FIGURE A.2 Market,
Government, and Firm-Level Failures in IFC Investment Projects MARKET FAILURES IDENTIFIED IN IFC PROJECTS (n = 249) Supply side failures Risk aversion
12 3
Lack of competition
12
Informational asymmetry Externalities
10 2 61
Credit market imperfections
0% 10% 20% 30% 40% 50% 60% 70% SOURCE:
IEG.
The Multilateral Investment Guarantee Agency (MIGA), like IFC, aims to fix market and government failures that restrict the flow of foreign direct investment (FDI) to developing countries. FDI is viewed as an important channel for transfer of technology and as a major source of innovation in developing countries. Indeed, MIGA’s Articles of Agreement stipulate that MIGA’s key mandate is to support the flow of capital and technology to developing countries. By the nature of its mission, MIGA’s projects aim to ameliorate market failures associated with the lack of a private source of political risk insurance. Underlying the need for political risk insurance are also government failures such as governments’ inability to precommit to refrain from certain actions such as currency transfer restrictions, expropriation and breach of contract etc. that are related to political risks. Studies have found that a major concern for foreign investors is the protection of their intellectual property rights. Such concerns often result in low quality FDI or no FDI to developing countries (Smarzynska 2002). The political risk insurance industry (including MIGA) does not currently offer products that address this risk although some efforts are under way in the industry to develop it (Bullitt and Lagomarsino 2012).
124
World Bank Group Support for Innovation and Entrepreneurship