# **I. Introduction**

Developing countries compete to attract foreign direct investment (FDI) because of its potential benefits for the local economy, which include technology transfer, stronger managerial and organizational skills, increased access to foreign markets, and export diversification. FDI can enhance productivity, increase investment in research and development, and create better-paying and more stable jobs in host countries. But these benefits are not guaranteed, nor do all types of FDI have the same potential impact. Thus, host governments must adopt the right policies to maximize their gains from different types of FDI.

The _Global Investment Competitiveness Survey_ (GIC Survey)—whose aggregate results were first reported in the Global Investment Competitiveness Report 2017-2018—offers practical evidence to help policy makers design policies and prioritize reforms that investors value. Through interviews with 754 executives of multinational corporations (MNCs) that have investments in developing countries, the survey measures the role in influencing FDI decisions of such investment climate variables as investment incentives, promotion, FDI regulations, and administrative processes. By identifying variables that are most valued by investors, the survey provides practical guidance to where policy makers in host countries can focus their efforts to attract and retain FDI and maximize its gains for development.

Policy reform initiatives must consider that FDI is heterogeneous, driven by different motivations and having different economic, environmental, and social impacts. MNCs possess different characteristics that influence their perspectives and decisions. One such characteristic is based on an FDI typology that builds on a framework proposed by Dunning and Lundan (2008). The framework contends that MNCs are lured to a particular location with a predominant motivation in mind: accessing domestic markets, seeking increased efficiencies of production, taking advantage of natural resources, and acquiring strategic assets. This paper extends the use of this typology to explore how various policy instruments influence investors differently depending on their FDI motivation, and how the impact of investment on the host economy varies by type of FDI.

This paper provides a corporate perspective on the investment decision making of MNCs across the stages of the investment cycle: attraction, entry and establishment, operations and expansion, linkages with the local economy, and in some cases, divestment and exit. The survey reveals how MNCs decide on FDI and how they identify and select a country for investment. It also looks at MNCs’ operational, reinvestment, and expansion experiences, as well as their encounters with political risks and their decisions to shut down foreign affiliates.

This paper investigates difference in perceptions and behavior between relatively smaller MNCs and larger ones. Foreign investments by relatively smaller firms play an increasingly important role in the global economy. Despite relatively small amounts invested, they represent a large number of investment projects. As this paper shows, relatively smaller MNCs also source more of their inputs from local companies compared to large investors, thus enhancing FDI’s benefits for the local economy. Governments, particularly in low-income countries, are encouraged to attract such FDI to contribute to need and opportunities in host countries such as economic diversification (UNCTAD 2011).

The remainder of the paper is structured as follows. The next section describes the survey data and methodology. Section III includes descriptive statistics of the sample. Section IV discusses the heterogeneity of FDI and how it affects MNCs’ perceived importance of the legal and regulatory environment relative to other country characteristics, and of various investment policy–related factors. Section V presents the results of the survey, and is organized according to the life cycle of investments— 2