Himalayan News Service

Kathmandu, June 12:

Investment climate effects in economic prosperity, as competition is getting tough. A good investment climate drives economic growth by encouraging investment and higher productivity, World Development Report (WDR)-2005 states in its report. Investment underpins economic growth by bringing more inputs to the production process, states WDR-2005, adding that foreign investment is becoming more important in developing countries, however the bulk of private investment remains domestic. “A good investment climate encourages firms to invest more by removing unjustified costs, risks, and barriers to competition. As a result of investment climate improvements in the 1980s and 1990s, private investment as a share of GDP nearly doubled in China and India, in Uganda, it more than doubled. In Poland, Romania, Russia, Slovakia and Ukraine firms that believe their property rights are secure reinvest between 14 and 40 per cent more of their profits in their businesses

than those who don’t. Improving policy predictability can increase the likelihood of new investment by more than 30 per cent.

“Reducing barriers to competition in telecommunications in the 1990s unleashed a surge of new investment worldwide - including investment by micro entrepreneurs in Bangladesh and Uganada. Low barriers to the diffusion of new ideas, including barriers to importing modern equipment and adjusting the way work is organised. And an environment that fosters the competitive processes that Joseph Schumpter called ‘creative destruction’ — an environment in which firms have opportunities and incentives to test their ideas, strive for success and prosper or fail. Sound investment climate makes it easier for firms to enter and exit markets in a process that contributes to higher productivity and faster growth. “Net market entry can account for more than 30 per cent of productivity growth and firms facing strong competitive pressure are at least 50 per cent more likely to innovate than those reporting no such pressure.” Hundreds of millions of poor people in developing countries make their living as micro entrepreneurs, as farmers, street vendors, home workers, and in a range of other occupations. They often operate in the information economy, which accounts for more than half of economic activity in many developing countries. Firms in the information economy face many of the same constraints as others, including insecure property rights, corruption, policy unpredictability, and limited access to finance and public services. WDR-2005 stresses that government policies and behaviours influence the costs of doing business and hence the range of investment opportunities that might profitable. Taxes are the most obvious example.