Sub-national Investment Climate Mehnaz S. Safavian Jevgenijs Steinbuks The World Bank Group Investment Climate Department

Local Versus National Investment Climate The most important forces combating poverty today are those activists who are fighting for better local governance – accountability, transparency, and the rule of law at the local level, and by using tools to spotlight corruption, mismanagement and tax avoidance. Tom Friedman, NY Times OP/ED, June 6, 2004

Sub-national Investment Climate The Investment Climate and Why it Matters Local versus National Investment Climate What Investment Climate Surveys can Tell Us Policy and Operational Implications

The Investment Climate and Why it Matters Investment Climate is determined by: Policies - the nature of the regulations imposed on businesses, Institutions - the effectiveness of institutions charged with enforcement of those regulations, and Infrastructure - the level and quality of financial and physical infrastructure services, and the degree of physical security. Competition – drives innovation and investment.

The Investment Climate and Why it Matters The Investment Climate Matters because: Attract needed domestic and foreign investment. Linked to higher economic growth and higher productivity. Linked to poverty reduction (via economic growth).

Local versus National Investment Climate Determinants of IC are often found at the sub-national (regional, municipal) level of government, Evidence of high regional disparity for both private sector development and poverty levels, In the context of decentralization agendas, Reform at the sub-national level can be more demand driven, locally-owned.

Investment Climates Diverge Across Municipalities

Policies Capacity Governance Nat. Endow. What drives within-country variability of investment climate?

Policies per se (variable), Tax Rates, Licenses, Permits Implementation capacity (variable), Management time dealing w/officials Unfair/Informal Competition Tax Administration

What drives within-country variability of investment climate? Governance (variable), Bribe tax Inspections Location, natural endowments (fixed), Access to finance Infrastructure/Power outages Trade

Incentives to Improve Investment Climates At the sub-national level, good investment climates are linked to: Higher Wages Higher Firm Productivity More Innovation More FDI

IC and Productivity

IC and Wages

IC and FDI

IC and Technology

Policy and Operational Implications IC survey results can be used to: Increase accountability of local/regional govts, Provide incentives for policy reform, Foster competition among cities (e.g. China), Benchmark progress over time, Tailor t.a. and/or lending at the sub- national level.

China: Using sub-national data to foster competition among regions

To find out more about IC Surveys Mehnaz Safavian – ICS Portal portal.htm portal.htm Thank you!