- A tool for Governments, Businesses and NGOs to look beyond economics toward Social Progress measurements to maximize FDI and growth
2 March, 2015 - With increased economic growth and globalization, 2015 is set to be a banner year for foreign direct investment (FDI) in many countries around the world. This increase in capital showcases the need for countries to look beyond financial figures and understand what impacts FDI. In support of this effort a report developed by Deloitte, in conjunction with the Social Progress Imperative (SPI), has found that the right policies can spur a virtuous circle where rising social progress in a country attracts FDI which in turn can be used to drive further progress.
The new report, Foreign Direct Investment and Inclusive Growth: The impacts on social progress, compares data from the Social Progress Index, a holistic measurement of growth and performance beyond GDP, and FDI metrics for 132 countries.
“While the economic benefits of FDI inflows are well understood, the contribution of FDI to social progress is less clear cut,” said Rashid Bashir, head of Strategy Consulting at Deloitte Middle East. “This report demonstrates how the Social Progress Index can act as a guide for business and other organizations to make smarter strategic investments and shows governments that policies focused on driving social progress can attract FDI, which in turn advances both economic and social development.”
The report found that FDI can encourage a country’s future social progress through specific support – such as investments in healthcare and education – and indirectly through employment and higher incomes. In addition, social progress factors such as infrastructure, education, and personal and political security can help attract overseas investment. Equally important for FDI are quality of life factors, such as tolerance and inclusion, as they help attract the international workforce and investment required for highly skilled industries such as finance.
However, in terms of social progress, not all FDI is equal and the virtuous cycle is not guaranteed. For instance, regardless of social progress, political unrest can halt FDI as seen in Egypt and Iraq. Governments must put in place complementary polices to really drive social progress through FDI. Countries such as Brazil, Russia, India and China (BRICs) or Kazakhstan attract significant levels of FDI without realizing higher social progress. This can occur in many instances including when rapid economic growth exceeds the pace of social progress, when FDI is disproportionately directed to certain industries such as natural resources, when the political environment deters investment or when countries are caught in poverty traps.
Key findings for the Middle East include:
• Oil rich countries in the Gulf (Saudi Arabia and Kuwait) receive relatively high FDI
• Conflict and instability create barriers to FDI, regardless of social progress, as witnessed in Iraq and Egypt
• Tax havens can attract FDI without experiencing social progress, as witnessed in Lebanon
Social progress, FDI and the ladder of economic growth
According to the report, social progress can explain some of the trends in FDI and FDI can explain some of the improvements in social progress. The report reveals how different elements of social progress evolve across stages of economic development, and how social progress contributes to countries’ climbing this ladder of development. With the majority of FDI now flowing into emerging economies, understanding what factors can drive development will help these countries to better leverage this nuanced relationship.
“This report demonstrates that the relationship between business and society can be symbiotic, not conflictual,” says Michael Green, Executive Director of the Social Progress Imperative. “It shows that, in the right circumstances, FDI delivers real benefits to the lives of ordinary people above and beyond its economic impact. Yet, crucially, it also shows how business thrives best in healthy societies.”