A blog by Neil Balchin (Economic Adviser, Trade Policy Analysis, International Trade Policy, Commonwealth Secretariat) and Kim Kampel (Trade Negotiations and Emerging Trade Issues, Commonwealth Small States Office) discussing their paper Investment Flows into Commonwealth Small States: Trends, Challenges and Implications.
The path toward sustainable economic growth and development in small states is fraught with difficulties. Their narrow production structures, small domestic markets and vulnerability to external shocks, climate change and recurring natural disasters, pose significant challenges.
Inward investment is critical to overcome these handicaps. It fosters diversification into other economic pathways and markets as a springboard to growth and development.
Foreign direct investment (FDI) can inject much-needed capital into small economies, while strengthening their productive capacity, enhancing workforce skills and productivity, encouraging innovation and improving access to technology. FDI also supports deeper integration into regional and global value chains.
Stubborn challenges, concentrated investments
Yet, many of the challenges that hold back growth and development in small states also dampen their prospects for attracting investment. They are often perceived as high-risk markets, lacking economies of scale and other characteristics that typically attract investors.
The 33 Commonwealth small states absorbed just 15% of inward FDI to the Commonwealth and only 1.8% of greenfield investments in 2023.
FDI flows to these countries tend to be very volatile and are highly concentrated. Five countries - Malta, Guyana, Cyprus, Namibia and The Bahamas - absorbed 91% of the FDI destined for Commonwealth small states in 2023. Nearly two-thirds of the greenfield investment going to Commonwealth small states from 2015 to 2023 was destined for Guyana, Brunei Darussalam, Papua New Guinea, Gabon or Namibia.
Learning from success
Some small states have succeeded in adapting their business and regulatory environments to attract and retain investment, including by:
- Basing reforms on a pre-existing investment strategy or comprehensive development plan.
- Creating or strengthening investment promotion institutions.
- Targeting regulatory reform, including through investment facilitation measures.
- Simplifying tax and incentive regimes.
- Addressing infrastructure gaps and skills shortages.
Some Commonwealth small states - including Antigua and Barbuda, Dominica, Grenada, Malta, St Kitts and Nevis, Saint Lucia, Samoa and Vanuatu - have introduced innovative variations of Citizenship or Residence by Investment (CBI/RBI) schemes to attract foreign investment. They grant foreigners citizenship or residence rights in exchange for a minimum capital investment.
Others have harnessed FDI to drive structural economic transformation. Mauritius did so through a stable macroeconomic environment, creating a competitive investment climate, a predictable regulatory regime and a reputation for good governance. Botswana developed a simple, transparent and competitive tax regime and established key institutions to attract and benefit from FDI, including a competition authority, investment promotion agency and Business Facilitation Services Centre. Guyana is utilising revenues from oil and gas production to develop energy and other infrastructure, while offering incentives to attract diverse investments into the agriculture, business support services, health, ICT and energy sectors.
Attracting sustained investment inflows
Small states can position themselves as more competitive destinations for FDI through interventions in three key areas.
- Getting investment fundamentals in place — A robust governance framework, sound investment climate and forward-looking policies form the foundation for attracting sustained FDI into high-growth sectors, especially when complemented by appropriate incentives.
- Capitalising on evolving global investment dynamics and trends — The reconfiguration of global supply chains, rise of the digital and services economies, drive towards sustainable, circular and green business models and value chains, as well as technological advances present new opportunities to attract sustainable, quality investments that build on small states’ inherent natural and human capital, with the potential to drive their diversification and growth.
- Implementing innovative measures to incentivise investment — Creative deployment of CBI schemes provides interesting avenues for attracting FDI, while innovative financing mechanisms — such as blue or green bonds — can help to mobilise private investment.
Attracting larger and more stable flows of high quality investment — particularly productive FDI — and channelling these flows strategically into existing and emerging priority sectors with rapid growth potential can make a significant contribution to optimising inward investment. This approach can also serve as a springboard to growth in other sectors, supporting the diversification of small states’ economies.
* This blog is based on a paper by Neil Balchin and Kim Kampel titled ‘Investment Flows into Commonwealth Small States: Trends, Challenges and Implications’, available here.
