Business advice toolkit: Investment promotion agencies

What are they and what do they aim to do?

Investment promotion agencies (IPAs) aim to increase inward flows of foreign direct investment (FDI). Increased Foreign Direct Investment (FDI) may bring both direct and indirect local economic benefits (for example, by directly providing employment or indirectly improving productivity of domestic firms). IPAs may fund image building activities such as advertisements, PR, etc; undertake investment generation by identifying and encouraging potential investors; provide investor servicing/facilitation to help investors find business opportunities or navigate bureaucracy; or engage in policy advocacy – such as lobbying government. IPAs can be based domestically or abroad and may target specific sectors.

In the UK, the Department for International Trade, or DIT (Formerly UK Trade & Investment, or UKTI) provide IPA services for foreign firms. DIT also provides support for UK firms exporting to foreign markets as covered in our toolkit on export promotion agencies (EPAs).

 Key findings

• Do IPAs increase FDI inflows? Evidence suggests that IPAs may increase FDI inflows although in some cases support has no effect.
• Should regions establish IPAs overseas? The available evidence suggests that regional IPAs are no more or less effective than national support.
• Can EPAs improve other aspects of firm performance? IPA support may sometimes improve other aspects of firm performance, but most of the evidence suggests that schemes have little or no effect.
• Which types of IPA support are most effective? We don’t know. We need to do more to understand cost-effectiveness of different types of support.
• Should IPAs target specific sectors? We don’t know, which suggests that targeting would need to be based on theoretical considerations (such as barriers to entry) and may not necessarily improve scheme performance.
• Could private sector involvement improve effectiveness? Only one study looks at this, suggesting that IPAs are more effective when they are public-private partnerships and have members of the private sector on their supervisory board. Reporting directly to the head of government helps too.

How effective are they?

Three of five studies find a positive relationship between IPA activity and FDI. Two studies find no effect.

Two of these studies look specifically at regional IPAs located overseas, one finding a positive effect on FDI inflows to the region, and the other finding no effect.

IPA support may sometimes improve other aspects of firm performance, but most of the evidence suggests that schemes have little or no effect. One study looking at UK Aftercare, finds no impact on employment, profit, wages value added, total factor productivity or export activity for supported foreign firms operating in the UK. Another study considers total productivity at the country level finding a positive effect for countries that have an IPA, while a final study considers total exports at the industry level finding no effect for industries targeted by IPAs.

Two studies evaluate the impact of IPAs targeted at specific industries, with one finding that FDI increases in targeted industries compared with non-targeted industries, and the other finding no effect on exports.

One study looks at whether IPA characteristics change effectiveness. It finds that sole ownership by government reduces effectiveness, although reporting directly to the countries head of government helps partially offsets this. Private sector membership on the advisory board has a positive effect.

Only one study (looking at UK Aftercare and already discussed above) looks at a specific type of support, finding that investor servicing and facilitation has no effect on foreign firm performance. Unfortunately this is not very informative about the likely impact on the primary objective of most IPAs.

Are they cost effective?

Unfortunately, none of the studies provide credible cost effectiveness information to make an assessment.