Best Practices in Investment for Development
How to attract and benefit from FDI in small countries: Lessons from Estonia and Jamaica

Small countries – defined in this study as those with a population of less than 3 million – face particular challenges in attracting foreign direct investment (FDI), and in maximizing its benefits for economic development.

This study selects two small economies that have demonstrated success over the last two decades in overcoming the constraints of size, thus achieving a strong record of FDI attraction and associated benefits.

Since 1990, Estonia and Jamaica have managed to outperform many other small countries in attracting foreign investors. At the end of 2008, FDI stock as a share of gross domestic product (GDP) was close to 70 per cent in the case of Estonia and 72 per cent for Jamaica, well above the equivalent level for small developed countries (with which Estonia is compared) and small developing countries (with respect to Jamaica) (figures I.1 and I.2). The large flows of FDI have provided direct and indirect economic benefits to both countries.

The objectives of this study are to compare and contrast: first, Estonia’s and Jamaica’s approach to setting objectives relating to inward FDI; second, the methods in the form of policy instruments used to achieve these objectives; and third, the results and impact. This study draws out the characteristics of policies that illustrate best practices, and identifies policies that were not as effective, with the aim of distilling policy lessons for small countries in attracting and benefiting from FDI.

Estonia and Jamaica are interesting cases to compare because of their different policy approaches. Jamaica’s emphasis on State planning contrasts with Estonia’s pro-market reform strategy. Thus, this study does not seek to identify which approach is best for small countries in all circumstances, but more about how to adapt general policy lessons to unique national contexts.

Neither Estonia nor Jamaica fully anticipated the supply-side impact deriving from their successful FDI attraction. Other small countries can draw important lessons from this when implementing policies to attract FDI. For instance, one of the key messages in this study is the importance of assessing early the bottlenecks in terms of infrastructure and skilled labour that are likely to arise quickly with important FDI inflows. By evaluating policy options and designing appropriate policies to early address these bottlenecks, a country could significantly increase the positive contributions FDI can make to its economy and avoid undesirable negative consequences. Action is also needed when privatization programmes to improve infrastructure can result in a concentration of market power that requires effective public oversight. Furthermore, governments need to consider ways to support local enterprises in developing the capacity needed to establish linkages with TNC affiliates in order to move beyond immediate direct effects and fully tap the indirect benefits of FDI.