A Bird in Hand is Worth Two in the Bush!

Following the COVID-19 pandemic, the competition to attract foreign direct investment (FDI) to the Caribbean has gotten even stiffer.

But while the good news is that investment flows to developing countries has rebounded, it has been noticeably uneven in its distribution, which is a cause for concern – and that’s according to Rebeca Grynspan, Secretary General of UNCTAD (United Nations Council on Trade and Development).

While countries such as Trinidad & Tobago, Guyana and Jamaica have benefitted from FDI inflows, it’s been much more challenging for several other islands, many of which depend on tourism as their main resource and revenue earner. As a result, many of these islands find themselves with inadequate reserves to finance key UN Sustainable Development Goals (SDGs) such as electricity, food and health.

This becomes even more worrying with the impact of Climate Change and the ongoing war in Ukraine on food production, which is also driving rising fuel prices, inflation and exacerbating supply chain shortages, all leading to a higher cost of production and doing business — which means that many investors, even though interested, are going to be very discerning with risking where they put out large capital expenditures now. What that means is that in addition to trying to attract new business, regional governments must be even more conscious of keeping the investors they already have and doing all they can to encourage re-investment or expansion in many cases.

In the current global economic and geo-political climate, FDI is important to many developing countries to foster economic growth and provide employment for citizens. It not only leads to infrastructural development, but also encourages spin-off industries and can lead to important transfer of skills and technology, as well as human resource development, by providing training to the population.

Many of these investors also make major inputs into the economy through purchases, wages and taxes.

However, while the intent to attract new FDI is always paramount, regional governments should not lose sight of what they already have – or, as the saying goes, ‘A bird in hand is worth two in the bush…’

The conditions that drive FDI inflows are an enabling environment, ease of doing business, infrastructure, market size, political stability and (of course) tax administration.

One of the most effective tools regional leaders have at their disposal is the use of tax concessions and incentives to drive investment. A widely held view is that taxes are likely to matter more in choosing an investment location as non-tax barriers are removed, and as national economies converge.

On the other hand, governments discourage or restrict FDI through ownership restrictions (as we see in Turks and Caicos), tax rates, unnecessary sanctions and making it cumbersome to do business rather than easier.

Regional governments should therefore always be cognizant of the fact that if tax incentives are only granted to new investment projects, existing investment partners may feel disfavoured — and this can and may discourage, rather than encourage investment.

It is these existing partners who have already shown their commitment to stay that makes it easier for governments to take for granted. What must be absolutely avoided is for the existing partners we have take capital out to a more favourable location, rather than reinvest where they currently operate.

Given the scarcity of FDI and competing claims for its use, there’s nothing wrong with incentives being provided, not only to woo new partners, but also to solidify the relationship with the established ones.

In fact, low-tax jurisdictions such as the Netherlands, Luxembourg, Hong Kong, Singapore and Ireland remain among the top countries benefitting from FDI inflows. Singapore enjoyed 10.17% of inflows in 2020 rising to 27.01% in 2021 – while at the same time FDI inflows to Saint Lucia were so minor we were rated at 0%.

It was good to see and hear Minister of Tourism and Investment Dr. Ernest Hilaire express his optimism for investment recently, but in addition to revamping the CIP programme and the renewed focus on housing development, government may also want to start and encourage continued building on what it already has, and demonstrate without doubt that it is creating the opportunity for current stakeholders to expand and reinvest even further.

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