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The Key to an Effective FDI Framework

The Key to an Effective FDI Framework

  • Sandro Zolezzi of the Costa Rican Investment Promotion Agency outlines why effective monitoring and evaluation procedures are integral to boosting inward investment.

Ensuring the efficiency and the effectiveness of public policies is a constant concern of governments, and investment promotion is not an exception. Investment promotion agencies (IPAs) are expected to provide reliable evidence of their results and performance in attracting FDI and generating the related benefits to the host economy (e.g. new jobs creation, GDP and export growth). Although OECD IPAs 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 (Mandamp;E), partly due to the direct support of the top management that sees it as a critical strategic decision-making tool. In fact, Costa Rica´s IPA (CINDE) ranked in the second place of the IPA Evaluation Index developed by Volpe Martincus and Sztajerowska of the Inter-American Development Bank (IADB). The IPA Evaluation Index captures the extent of IPA’s overall engagement in Mandamp;E activities and allows for comparisons across countries. This index looks at the institutional arrangement for Mandamp;E activities (i.e. presence or not of a dedicated unit), the array and sophistication of Mandamp;E techniques and tools used as well as the coverage of the agency’s CRM, among others, to capture the differences in Mandamp;E approaches.

Boosting efficiency
The cliché “what gets measured gets done” does apply in practice. Mandamp;E typically has two main functions: First, to allow the stakeholders to check that enough is being achieved towards the overarching goals set for the IPA and to allocate resources accordingly and, second, to allow IPA management to more effectively manage the organization and its resources. For example, making the results transparent for the local economy, demonstrating the ROI (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 Mandamp;E practices in public institutions and other NGO’s to start measuring their impact.

Perhaps the most important point is that in the end, Mandamp;E helps improve the probability that a foreign company will open its first operations in Costa Rica. Mandamp;E is used to assess the services provided by the investment agency to investors, to know the investors’ feedback about each step or point of contact in the promotion process, and to improve the quality and relevance of reliable information delivered to mitigate information asymmetry or information barriers facing foreign investors when they consider doing business in the country. Basically, foreign investors do not know how to do business in the host economy. Information in these regards can be highly incomplete and gathering it can be very costly, particularly in less popular or far away destinations.

In promoting foreign direct investment into Costa Rica, CINDE carries out multiple activities that primarily aim at supporting foreign investors in gathering specific information on local business conditions, and the installation process, plus additional services. This can include, for example, participation and establishment of contacts with investors in sectoral fairs and exhibitions; reply 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 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 significant 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 Mandamp;E activities carried out by CINDE are paying off.

About the author
Sandro Zolezzi is Head of Applied Research Monitoring and Evaluation at the Costa Rican Investment Promotion Agency (CINDE).

*This article was originally published at The European Magazine-Winter Edition: