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Government policies are critical for trade and investment, here's how.

Jan 18, 2021
2 min read
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Government policies are critical for trade and investment, here's how.

Government policies and programs can both, directly and indirectly, affect trade and investment. This is why creating an enabling environment is crucial, especially since private sectors like MSMEs are essential to the growth and development of any economy.

Government authorities have significant influence over the wellbeing of a business environment because they can stimulate innovation and attract investment by increasing productivity and competitiveness, or they can make it difficult for firms to operate and grow. According to the World Bank, although the private sector creates jobs and drives economic growth, conditions set by the government through its policies, programs, and regulations can make or mar economic development.

Recently, there has been a trend to encourage trade and investment in many countries. This has led to policy reforms and the creation of special initiatives, such as free trade zones, business incubators, training, and accelerator programs for SMEs. However, as useful as these initiatives can be, the government must create a conducive business environment first before developing policies and programs.

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The global economy is more integrated now than ever. Thus, attracting investments has become highly competitive, so the need for governments to improve their policies to make doing business easier is now paramount. Since poor business environments can reduce the ability of firms to compete and expand, governments should see the business environment as the engine for inclusive growth, providing jobs, services, products, and overall quality of life for their people. To create a business environment that is conducive for the facilitation of trade and direct investments, governments should pursue these strategies:

  1. Open markets. Provide open and dependable conditions for businesses, such as access to imports, relatively flexible labor markets, and protection of intellectual property rights.
  2. Invest in quality infrastructures like sufficient transport facilities (airports, railroads, and ports), adequate and reliable supply of energy, and the use of technology.
  3. Encourage first-time foreign direct investors. Foreign firms that are not already part of an extensive network of subsidiaries are likely to accept linkages to domestic suppliers.
  4. Provide access to credit facilities. Setting up a business-friendly financial system helps firms to respond to challenges and impulses from foreign entrants and to grow and prosper.
  5. Organize Export Processing Zones (EPZs). Set up an industrial zone for local suppliers in locations close to formal EPZs or as a legal status to allow foreign-domestic linkages.

Going this route will help create a better business environment and improve international trade and investment. In turn, this will boost international trade, influence economic growth, and create more opportunities for people.

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