopting unilateral actions (e.g. lowering tariff barriers) – can attract export- oriented FDI. Attractive and strategic geographic positions, adjacent to potential importing countries and providing access to regional and global markets, are also significant factors in attracting FDI. Foreign Direct Investment for Development: Maximising Benefits, Minimising Costs The regulatory and policy framework and policy coherence. General economic, political and social stability forms the background of a host country’s FDI policy. Investors are ultimately motivated by their expected risk-adjusted returns, so a transparent and well-functioning legal framework and business environment is of the first order of importance since it lowers the (political) risk of doing business in an unfamiliar environment. Rules and regulations regarding the entry and operations of foreign firms, and standards of treatment of foreign firms, are particularly relevant. Good corporate governance and fair business practices, including combating corruption, are equally important.

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Investment Compass UNCTAD’s Investment Compass is one of the scoreboards that focus most strongly on countries’ attractiveness to international direct investment per se. It provides an FDI benchmarking tool by analysing key macroeconomic indicators thought to influence the investment climate in individual countries. The Compass aims to assess the quality of the investment climate according six major areas of concern to investors. All major areas can be influenced by policy makers, some of which immediately and others by means of long-term structural policies. Resource assets. Infrastructure. Operating costs Taxation Regulatory framework.

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Prosperity or growth Оne can judge an economy or society by its level of prosperity, e.g. the gross domestic product (GDP) per capita, or by the yearly growth of the prosperity. These are two separate things which lead to a different ranking order of countries. Imitation or innovation In some countries labour productivity is lower than in the Netherlands and similar countries. In most cases this goes hand in hand with lower labour costs. Globalisation The interest of governments of the different countries in the investment climate is among other things triggered by the ongoing globalisation of economies.

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation"

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" The model contains five layers, each of which contains relevant factors. The bottom layer covers factors which are preconditions for economic growth: the societal situation, macroeconomic conditions, functioning of the apparatus of government, and infrastructure. The second layer contains factors that boost economic growth: INNOVATION, ENTREPRENEURSHIP, MARKET COMPETITION,HUMAN CAPITAL AND LABOUR SUPPLY AND CAPITAL The third layer pays specific attention to the determinants of economic growth: labour productivity and the deployment of labour. And finally the fourth and fifth layers focus on aspects which ultimately shape the economic and social results: the gross domestic product (GDP), ecological sustainability and the quality of life.

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Performance indicators Investment climate Netherlands: example of estimation

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Breakdown of GDP growth, 2006–2011

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation"

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Development of the investment climate; performance Dutch economy (summary)

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Human capital and labour supply

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation"

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Development of the investment climate; human capital and labour supply (summary)

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Innovation

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation"

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation"

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation"

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Development of the investment climate; innovation (summary)

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Capital

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Development of the investment climate; capital (summary)

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Entrepreneurship

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Development of the investment climate; entrepreneurship (summary)

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Market competition

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Development of the investment climate; market competition (summary)

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Macroeconomic conditions

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Development of the investment climate; macroeconomic conditions (summary)

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Functioning of the apparatus of government

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Development of the investment climate; functioning of the apparatus of government (summary)

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Infrastructure

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Development of the investment climate; infrastructure (summary)

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Society

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation"

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation"

JEAN MONNET MODULES, project “Good governance, strong democratic institutions, rule of law: prerequisites for investing in innovation" Development of the investment climate; society (summary)