This chapter provides guidance to support decision making in the design, implementation and monitoring of development co-operation projects supporting investment for sustainable development. It provides examples of how development co-operation effectiveness principles can be applied and embedded into interventions focused on enhancing the qualities of FDI.
FDI Qualities Guide for Development Co-operation
Strengthening the Role of Development Co-operation for Sustainable Investment
OECD Development Policy Tools
3. Guidance for effective design and implementation of development co‑operation assistance on sustainable investment
Abstract
3.1. How to develop and implement effective interventions
While development co-operation partners can use a range of financial and technical assistance solutions to enhance sustainable investment, effective support requires prioritising interventions taking into account specific country contexts and objectives. Chapter 2 provided an overview of the various types of development co-operation mechanisms that can be considered to promote sustainable investment. This third chapter focuses on how to develop relevant interventions adapted to specific country contexts, and make decisions between different options that may each entail costs and benefits. Considerations for prioritising interventions include, for example, ensuring that support aligns with the national priorities of partner countries; ensuring that the support provided addresses a need and does not overlap with existing development co-operation interventions; and considering complementarities and trade-offs between different support modalities and objectives.
This chapter highlights good practice that development co-operation partners may consider to support decision-making on investment and sustainable development. It is structured around six key areas where enhanced engagement of governments, donors, businesses and stakeholders can strengthen the role of development co-operation to enhance the impacts of FDI on sustainable development:
1. Assessing and understanding the impact of FDI on sustainable development
2. Ensuring alignment with national priorities
3. Ensuring coordination and coherence among the development co-operation community
4. Identifying opportunities, trade-offs and managing the risks of development co-operation assistance for sustainable investment
5. Engaging with businesses, trade unions and civil society
6. Enhancing impact measurement and accountability in development co-operation projects
Annex A of this Guide provides a list of guiding questions along these six areas to support governments and development co-operation actors to review, develop and implement development co-operation interventions to mobilise and leverage FDI for the SDGs. While this list does not intend to be exhaustive, it provides a condensed summary of elements to consider throughout the project cycle. It can be used to inform development co-operation strategies, programmes and projects, and can support collaboration between various actors in a specific country context. Guiding questions drawn from Annex A are also presented at the end of each corresponding section below.
3.2. Assessing and understanding the impact of FDI on sustainable development
In order to effectively design and implement support measures to enhance sustainable investment, it is essential to examine the relationship between FDI and sustainable development in a specific country context. FDI can contribute to sustainable development through the activities of foreign firms (direct impact) and via knowledge and technology spill-overs that arise from market interactions with domestic firms (indirect impact). The impacts of FDI may not materialise automatically, and depend on a number of economic, market and firm-specific factors. These framework conditions underpin the channels through which FDI affects sustainable development and shape the magnitude and direction of spill-overs in the host economy.
The Policy Toolkit provides guidance on how to assess the performance of FDI for each of the four areas of the SDGs covered by the toolkit (productivity and innovation; employment, job quality and skills; gender equality; and decarbonisation). Such an assessment can shed light on the trends and complexities of the relationship between FDI and sustainable development, facilitating the identification of policy priorities and possible trade-offs.
Development co-operation actors may rely on analysis carried out by partner countries to inform their interventions on investment and sustainable development, or work with partner countries to undertake such an assessment. Guiding questions below provide a non-exhaustive list of questions that can help development co-operation actors gain a better understanding of the effects of FDI on the SDGs. Additional details and guidance tailored to each SDG area covered by the Policy Toolkit (productivity and innovation; employment and skills; gender equality; decarbonisation) and can provide a reference to examine the impact of FDI in a specific country context to any party interested in enhancing sustainable investment.
Effective support starts with adequate capacity and technical expertise. While development co-operation actors have developed extensive expertise on policies and incentives to mobilise FDI, FDI impacts and the specific ways in which FDI contributes to the SDGs is a relatively new field. Development co-operation actors willing to engage in that field should ensure adequate expertise and capacity to engage meaningfully and provide support to partner countries. Partner countries may also work with partner organisations to build their own capacity to engage with the development co-operation community.
Guiding questions to assess and understand the impact of FDI on the SDGs
Has an assessment of the impacts of FDI on productivity and innovation, job quality and skills, gender equality, and carbon emissions been carried out in recent years? Is further analysis required to understand the relationship between FDI and sustainable development?
What is the country’s performance in terms of productivity and innovation; labour issues; gender equality; carbon and other GHG emissions?
Which sectors are driving performance on each SDG area? Does concentration of economic activity in certain sectors present challenges when it comes to enhancing FDI impacts?
What is the status of GVC integration (both through backward and forward linkages)? Which sectors are better integrated into GVCs? To what extent are SMEs integrated into GVCs?
How does FDI generate positive effects on productivity and innovation; job qualities and skills; gender equality? What are the impacts resulting from foreign firms’ direct operations in the country? From competition and imitation effects? From labour mobility of workers?
How do foreign companies perform on different sustainability areas compared to domestic firms?
Are there regional disparities in the performance of foreign and domestic firms on sustainable development?
3.3. Ensuring alignment with national priorities
Development co-operation interventions on investment and sustainable development should be informed and aligned with countries’ national priorities. Various international instruments aiming to strengthen aid effectiveness recognise the importance of ensuring alignment with national priorities of partner countries. For example, the Paris Declaration on Aid Effectiveness (2005) includes a commitment to “increasing alignment of aid with partner countries’ priorities, systems and procedures and helping to strengthen their capacities”, echoed in the Busan Partnership for Effective Development Co-operation (2012), Nairobi Outcome Document (2016), and Kampala Principles on Effective Private Sector Engagement in Development Co-operation (hereafter: the Kampala Principles) (OECD, 2019[1]).
In considering financial and technical assistance solutions to enhance sustainable investment, development co-operation partners can apply these principles to guide decisions and foster effectiveness. This can mean, for example, considering whether development co-operation assistance aligns and supports existing national strategies and plans, ensuring broad consultations and engaging in a continued dialogue with national authorities.
A number of initiatives have been developed to support alignment of development co-operation assistance with national priorities. For example, the Integrated National Financing Frameworks (INFFs), introduced in the Addis Ababa Action Agenda, aim to strengthen the link between medium-term development plans and financing strategies that mobilise and align public and private finance with sustainable development. INFFs can help match investment supply with needs communicated by partner countries through INFFs (OECD, 2021[2]). The WEF-OECD Sustainable Development Investment Partnership (SDIP) provides a platform to create the conditions for capital to flow where it is most needed. The SDIP’s country financing roadmaps, in particular, can help countries create and leverage government-led multi-stakeholder coalitions to design strategies and action plans to mobilise finance and investment towards the SDGs (SDIP, 2022[3]). Such mechanisms can facilitate national ownership of development co-operation assistance on investment and sustainable development. More broadly, donors and development co-operation actors can take active steps to ensure alignment and ownership of support provided. Questions listed below can help identify and ensure alignment with national priorities.
Guiding questions to identify and align with national priorities on investment and sustainable development
What are the country priorities on productivity and innovation; job quality and skills; gender equality; and carbon emissions? Are they reflected and communicated in national strategies, policies and action plans?
Have policy dialogues and consultations been organised with the government to discuss country priorities and plans on sustainable investment? Have all relevant institutions involved in investment and sustainable development been consulted?
Have businesses and stakeholders been consulted on challenges and opportunities related to sustainable investment?
How do national priorities compare to the assessment of the impact of FDI on sustainable development?
3.4. Ensuring coordination and coherence among the development co-operation community
Ensuring relevance and effectiveness of development co-operation assistance also implies ensuring that support does not duplicate existing projects, and adequately complements what is already in place. The importance of aid coordination is embedded in the 2015 Paris Declaration on Aid Effectiveness, where donors committed to “coordinat[e] aid at all levels in conjunction with other development resources in dialogue with donors […]” (OECD, 2015[4]). Several development co-operation actors may engage in private sector development in a given country context. Identifying what type of support is already available or planned, which SDGs are targeted, and drawing lessons from past interventions is key to ensure complementarity, coherence and continuity of support for investment and sustainable development.
Earlier studies have found that the development co-operation community often falls short when it comes to ensuring coordination, alignment and harmonisation of investment-related projects (OECD, 2006[5]). Often, use of different terminologies to designate similar or close realities may hamper efforts to link investment and sustainable development agendas. Limited dialogue and interactions between donors may lead to missed opportunities for synergies and continuity. Development co-operation partners may address these issues by identifying past, present and planned projects on areas of shared interest, and engaging in regular dialogue to coordinate interventions. They may also step up efforts to align terminologies and communicate widely about similarities and differences, if any, in terms used.
As part of efforts to better coordinate and maximise collective impact, development co-operation actors may wish to identify and map existing interventions. Such a mapping can also help assess alignment with national priorities on investment and sustainable development, identify potential gaps in the breadth of modalities used and areas of the SDGs targeted, and help identify opportunities to replicate or scale‑up relevant interventions. Annex B of this Guide provides an example of how projects can be mapped to review and inform development co-operation projects.
Guiding questions to enhance coordination and coherence among the development co-operation community
Are there or has there been an engagement from the development co-operation community on investment and sustainable development? What have been the outcomes of past projects?
Are there ongoing projects that include a focus on enhancing the impact of investment on sustainable development? Do such projects target specific SDGs or SDG areas, including productivity and innovation, job quality and skills, gender equality, and / or carbon emissions?
Based on the non-exhaustive list of development co-operation options provided in Chapter 2:
Are projects aiming to support policy coherence, continuity and implementation on investment and sustainable development part of the development co-operation community portfolio?
Are projects aiming to promote alignment between domestic regulation and international standards on investment and sustainable development part of the development co-operation community portfolio?
Are development co-operation actors involved in incentivising firms to mobilise and enhance the impact of FDI on sustainable development?
Are development co-operation actors providing support to facilitate sustainable investment opportunities?
Do development co-operation actors involved in related topics engage in dialogues and coordinate through formal or informal mechanisms?
Do development co-operation actors involved in investment and sustainable development seek alignment and complementarity in their projects’ objectives, terminologies, and activities?
3.5. Identifying trade-offs, complementarities, and managing risks of development co-operation assistance for sustainable investment
As discussed in Chapter 2 of this Guide, development co-operation actors have a range of tools to enhance the impact of FDI on sustainable development. Reviewing the characteristics of FDI and engaging in a dialogue to understand and align with country priorities are important first steps to identify most pressing needs, prioritise between different support options, and provide adequate support.
Development actors should also consider potential trade-offs and complementarities that may exist between support modalities. For example, research carried out on 86 ODA recipient countries for the period 2003-14 found that ODA devoted to reducing carbon emissions was effective only when certain criteria of institutional qualities were in place. The study also found that in the absence of certain institutional qualities, ODA could be associated with the opposite effect on carbon emissions (Li, 2021[6]). Such results call for enhanced consideration to the institutional and development co-operation context to maximise the effectiveness of support provided.
Trade-offs and complementarities may also exist between SDGs: support provided to high-skill sectors but with low representation of women could potentially boost availability of quality jobs but lead to worse outcomes for gender equality. Conversely, support allocated to enhance sustainable investment in renewable energy may simultaneously contribute to productivity and innovation. Consideration to the impact of development co-operation across SDGs and potential complementarities and trade-offs is essential to ensure positive sustainability outcomes.
Development co-operation partners should also identify and manage any potential unintended consequences of interventions. Robust environmental and social impact assessment processes, before and throughout the project lifecycle, are essential to avoid any negative impacts of development co-operation support. Various tools developed by donors and development finance providers have been developed to support such processes (USAID, 2019[7]). In the case of FDI-related assistance, development co-operation actors should also ensure that the support provided does not crowd out domestic investment, creates undue advantage or harmful market distortions. Good practice on policy and financial incentives apply to development co-operation. Tools such as the Policy Toolkit and the PFI can help ensure alignment with international good practice in that field and support collaboration with national authorities.
Guiding questions to support identification of potential trade-offs, complementarities and managing risks of unintended consequences
Based on the assessment of FDI impacts on sustainable development, national priorities, consultations, and mapping of existing projects, are there specific support gaps where development co-operation could support national priorities?
Are there specific areas where support could complement, reinforce or enhance the impact of existing projects?
Is the required expertise and capacity available to carry out the project? Are the conditions in place to ensure successful implementation and continuity?
What will be the impact of the support provided on domestic and foreign businesses that are not targeted by the intervention? Is there any risk of creating harmful distortions?
For what duration will the support be provided? How has this duration been defined? What would be the consequences of interrupting this support?
What are the main risks to the environment, local communities, workers and other stakeholders, associated with the projects? How have these risks been identified? How will these risks be managed and addressed?
Have all relevant stakeholder groups, including representatives from domestic and foreign businesses, workers and civil society been consulted in identifying risks and opportunities?
Where could project beneficiaries, local communities or any party affected by future projects seek resolution if they have any complaint? Would formal or informal grievance mechanisms be made available?
3.6. Engaging with business, trade unions and civil society
Engagement with businesses and stakeholders is essential throughout the project cycle, to inform, implement and monitor development co-operation interventions to strengthen sustainable investment. Understanding the challenges businesses might be facing, for example to invest in sectors with high development impact potential, or to meet certain sustainability standards, is crucial to provide effective support, improve framework conditions under which they operate, and design effective development co-operation interventions. Businesses may also be involved as partners in the implementation of projects – a practice that has gained traction over the last years, as donors increasingly partner with private companies to facilitate the co-creation of innovative solutions to development challenges.
While greater engagement with the private sector can present benefits, ensuring appropriate processes and safeguards on the use of public resources is essential. While business and development co-operation interests may intersect, processes and practices, including when it comes to managing risks and impacts, may differ. Donors, development finance providers and other actors should take steps to ensure visibility, oversight and accountability when working with the private sector. The Kampala Principles provide a useful framework to engage effectively with the private sector (Figure 3.1). The Kampala Principles promote ownership of partnerships with the private sector by partner countries and seek to ensure the alignment of the resulting projects and programmes with national sustainable development priorities. They focus on realising sustainable development results and serve as a basis for inclusive dialogue and more effective partnerships, as well as on supporting greater transparency and accountability (GPEDC, 2019[8]).
Figure 3.1. Kampala Principles at glance
Source: Reproduced from GPEDC (2017[9]), Kampala Principles for effective private sector engagement through development co-operation, https://www.effectivecooperation.org/content/kampala-principles-effective-private-sector-engagement-through-development-co-operation
Civil society representatives, such as NGOs and trade unions, are also important factors to consider and their views should be central to the design, implementation and monitoring and evaluation of development co-operation interventions. Civil society can also act as implementing partners, influence policies through dialogue and advocacy and play an important role in fostering transparency and accountability (OECD, 2020[10]). Similarly to businesses, high standards of quality should apply when working with non-governmental organisations. While not all projects should involve stakeholders by default, more could be done to strengthen inclusive partnerships. For example, results from a review of 919 private sector engagement projects carried out by the Global Partnership for Effective Development Co-operation (GPEDC) found that only 9% of reviewed projects listed civil society as partners, and even fewer listed business associations (5%) or trade unions (0%) (GPEDC, 2019[8]). While these projects may not systematically focus on sustainable investment, these results suggest that there is scope to reinforce engagement with different stakeholder groups in projects that include a private sector component, including on investment. Chapter 2 of this document provides various examples of projects funded by donors and implemented by businesses, stakeholders or multi-stakeholder initiatives to support sustainable investment. A number of development co-operation partners have also started developing strategies to strengthen collaboration with diverse actors. Japan, for example, has deployed efforts to strengthen collaboration between the country’s development agency, JICA, and other agencies responsible for official funds, as well as businesses, international organisations, NGOs and academia (MOFA, 2016[11]).
Guiding questions to engaging with business, trade unions and civil society
Have all relevant stakeholder groups been consulted as part of the project identification and definition phase?
How could domestic and foreign firms be involved in the development, implementation and monitoring of future projects?
How could civil society organisations, including local and national NGOs, trade unions, and local communities be involved in the development, implementation and monitoring of future projects?
How do potential business and civil society partners manage their environmental and social risks? Has a proper due diligence process been carried out for all parties that may receive funding or be directly involved in project implementation?
3.7. Enhancing impact measurement and accountability
Ensuring adequate impact measurement, transparency and accountability is key to ensure that interventions achieve their intended objective and promote effectiveness and trust. As mentioned earlier significant advances have been made to enhance the monitoring and evaluation of private sector development projects. This includes new methodologies to measure amounts mobilised from the private sector for sustainable development, as well as efforts to better link private sector development assistance with the SDGs. Development co-operation actors should make use of resources available and ensure that their programmes and projects are regularly monitored and evaluated against indicators established in the design phase and that are agreed on by their reform programme partners.
There is significant scope to enhance capacity to assess the impact of interventions aimed at strengthening sustainable investment. When it comes to support provided to enhance the impact of FDI on the SDGs, an important shortfall lies with the absence of official definition of development co-operation support for FDI. As a result, this can only be measured through proxies, such as private sector development, for which definitions exist. Efforts to establish common definitions could help develop a common knowledge management system, and better measure and track results in that area.
Guiding questions to support effective monitoring and evaluation
Are there existing indicators of performance and monitoring and evaluation frameworks that can be drawn up to assess the impact of the development co-operation assistance provided on investment and sustainable development?
Do such frameworks include suitable metrics and indicators to measure the impact of assistance provided in terms of:
FDI mobilised through the development co-operation intervention
Impact of FDI supported on productivity and innovation; employment and skills; gender equality; decarbonisation
How will data be collected and processed? Does the monitoring and evaluation framework recognise and address potential constraints related to data availability?
Does the monitoring and evaluation framework include plans for ongoing and dynamic monitoring, and integration of results into decision-making and potential project improvements?
Does the monitoring and evaluation framework include a process for managing the environmental and social risks associated with the project?
How much capacity and resources will be required to ensure suitable monitoring and evaluation throughout the project lifecycle?
What mechanisms and processes could ensure impartiality and independence of project evaluation? Will any oversight body be involved in the monitoring and evaluation process?
Through which modalities would information about the project be made available to the public?
References
[8] GPEDC (2019), Kampala Principles on Effective Private Sector Engagement in Development Co-operation, https://www.effectivecooperation.org/system/files/2019-07/Kampala%20Principles%20-%20final.pdf.
[9] GPEDC (2017), Kampala Principles for effective private sector engagement through development co-operation.
[6] Li, D. (2021), Green official development Aid and carbon emissions: Do institutions matter? Environment and Development Economics, 26(1), 88-107, https://doi.org/10.1017/S1355770X20000170.
[11] MOFA (2016), White Paper on Development Co-operation, https://www.mofa.go.jp/files/000286339.pdf.
[2] OECD (2021), Integrated national financing frameworks stocktake, https://www.oecd.org/dev/UNDP-Stocktake-Report-on-INFFs.pdf.
[10] OECD (2020), Development Assistance Committee Members and Civil Society, https://doi.org/10.1787/51eb6df1-en.
[1] OECD (2019), Making Development Co-operation More Effective. 2019 Progress Report., OECD, https://doi.org/10.1787/26f2638f-en.
[4] OECD (2015), Paris Declaration on Aid Effectiveness, https://doi.org/10.1787/9789264098084-en.
[5] OECD (2006), Using ODA to Promote Private Investment for Development: Policy Guidance for Donors, https://doi.org/10.1787/oecd_papers-v6-art4-en.
[3] SDIP (2022), Country Financing Roadmaps, http://sdiponline.org/country-financing-roadmaps.
[7] USAID (2019), Social Impact Assessment Principles, https://www.usaid.gov/environmental-procedures/environmental-compliance-esdm-program-cycle/social-impact-assessment.