Joining Forces for Gender Equality

31. Harnessing foreign direct investment for gender equality

Letizia Montinari

Abstract

This chapter examines how foreign direct investment (FDI) influences gender equality in host countries by contributing to the development of sectors where many women work or have the potential to work and through the activities of foreign affiliates of multinational enterprises (MNEs). It examines institutional frameworks and policies that can enhance the positive impact of FDI on gender equality, providing examples of good practices from OECD and non-OECD countries. Finally, it discusses how development co‑operation can play an important role in mobilising and improving the impact of FDI on gender equality.

Key findings

• The OECD Foreign Direct investment (FDI) Qualities indicators show that FDI tends to be higher in sectors with a lower share of women and higher gender wage gaps. They also show that, on average, foreign affiliates of multinational enterprises (MNEs) employ higher shares of women, but do not always perform better in terms of promoting women to higher levels of management and supporting women’s participation in business ownership.

• The impact of FDI on gender equality is not automatically positive. Domestic legal and regulatory frameworks and a range of technical and financial support measures may be needed to allow FDI to create quality jobs and enable women to take advantage of these opportunities.

• Official development assistance for private sector development, which includes FDI-related assistance, has grown steadily in recent years, but the link with gender equality objectives remains weak. By incorporating a gender equality focus in FDI interventions, donors and development co‑operation partners can help mobilise and leverage FDI for gender equality.

The impact of FDI on gender equality is not clear cut and many factors are at play

FDI can influence gender equality outcomes in host countries. It can contribute to the development of sectors that employ or have the potential to employ many women, such as services (e.g. professional services, hospitality, information and communication). It can also affect the employment and working conditions of local women through the activities of foreign affiliates of MNEs, such as recruitment, remuneration, promotion and other work practices (OECD, 2019[1]; 2022[2]). FDI can also influence gender outcomes in domestic firms through business linkages, competition and labour mobility. For instance, FDI could create jobs for women in domestic firms through the business opportunities along domestic supply chains. Evidence on these channels, however, remains limited to specific countries due to the lack of internationally comparable data (OECD, 2019[1]; OECD, 2022[2]).

The OECD FDI Qualities Indicators (Box 31.1) show that new establishments by foreign companies (e.g. greenfield FDI) are concentrated in sectors with smaller shares of women in both OECD and non-OECD countries. In the OECD area and in most regions, significant portions of FDI are directed to manufacturing, construction and, especially in resource‑rich countries, mining and energy (Figure 31.1). Smaller shares of FDI are channelled into services, which globally employ larger shares of women. The indicators also show that the gap between earnings of women and men is on average higher in manufacturing and services. The gap tends to be lower in construction and mining and energy – sectors that employ relatively fewer and proportionally more higher-skilled women. These regional and sectoral aggregates hide significant variations between countries. Moreover, the indicators provide only a partial picture of the impact of FDI, as they reflect greenfield projects and not foreign mergers and acquisitions (i.e. a consolidation of companies through a merger or an acquisition).

Figure 31.1. Greenfield FDI is higher in sectors with lower shares of women and larger gender pay gaps

Note: Greenfield FDI is a type of foreign direct investment in which a parent company sets up a subsidiary in another country. Greenfield FDI stocks measure the level of greenfield FDI at a given point in time in a country. In this figure they are shown as sectoral shares in the total greenfield FDI stocks of a region, therefore add up to 100%, while female employees are shares in the total number of employees in a given sector, and do not add up to 100%.

Source: OECD elaboration based on Financial Markets’ Greenfield FDI (2022[3]), https://www.fdimarkets.com/ and ILOSTAT (2022[4]), Labour statistics 2022, https://ilostat.ilo.org/data/.

Statlink

In most countries foreign affiliates of MNEs are, on average, more productive and pay higher wages than domestic firms (OECD, 2019[1]; OECD, 2022[5]). This is because foreign firms tend to be larger and more technology-intensive, given their access to technologies and knowledge of the parent company (Javorcik, 2004[6]). Nonetheless, when looking at their performance in relation to various gender equality outcomes, the results are less clear-cut (Figure 31.2). In the OECD area and in all regions under analysis, foreign firms have on average higher shares of female employees than domestic firms. Foreign companies, however, do not seem to perform better than domestic companies when considering the promotion of women to top management level. The indicators show very small differences in the shares of companies with women in top management in the OECD area, the Middle East and North Africa, and Southeast Asia, while in the remaining regions the share of domestic companies with women in top management positions is higher. The share of domestic firms with women in ownership is higher in most regions and in the OECD area, with the exception of the Middle East and North Africa and Sub-Sahara Africa, where the differences between the shares of foreign and domestic firms are small.

Figure 31.2. In some dimensions of gender equality, domestic firms perform better than foreign ones

Note: LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SEA = Southeast Asia and SSA = Sub-Saharan Africa,

Source: OECD elaboration based on the World Bank Enterprise Surveys (2022[7]), Enterprise Surveys 2022, https://www.enterprisesurveys.org/en/enterprisesurveys.

Statlink

The results confirm that a broader context is needed to assess the contribution of FDI to gender equality. The impact of foreign firms on gender outcomes is influenced by several factors such as the sector of the investment, the entry mode of the foreign investor (e.g. greenfield FDI or mergers and acquisitions deals), the motive of the FDI (e.g. efficiency seeking, market seeking), as well as the MNE corporate culture, which is in turn influenced by the norms and values prevailing in the country of origin (OECD, 2022[2]). Recent studies find that foreign companies from more gender-equal countries have higher shares of women, including in management levels, lower gender pay gaps and are more likely to offer family-friendly work arrangements (Kodama, Javorcik and Abe, 2018[8]; Tang, 2017[9]). The policy and institutional context of the host country also matter, including its commonly accepted social and cultural norms in relation to gender (OECD, 2022[2]).

Box 31.1. OECD FDI Qualities Initiative

Foreign direct investment (FDI) is a key source of funding to achieve the sustainable development goals and commitments made in the Paris Agreement on climate change. However, the benefits of FDI do not always materialise, and the impact of investment can vary across countries and sustainability areas. Moreover, policies and institutional arrangements play a critical role in maximising the positive impact of FDI. The FDI Qualities Initiative supports governments in their efforts to improve the contribution of FDI to achieving the SDGs. It provides governments with the tools and data to develop and implement evidence‑based policies that encourage investments leading to the key objective of sustainable development. It comprises three main pillars:

• FDI Qualities Indicators help governments assess the impact of investment across four areas of the SDGs: decarbonisation; job quality and skills; gender equality; and productivity and innovation.

• FDI Qualities Policy Toolkit helps governments improve the impact of investment on sustainable development through decarbonisation, quality of work and skills, gender equality, productivity and innovation. The Toolkit complements the OECD’s Policy Framework for Investment (PFI) by providing governments with detailed, tailored policy guidance and best practices for attracting and retaining sustainable investment. The Policy Toolkit also includes guidance on strengthening the role of development co‑operation in mobilising FDI and enhancing its positive impact in developing countries.

• OECD Council Recommendation on FDI Qualities complements the Policy Toolkit by incorporating a set of key policy principles from the Policy Toolkit into a legal instrument. Adopted at the 2022 Meeting of the OECD Council at the Ministerial Level (MCM), it is the first government-backed instrument on how to improve the positive contribution of international investment to the SDGs.

Source: OECD (2022[2]), FDI Qualities Policy Toolkit, https://doi.org/10.1787/7ba74100-en; OECD (2022[5]), FDI Qualities Indicators 2022, https://www.oecd.org/investment/investment-policy/FDI-Qualities-Indicators-Measuring-Sustainable-Development-Impacts.pdf; OECD (2019[1]), FDI Qualities Indicators: Measuring the sustainable development impacts of investment, https://www.oecd.org/investment/investment-policy/FDI-Qualities-Indicators-Measuring-Sustainable-Development-Impacts.pdf.

The right policy mix and governance mechanisms can improve the impact of FDI on gender equality

The governance framework for gender equality can vary across countries. Especially in developed countries, gender is typically mainstreamed into the activities of all government ministries. In less developed countries, which rely more on private investment, government intervention is often more limited and gender equality initiatives depend largely on dedicated ministries and institutions, including private actors and the donor community. However, the policy and institutional framework can change significantly even between countries with similar levels of development. For example, Canada and Sweden, two countries strongly committed to achieving gender equality, have very different governance frameworks. Both countries have ministries dedicated to gender issues. However, Sweden has very few initiatives to support gender equality and relies on a formal gender mainstreaming programme to raise awareness of gender issues among government agencies. Canada, on the other hand, relies more on targeted gender initiatives at both federal and provincial levels (OECD, 2022[2]).

Co‑ordination between actors responsible for gender and investment policies, as well as other relevant policies, are key to improving the impact of FDI. Investment promotion agencies (IPAs) are in a unique position to link investment to gender equality objectives. Only recently some IPAs have started to attach importance to gender equality objectives. For example, Business Sweden has introduced a clear code of conduct and vision for gender equality. Invest in Canada has a gender-focused strategy in outbound investments. Costa Rica’s IPA, CINDE, supports several educational programmes for women in collaboration with universities and some MNEs.

Institutional co‑ordination mechanisms between the relevant institutions and agencies also play an important role. These can take different forms, from gender focal points to inter-ministerial and inter-agency committees. In Jordan, for example, gender units are an important tool for mainstreaming gender issues in the activities of ministries, including in investment issues. They are co‑ordinated and report directly to the Jordanian National Commission for Women (JNCW), a semi-governmental body that serves as a reference authority for women’s issues (OECD, 2022[10]).

The national legal and regulatory framework influences the ability of FDI to create quality jobs, as well as the capacity of women to take advantage of these opportunities. Regulatory restrictions on FDI (for instance related to foreign ownership, screening and approval procedures, and constraints on foreign staff) can limit the potential employment impact of FDI, particularly when it affects sectors that employ or could employ many women. Regulations on minimum wage, employment protection, social protection, taxation, sexual harassment and flexible working arrangements affect the quality of employment opportunities created by FDI. Burdensome and non-transparent business regulations and discriminatory laws regarding property and inheritance rights can hinder women’s ability to become entrepreneurs and benefit from the business opportunities brought by FDI. Access to quality education and healthcare is also crucial for a productive and well-educated female workforce.

It is important that the national legal and regulatory framework is aligned with international standards on gender equality (e.g. CEDAW, ILO conventions) and promotes the OECD Guidelines for Multinational Enterprises and Due Diligence guidance, which help companies prevent and address the negative impacts of business operations on the economy, society and the environment (OECD, 2011[11]). In addition, the inclusion of gender-related provisions in regional trade agreements and bilateral investment treaties, even if non-binding, can provide a means of signalling a country’s commitment to promoting gender equality (Chapter 30).

A range of policy instruments can help address market failures, such as information asymmetries, which penalise women in the labour market and limit their capacity to benefit from the presence of foreign firms. For example, targeted tax incentives can encourage the recruitment and promotion of women or the adoption of gender-inclusive working practices in both foreign and domestic companies. Jordan, for instance, provides a corporate income tax reduction to companies that hire between 15% and 25% of women in their workforce, depending on the sector. It is important, however, that these measures are designed in a transparent way and regularly assessed.

Training programmes tailored to the needs of foreign investors can help increase the employability of women in foreign companies. Training programmes adapted to the needs of foreign investors can help increase the employability of women in foreign companies. For example, Costa Rica’s CINDE promotes training programmes for women in collaboration with universities and multinationals to increase the participation of women in Science, Technology, Engineering, Arts and Mathematics (STEAM) sectors. Information and facilitation measures can help eliminate prejudices and stereotypes that influence the perceptions of employers and investors. These include public information campaigns and programmes that enable women entrepreneurs to connect with potential business partners and investors, such as supplier diversity programmes and matchmaking events (Box 31.2) (Chapters 28 and 29).

Box 31.2. Programmes to connect women entrepreneurs with foreign MNEs and regional supply chains: experiences from Canada, Morocco and Rwanda

Several countries have implemented programmes to help women entrepreneurs link with foreign MNEs and global supply chains. Some notable examples are Supplier Diversity Canada and the programmes implemented with the support of SheTrades Global in Morocco and Rwanda.

Supplier Diversity Canada is an initiative funded by Women and Gender Equality Canada, which aims to advance business diversity and inclusion in Canada by bringing women-owned, aboriginal-owned, minority-owned and LGB-owned businesses into corporate supply chains and government contracts. The initiative includes training procurement professionals on the advantages and tools available to broader their supplier network and connecting diversity suppliers with procurement opportunities. Numerous MNEs have engaged in supplier diversity programmes, including Dell, IBM, Marriott, Sodexo and several others.

SheTrades Global is a programme of the Centre for International Trade that helps women-owned businesses expand their network, learn new skills and connect with business partners and investors. With the support of SheTrades Global, Morocco and Rwanda have developed similar programmes. In Rwanda, where 98% of women-owned businesses are small or micro enterprises, these programmes focus on connecting different female suppliers with local and regional supply chains. The programme is especially adapted to the horticulture and coffee sectors, where women business owners dominate. In Morocco, the programme is geared more towards women in the agri-food sector, with an international focus on linking Moroccan suppliers with potential buyers in both Canada and Europe.

Source: OECD (2022[2]), FDI Qualities Policy Toolkit, https://doi.org/10.1787/7ba74100-en.

Development co‑operation can help attract FDI that improves gender equality

Development co‑operation can play an important role in mobilising and enhancing the impact of FDI on gender equality. Development co‑operation actors (e.g. state agencies, international organisations, development banks and NGOs) have long worked with developed countries to create sound governance and policy frameworks on investment and support sustainable development, including gender equality (Chapter 2).

Developing countries may struggle to attract FDI due to a combination of investment barriers and real or perceived risks that make it more difficult for the private sector to invest (OECD/UNCDF, 2020[12]). Development co‑operation can help lower these barriers, reducing costs, risk and uncertainty for investors. It can do so by improving the investment climate, productive capacity (e.g. economic diversification, integration into regional and global value chains) and infrastructure of beneficiary countries. While fostering the development of the private sector, development co‑operation can help countries achieving the SDGs. Over the last decade, official development funding (ODF) for private sector development, which includes FDI-related assistance, has grown steadily. OECD research shows, however, that ODF is rarely linked to gender equality targets, while it more often supports other SDGs such as low-carbon transition, industry, innovation and infrastructure, and job and skill development (Box 31.3) (OECD, 2022[13]).

The FDI Qualities Guide for Development Co‑operation (OECD, 2022[13]) provides advice on how to make donor interventions more effective and improve the positive impact of FDI on gender equality as well as on other sustainable development dimensions. It offers a compendium of options for development co‑operation partners to mobilise and enhance the sustainable development impact of FDI, including through the implementation of recommendations from the OECD FDI Qualities Policy Toolkit.

Box 31.3. Development co‑operation efforts to improve the impact of FDI on gender equality: evidence from Latin America and Armenia

Financial instruments based on gender outcomes by Canadian Climate Fund and IDB

In Latin America, IDB Invest, the private arm of the Inter-American Development Bank, offered a financial instrument based on gender outcomes, with funds from the Canadian Climate Fund. Under this mechanism, a project that meets a predefined gender-related target could have the interest rate on the loan reduced by up to 25 basis points. For example, the company Tecnogroup in Uruguay obtained a loan to build six solar photovoltaic plants associated with targets of having at least 15% female employees, and at least 15% of the working hours at each plant assigned to women.

United Kingdom and World Bank Group’s support for FDI promotion in Armenia

The World Bank Group, in partnership with Good Governance Fund of the United Kingdom, launched a new advisory programme in Armenia to help the government implement reforms, attract FDI, and foster female entrepreneurship to spur business growth and job creation. The programme, implemented by the International Finance Corporation, works in two directions: it advises the government on attracting FDI through targeted investment promotion and measures to improve investor confidence; and it helps improve the economic outcomes of women entrepreneurs by improving their business skills and access to business networks. While supporting the growth of high-potential sectors, including through the identification of promising sectors for targeted FDI promotion, the project will help strengthen relevant legal and regulatory frameworks and help the government identify export potential for selected products. To ensure that women entrepreneurs can benefit from business environment reforms, the project will also help analyse key constraints for women in business and build capacity of women entrepreneurs.

Source: IDB Invest (2022[14]), Canadian Climate Fund, https://idbinvest.org/en/canadian-climate-fund; IFC (2019[15]), World Bank Group to Help Attract Investments and Empower Women Entrepreneurs in Armenia, https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=18531.

Key policy messages

• Assessing the impact of FDI on gender equality outcomes and regularly evaluating how these impacts evolve over time is important to identifying areas where policy action might be needed. This requires gender-disaggregated data on investment, the labour market, entrepreneurship, which are internationally comparable and regularly updated.

• Countries should intensify their efforts to enhance the positive contribution of FDI to gender equality in their economy. The implementation of the OECD FDI Qualities Policy Toolkit, in particular the gender-related policy directions, and the adoption of the OECD Council Recommendation on FDI Qualities for Sustainable Development, can support them in this process.

• Countries should strengthen the role of development co‑operation in mobilising FDI and its positive impact on gender equality in developing countries. The FDI Qualities Companion Guide for Donor’s Engagement can help countries achieve this goal.

References

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[14] IDB Invest (2022), Canadian Climate Fund, https://idbinvest.org/en/canadian-climate-fund (accessed on 13 March 2023).

[15] IFC (2019), World Bank Group to Help Attract Investments and Empower Women Entrepreneurs in Armenia, https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=18531.

[4] ILOSTAT (2022), Labour statistics, https://ilostat.ilo.org/data/ (accessed on 13 March 2023).

[6] Javorcik, B. (2004), “Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages”, Americal Economic Review, Vol. 94/3, pp. 605-627.

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[13] OECD (2022), FDI Qualities Guide for Development Co-operation: Strengthening the Role of Development Co-operation for Sustainable Investment, OECD Development Policy Tools, OECD Publishing, Paris, https://doi.org/10.1787/7f251bac-en.

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[7] The World Bank (2022), Enterprise Surveys, https://www.enterprisesurveys.org/en/enterprisesurveys (accessed on 13 March 2023).