(Commonwealth)_ Small nations are facing a difficult task achieving long-term sustainable economic growth and development. They have economies with shallow bases of production, small home markets, and higher vulnerability to external shocks, global warming, and recurring natural disasters. Given the inherent characteristics of these challenges, achieving resilience and stability over the long term presents a significant challenge.
Inward investment is necessary to facilitate small states in surmounting their structural incapacities. Investment not only infuses capital into their economies, which they so passionately need, but also induces diversification, facilitates manpower development, stimulates innovation, and improves access to technology. Foreign direct investment (FDI), in particular, can act as a push factor for the greater integration of small states into regional and global value chains and offer them new chances of growth.
Breaking through barriers and concentrated flows
While there are potential benefits which inward investment can yield, there are inherent barriers to its embrace for small states. Their limited size, lack of economies of scale, and perceived risk by investors deter massive flows of FDI. All 33 Commonwealth small states combined registered only 15 per cent of inward FDI to the Commonwealth and a mere 1.8 per cent of greenfield investment in 2023.
Furthermore, these flows exhibit significant concentration and instability. Investment receipts are dominated by only a handful of countries: in 2023, Malta, Guyana, Cyprus, Namibia, and The Bahamas accounted for 91 per cent of all FDI to the Commonwealth small states. Similarly, during 2015-2023, nearly two-thirds of greenfield investment was registered by only five economies—Guyana, Brunei Darussalam, Papua New Guinea, Gabon, and Namibia. This focus refers not only to the imbalance in the distribution of FDI but also to the challenge for the majority of small states to compete for foreign capital.
Lessons from success stories
There are instances of successful small states that have managed to reform their environment to attract and retain investment. Success has typically entailed reforms based on fully integrated development plans or previous investment policy. Strengthened investment promotion institutions, simplification of tax regimes, solving infrastructural deficits, and selective regulatory reforms have also been successful in establishing more investor-friendly environments.
Some smaller countries have established trailblazing Citizenship or Residence by Investment schemes, under which they offer residence or citizenship to foreigners in exchange for money investment. Antigua and Barbuda, Dominica, Grenada, Malta, St. Kitts and Nevis, Saint Lucia, Samoa, and Vanuatu have all employed the schemes to attract investment and direct funds towards national development requirements.
Others have employed FDI to produce structural change. Mauritius has been extensively quoted to have balanced good governance, judicious macroeconomic policies, and good regulation to become an investment-competitive destination. Botswana adopted an open and simple tax regime and initiated significant institutions such as a competition commission, an investment promotion agency, and a Business Facilitation Services Centre in a ttempting to associate FDI with long-term development. Guyana, with the investment of oil and gas proceeds, is also investing in infrastructure and providing incentives for spurring investments in other sectors such as agriculture, ICT, health, energy, and business support services.
Long-term inflow channels
Small states can become, in the future, a more interesting place for investment by engaging in three areas of strategic action. First, a sound investment foundation has to be in place. Progressive policies, macro stability, and sound governance architecture are the cornerstones of a sound investment climate. Coupled with appropriate incentives, these foundations can enable the mobilisation of investment in high-growth sectors, culminating in diversification.
Second, small states can utilise shifting trends in international investment. The shifting of the global value chain, rising digital and services economy, and rising emphasis on sustainability and circular business models offer new promise. Small states can leverage their natural capital and human capital to position themselves in alignment with these new global trends to access quality investment and create structural change.
For many small Commonwealth nations, it is not only bringing in investment that is problematic but also creating it as stable, productive, and strategic by national goals. Predictable, large volumes of FDI into priority sectors of growth have multiplier effects in economies, creating jobs, enhancing skills, and promoting diversification. Through this, inward investment is both capable of serving as a stepping stone and a foundation for broader economic transformation and of helping small states move beyond their vulnerabilities and shift to more sustainable and more resilient patterns of growth.
