January 18, 2025

Analytical Business Tactics

Long Term Benefits of Investment

Political risk insurance in a shifting landscape for foreign direct investment

Political risk insurance in a shifting landscape for foreign direct investment

To investigate recent trends in the relocation of FDI and to evaluate the prospects of near-shoring, friend-shoring, and reshoring, the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA) commissioned a survey of investment promotion agencies (IPAs) in 2024, with support from the World Association of Investment Promotion Agencies. The survey results raise the expectation that friend-shoring and near-shoring will significantly influence the transformation of the FDI landscape in the coming years, especially in manufacturing.

Reflecting the views of foreign investors, nearly 80 percent of all IPAs—and almost 90 percent of those based in developing countries—said friend-shoring would be very important or moderately important over the next three years. A large majority of IPAs were also optimistic about the advantages of friend-shoring and near-shoring for their countries, highlighting their compatibility with FDI source countries and the integration within supply chains of multinational enterprises. Yet all countries cannot benefit simultaneously from FDI relocations driven by friend-shoring or near-shoring, and some are certain to lose out.

For countries that are unlikely to benefit from near-shoring and friend-shoring, the best course of action is to refocus on the long-standing drivers of FDI: a conducive regulatory environment, a supportive business climate, access to skilled labor, moderate taxation, and good infrastructure, among other factors. These countries, and potentially others, should consider political risk insurance (PRI) to mitigate political risks and strengthen foreign investor confidence. 

Surprisingly the evidence shows that despite a rise in political instability, fragility, violence, and conflict, a very small—and declining—portion of FDI to emerging markets is covered by PRI. Although higher in absolute terms, the portion of FDI in low- and lower-middle-income countries covered by PRI is also declining. Greater investor awareness of how these risks can be insured, as well as new products tailored to investor needs, including in the context of the green transition, can support FDI, especially in challenging environments.

Multilateral insurers may be particularly well-positioned to address political risks due to their perceived neutrality and ability to leverage their convening power to de-escalate disputes. New products under development, such as PRI covering carbon credits and fair and equitable treatment in bilateral investment treaties, may also contribute to the development of new markets and better align with investor needs.

This is where MIGA and the World Bank Group Guarantee Platform can help. MIGA began hosting the new platform in July 2024, consolidating guarantee products and experts from across the World Bank Group. The goal is to make guarantees more accessible for clients by simplifying offerings, processing guarantees faster, and developing innovative products to support private-sector investments and lending. With the heightened political risk now evident in many countries, and near-shoring and friend-shoring potentially leaving some countries behind, concerted steps to make guarantees more readily available can be a valuable tool to promote FDI in riskier environments.


link

Leave a Reply

Your email address will not be published. Required fields are marked *