Kazakhstan Institute for Strategic Studies

under the President of the Republic of Kazakhstan

The Address to the People of Kazakhstan by President

of the Republic of Kazakhstan – Kassym-Jomart Tokayev

“Constructive Public Dialogue – the Basis of Stability

and Prosperity of Kazakhstan”

Only through a constant dialogue between the Government and society

can a harmonious state be built in the context of modern geopolitics.

 

 

Vyacheslav Dodonov

Chief Research Fellow of the Kazakhstan Institute for Strategic Studies under the President of the Republic of Kazakhstan, Doctor of Economic Sciences

Abstract. The article examines the interrelation between the position of the countries in international ratings characterizing the quality of institutions, and the volume of foreign direct investments accumulated in these countries. The positions and progress of countries in the Doing Business rating of the World Bank, the Global Competitiveness Index and the Index of Economic Freedom on the one hand, and the change in the volume of foreign direct investment stock, on the other hand, are compared. The purpose of this comparison is to check on the data of the last decade the previously formulated theses on the relationship between the level of institutions development and the investment attractiveness of national economies. The obtained results demonstrate the loss of this relationship, which is expressed in the absence of an intensive positive dynamics of foreign investment in the leading countries of these ratings.

Keywords: Institutes, Foreign Direct Investment, Global Competitiveness Index, Index of Economic Freedom, Doing Business Rating.

Introduction

The attractiveness of national economies for foreign investment is now tied to the level of development of institutions; economic freedom; the reduction of administrative barriers; and other aspects of the business environment as assessed by numerous ratings compiled by a wide variety of organizations - from the UN to small private institutions. The annual publication of these ratings is widely covered in the press and discussed in the expert community; and the progress or decline of individual countries in relation to them is a priori identified with the quality and outcomes of the public administration and economy of the respective states.

The most common and well-recognized ratings have begun to be used not only at expert but also at state level as indices for the success of reforms and economic policy. Progress on such rankings as the Human Development Index, the Global Competitiveness Index and the World Bank's Doing Business rating have been used as targets in government programs at various levels, including in the CIS countries.

In Russia, for instance, progress in the World Bank’s Doing Business rating is one of the key objectives of the Presidential Decree, “On Long-Term State Economic Policy”, dated May 7, 2012 (one of the so-called “May decrees”), wherein the Government is instructed to take measures “to improve the position of the Russian Federation in the World Bank's rating in terms of doing business from 120th in 2011 to 50th in 2015 and 20th in 2018”.[1]

In Kazakhstan, improvement in the World Bank's Doing Business rating was first announced as a goal in the Government Program of the Republic of Kazakhstan for 2007-2009[2] (in Section 4.2.4.); and in subsequent years it continues to figure in this capacity in many documents at national and sectoral levels. In particular, a growth in profile indicators is set out in the Strategic Plans of most sectoral ministries and a number of programs: “work is under way on an ongoing basis to improve Kazakhstan's legislation on corporate governance, including work to improve Kazakhstan's position in the international Doing Business rating”[3]. A similar situation appears with the advancement of Kazakhstan in the rating of the Global Competitiveness Index of the World Economic Forum, which is also the target indicator of many sectoral programs and appears in the strategic plans of the leading ministries. International ratings are considered in Kazakhstan government programs in direct correlation with improving the investment attractiveness of the country. Thus, in the National Investment Strategy adopted in 2017, both the Doing Business rating and the Global Competitiveness Index (GCI) act as target indicators for improving the investment climate in the Republic of Kazakhstan.[4]

Literature review

The developers of the ratings also note their influence on state policy in the relevant spheres. Thus, the World Economic Forum regards the GCI as “an instrument that helps governments, the private sector and civil society work together for future prosperity”[5]; and cites examples of recent changes in the economic policies of countries such as the Dominican Republic and Saudi Arabia that occurred under the influence of the GCI. The World Bank, presenting the Doing Business rating, notes that it encourages countries to implement more effective regulation, provides measurable guidelines for implementation of reforms[6], and also cites the number of reforms carried out around the world under the influence of the desire of various countries to improve their positions in this rating: “In the period from June 2, 2016 through June 1, 2017[7], the Doing Business report took into account 264 reforms that simplified business in 119 countries that implemented at least one reform in the areas assessed by the Doing Business report. From the very beginning of its existence, the Doing Business project has taken into account more than 3,188 regulatory reforms”.[8]

At the same time, the real relationship between advancement in such ratings and macroeconomic statistics is not obvious. The area of the economy in which such interconnection should be manifested most clearly is perhaps that of the flow of foreign investment - the axiom is the positive influence of the level of development of institutions, forming a favorable environment, on the investment attractiveness of the national economy in the eyes of foreign investors. This relationship is also to a great extent confirmed by many academic studies. For instance, C. Daude and E. Stein found that “the quality of institutions has a positive effect on foreign direct investment (FDI)” [8, 27][9], taking into consideration from several sources such parameters as the risk of expropriation, corruption, law and order, the level of democracy, the quality of bureaucracy and others, all taken as characteristics of the development of institutions. B. Buchanan, Q.V.Le and M. Rishi found that “institutional quality has a positive and significant effect on attracting FDI” [9, 1][10], having analyzed the data for 164 countries for the period of 1996-2006. C. Coffman, examining the relationship between FDI inflows and institutional differences among countries in the ten components of the Heritage Foundation's Index of Economic Freedom, revealed “statistically significant results for the five institutional variables” [10, 2][11]

Results and conclusions

At the same time, a review of a number of key ratings that use indicators related to institutions, economic freedom and other aspects of an administrative nature often demonstrates a discouraging discrepancy between the high positions of individual countries in these indicators and the FDI indicators. An example of this kind can be the Index of Economic Freedom - 2018 from The Heritage Foundation, the authoritative American analytical center, which ranks first in the global ranking of such institutions of the Global Go-To Think Tank Index [12].In the latest rating of this fund, the countries that occupy a leading position in the Index of Economic Freedom have a very wide range of values for the volume of annual FDI inflows, including several outflows of these investments (Table 1). At the same time, the correlation between the inflow of FDI and positions in the rating is not very pronounced, not only when taking into account the positions in the general rating, but also in the rating of the specialized pillar of the Index - “freedom of investment”.

Table 1. Interrelation of positions in the rating of The Heritage Foundation’s Index of Economic Freedom and the positions on the annual inflow of foreign direct investment[13].

 

Place in the rating

Score

Rank in terms of the rating

“freedom of investment”

Score on the “freedom of investment”

indicator

Rank according to the inflow

of FDI per capita

FDI inflow per capita per year,

USD

Hong Kong

1

90.2

2-7

90

2

14,677

Singapore

2

88.8

8-23

85

3

10,986

New Zealand

3

84.2

24-39

80

33

483

Switzerland

4

81.7

8-23

85

181

-3,163

Australia

5

80.9

24-39

80

11

1,985

Ireland

6

80.4

2-7

90

7

4,753

Estonia

7

78.8

2-7

90

24

663

United Kingdom

8

78

2-7

90

9

3,871

Canada

9

77.7

24-39

80

20

931

United Arab Emirates

10

77.6

144-152

40

21

912

Iceland

11

77

8-23

85

180

-1,442

Denmark

12

76.6

2-7

90

70

167

Taiwan

13

76.6

86-103

60

47

354

Luxembourg

14

76.4

1

95

1

46,627

Sweden

15

76.3

8-23

85

12

1,959

In part, these discrepancies can be explained by fluctuations in the indicator of a single period, but, in our opinion, their causes are deeper and more complex; and lie in the specifics of the economic situation and patterns in different countries that are not taken into account by aggregated indices like the Index of Economic Freedom. Academic studies, which have a more specialized character, also testify in favor of this. In particular, in Coffman’s study mentioned above, the author notes differences in the impact of institutional quality on FDI inflows in countries with different levels of income: “strong institutions are negatively associated with FDI inflows in low-income countries... For middle- and high-income countries, strong institutions are positively associated with FDI; but for middle-income countries, governance and regulation are important, and for high-income countries, financial markets and capital mobility are more important”[14]

Another explanation for the fact that many studies have identified a link between FDI inflows and high institutional ratings with different ratings, which is currently not obvious, may be changes in the global economy, including investment flows in recent years. These changes are caused by many factors and take place within the transformation of the world economic system, the center of which is shifting to Asia, and the key investors are not the traditional centers of economic power (the USA and Europe), but the rapidly growing economies of China, India, Russia and other countries, investors of which refer somewhat differently to the traditional values of the institutional environment for the West and are ready to conduct business in conditions that differ from the preferences of the Euro-Atlantic business. Meanwhile, it is during the last decade that the ratio of the volume of FDI flows from developed and developing countries has significantly changed (Figure 1).

123

Figure 1. Dynamics of the share of developed and developing economies in the global outflow of foreign direct investment in 2007-2016.[15]

Back in 1999, developed countries accounted for 95% of the world outflow of FDI, whereas by 2014 the positions of developed and developing economies have almost equaled. The crisis and the fall of commodity markets, which are the basis of many developing economies, have undermined their positions, but the trend of changing the alignment of forces in global investment processes is evident. The largest emerging economies in the 2000s increased their investments abroad by dozens of times - only the outflow of FDI from the PRC increased from 916 million US dollars in 2000 to 183.1 billion US dollars in 2016[16] (200 times). Together with the change in the type of investing economies and their economic entities (which are largely represented by the state and quasi-public sector), both investment models and criteria are changing. At the same time, the criteria of state-owned companies from Asia are not always the same as those of corporate business from Europe, including the requirements for the quality of institutions and other aspects that are given great importance in compilation of various international ratings whose methodology is based on the Western attitude to business conditions and institutions.

In our opinion, it is this discrepancy between the traditional criteria for assessing the economic conditions of the FDI recipient countries and the changed structure of foreign investors, among which the growing economies play an increasing role, that has become one of the reasons for the growing discrepancy between the scores of certain countries and the ratings and investors. If the ratings are still traditionally highly valued by many developed economies, the FDI statistics in these countries often show stagnation or even outflow. We analyzed the indicators of the volume of accumulated FDI and country assessments by the three well-known ratings in order to better understand the relationship between the ratings of recognized international indices and foreign investment activity in national markets.

The study was conducted on the data representing the period of 2007-2016, for which the indicators of the change in the volume of accumulated FDI for 171 economies were calculated.  The UNCTAD database was used as a source of data on the volume of FDI. These indicators were compared with the indicators of advancement of individual economies in three ratings - The Heritage Foundation's Index of Economic Freedom, the World Bank's Doing Business, and one of the pillars of the Global Competitiveness Index (GCI), namely, the “Institutions”, assessing the effectiveness of public and private institutions based on calculation of 21 indicators. Three rating data were examined for the period comparable with the data for foreign investment - reports from 2007 to 2017 were used. For the analysis, the indicators of the countries occupying the first 15 positions in the relevant samples were used, which, in our opinion, made it possible to obtain representative results, given that the number of countries estimated by these ratings ranges from 152 to 190.

In the course of the study, indicators of changes in the volume of accumulated FDI were compared with changes in the positions of countries in these ratings, as well as with their absolute positions. The aim of the analysis was to find the relationship between progress (or regress) in the respective ratings with the change in the volume of FDI, as well as to test the hypothesis that a high level of development of the institutional environment of business in the leading countries of the rating should be accompanied by a high level of attracting foreign investment to these countries.

Considering the best states in absolute positions in the ranking of the “Institutions” of the GCI, it can be noted that out of the 15 leading countries, six have experienced a decline in the amount of accumulated FDI, and another three have had a minimal growth of 20% over a 10-year period (Figure 2).

Figure 2. Change in the volume of accumulated foreign direct investment of the countries occupying the first positions in the “Institutions” pillar[17] of the 2017-2018 Global Competitiveness Index of the World Economic Forum and advancement in the ranking for this pillar from 2007 to 2017.[18]

At the same time, the average growth in accumulated FDI in the sample countries was 39.8%, which is five times less than the average of 199.4% for 171 economies (the entire sample) that were considered in the study. Thus, the leading countries in assessment of their institutions rated by the World Economic Forum demonstrated a much smaller inflow of FDI. If we look at the progress of these countries in this rating over the last decade, also reflected in the diagram of Figure 2, we can find a particular relationship - out of 10 states that showed upward advancement in the rating, eight had an increase in accumulated FDI, while the three countries that worsened their position had a decrease. Thus, with the example of the leading countries in the ranking of the “Institutions” pillar of the GCI, it can be concluded that progress in the advancement of this rating is interlinked with the inflow of FDI more than the high positions themselves.

To clarify this thesis, economies were chosen that achieved the maximum progress in this rating in order to compare this progress with their indicators on the change in the volume of accumulated FDI (Table 2).

Table 2. The change in the volume of accumulated foreign direct investment for the last decade in the countries that have shown the greatest progress in the advancement on the “Institutions” pillar of the 2017-2018 Global Competitiveness Index of the World Economic Forum.[19]

 

Country

Advancement for the period, the number of positions

Position in 2017 rating

Change in the volume of accumulated FDI in 2007-2016, %

1

Azerbaijan

50

33

304.4

2

Albania

46

68

85.1

3

Tajikistan

46

42

288.0

4

Lesotho

43

69

-51.8

5

Armenia

41

55

79.1

6

China

36

41

314.1

7

Georgia

36

50

162.6

8

Russia

33

83

-22.4

9

Nepal

30

89

476.6

10

Senegal

30

67

340.8

11

Kenya

26

75

394.4

12

Jamaica

24

63

73.4

13

Kyrgyzstan

24

103

419.2

14

Kazakhstan

20

60

191.0

15

Bangladesh

19

107

230.5

 

Average sample value

219.0

 

Average for all countries 

199.4

In this case there are no strong inconsistencies between the compared indicators - in 13 of the 15 economies that are leading in terms of progress in the rating, the increase in the volume of accumulated FDI is positive and only in two it is negative. At the same time, the average indicator for the increase in the volume of accumulated FDI in the sample is above the national average for all countries - 219% versus 119.4%. At the same time, the attempt to identify a closer relationship between these two indicators was not successful: the number of positions that the economy advanced in the GCI's “Institutions” rankings does not practically correspond to the intensity of the increase in FDI. Thus, among the countries that have advanced by 40-50 positions, the spread of FDI growth is very large - from a decline of 52% to a growth of 304%, and the correlation coefficient between the two data sets is -0.25. Therefore, the comparison results given in Table 2 can be interpreted as follows: the strong progress of economies in the GCI's “Institutions” rankings is in most cases accompanied by an outflow of FDI, which is ahead of the average level, but this advance is insignificant and is not related to the intensity of advancement.

A similar comparison was made for the worst economies in the ranking (Table 3), which also showed mixed results. In particular, the three leaders of this anti-rating (Mauritania, Tunisia and El Salvador) demonstrated an increase in the volume of accumulated FDI. Four out of the worst fifteen in terms of progress in the country rating, had the growth in accumulated FDI above the average for all countries in the sample. A negative increase in accumulated FDI was recorded only in four economies out of fifteen. At the same time, the average indicator of the change in the volume of accumulated FDI among the worst 15 countries is still significantly below the average for the whole sample.

Table 3. Change in the volume of accumulated foreign direct investment for the last decade in the countries that have shown the greatest regress on the “Institutions” pillar of the 2017-2018 Global Competitiveness Index of the World Economic Forum.[20]

 

Country

Advancement for the period by number of positions

Position in 2017 rating

Change in the volume of accumulated FDI in 2007-2016, %

1

Mauritania

-60

132

254.9

2

Tunisia

-59

80

12.6

3

Salvador

-49

133

54.4

4

Hungary

-47

101

-18.6

5

Mali

-43

110

214.2

6

Greece

-38

87

-48.6

7

Colombia

-38

117

190.9

8

Mexico

-38

123

49.6

9

Republic of South Africa

-37

76

3.8

10

Croatia

-37

102

-33.7

11

Madagascar

-37

130

231.7

12

Slovakia

-33

93

-12.8

13

Korea

-32

58

51.7

14

Thailand

-31

78

99.3

15

Honduras

-31

120

206.9

 

Average sample value

83.7

 

Average for all countries

199.4

Special attention should be paid to the fact that countries with low absolute positions in the rating, both among the best in terms of progress in it and among the worst, have shown the best results in terms of growth in the volume of accumulated FDI. There are eleven such countries occupying positions below the 100th rank in both tables, and nine of them have the positive investment result, and in seven the average value of the change in the volume of accumulated FDI is above the average for all countries in the sample (199.4%); that is, most countries that occupy extremely low positions in the level of development of institutions are very successful in attracting foreign investment. The results of the comparison of both the best and the worst countries on advancing in the GCI’s “Institutions” rating demonstrate, in our opinion, its low adequacy to the real state of affairs with investment attractiveness at the level of individual economies, as well as the weak correlation of the indicators taken into account in this rating[21] with an investment climate. 

It can be assumed that the methodology of the World Economic Forum, according to which the Global Competitiveness Index is compiled and its components, differs in some specific way that does not allow to take fully into account all the factors that determine the investment attractiveness of individual economies, but the high attention, paid to international ratings of this kind, is justified by the reliability of other estimates. In this regard, we compared the volume of accumulated FDI with the positions of countries in the Doing Business rating of the World Bank. For economies that occupy the first 15 positions in this rating, the results of attracting FDI were in the same way contradictory as in the case with the rating of “Institutions” of the GCI (Figure 3).

Figure 3. Changes in the volume of accumulated foreign direct investment in 2007-2016 in the economies that occupy the first 15 positions in the World Bank’s Doing Business-2018 rating.[22]

In four out of the fifteen countries that are at the top of the rating, the volume of accumulated FDI has declined over the past decade, another two had a symbolic growth, amounting to less than 20%. In none of the countries among the leaders of the rating, the increase in the volume of accumulated FDI reached the average for the total sample at 199.4%, while the average for the fifteen countries was 41.9% - five times lower than this level. Thus, just as in the case of the Global Competitiveness Index, leadership in the ranking was not only not accompanied by better indicators of FDI inflows, but, on the contrary, was a sign of a serious lag from the world average.

A comparison was also made of the progress in the Doing Business rating with the change in the volume of accumulated FDI for the best and worst economies. Countries that have demonstrated the maximum progress in the rating (Table 4), have a higher average index of change in the volume of accumulated FDI (225.1%) than for the entire sample (199.4%). At the same time, in two states that are among the leaders on the progress in the rating (Croatia and Russia), the change in the volume of FDI was negative. Only in four out of the fifteen states this indicator exceeded the average for the whole sample, but due to its very high values ​​in these four cases, the average for 15 economies exceeded the average for all studied countries.

Table 4. Change in the volume of accumulated foreign direct investment over the past ten years in countries that have made the greatest progress in advancing the World Economic Forum’s Doing Business-2018 rating.[23] 

   

Progress for 2007-2018, the number of positions

Position in 2018 rating

Change in the volume of accumulated FDI in 2007-2016, %

1

Rwanda

117

41

1,213.2

2

Belarus

91

38

323.2

3

Macedonia, FYR

81

11

33.9

4

Uzbekistan

74

74

311.6

5

Croatia

73

51

-33.7

6

Indonesia

63

72

194.0

7

Bhutan

63

75

740.1

8

Russian Federation

61

35

-22.4

9

Moldova

59

44

90.9

10

United Arab Emirates

56

21

141.3

11

Ukraine

56

76

27.1

12

Albania

50

65

85.1

13

Poland

48

27

13.1

14

Morocco

46

69

41.9

15

Costa Rica

44

61

217.3

 

Average sample value

225.1

 

Average for all countries

199.4

The relationship between the number of positions for which a particular state has advanced over decade and the change in the volume of accumulated FDI in this case can be called pronounced, in contrast to the “Institutions” rating of the GCI, which was reflected in the correlation coefficient between two data sets at level of 0.68. The same ratio for the worst-performing economies of the Doing Business rating was 0.25, and a comparison of their regress with the FDI volumes confirmed the lack of correlation between this regress and the processes of attracting foreign investments (Table 5).

Table 5. Change in the volume of accumulated foreign direct investment over the past decade in countries that have made the greatest regress in the World Economic Forum’s Doing Business-2018 rating.[24] 

   

Regress for 2007-2018, the number of positions

Position in 2018 rating

Change in the volume of accumulated FDI in 2007-2016, %

1

Bangladesh

-89

177

230.5

2

Pakistan

-73

147

52.3

3

Fiji

-70

101

100.4

4

Grenada

-69

142

69.5

5

Belize

-65

121

142.7

6

Saint Lucia

-64

91

57.7

7

Namibia

-64

106

13.3

8

Nicaragua

-64

131

217.0

9

Ethiopia

-64

161

281.8

10

Saudi Arabia

-54

92

215.1

11

Republic of South Africa

-53

82

3.8

12

Papua New Guinea

-52

109

184.4

13

Kuwait

-50

96

1,408.3

14

Algeria

-50

166

134.3

15

Lebanon

-47

133

89.5

 

Average sample value

213.4

 

Average for all countries

199.4

Unlike the list of the best in terms of progress in the World Bank's rating, in this case, all fifteen of the worst economies showed a positive trend in the change in the volume of FDI. At the same time, the average for this sample is 213.4%, that is practically equal to that of the best progressing countries (225.1%) and exceeds the average level for all studied economies (199.4%). The best indicator of the increase in the volume of FDI from the two given samples was shown by Kuwait (1,408.3%) - the country that lost 50 positions in the ranking in ten years, and the absolute leader on regress - Bangladesh - slipped by 89 positions, demonstrated an increase in the volume of FDI in 230.5 %, which is almost one and a half times higher than the best country among the absolute leaders of the rating - Georgia (162.5%), and is significantly better than the average for the group of absolute leaders of Doing Business-2018.

These facts testify, in our opinion, the inadequacy of the Doing Business rating as an indicator of the investment attractiveness of certain economies, the investment climate in them, and, finally, the criteria for foreign investors, according to which they make decisions about entering local markets and increasing investment in them. The situation, when the leaders of the rating demonstrate a multiple backlog in the volume of attracted FDI from outsiders, and the progress or regress in this rating is not accompanied by obvious differences in investment flows, characterizes this rating as not reflecting the real situation in the investment sphere and actually useless for improving the business environment.

Comparison of positions and progress/regress in the ratings of the development of the institutional environment with the change in the volume of accumulated investments did not reveal a stable interrelation between these indicators. To complete the process of revealing such relationships, the author also ranked countries in terms of leadership in attracting FDI over the past decade in order to identify the positions occupied by these countries in the three rankings - the GCI’s “Institutions” pillar, the Doing Business ranking and the Index of Economic Freedom (Table 6). The 15 best and worst economies were identified to change the volume of accumulated FDI in the period of 2007-2016.

Table 6. Comparison of the best and worst performing countries in terms of accumulated foreign direct investment with their positions in the ratings of the Index of Economic Freedom, the “Institutions” pillar of the Global Competitiveness Index and Doing Business-2017.[25]

 

Change in the volume of accumulated FDI in 2007-2016, %

Positions in ratings

Index of Economic Freedom (out of 183 countries)

The GCI “Institutions” pillar (out of 152 countries)

Doing Business (out of 190 countries)

The best economies in terms of growth in accumulated FDI

1

Burundi

2,239

157

122

164

2

Niger

1,809

160

n/a

144

3

Guinea-Bissau

1,424

118

n/a

176

4

Kuwait

1,408

81

57

96

5

Rwanda

1,213

39

16

41

6

Mozambique

891

170

127

138

7

Mongolia

860

125

108

62

8

Cyprus

841

48

51

53

9

Turkmenistan

811

169

n/a

n/a

10

Ghana

770

122

59

120

11

Bhutan

740

87

32

75

12

Gabon

659

109

85

167

13

Somalia

657

n/a

n/a

190

14

Nepal

477

133

89

105

15

Cambodia

447

101

106

135

 

The worst economies in terms of growth in accumulated FDI

1

Finland

-11

26

1

13

2

Denmark

-12

12

13

3

3

Slovakia

-13

59

93

39

4

Turkey

-14

58

71

60

5

Hungary

-19

55

101

48

6

Germany

-19

25

21

20

7

Russia

-22

107

83

35

8

Norway

-23

23

6

8

9

Venezuela

-33

179

137

188

10

Croatia

-34

92

102

51

11

Swaziland

-39

123

61

112

12

Iceland

-41

11

14

23

13

Belgium

-41

52

25

52

14

Samoa

-48

90

n/a

87

15

Greece

-49

115

87

67

The data given in Table 6 allows us to make the following generalizations. Firstly, almost all countries that have shown the largest increase in accumulated FDI over the past decade are ranked low or very low in the three ratings, and in some cases, they are not even considered by these ratings (Somalia, Turkmenistan, Niger, Guinea-Bissau). The average positions for 15 countries are: for the Index of Economic Freedom - 116 position out of 183, for the GCI’s “Institutions” pillar - 77 position out of 152, according to Doing Business rating - 119 position out of 190. At the same time, the average FDI growth rate for these 15 economies was 1,016%, which is 5.1 times higher than the average for all studied countries (199.4%).

Secondly, among the worst countries in terms of growth in the accumulated FDI, a number of countries occupy leading positions in the reviewed ratings - Finland, Denmark, Germany, Norway, Iceland; while there are few outsiders in terms of these ratings - Venezuela, Croatia, Swaziland. The average positions for 15 countries are: Index of Economic Freedom: 68th position out of 183; GCI’s “Institutions” pillar: 58th position out of 152; and Doing Business rating: 54th position out of 190. That is, the average position of countries from this list for all three ratings is at the top - in the first third.

Thus, there is a clear contradiction between the quality of business conditions that are assessed by these three ratings and the inflow of foreign direct investment:  according to the assessments of The Heritage Foundation, the World Bank and the World Economic Forum, there is an inverse relationship between the positions of countries in their ratings and the inflow of investments from abroad. Low positions in the ratings are accompanied by a high inflow of FDI and vice versa - high positions are held by states with low or even negative volumes of growth. Obviously, this discrepancy may indicate systemic drawbacks in the methodology of drawing up appropriate indicators of these ratings, which distort the relationship between the level of development of institutions and the investment attractiveness of economies, as revealed by the majority of studies.

The reasons for this discrepancy will be diverse and their identification is not included in the purpose of this paper. It can only be noted that among the factors of high FDI inflow to developing economies with low ratings can be such things as a low starting base; the small absolute size of economies in which even single large projects provide intensive growth dynamics; and the origin of foreign investment from developing countries (such as China), for which the institutional environment is secondary. It can also be noted that the low level of FDI increase in the leading countries of the ratings may be related to the fact that they are mostly developed countries, which often act as sources of FDI, rather than their recipients. However, the explanations (these or other) of discrepancies between the country's rating estimates and their actual investment attractiveness do not abolish the fact that these ratings do not correspond to the real state of affairs in most of the assessed economies and, as a consequence, cannot serve as a basis for judging the investment attractiveness, nor a criterion for its improvement, including in state economic programs.  

References:

  1. The Decree of the President of the Russian Federation “On Long-Term State Economic Policy”. May 7, 2012. President of Russia. URL: http://kremlin.ru/events/president/news/15232.
  2. The Program of the Government of the Republic of Kazakhstan for 2007-2009. Approved by the Decree of the President of the Republic of Kazakhstan dated April 6, 2007 No.310.
  3. The Plan of joint actions of the Government of the Republic of Kazakhstan and the National Bank of the Republic of Kazakhstan for the development of the national stock market for 2018-2021. Approved by the Decree of the Government of the Republic of Kazakhstan dated January 25, 2018 No.32.
  4. The program on attracting investments “National Investment Strategy”. Approved by the Decree of the Government of the Republic of Kazakhstan dated August 22, 2017 No.498. URL: http://adilet.zan.kz/rus/docs/P1700000498.
  5. Our Impact. Redefining Global Competitiveness. World Economic Forum website. URL: https://www.weforum.org/our-impact/redefining-global-competitiveness.
  6. About the Doing Business project. DOING BUSINESS. Business Regulation Assessment. World Bank website. URL: http://russian.doingbusiness.org/about-us.
  7. Reforms aimed at regulating business. DOING BUSINESS. Business Regulation Assessment. World Bank website. URL: http://russian.doingbusiness.org/reforms.
  8. The Quality of Institutions and Foreign Direct Investment. Christian Daude, Ernesto Stein. March 2001. This Version: February 2004. URL: http://econweb.umd.edu/~daude/research_files/institutions.pdf.
  9. Foreign direct investment and institutional quality: Some empirical evidence. Bonnie G.Buchanan, Quan V.Le, Meenakshi Rishi. International Review of Financial Analysis. Volume 21, January 2012, Pages 81-89.
  10. Coffman, Charles, "Institutions, Distance, and Foreign Direct Investment" (2015). Honors Theses. Paper 779. http://digitalcommons.colby.edu/honorstheses/779
  11. Heritage Ranked No. 1 Globally for Impact on Public Policy February 1st, 2018. URL: https://www.heritage.org/impact/heritage-ranked-no-1-globally-impact-public-policy.
  12. Compiled according to the 2018 Index of Economic Freedom. The Heritage Foundation website. URL: https://www.heritage.org/index/explore
  13. Foreign direct investment: Inward and outward flows and stock, annual, 1970-2016. UNCTADStat Data Center. UNCTAD website, URL: http://unctadstat.unctad.org/wds/TableViewer/tableView.aspx.
  14. The Global Competitiveness Index Historical Dataset © 2007-2017 World Economic Forum | Version 20171002. World Economic Forum website. URL: http://reports.weforum.org/global-competitiveness-index-2017-2018/competitiveness-rankings/#series=GCI.A.01.

15. Country rating. DOING BUSINESS. Business Regulation Assessment. World Bank website. URL: http://russian.doingbusiness.org/rankings.

 

[1] The Decree of the President of the Russian Federation “On Long-Term State Economic Policy”. May 7, 2012. President of Russia. URL: http://kremlin.ru/events/president/news/15232 (access date: February 13, 2018).

[2] The Program of the Government of the Republic of Kazakhstan for 2007-2009. Approved by the Decree of the President of the Republic of Kazakhstan dated April 6, 2007 No.310.   

[3] The Plan of joint actions of the Government of the Republic of Kazakhstan and the National Bank of the Republic of Kazakhstan for the development of the national stock market for 2018-2021. Approved by the Decree of the Government of the Republic of Kazakhstan dated January 25, 2018 No.32.

[4] The program on attracting investments “National Investment Strategy”. Approved by the Decree of the Government of the Republic of Kazakhstan dated August 22, 2017 No.498. URL: http://adilet.zan.kz/rus/docs/P1700000498 (access date: February 13, 2018).

[5] Our Impact. Redefining Global Competitiveness. World Economic Forum website. URL: https://www.weforum.org/our-impact/redefining-global-competitiveness (access date: February 13, 2018).

[6] About the Doing Business project. DOING BUSINESS. Business Regulation Assessment. World Bank website. URL: http://russian.doingbusiness.org/about-us (access date: February 13, 2018).

[7] The spelling of the source is preserved.

[8] The reforms aimed at regulating business. DOING BUSINESS. Business Regulation Assessment. World Bank website. URL: http://russian.doingbusiness.org/reforms (access date: February 13, 2018).

[9] The Quality of Institutions and Foreign Direct Investment. Christian Daude, Ernesto Stein. March 2001. This Version: February 2004. URL: http://econweb.umd.edu/~daude/research_files/institutions.pdf

[10] Foreign direct investment and institutional quality: Some empirical evidence. Bonnie G.Buchanan, Quan V.Le, Meenakshi Rishi. International Review of Financial Analysis. Volume 21, January 2012, Pages 81-89.

[11] Coffman, Charles, "Institutions, Distance, and Foreign Direct Investment" (2015). Honors Theses. Paper 779.

http://digitalcommons.colby.edu/honorstheses/779

[12] Heritage Ranked No. 1 Globally for Impact on Public Policy February 1st, 2018. URL: https://www.heritage.org/impact/heritage-ranked-no-1-globally-impact-public-policy (access date: February 15, 2018).

[13] Compiled according to the 2018 Index of Economic Freedom. The Heritage Foundation website. URL: https://www.heritage.org/index/explore (access date: February 7, 2018).

[14] Coffman, Charles, "Institutions, Distance, and Foreign Direct Investment" (2015). Honors Theses. Paper 779.

http://digitalcommons.colby.edu/honorstheses/779

[15] Calculated according to the UNCTAD data: Foreign direct investment: Inward and outward flows and stock, annual, 1970-2016. UNCTADStat Data Center. UNCTAD website, URL: http://unctadstat.unctad.org/wds/TableViewer/tableView.aspx (access date: February 16, 2018).

[16] Ibid.

[17] In the original - 1st pillar: Institutions.

[18] Calculated and compiled from the data from the following sources: The Global Competitiveness Index Historical Dataset © 2007-2017 World Economic Forum  | Version 20171002. World Economic Forum website. URL: http://reports.weforum.org/global-competitiveness-index-2017-2018/competitiveness-rankings/#series=GCI.A.01; Foreign direct investment: Inward and outward flows and stock, annual, 1970-2016. UNCTADStat Data Center. UNCTAD website, URL:  http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_ChosenLang=en (access date: February 7, 2018).

[19] Calculated and compiled from the data from the following sources: The Global Competitiveness Index Historical Dataset © 2007-2017 World Economic Forum  | Version 20171002. World Economic Forum website. URL: http://reports.weforum.org/global-competitiveness-index-2017-2018/competitiveness-rankings/#series=GCI.A.01; Foreign direct investment: Inward and outward flows and stock, annual, 1970-2016. UNCTADStat Data Center. UNCTAD website, URL:  http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_ChosenLang=en (access date: 2/7/2018).

[20] Calculated and compiled from the data from the following sources: The Global Competitiveness Index Historical Dataset © 2007-2017 World Economic Forum  | Version 20171002. World Economic Forum website. URL: http://reports.weforum.org/global-competitiveness-index-2017-2018/competitiveness-rankings/#series=GCI.A.01; Foreign direct investment: Inward and outward flows and stock, annual, 1970-2016. UNCTADStat Data Center. UNCTAD website, URL:  http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_ChosenLang=en (access date: 2/7/2018).

[21] This pillar is formed from 21 indicators, including such as: property rights, protection of intellectual property, public trust in politicians, independence of justice, favoritism in the decisions of government officials, efficiency of public spending, burden of state regulation, transparency of government decisions, organized crime, business ethics, protection of minority shareholders, investor protection force and others.

[22] Calculated and compiled from the data from the following sources: Country rating. DOING BUSINESS. Business Regulation Assessment. World Bank website. URL: http://russian.doingbusiness.org/rankings (access date: February 9, 2018).

[23] Calculated and compiled from the data from the following sources: Country rating. DOING BUSINESS. Business Regulation Assessment. World Bank website. URL: http://russian.doingbusiness.org/rankings (access date: February 9, 2018); Foreign direct investment: Inward and outward flows and stock, annual, 1970-2016. UNCTADStat Data Center. UNCTAD website, URL:  http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_ChosenLang=en (access date: February 7, 2018).

[24] Calculated and compiled from the data from the following sources: Country rating. DOING BUSINESS. Business Regulation Assessment. World Bank website. URL: http://russian.doingbusiness.org/rankings (access date: February 9, 2018); Foreign direct investment: Inward and outward flows and stock, annual, 1970-2016. UNCTADStat Data Center. UNCTAD website, URL:  http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_ChosenLang=en (access date: February 7, 2018).

[25] Calculated and compiled from the data from the following sources:  Country rating. DOING BUSINESS. Business Regulation Assessment. World Bank website. URL: http://russian.doingbusiness.org/rankings (access date: February 9, 2018); Foreign direct investment: Inward and outward flows and stock, annual, 1970-2016. UNCTADStat Data Center. UNCTAD website, URL:  http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_ChosenLang=en (access date: February 7, 2018); The Global Competitiveness Index Historical Dataset © 2007-2017 World Economic Forum  | Version 20171002. World Economic Forum website. URL: http://reports.weforum.org/global-competitiveness-index-2017-2018/competitiveness-rankings/#series=GCI.A.01; 2018 Index of Economic Freedom. The Heritage Foundation website. URL: https://www.heritage.org/index/explore (access date: February 7, 2018).

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