Foreign Direct Investment (FDI) is one of the main sources of finance to developing countries for achieving the Sustainable Development Goals (SDGs). FDI represents one of the greatest sources of international capital flows to developing countries. It is a relatively stable source of private international investment, as compared to portfolio investment. FDI reflects long-term investment decisions of firms seeking to bolster existing – or to establish new – productive capacity in international markets. As such, it is often considered to be conducive to sustainable development. The Addis Ababa Action Agenda (AAAA), which provides a global framework for financing the 2030 Agenda, recognises that FDI flows and knowledge spill-overs from FDI, enabled through appropriate public policies, are key for achieving the SDGs.

Development co-operation is often essential to attract FDI in developing countries. Countries where the needs are the greatest often face a combination of barriers to investment and actual or perceived risks making it more difficult for the private sector to invest. Development co-operation can help lower these barriers, for example by offering access to de-risking instruments such as blended finance, including loans or guarantees offered at concessional or competitive terms to unlock private finance. Donors also play an important role in supporting governments’ efforts to enhance the attractiveness of developing countries as investment destinations. In recent years, increased pressures on public finance and efforts to narrow the SDG financing gap have placed FDI and mobilisation of private sector resources at the centre of development co-operation efforts.

Beyond the quantities of FDI, its qualities also matter. FDI can play a crucial role in making progress toward the SDGs by advancing decarbonisation, increasing innovation, creating quality jobs, developing human capital, promoting gender equality. Realising the potential benefits of FDI, however, is not a foregone conclusion. Among FDI-receiving countries, some have benefited more than others and, within countries, some segments of the population have lagged behind. Efforts to mobilise investment should therefore be aligned with concerns on qualities and impacts of investment, including progress toward the SDGs. Enhanced collaboration between governments, private actors and the development co-operation community on FDI qualities can help mobilise FDI while aligning priorities, policy objectives and practices with the SDGs.

The Recommendation on Foreign Direct Investment Qualities for Sustainable Development (the Recommendation), together with the OECD FDI Qualities Policy Toolkit (the Policy Toolkit), as well as this FDI Qualities Guide for Development Co-operation (the Guide) – provide a framework to enhance the contribution of FDI to sustainable development, and strengthen collaboration between partner countries and the development co-operation community. The Policy Toolkit provides advice on how governments can enhance the impact of FDI on the SDGs, particularly in the areas of productivity and innovation; job quality and skills; gender equality; and decarbonisation. It outlines a structured process for reviewing policies and institutions underpinning FDI Qualities. With this Guide, the Recommendation and the Policy Toolkit will be complemented by a dedicated component providing guidance to development partners, which can serve as a framework for governments and development co-operation actors willing to collaborate in this agenda.

Development co-operation actors have various options at their disposal to leverage FDI for sustainable development. For example, they can work with partner countries to improve the enabling environment for sustainable investment through support for policy reforms and implementation; or, they can collaborate with businesses themselves – both foreign multinational enterprises (MNEs) and domestic firms – to incentivise investments in sectors and activities with high sustainable impact potential, or to influence the behaviour of investors. While donors have extensive experience providing support in each of these areas, FDI-related development co-operation programmes rarely integrate these different options into comprehensive strategies with a deliberate objective to improve the positive effects of FDI on sustainable development. Furthermore, in specific country contexts, coordination on the topic within the development co-operation community tends to be limited. As a result, development co-operation assistance on investment and sustainable development tends to be fragmented, with risks of duplication, loss of opportunities and misalignment with specific country needs.

A more systematic approach to leveraging FDI for sustainable development can make development co-operation efforts more effective and maximise the impact of investment on the SDGs. Identifying the different mechanisms through which development co-operation actors can enhance FDI impacts is an important starting point to define how tools and limited development co-operation resources can be used effectively. Donors and partners can also reinforce coordination with governments, stakeholders and the development co-operation community to ensure alignment with national priorities, as well as consistency and complementarity of development co-operation interventions. Mapping existing interventions can support greater coordination and help identify potential gaps and opportunities to replicate or scale up relevant interventions. Across and throughout interventions targeting the investment climate and spill-over effects, ensuring consultations and fostering partnerships with a broad range of stakeholders, including policy makers, the private sector, civil society and trade unions is essential at all stages of programmes and project cycles.