The key to an effective FDI framework

Article by Sandro Zolezzi is Head of Applied Research, Monitoring and Evaluation at the CINDE

Ensuring the efficiency and the effectiveness of public policies is a constant concern for governments, and investment promotion is by no means exempt from that concern. Investment promotion agencies (IPAs) are expected to provide reliable evidence of their results and performance in attracting foreign direct investment (FDI) and generating the related benefits to the host economy (e.g. new jobs creation, GDP and exports growth). Although IPAs within the OECD adopt different approaches to monitoring and evaluation, there are some overall trends and common practices. Close to two thirds of IPAs have a dedicated evaluation unit that reports to the IPA’s head, board or management, and most use customer relationship management (CRM) systems to track and monitor their activities.

According to the OECD’s findings, several small agencies – notably Costa Rica – invest heavily in monitoring and evaluation (M&E) practices, partly due to the direct support of the top management that see it as a critical and strategic decision-making tool. In fact, Costa Rica’s IPA – the Costa Rican Investment Promotion Agency (CINDE) – is ranked second in the IPA Evaluation Index developed by Christian Volpe Martincus and Monika Sztajerowska of the Inter-American Development Bank (IADB). The IPA Evaluation Index captures the extent of an IPA’s overall engagement in M&E activities and allows for comparisons across countries. This index looks at the institutional arrangement for M&E activities (i.e. presence or not of a dedicated unit), the array and sophistication of M&E techniques and tools used as well as the coverage of the agency’s CRM system, among others, to capture the differences in M&E approaches.

Boosting efficiency

The cliche “what gets measured gets done” does apply in practice. M&E typically has two main functions: first, to allow stakeholders to check if there is enough fulfilment towards the overarching goals set by the IPA and thus allocate resources accordingly, and second, to enable IPA executives to effectively manage the organisation and its resources. For example, making the results transparent for the local economy, demonstrating the return on investment of public funds allocated to CINDE, improving performance and institutional excellence, implementing actions to correct deviation of intermediate indicators (e.g. conversion rate from leads to projects) and promoting M&E practices in public institutions and other non-governmental organisation’s to start measuring their impact.

Perhaps the most important point is that in the end M&E helps improve the probability that a foreign company will open its first operation in Costa Rica. M&E is used to assess the services provided by the investment agency to investors, to process the investors’ feedback about each step or point of contact in the promotion process. It is also about improving the quality and relevance of reliable information delivered to mitigate information asymmetries or information barriers foreign investors face when they consider doing business in the country. Ultimately, it is about helping foreign investors to do business in the host economy. Information in this regard can be highly incomplete and gathering it can be very costly, particularly in less popular destinations.

In promoting foreign direct investment into Costa Rica, CINDE carries out multiple activities aimed primarily at supporting foreign investors in gathering specific information on local business conditions and installation processes, plus additional services. This can include, for example, participation and establishment of contacts with investors in sectoral fairs and exhibitions; replying to specific inquiries including analysis of raw data and production of market studies, tailored Gantt charts along with a detailed explanation of sector-specific installation process, and simulations of expected profits and losses for concrete business in Costa Rica. A recent academic article carried out by the IADB and the University of Colorado Boulder shows that the type of services that CINDE provides to foreign investors helps them overcome information barriers. The estimation results consistently indicate that assistance from CINDE has had a significantly positive impact on the probability that multinational firms establish a first affiliate in Costa Rica.

These effects seem to be larger for countries and sectors facing higher information barriers such as countries not sharing a common language with Costa Rica and sectors producing differentiated goods and services. The results are clear: the many M&E activities carried out by CINDE are paying off.

Further information

www.cinde.org