Investment climate and governance

What are investment climate and governance?

The investment climate in a country or region can be defined by a wide range of factors that determine whether domestic and foreign investment happens: by the soundness of macroeconomic policies, the strength of economic and political institutions, the functioning of the legal and regulatory framework, the quality of infrastructure and other services, amongst others.

As a major investor and also a publicly-owned institution established to foster transition to well-functioning markets and catalyse investment by others, the EBRD works closely with recipient country governments, other development partners and its private sector clients to promote a positive investment climate.

Governance is an equally broad concept that can encompass aspects of political governance (the type of political system, constitutional set-up, relations between state and society), economic governance (state institutions that regulate the economy, competition, property and contract rights) and corporate governance (national and company laws and practices that determine corporate conduct, shareholder rights, disclosure and transparency, accounting standards).

As an institution with a political aspect to its mandate, established to foster transition to well-functioning markets by focusing on private sector development, the EBRD seeks to promote all these forms of good governance.

No matter how one defines these terms, the lessons of more than two decades of transition are clear: the investment climate and governance matter.  They matter not only for economic growth, but also for the sustainability and resilience of the transition process, for its inclusiveness and for countries’ ability to cope with global challenges.

With experience as a transition bank stretching back to 1991, we have learned important lessons about the process of transition in countries with different starting points, with different histories and cultures and with different factor endowments.

A key lesson is: for markets to function well and for investments to flow where they can find the highest return it is important to get the balance between state and private sector right.

Clear rules of the game are needed for how the state interacts with the private sector.  There needs to be a level playing field and platforms for constructive dialogue between state agents and private business.

Businesses do not get started, thrive and expand where the state does not provide certain essential ‘public goods’ – such as sound regulation, market-supporting laws that are implemented fairly by honest and well-trained judges and a transparent procurement system.  Trust cannot be established without a means to address abuses by public officials for private gain – in other words, corruption. In short, the private sector needs an effective, enabling state.