Frequently Asked Questions
Due to the high volume of queries we receive, we can only answer questions directly related to the Investing Across Borders indicators and database. Please include the name of your organization and the economy you reside.
These are the most frequently asked questions (click to see answers):
Investing Across Borders (IAB) is a new World Bank Group initiative comparing regulation of foreign direct investment (FDI) around the world. It presents indicators on economies’ laws, regulations, and practices affecting how foreign companies invest across sectors, start businesses, access industrial land, and arbitrate commercial disputes.
The IAB indicators evaluate the text of laws and regulations as well as, to the extent possible, their implementation. The indicators are based on data collected through questionnaires completed by local experts -- including lawyers, business consultants, and investment promotion specialists -- in each of the economies surveyed.
IAB does not measure all aspects of the business environment that matter to investors, including security, macroeconomic stability, market size and potential, corruption, skill levels, or infrastructure quality. Still, the indicators provide a starting point for governments seeking to improve their competitiveness in attracting foreign direct investment.
Restrictive and obsolete laws and regulations impede FDI. Most of the 87 economies measured by IAB have FDI-specific restrictions that hinder foreign investment. For example, almost 90% of economies limit foreign companies’ ability to participate in some sectors of their economies. A fifth of the economies surveyed require foreign companies to go through a foreign investment approval process before proceeding with investments in light manufacturing. Nearly 10% of IAB economies do not have special statutes for commercial arbitration.
Red tape and poor implementation of laws create further barriers to FDI. The IAB indicators go beyond analyzing the text of laws. They also examine the typical experience of investors as they go through administrative processes and interact with public institutions. In Angola and Haiti excessive red tape means it can take half a year to establish a subsidiary of a foreign company. In Canada, Georgia, and Rwanda, this can be done in less than a week. Leasing industrial land in Nicaragua and Sierra Leone typically requires half a year as opposed to less than two weeks in Armenia, the Republic of Korea, and Sudan. In Pakistan, the Philippines, and Sri Lanka it can take up to two years to enforce an arbitration award.
Effective institutions and efficient processes help foster FDI. Easily accessible and reliable information, and efficient and predictable actions by public institutions help create a business environment conducive to investment. In general, IAB shows that effective institutions that provide easily accessible and reliable information matter for creating an enabling investment climate. Furthermore, economies that provide their citizens with good public services, have good institutions, enjoy political stability, and do not suffer from corruption tend to score well on the IAB indicators.
Economies can improve their FDI competitiveness. The IAB indicators are designed to identify good practices that offer governments concrete tools for improving their investment climates in the policy areas measured by the indicators. Though legal frameworks and their implementation may not be the main drivers of foreign investment decisions (see the Introduction chapter of the report), they can tip the balance in favor of one economy over another if all other factors are equal. The IAB 2010 report offers specific suggestions for each economy on how to improve its business environment in each of the thematic areas covered by the project.
The indicators highlight differences among economies in their regulatory treatment of FDI in order to identify good practices, facilitate peer learning opportunities, stimulate reforms, and provide annual cross-economy data for research and analysis.
Strong, stable legal and regulatory frameworks help create a more transparent, predictable business environment -- one more conducive to business and investment. In fact, preliminary correlation analysis using IAB data shows that economies with good regulations and efficient processes for foreign companies receive more FDI and have greater accumulated stocks of FDI.
The IAB indicators aspire to meet the needs for information, analysis, and policy action of different stakeholders, including:
Governments and policymakers -- to identify, prioritize, and implement investment policy reforms. IAB will also analyze regional and international good practices and foster competition among economies for better investment climates.
Investors and businesses -- to help guide their investment location decisions and policy-level dialogue with governments.
Development organizations -- to track reforms, facilitate sharing of reform experiences, and enable research and analysis of links between reforms and socio-economic outcomes.
The IAB indicators aim to complement existing measures of the quality of business environments. Quantitative data and benchmarking can help stimulate policy debate and action, both by exposing potential challenges and by identifying where policymakers might look for lessons and good practices. Indicators can also provide a basis for analyzing how different policy approaches -- and different policy reforms -- can contribute to broader desired outcomes such as FDI, competitiveness, and growth.
There is an abundance of resources that measure the quality and competitiveness of business environments worldwide. The IAB indicators are designed not to compete, but rather to complement these existing resources. Their value proposition is based on IAB’s ability to identify specific, actionable and practical steps that governments can take to increase the investment competitiveness of their economies in the 4 policy areas measured by the IAB indicators. The defining characteristics of the IAB indicators differentiate them from other available data sources and are the basis for their value proposition:
Actionable, reform-oriented indicators. The IAB indicators are actionable because they identify specific impediments to FDI in the legal, regulatory, administrative, and institutional frameworks of each economy covered. The indicators are reform-oriented because they identify problems that can be addressed in the short and medium term to strengthen an economy’s investment climate. They are based on standardized questionnaires, allowing for straightforward international comparisons of results, providing examples of good practices, and encouraging exchanges of information between economies.
Local expertise. The IAB indicators are based on information collected from more than 2,350 local experts and practitioners representing leading law and accounting firms, chambers of commerce, and investment promotion institutions. These experts bring a wealth of knowledge based on their experiences advising foreign investors on market entry and operations in their economies.
Focus on laws and their implementation. The IAB indicators evaluate the strength of written laws and regulations as well as, where possible, their implementation and application. Many economies have adopted modern laws and rules, but these are often not applied effectively. The combined measures of de jure and de facto performance in some of the indicators provide a more comprehensive, realistic picture of business conditions.
Periodic updates. The IAB report will become a regular publication measuring changes in FDI regulation worldwide. Similar initiatives have shown the power of regularly updated indicators to stimulate dialogue and actions that can lead to systemic, long-term reforms. IAB’s ability to capture and recognize these improvements on a regular basis gives political actors compelling tools for engaging in strategic communication and for initiating or sustaining reform momentum. As IAB develops, it will be regularly updated to ensure it remains an effective driver of reform.
IAB provides a complementary measure to Doing Business. The Doing Business indicators of the World Bank Group (Doing Business Project) measure regulation of domestically-owned small and medium enterprises. Some of these indicators -- for example on the efficiency of export and import procedures -- also apply to foreign companies. Other Doing Business indicators -- for example starting a business -- apply exclusively to domestic companies.
IAB measures laws and regulations in 4 policy areas specifically relevant for foreign companies. The IAB indicators, in conjunction with the Doing Business indicators, are therefore able to provide a more precise and extensive measure of the business environment for FDI in each measured economy.
However, neither Doing Business norIABmeasure all aspects of the business environment that matter to firms or investors, or all factors that affect competitiveness.
What matters most are the fundamental drivers of FDI that influence foreign investors’ decisions, including the host economy’s market size and location, availability of natural resources, macroeconomic performance, infrastructure quality, labor and production costs, and quality of governance and institutions. Other factors include related and supporting industries, capital costs, trade policy and administration, access to finance, and quality of life.
However, many competitive factors (such as market size, location, and natural resource availability) cannot easily be influenced by public policy. Furthermore, other policy-level drivers of FDI (such as macroeconomic performance, infrastructure quality, and human capital) can only be influenced in the medium to long run. In contrast, most of the areas of business and FDI regulation measured by IAB can be affected in the short run and at comparatively low cost to governments, providing an excellent opportunity for near-term benefits.
As a result, the IAB indicators provide a starting point for governments seeking to improve their competitiveness in attracting foreign investment. The indicators are designed to identify good practices that offer governments concrete tools for improving their investment climates in the 4 measured indicator areas. The IAB 2010 report offers specific suggestions for each economy on how to improve the business environment in each of the thematic areas covered by the project.
Because of IAB’s limited thematic coverage, the indicators should not be used in isolation to identify the key priorities for reforms. It is advisable that IAB data be used in conjunction with other measures when analyzing the quality of investment climates and designing reform programs. Once a economy has determined that one of the topics covered by the IAB as a priority area, the IAB indicators can be used to help guide and focus the necessary reforms.
One cannot determine which economy scores best on all IAB indicators. For each of the indicators (and there are 23 of them, across 4 thematic areas), the IAB 2010 report and online database identify the economies which receive the highest and lowest scores in order to identify good practices and encourage reforms. Data are also presented in a way that allows each economy to determine whether their performance on each of the individual indicators is above or below the regional and global averages.
No, at this stage IAB is a pilot research initiative aiming to solicit feedback on the data and methodology. The IAB 2010 report does not rank economies, nor are the IAB indicators currently aggregated at a topic level. The performance of each economy on each of the individual IAB indicators is benchmarked against other economies and regional and global averages.
The project will consider introducing economy ranks in the future after the project’s methodology has been stabilized.
High performance of a economy on any of the IAB indicators should not be automatically equated with the expectation of high performance of that economy in attracting FDI. Main drivers of FDI include market size, political stability, economic prospects, cost of production, infrastructure quality, natural resource endowment, and other factors, many of which are difficult to affect through public policy. IAB indicators focus on 4 specific areas of FDI regulation representing only a small number of the variables contributing to the attractiveness of investment climates.
Nonetheless, good regulations and efficient processes matter for FDI. Preliminary correlation analysis shows that economies with poor regulations and inefficient processes for foreign companies receive less FDI and have smaller accumulated stocks of FDI. Based on the IAB results, economies tend to attract more FDI if they allow foreign ownership of companies in a variety of sectors, make start-up, land acquisition, and commercial arbitration procedures efficient and transparent, and have strong laws protecting investor interests. But this correlation does not imply existence or direction of a causal relationship. Many other variables -- such as market size, political stability, infrastructure quality, and level of economic development -- will also be important in explaining the relationship.
IAB also finds that economies with smaller populations and markets tend to have fewer restrictions on FDI. There is a statistically significant and positive association between openness to FDI and its inflow, even after controlling for other determinants like market size, wages, quality of infrastructure and institutions, and natural resource endowments. Economies that have done particularly well in attracting FDI (before the recent economic crisis) -- such as Ireland, Singapore, the United Kingdom, and the United States -- also score well on the IAB indicators.
IAB covers 87 economies in 7 regions, selected based on the following criteria:
- All economies where the IAB indicators were pre-tested in 2007 - 08.
- Population size, to create a balance between highly populated and less populated economies.
- Economies in the current and expected future project portfolio of the World Bank Group’s Investment Climate Advisory Services.
- Economies that have requested Doing Business reform assistance, and have thus shown interest in using indicators to motivate reforms.
- Economies that have demonstrated commitment to business environment improvements and have been recognized by Doing Business as leading reformers.
- Post-conflict economies, which are one of IFC’s corporate priorities.
- Middle- and high-income economies that have done particularly well in attracting FDI, and could thus be interesting comparators and case studies for identifying good practices.
Given the report’s pilot nature and the project’s resource constraints, not all economies were included in IAB 2010. In future years, IAB plans to expand its coverage of economies. This increase will be driven primarily by demand and resource availability.
The 4 topics covered by this report were chosen from a wide range of policy variables that affect investment climates and influence investment decisions. These include the host economy’s market size and location, availability of natural resource, macroeconomic performance, infrastructure quality, labor and production costs, and quality of governance and institutions. Other factors include related and supporting industries, capital costs, trade policy and administration, access to finance and quality of life.
Many competitive factors (such as market size, location, and natural resource availability) cannot easily be influenced by public policy. Furthermore, other policy-level drivers of FDI (such as macroeconomic performance, infrastructure quality, and human capital) can only be influenced in the medium to long run. In contrast, most of the areas of business and FDI regulation measured by IAB can be affected in the short run and at comparatively low cost to governments, providing an excellent opportunity for near-term benefits.
In its conceptual and developmental phases (2006–08) IAB considered and tested indicators measuring policy areas such as employment of expatriate workers and managers, investment incentives and promotion, currency convertibility and repatriation, expropriation, breach of contract, public procurement, environmental and social regulation, and intellectual property. The team ultimately decided on the more modest thematic coverage of the 4 topics presented in this report based on what was desirable, feasible, and practical.
IAB favored topics that could be affected by public policy in the short term and information that could be captured through surveys of local experts. It aimed for indicators that capture the treatment of a typical foreign investor and offer enough variation across economies to warrant the development of global indicators.
The indicators are structured to reward good regulation and efficient processes. Transparent, predictable, and effective laws and regulations are critical to ensuring that foreign investment results in a win-win situation for investors, host economies, and their citizens. A solid, consistently applied legal framework gives investors confidence in the security of their property, investments, and rights. The IAB project does not advocate for reducing all regulatory barriers, but hopes to improve understanding of how to maximize the development benefits of FDI through appropriate regulatory frameworks.
Understanding the limitations of the IAB indicators is just as important as understanding their scope. Like all other indicators, the IAB data are limited by their coverage, depth and underlying design. Some key limitations apply to the IAB indicators in three areas -- (1) substantive, focusing on the content and thematic coverage of the indicators, (2) methodological, concerned with the questionnaire design and data collection, and (3) and limits to the implications of the indicators, addressing their potential interpretation, uses, and relationships with various economic and social data.
These limitations pertain to the project as a whole and are discussed in greater detail in the methodology note, where additional limitations related specifically to each of the 4 topics covered by the project are also presented. Readers and users of the IAB indicators are urged to keep these limitations in mind when interpreting the data.
- IAB focuses on regulation of FDI, not portfolio investment.
- Thematic coverage is limited to 4 discrete areas.
- IAB focuses on national laws and, in some cases, on economies’ ratifications of international conventions. It does not focus on international investment agreements.
- The project does not cover legal regimes for special economic zones (SEZs), export processing zones (EPZs), and other areas governed by special legal frameworks designed to promote FDI and exports.
- IAB is not a survey of investor or company perceptions.
- IAB data are not based on a statistically significant sample of respondents in each economy.
- The IAB indicators are not necessarily representative of all investment projects.
- Data on the efficiency of administrative processes refer to each economy’s largest business city only.
- Measures of time, captured in particular through some of the de facto indicators, involve an element of judgment by the expert respondents.
- For indicators that quantify the length of administrative processes, the methodology assumes that an investor and its legal counsel have full information on what is required and that they do not waste time when completing procedures.
- The IAB indicators are not specifically designed to indicate whether treatment of foreign investors is more or less favorable than that of domestic enterprises.
Limitations regarding interpretation and use
- The IAB indicators do not examine whether more regulation is preferable to less. They focus on good regulation.
- IAB data should not be used as a proxy for government reforms in general, and governments should not assume that improvements in the indicator scores will increase FDI.
Due to these and other limitations, the IAB indicators are only partial measures of the topics they cover. They are limited in scope and explanatory power when it comes to actual policies and business realities. Circumstances in each economy must be considered when interpreting the indicators and their implications for policies and the investment climate.
Investing Across Borders is a new initiative that will continue to improve in the future. Over time the IAB team hopes to increase the number of economies surveyed, introduce rankings and other direct comparisons for each topic measured, and engage a growing number of questionnaire respondents. Though there are currently no plans to expand the report’s thematic coverage to other areas of FDI regulation, this option will be considered if there is specific and sufficient demand from governments or other stakeholders to carry out the additional research.
The IAB team also intends to leverage the report’s findings in the research, analysis, and reform advisory work of the World Bank Group and its partners. Any parties interested in collaborating on any of these areas are welcome to contact the IAB team. The team would also be grateful for feedback on the data, methodology, and overall project design that would make IAB a better, more useful resource for its users.