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Separating Politics from Foreign Direct Investment

Perhaps the title to this piece is misleading, as events have shown over the years that attempting to separate FDI from politics is a little optimistic. While the losers in the short term are investors, in the longer term they are the locations vying to enhance their economic development.

It’s one thing where policy is involved…

In general terms, economic development policy will tend to encourage liberalization, which is likely to support FDI growth. Indeed, for better or worse, TPP (and TTIP) policy can only help to grow FDI. But the criticism of these agreements come from the inherent political strand in what they may achieve (i.e. the largest companies gain ever more influence). Without the politics, both of these trade agreements may well be more popular. But then perhaps by definition it’s impossible to reach such major agreements without them being in some way political?

But when policy is irrelevant….

This may well be the case, but what is arguably more unfortunate is where FDI takes the hit, simply for the sake of politics. A good example was when the UK’s regional agencies were suddenly removed in 2010, to be eventually replaced by LEPs, organizations covering much smaller geographies. Whether this turns out to be a net positive for FDI is debatable, but certainly the way the change occurred after the election, with no real plan in place at that stage as to what the alternative would look like, can only be viewed as a political maneuver.

A more recent example comes from the US, where despite another upcoming SelectUSA summit to reinforce that the country is ready to attract more FDI, some of the events of the election campaign are doing the opposite. Whatever your views on the politics, the rhetoric attached to the Republican campaign is hardly encouraging investment from certain locations. But ironically, Donald Trump says the UK is discouraging FDI through its political reaction to some of the comments...

Why does it matter?

The problem with all this, is that if the US or UK appear closed for FDI, even if it is just rhetoric, as major sources and destinations for FDI, this has a potential effect on global FDI.

Economic development should not in itself become a political issue, but nevertheless agencies are forced to work extra hard to try to overcome the image problems that political statements have created for them. After all, arguably the job of investment attraction is above all about conveying the right image i.e. marketing, with the location’s actual investment offer then supporting that.

Policy aside, it’s a shame that however inevitable it may be, politics sometimes use its influence in such a way that creates unfavorable images for their own location, which the agency then has to fight against. Perhaps the private sector has a role in lobbying politicians on the importance of protecting economic development. After all, in many cases government is highly supportive of economic development, but unfortunately a few isolated examples can undo some of that good work.

So, what happens now?

Well, economic developers will just keep fighting to attract investment, working to overcome the roadblocks that politics might put in their way.

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