Robust and predictable sources of financing for sustainable development

SDG indicators

SDG target 10.b: Encourage official development assistance and financial flows, including foreign direct investment, to States where the need is greatest, in particular least developed countries, African countries, small island developing States and landlocked developing countries, in accordance with their national plans and programmes
SDG indicator 10.b.1: Total resource flows for development, by recipient and donor countries and type of flow (e.g. official development assistance, foreign direct investment, and other flows) (Tier I/II)

SDG target 17.3: Mobilize additional financial resources for developing countries from multiple sources.
SDG indicator 17.3.1: Foreign direct investment, official development assistance and South-South cooperation as a proportion of gross national income (Tier I)

Target 17.5: Adopt and implement investment promotion regimes for least developed countries.
Indicator 17.5.1: Number of countries that adopt and implement investment promotion regimes for least developed countries (Tier III)

Many developing countries lack the capacity to mobilise sufficient funds under the right conditions to support programmes and implement reforms towards sustainable development. In addition, even at an aggregate level, there can be considerable fluctuation in resource flows from one year to the next -—
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. These economic flows can also have a vastly different impact on short and long-term sustained development depending on their source, type and volume. For this reason, financing strategies for the 2030 Agenda receive a prominent role in all implementation strategies.

There are three crucial challenges when it comes to financing development programmes:

• First, there is a need for more resources to achieve the SDGs and address financing gaps and rising borrowing costs. In the context of the “two-speed recovery” from the COVID-19 pandemic, compounded by the war in Ukraine, concerns have been voiced over “the great finance divide” -—
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. That is, the inability of poorer countries to raise sufficient resources and borrow affordably for investment.
• Second, it is important to find the right mix and adequate terms of financing in order to have a lasting effect and reach those individuals, households and communities with the most urgent needs and where the highest impact can be achieved.
• Third, as developing countries have gradually integrated into global financial markets, they have grown more vulnerable to the volatility and procyclical nature of private capital flows. Subject primarily to external factors (such as monetary and fiscal policy decisions in advanced economies or commodity price movements) rather than local factors, these flows have been particularly fickle since 2008, with the recurrence of global external shocks, including the pandemic and more recently the war in Ukraine. In addition to the numerous macroeconomic challenges that these flows pose -—
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, it has been extremely difficult for developing countries to harness them so that they become efficient, robust and predictable sources of financing for development. The challenge is even more critical when countries graduate to the next income group, lose eligibility for concessional finance, or part thereof, and are instead expected to rely more on private financial markets.

Different external financing sources are better for different aspects of development

The outcome documents of the most recent United Nations International Conferences on Finance for Development, namely the Monterrey Consensus -—
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and the Addis Ababa Action Agenda -—
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state that the primary responsibility for financing development belongs to the countries themselves. Therefore, governments must enhance their domestic resource mobilization so that financing needs are met in a predictable and sustained manner. However, the international community also has an important role to play. Sources of external financing include international trade, FDI and other private flows (from businesses and individuals), international financial and technical cooperation, and external debt. These different forms of economic flows are, however, not assumed to be equal in their effect on development.

International trade has expanded significantly in previous decades under the existing multilateral trading system, while many new and longstanding challenges remain. These issues are covered in Multilateralism for Trade & Development. International trade is an important engine for economic growth. With adequate support and fostering mechanisms, trade can encourage long-term investments and higher productivity, create jobs and livelihoods for millions, and provide important resources to finance public services and policy interventions. However, a high dependence on international markets could increase exposure to global volatility and macroeconomic imbalances, as well as imperil vulnerable or immature domestic industries to excessive competition. If not managed properly, trade can create imbalanced development opportunities thus promoting inequality across population groups, as well as between women and men (see -—
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and The Many Faces of Inequality).

Public debt is another essential financing mechanism for development. As long as funds raised by external or domestic borrowing support strategic productive investment, they can foster growth without threatening future financial stability. It is, therefore, important for countries to reach long-term debt sustainability. This topic is covered in depth in Developing countries' external debt sustainability.

FDI remains a vital source of financing for development. With inflows of US$733 billion in developing economies in 2020 -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- , FDI was the largest source of external financing in these countries -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . FDI was hit hard in 2020, however, with the US$733 billion figure representing an 8.4 per cent decline compared with 2019. Moreover, these flows are directly linked to the main drivers of productive growth and employment creation: establishment of new businesses and greenfield investments; expansion of operations; acquisition of machinery and equipment; upgrade of technology, knowledge and innovation; and others. However, FDI inflows are not distributed evenly among countries; instead, they are concentrated among countries with higher growth prospects, stronger rule of law and respect for contracts, and stable institutions. This means that some countries with urgent financing needs may be bypassed. FDI to LDCs represented only 2.1 per cent of global inflows in 2020, for example -—
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. In addition, this source of external financing remains tied to macroeconomic performance and the global economic climate. It is, therefore, typically a pro-cyclical flow that may be absent in times when sustained financing is most needed. FDI flows were severely impacted by the global pandemic, with global 2020 flows dropping to their lowest level since 2005. Despite their reliance on export and commodity-based investments, which have been hit especially hard during the pandemic, LDCs and developing countries suffered a relatively milder pullback in FDI compared with other countries.

Remittances lack the employment creation potential of FDI because they are managed directly by individuals and are mostly directed towards household consumption. Their capacity to raise productive investment is, therefore, limited. However, remittances are an indispensable source of income for many countries. In LDCs, for example, they are the most important source of external financing, remaining substantially higher than FDI in 2020 (US$48 billion compared with US$22 billion) -—
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. Remittances are also a stable source of income for families, contributing to housing, nutrition, health and education. Thus, they act as an important social safety net. In addition, in countries with an active support policy, remittances have become a significant source of funds for improving social and economic infrastructure.

Official international support plays a unique role when it comes to supporting global development, especially for LDCs and other vulnerable economies. In addition to its concessional nature, official support is the only source of financing available in many cases. Especially in situations of low rentability or high risk, official support can become important for mobilizing additional resources. This source of funding is described in greater detail in Official Support for Sustainable Development.

In this context, it is also important to monitor South-South Cooperation. Links and connections between countries of the Global South have expanded in volume and scope over the previous decades. This is explained to a certain extent by the increasing political and economic weight of several emerging and developing economies across Asia, Africa and Latin America. For a variety of reasons, including the lack of a universally accepted definition and opacity regarding its scope and coverage, South-South cooperation has long proven hard to quantify -—
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.

However, thanks to the joint efforts by countries from the global South, for the first time there is now a global, voluntary framework to measure South-South cooperation (see Box 1). This new statistical framework will serve as a reference for measuring both financial and in-kind flows for sustainable development from the recipient perspective. It will play a critical role in providing the data needed to report on the new SDG indicator 17.3.1 on ‘additional financial resources mobilized for developing countries from multiple sources’ -—
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, which has just been adopted by the United Nations Statistical Commission in its 53rd session -—
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and for which co-custodianship was assigned to UNCTAD and OECD.

The Commission also “requested that further work on this [framework], including on global reporting and capacity building, be enabled by UNCTAD's co-custodianship and led by countries from the global South, building on country-led mechanisms, and be included under indicator 17.3.1 in the future” and “invited countries involved in South-South cooperation to work closely with UNCTAD”. Against this backdrop, UNCTAD has launched pilot measurement exercises with pioneering countries to develop, test and refine tools to prepare and collect data on South-South cooperation for the new SDG indicator. UNCTAD will also be launching a wider capacity development project where the pioneering countries will be able to share their expertise with other providers of SSC.

Box 1: The new statistical framework for the quantification of South-South cooperation in the context of Target 17.3

In April 2019, the United Nations General Assembly (A/RES/73/291, para 25) encouraged “all actors to support initiatives for information and data collection, coordination, dissemination and evaluation of South-South cooperation, upon the request of developing countries”. So far, country and regional variations in approaches to and concepts of South-South cooperation, as well as political dimensions, have made it difficult to reach consensus on a definition or statistical estimates as to the value of South-South cooperation. This uncertainty has prevented reporting on the related SDG indicator and seriously hampered the monitoring of progress in mobilizing financial resources for developing countries.

In view of the increased urgency, in October 2020, the Working Group on Measurement of Development Support of the IAEG-SDGs established a sub-group dedicated to South-South cooperation. UNCTAD was asked to act as secretariat to this sub-group, consisting of Southern countries.

In a process led by Southern countries, a conceptual framework for the measurement of SSC was developed reflecting current experience and solutions for addressing measurement challenges. The work provides an operational framework which, among other things, will allow measurement of the current modalities of SSC under Target 17.3.

The framework takes into account the multidimensional and unique characteristics of South-South cooperation and its different modalities, thus enabling the measurement of its financial and non-financial dimensions from the perspective of developing countries. It considers elements of solidarity between developing countries that constitute powerful instruments for promoting international and regional development, instead of focusing only on vertical relations driven by grants, technical cooperation and concessional loans.

Considering different views among developing countries on the methods that could be applied to quantify SSC and to allow flexibility to develop country-led systems, the framework presents three sets of quantifiable items, that can be independently measured and reported:

• Group A: Financial modalities of South-South cooperation (reported directly through monetization)
• Group B: Non-financial modalities of South-South cooperation (including items that may be monetized)
• Group C: Non-financial modalities of South-South cooperation (the same items as in Group B, subject to quantification by non-monetized methods)

A full listing and a description of the items included in each group of the conceptual framework is available on the IAEG-SDGs website -—
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Pilot data collection exercises are being carried out in 2022, to be followed by a wider capacity development project by UNCTAD and United Nations Regional Commissions from 2023 onward to support countries of the South to start reporting on SDG indicator 17.3.1.

Recent trends in external financing

Financing for development is a crucial element of the 2030 Agenda. SDG target 10.b seeks to “encourage official development assistance and financial flows, including foreign direct investment, to States where the need is greatest [...]” To this end, SDG indicator 10.b.1 measures total resource flows for development. Figure 1 presents recent trends in these flows for three groups of economies, LDCs, LLDCs and SIDS, that face heightened challenges in achieving their development goals.

Figure 1. Total resource disbursements for development (SDG 10.b.1)
(Billions of current US$) Source: UNCTAD calculations based on data from -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . Even expressed in current prices, the trends in external financing have not been homogeneous through time or across country groups. Resource flows to LDCs increased fourfold between 2000 and 2019. However, most of this increase was registered before 2010. Since then, total external funding for LDCs has increased at a slower rate and with some transitory reversals. Figure 1 shows a more disappointing evolution for LLDCs. The years from 2000 to 2007 showed sustained growth in funding, followed by several years of stagnation. An improvement during the years 2012 to 2015 was followed by three straight years of decline, falling back to 2006 levels in 2018. 2019 brought hope, however, registering the first increase since 2015. Funding for SIDS has shown more modest volumes and greater volatility. After a peak in 2007, external financing has seen steep declines, practically drying out in 2018 before rebounding somewhat in 2019. Despite positive developments in 2019, unfortunately, a significant decline can be expected for 2020. The earlier SDG indicator 17.3.1 also examined financial support for development from multiple sources, but as a proportion to GNI. This transformation put external financing in context with all sources of income in the national economy. Figure 2 shows the results for LDCs, LLDCs, and SIDS. The figure also includes remittances because, although not part of the official SDG indicator, they are an important revenue source for many countries. Figure 2. FDI, ODA and remittances (Percentage of GNI) Source: -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- and -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . Figure 2 shows the importance of external financing flows to LDCs, LLDCs and SIDS. The three sources combined on occasion amount to 15 per cent or more of total GNI, though in recent years this share has been decreasing, driven mostly by slowdowns in FDI or ODA, the latter of which increased significantly in 2020. In fact, although a sizable source of financial flows, FDI shows high volatility, in addition to a downward trend since 2008 for LLDCs and SIDS. Remittances for all three groups routinely account for more than 4 per cent of GNI and they are significant both in terms of high volume and low volatility. Remittances represent a more stable inflow than FDI, with a standard deviation almost 10 times lower over the period covered in Figure 2. The observed downward trends for FDI and ODA in these groups of economies indicate room for policies to attract investment and other sources of funds to the places where they are most urgently needed. It is, for instance, pressing that developed countries meet their ODA pledges, equivalent to 0.7 per cent of GNI, as well as protect current shares of assistance to developing countries. Figure 3 shows a clear increase in the volatility of net private capital flows to developing countries since the 2008 crisis, a reaction to the increasing occurrence of jitters or shocks in global financial markets. The mobilization of these resources was unsurprisingly challenged in the wake of the COVID-19 crisis: while expansionary monetary policies in the North, alongside measures from the international community, such as the G20 Debt Suspension Initiative and the allocation of new SDRs by the IMF, managed to eventually contain the huge capital flight which occurred during the first quarter of 2020, the emergence of new COVID-19 variants as well as looming inflation and prospects for a tightening of monetary conditions in the United States of America have caused net private capital flows to developing countries to plummet in 2021. They fell sharply by 283 per cent, to -US$256 billion. If the international community does not take concrete measures to facilitate access to private financial flows for development, this trend is likely to worsen in 2022 with the war in Ukraine, which is projected to produce alarming cascading effects to a world economy already battered by COVID-19 and climate change -—
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Figure 3. Net private capital flows to developing countries
(Billions of US$) Source: -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . Outward investment promotion instruments increasingly adopted by developed countries SDG target 17.5 encourages countries to promote investment for LDCs. The intention of SDG indicator 17.5.1 is, more specifically, to measure the “number of countries that adopt and implement investment promotion regimes for developing countries, including LDCs”. As a result of work done by UNCTAD, as the custodian of this indicator, the definitions and measurement methodologies were agreed upon in late 2019 by the IAEG-SDG -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . In recent years, developed economies have implemented policies and measures to encourage outward FDI, including investment in LDCs. Some emerging economies have also begun to do so. These policies include mainly investment guarantees protecting outward investors against certain political risks in a host country, financial and fiscal support, mostly in form of loans, direct capital participation by a home state in an investment project abroad or investment facilitation instruments, such as information hubs, networking events, and other support services. Investment promotion instruments are generally available for outward investment in any foreign country or economy. Promotion tools targeted specifically at supporting investment in LDCs are difficult to identify. Even if most provider countries do not yet have in place investment promotion regimes targeting specific groups of countries, such as LDCs, progress on these indicators can be assessed by looking at the number and amount of investment guarantees and financial and fiscal support that home countries and international institutions have provided to investors when investing in LDCs and other developing countries. However, information on this is still scarce. In total, in its direct survey of countries, UNCTAD identified 28 countries that provide for at least one type of instrument for promoting OFDI that directly targeted or benefited investors in developing countries. Among them, at least 10 countries had implemented policies that specifically promote OFDI in developing countries, including LDCs. The most common policy instruments are investment guarantees or insurance policies (at least 23), but countries provide also loans for internationalization of local companies (at least 14). In addition, at least 11 countries offer minority equity participation of the State for investment projects abroad. Investment facilitation instruments are used by at least 7 countries. Some countries use all four types of investment promotion instruments. While most OFDI promotion regimes are implemented by developed economies, UNCTAD research points to an early trend towards the adoption of such schemes by emerging economies (e.g., Brazil, India, Mexico, Paraguay, Qatar and Turkey), consistent with the rising South-South FDI flows. The rise of megaregional investment agreements IIAs are another policy tool to foster investment promotion regimes for developing countries, including LDCs, as pursued by SDG target 17.5. The annual number of new BITs continues to decline. As in 2020, the number of effective treaty terminations in 2021 exceeded that of new IIAs -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . On the other hand, megaregional IIAs have been proliferating in recent years, with possible significant implications for future international investment rulemaking. Megaregional agreements are broad economic agreements among a group of countries that together carry significant economic weight and in which investment is only one of several subjects addressed. These include for example the African Continental Free Trade Area (AfCFTA); the EU–United Kingdom Trade and Cooperation Agreement; the China–EU Comprehensive Agreement on Investment (CAI); the Regional Comprehensive Economic Partnership (RCEP); the United States–Mexico–Canada Agreement (USMCA); and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). As of December 2021, LDCs have concluded a total of 552 BITs (307 of which are in force). LDCs’ bilateral treaty activity has hence followed the overall trend in IIAs, with a shift away from bilateral towards regional investment rulemaking. LDCs are now party to 76 treaties with investment provisions (TIPs). These include for example recent megaregional IIAs such as the Regional Comprehensive Economic Partnership (2020); the CARIFORUM-UK EPA (2019); the ASEAN - Hong Kong, China SAR Investment Agreement (2017); the Pacific Agreement on Closer Economic Relations Plus (2017); as well as AfCFTA Investment Protocol currently under negotiations. UNCTAD works with members states to modernize IIAs using the Investment Policy Framework for Sustainable Development first developed in 2012 and updated in 2015 -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . Since then, 155 countries have formulated new sustainable, development oriented and equitable IIAs. These modernized IIAs emphasize investment for sustainable development and ensure the parties’ right to regulate for public policy objectives such as the protection of the environment, labour and health. More remains to be done to modernize the stock of 2 500 old-generation IIAs in force today. Most recently, UNCTAD has launched the IIA Reform Accelerator -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- to expedite this process. The Accelerator responds to the need for change of substantive aspects of the IIA regime by focusing on a selection of reform-oriented formulations for eight key IIA clauses (including fair and equitable treatment, and indirect expropriation provisions). The IIA Reform Accelerator identifies ready-to-use model language, accompanied by recent IIA and model BIT examples. This work is further supported by UNCTAD “Action Packages” for investment to mainstream SDGs into IPAs and investment strategies -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . Modern industrial policies often directly promote SDG-related industries, such as clean energy, electric vehicles, ecotourism, health care and education, but the process of modernizing industrial policies is slow. Figure 4. Bilateral investment treaties with LDCs by development status of donor countries Source: -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . Figure 5. Number of IIAs concluded by LDCs, 1980-2021 (Number of IIAs) Source: -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . Typically, LDCs’ BITs with other countries are still “old generation” treaties that are in need of modernization so that they can help achieve more sustainability-oriented development outcomes. BITs and other IIAs could be reformed in five areas: (i) safeguarding the right to regulate, while providing protection; (ii) reforming investment dispute settlement; (iii) promoting and facilitating investment; (iv) ensuring responsible and sustainable investment; and (v) enhancing systemic consistency -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . LDCs concluded 86 “new generation” BITs between 2010 and 2020, while 449 existing “old generation” BITs, dating from before 2010, have not yet been reformed. Most of these old generation BITs make little or no reference to sustainable development objectives or to the right of LDCs to regulate investment in the public interest. UNCTAD’s Investment Policy Framework for Sustainable Development -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- , its Reform Package for the International Investment Regime -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- and the newly released IIA Reform Accelerator -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- can guide countries in reforming these old-generation IIAs. Preliminary data for SDG indicator 17.5.1, available from UNCTAD’s IIA Navigator, show that LDCs were parties to a total of 628 IIAs (signed or in force) as of 1 December 2021. This includes 262 IIAs with developed countries, and 366 IIAs concluded with other developing countries. The cumulative number of countries that have signed (“adopted”) BITs with LDCs and developing economies reached 120 and 183 by the end of 2021, respectively (Figure 6). The rate of new countries signing BITs with LDCs and developed economies has slowed in recent years after rapid growth in the 1990s. In light of IIA reform efforts across different country groupings and geographical regions, the negotiation of BITs is becoming more complex as countries attempt to strike a balance between investment protection and the right of host states to regulate, assessing the risks and benefits of these agreements. Figure 6. Cumulative number of countries with signed BITs (SDG 17.5.1) Source: -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . Developed economies, including many EU member states, have the largest number of BITs with LDCs; for instance, Germany has 33. The top ten economies, listed in table 1, are also well placed to contribute to the modernization of investment agreements with LDCs to consider sustainable development and social responsibility. The LDCs with the most BITs in place with other economies comprise Yemen, Ethiopia and Sudan (see Table 1). Efforts to modernize investment treaties would have a potentially large effect on these LDCs to promote investment for development. Table 1. Economies with the most BITs with LDCs, as of end-2020 Top 10 developed countries with most BITs with LDCs Developed countryNumber of BITs Germany33 Switzerland26 France18 Belgium and Luxembourg19 United Kingdom17 The Netherlands16 Italy15 Portugal7 Spain7 Sweden7 Top 10 LDCs with BITs LDC countryNumber of BITs Yemen36 Ethiopia33 Sudan32 Bangladesh29 Senegal29 Mozambique27 Cambodia26 Guinea24 Laos23 Mali22 Mauritania22 Source: -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . Note: Belgium/Luxembourg are included as a group because they negotiate treaties together as an economic union -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- . Africa was the main recipient for development finance -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- -— – ‒ - – —- collects data on funds mobilized from the private sector by development finance interventions, such as investment guarantees, syndicated loans, credit lines and direct investment in companies. According to data by OECD, a total of US$257.6 billion was mobilized globally from 2012 to 2019, with a drop of 9 per cent in 2019 from the previous year. A further drop in 2020 due to the pandemic’s impacts on the private sector is expected. In 2019, over nine per cent of the amounts mobilized supported LDCs, totalling US$4.4 billion. Support to LDCs increased by 14 per cent from 2018. In the period 2017-2018, development finance was divided evenly across the five continents. Among LDCs, the top recipients were Uganda, Myanmar, Benin, Mauritania and Bangladesh, receiving half of the support to LDCs. The top sectors receiving development finance in LDCs were energy (US$677 million), banking (US$503 million), industry and construction (US$303 million) as well as communications (US$211 million). Overall, investment guarantees were the instrument that mobilized the most funds for LDCs, US$2.6 billion according to preliminary figures for 2019, accounting for about 60 per cent of the total. Other financing tools included direct investment, syndicated loans, credit lines and co-financing. In 2017-2018, the largest bilateral providers were France, the United States of America, the United Kingdom, Finland and the Netherlands. The flows from Finland consisted of direct investment only; the Netherlands mainly offered syndicated loans; whereas the other three utilised more often investment guarantees.

Despite progress, the measurement of indicator 17.5.1 remains a challenge, and UNCTAD will continue efforts to improve the coverage of types of investment promotion schemes. A more comprehensive assessment would also require home countries of investment to collect additional and more exhaustive data on the impact of their outward investment promotion tools, including in terms of volume and geography of supported investment.

References

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