Business environment and investment potentials in selected Pacific island countries

Abstract

Recent literature on foreign direct investment (FDI) indicates increasing levels of FDI inflows can benefit the recipient countries such as through the absorption of domestic labour, transfer of useful technology and improved long-term growth. This phenomenon is noticeable in the Pacific Island countries in recent times. Official statistics on FDI in the Pacific Island countries reveals an increasing level of inflows particularly in the post-2005 period. A contributory factor to this trend is likely to be an improved business environment, amongst others. Long-term Investors usually give priority to choosing investment locations where ease of doing business favours their investment objectives. This study provides an assessment of Pacific Island countries business environment in terms of attracting foreign direct investment (FDI). Several measures of business indicators for the period 2003-2011 are used to assess the attractiveness of the Pacific Island countries business environment. Numerical data for the period 2003-2011 on several business indicators from the World Bank: starting a business, building a warehouse, enforcing contracts, registering a property, paying taxes, trading across borders, and investor protection are chosen in order to qualitatively assess the achievements in the business environment. This study also attempts to empirically ascertain if the business environment matters for FDI inflows on the basis of Dunning’s (1988) theoretical framework. The estimation phase pools the data across nine Pacific Island countries. The estimation framework based on panel data estimation methodology is formulated so that key influences on FDI are unfolded. Our findings show that Pacific Island countries have a business environment that is much better than the average for the low and middle-income category of countries but falls short to that of New Zealand. Our analysis reveal some significant achievements in various countries. For example, the cost of business start-up procedures is many times lower in Samoa than those of the other Pacific Island countries and that Kiribati, Samoa, Solomon Islands and Vanuatu made the most significant progress in terms of reducing their cost of business start-up procedures. The study also provides empirical support that the time required to resolve insolvency; the time required to build a warehouse; and the strength of legal rights are important determinants of FDI. The implication of this study is that policy makers should formulate strategies to facilitate several improvements in the business environment so as to continue attracting investments from abroad. The reform of the business environment can deliver positive payoffs in the long-run.