A partnership with academia

Building knowledge for trade and development

Vi Digital Library - Text Preview

Best Practices in Investment for Development - Case Studies in FDI (Estonia and Jamaica)

Case study by UNCTAD, 2011

Download original document (English)

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.

Investment Advisory Series
Series B, number 6

Best Practices in Investment
for Development

How to attract and benefit from FDI in small countries
Lessons from Estonia and Jamaica

United Nations Conference on Trade and Development





How to Attract and Benefit from FDI
in Small Countries:

Lessons from Estonia and Jamaica

New York and Geneva, 2011

ii How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B


As the focal point in the United Nations system for
investment within its mandate on trade and development, and
building on three and a half decades of experience in this area,
UNCTAD, through the Division on Investment and Enterprise
(DIAE), promotes understanding of key issues related to foreign
direct investment (FDI) and enterprise development. DIAE also
assists developing countries in enhancing their productive capacities
and international competitiveness through the integrated treatment
of investment and enterprise development.

The term “country” as used in this publication also refers, as
appropriate, to territories or areas. The designations employed and
the presentation of the material do not imply the expression of any
opinion whatsoever on the part of the Secretariat of the United
Nations concerning the legal status of any country, territory, city or
area, or of its authorities, or concerning the delimitation of its
frontiers or boundaries. In addition, the designations of country
groups are intended solely for statistical or analytical convenience
and do not necessarily express a judgement about the stage of
development reached by a particular country or area in the
development process.

The following symbols have been used in the tables:

Two dots (..) indicate that data are not available or not
separately reported. Rows in tables have been omitted in
those cases where no data are available for any of the
elements in the row.
A dash (-) indicates that the item is equal to zero or its value
is negligible.
A blank in a table indicates that the item is not applicable.


UNCTAD Investment Advisory Series B

A slash (/) between dates representing years – for example,
2004/05, indicates a financial year.
Use of a dash (–) between dates representing years – for
example 2004–2005 signifies the full period involved,
including the beginning and end years.
Reference to the “dollars” ($) means United States dollars,
unless otherwise indicated.
Annual rates of growth or change, unless otherwise stated,
refer to annual compound rates.
Details and percentages in tables do not necessarily add to
totals because of rounding.

The material contained in this publication may be freely
quoted or reprinted with appropriate acknowledgement. A copy of
the publication containing the quotation or reprint should be sent by
post to the Chief, Investment Promotion Section, DIAE, UNCTAD,
Palais des Nations, Room E-10078, CH-1211 Geneva, Switzerland;
by fax to 41 22 917 0197; or by e-mail to ips@unctad.org.
Publications are available on the UNCTAD website at


Sales No. 10.II.D.

ISBN 978-92-1-112794-2

Copyright © United Nations, 2011
All rights reserved

Printed in Switzerland

iv How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B


The Investment Advisory Series provides practical advice
and case studies of best policy practice for attracting and benefiting
from foreign direct investment (FDI), in line with national
development strategies. The series draws on the experiences gained
in, and lessons learned through, UNCTAD’s capacity-building and
institution-building work in developing countries and countries with
economies in transition.

Series A deals with issues related to investment promotion
and facilitation and to the work of investment promotion agencies
(IPAs) and other institutions that promote FDI and provide
information and services to investors. The publications are intended
to be pragmatic, with a how-to focus, and they include toolkits and
handbooks. The prime target audience for series A is practitioners in
the field of investment promotion and facilitation, mainly in IPAs.

Series B focuses on case studies of best practices in policy
and strategic matters related to FDI and development arising from
existing and emerging challenges. The primary target audience for
series B is policymakers in the field of investment. Other target
audiences include civil society, the private sector and international
organizations. Series B was launched in response to a call at the
2007 Heiligendamm G-8 Summit for UNCTAD and other
international organizations to undertake case studies in making FDI
work for development. It analyses practices adopted in selected
countries in which investment has contributed to development, with
the aim of disseminating best practice experiences to developing
countries and countries with economies in transition. The analysis
forms the basis of a new technical assistance work programme
aimed at helping countries to adopt and adapt best practices in the
area of investment policies.


UNCTAD Investment Advisory Series B

For Series B, UNCTAD’s approach is to undertake case
studies of a pair of developed and developing or transitional
economies that exhibit elements of best practices in a selected issue.
Country selection follows a standard methodology, based primarily
on the significant presence of FDI and resulting positive outcomes.

The Investment Advisory Series is prepared by a group of
UNCTAD staff and consultants in the Investment Policies Branch,
under the guidance of Joerg Weber and Chantal Dupasquier. This
study of the Series B was prepared by Stephen Young, Marek Tiits,
Noel Watson and Rory Allan. Fact-finding missions were
undertaken in Estonia and Jamaica in late 2007 and early 2008. The
report was finalized by John Kline, Ioanna Liouka and Cam Vidler.
Contributions and comments were received from Torbjörn
Fredriksson, Thomas Westcott, Hans Baumgarten and Antje
Watermann. The report has also benefited from views of current and
former Government officials, the domestic and foreign private
sector and academics. The programme receives financial support
from the Government of Germany.

Geneva, July 2011

vi How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B


NOTE ............................................................................................... ii
ABBREVIATIONS ...................................................................... viii
I. INTRODUCTION ....................................................................1
II. POLICIES AND METHODS ..................................................7
A. Overview of Estonia and Jamaica ..............................................7
B. Attracting FDI to small economies...........................................16
C. Maintaining FDI inflows ..........................................................30
D. Maximizing contributions from FDI ........................................37

COUNTRIES ..........................................................................63
IV. CONCLUSION .......................................................................83
INVESTMENT.............................................................................. 91
QUESTIONAIRRE....................................................................... 99


UNCTAD Investment Advisory Series B


Box II.1. Incentives in the tourism sector in Jamaica ...............23
Box II.2. Shifting from apparel to ICT....................................42
Box II.3. Size matters in tourism............................................46
Box II.4. Hansabank and the Swedbank Group........................50
Box II.5. FDI in Jamaican bauxite ..........................................52
Box II.6. Telecom liberalization and TNC upgrading...............54
Box II.7. Example of an Estonia-founded firm that

internationalized .....................................................57


Figure I.1. Estonia - FDI inflows, outflows and inward
FDI stock as % of GDP .............................................2

Figure I.2. Jamaica - FDI inflows, outflows and inward
FDI stock as % of GDP .............................................3

Figure II.1. Estonia - FDI inflows by region of origin..................11
Figure II.2. Sectoral distribution of inward FDI in Estonia .......... 12
Figure II.3. Jamaica – FDI inflows by region of origin ................14
Figure II.4. Sectoral distribution of inward FDI in Jamaica ...........15
Figure II.5. Estonia’s goods exports by region of destination ....... 28
Figure II.6. Jamaica’s goods exports by region of destination ......30
Figure II.7. Estonia’s export structure ............................................39


Table II.1. Estonia’s and Jamaica’s Percentile Rank on
Governance Indicators ................................................ 21

Table II.2. Education in Estonia ................................................... 31
Table II.3. Outsourcing Companies in Jamaica............................ 44
Table II.4. Ownership structure in Jamaica’s bauxite industry .... 53

viii How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B


BCDP Bauxite Community Development Programme
BIT bilateral investment treaty
BPO business process outsourcing
CARICOM Caribbean Community
CEE Central and Eastern Europe
CET common external tariff
CIS Commonwealth of Independent States
EU European Union
FDI foreign direct investment
FTA free trade agreement
FZ free zone
GDP gross domestic product
ICT information and communication technology
IDB Inter-American Development Bank
IMF International Monetary Fund
IPA investment promotion agency
IPR intellectual property rights
JBI Jamaica Bauxite Institute
JCCP Jamaica Cluster Competitiveness Project
JTI Jamaica Trade and Invest
M&A merger and acquisition
MFA Multi-Fibre Arrangement
NAFTA North American Free Trade Agreement
NIP National Industrial Policy (Jamaica)
PSDP Private Sector Development Programme
R&D research and development
RHQ Regional Headquarters
SME small and medium-sized enterprise
TNC transnational corporation
UNESCO United Nations Educational, Scientific and Cultural

USITC United States International Trade Commission
WTO World Trade Organization


UNCTAD Investment Advisory Series B

Estonia Jamaica


Estonia Jamaica

1995-2000 2001-2006 2007-2010 1995-2000 2001-2006 2007-2010

Population (millions)* 1.37 1.34 1.31 2.57 2.68 2.70

Annual GDP growth (%) 5.2 8.3 -2.9 -0.2 1.7 1.6

GDP per capita ($)* 4106.7 12232.5 14661.3 3485.4 4468.6 5097.2

GDP by sector (%)

Services 57.6 59.6 68.8 62.0 64.8 64.6

Industry 26.5 25.5 28.7 24.2 22.0 29.7

Agriculture 4.7 3.3 2.5 7.2 5.4 5.7

FDI inflows (annual
average) ($ million) 315.2 1240.3 1958.3 316.0 663.3 761.25

FDI outflows (annual
average) ($ million) 55.3 425.9 1135.1 77.9 87.6 79.7

FDI inflows ( % of GDP) 6.1 11.4 9.4 3.9 6.5 5.7

FDI inflows (% gross
fixed capital formation) 22.5 36.4 35.5 16.3 24.1 25.8

Exports of goods and
services (% GDP) 72.5 76.4 75.2 40.5 36.5 39.2

Imports of goods and
services (% GDP) 80.3 84.3 76.6 49.3 52.9 66.3

Source: UNCTAD, FDI/TNC database and GlobStat database.
* Data are for 2000, 2006 and 2010 only.


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.

2 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Figure I.1. Estonia – FDI inflows, outflows and inward FDI
stock as % of GDP




























1 000

1 500

2 000

2 500

3 000

3 500

Estonia Inward FDI Stock (%GDP)
Small Developed Economies Inward FDI Stock (%GDP)
FDI Inflows ($ million)
FDI Outflows ($ million)

Source: UNCTAD, FDI/TNC database.

Challenges faced by small economies

There are 67 small developing and transitional economies
with less than 3 million people. These countries face three main
challenges with respect to attracting and benefiting from FDI. The
initial challenge, from the demand side, is to overcome the small
domestic market and limited purchasing power that may discourage
certain market-seeking FDI. Solutions to this include emphasizing
other features of the economy, such as natural resources, human
skills or geographic location. Market size can also be expanded
through policies that seek to increase access to foreign export
markets. Estonia and Jamaica, through a combination of these tools,
have managed to attract remarkably high levels of FDI.

Chapter I 3

UNCTAD Investment Advisory Series B

Figure I.2. Jamaica – FDI inflows, outflows and inward FDI
stock as % of GDP





























1 000

Jamaica Inward FDI Stock (%GDP)
Small Developing Economies Inward FDI Stock (%GDP)
FDI Inflows ($ million)
FDI Outflows ($ million)

Source: UNCTAD, FDI/TNC database.

The second challenge is on the supply side and concerns the
pressures associated with significant FDI inflows into small
markets. Labour, skills and infrastructure shortages must be
addressed in order to maintain investment attractiveness. An
important finding identified in the case studies was that both Estonia
and Jamaica did not identify and anticipate some supply-side
challenges, nor did they necessarily address these issues in an
optimal way. Consequently, while the case studies demonstrate
model practices in many areas, important lessons are also derived
from policy shortcomings.

Third is the challenge of designing policies that maximize
the contributions of FDI to economic growth. Conventionally, FDI
brings with it benefits including capital, employment and

4 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

technology. This commonly leads to the introduction of new
management practices, improvements in product and services
quality, cost and innovation, and leads to positive impacts on
productivity and wage levels. These can be categorized as either
direct or indirect contributions.

Direct contributions refer to (a) FDI effects on capital
formation; (b) trade and the balance of payments; (c) employment
and human resource development; (d) technology and innovation;
and (e) market structure and expansion. On the other hand, small
countries must be aware of the potential for dominant foreign
enterprises to negatively affect the balance of payments, “crowd-
out” local firms, or engage in anti-competitive behaviour. In their
own right, Estonia and Jamaica have managed to secure significant
direct benefits from FDI in their economies, although they have not
entirely avoided the problems associated with large-scale FDI
projects in such small markets.

With respect to indirect contributions of FDI, these can
often be more important in the long run. The indirect contributions
of FDI to economic growth relate to benefits in the form of
spillovers due to close interaction with the local economy. It is in
the interest of host countries to encourage foreign affiliates to embed
themselves in the local economy and to increase, upgrade, and
diversify their operations, including by using the host country as a
base for operations in other countries. While these developments are
essential for sustaining the competitiveness of the affiliate within the
transnational corporation (TNC) group, they make spillovers more
likely and are thus crucial to continuing productivity growth and
innovation in the host country, and to moving local business activity
up the value chain. A key objective is for small economies to
progress to what can be described as a “second generation” growth
phase, where domestic firms and foreign affiliates generate outward
FDI to expand into other markets. It is difficult to assess the extent
to which Estonia and Jamaica have benefited from indirect effects.

Chapter I 5

UNCTAD Investment Advisory Series B

Although there are strong examples of their occurrence in both
cases, there is also evidence of missed opportunities.

In sum, policies to create a positive investment climate for
attracting FDI per se are likely to generate certain direct
contributions to economic development. However, other dimensions
of Government policy have an important role in maximizing the
contributions from FDI, especially those of an indirect nature. The
following case studies reflect the experiences of Estonia and
Jamaica in addressing challenges relating to both FDI attractions
and contributions.


A. Overview of Estonia and Jamaica

Estonia became independent in 1991 following the break-up
of the Soviet Union. It experienced considerable uncertainty and
volatility in the immediate aftermath of the break-up and embarked
on policy reforms in 1993. Perhaps taking advantage of the
opportunity presented by this disruption, Estonia achieved almost
complete investment and trade liberalization very quickly after
independence. In Jamaica, liberalization began in the 1980s but
took place much more slowly against the background of that
country’s foray into democratic socialism in the 1970s. Jamaica also
undertook significant reforms in the early 1990s with substantive
trade reform in 1990–1991, and the removal of exchange controls
and the adoption of a floating currency in 1991.

Estonia was under the rule of neighbouring powers for

much of the period since the Middle Ages, with brief periods of
independence. Following the end of Soviet control in 1991, Estonia
experienced a severe transition crisis leading to a 40–50 per cent
decline in GDP. It responded with a strong and continuing pro-
market reform agenda, supported by a bipartisan political consensus.
The rapid reform process involved early price liberalization, full
currency convertibility, a legal requirement for a balanced budget,
large-scale privatization targeting foreign investors, low taxation
and an emphasis on high-quality economic governance.

Rapid economic growth followed the stabilization of the
economic environment in the mid–1990s and, by 2002, Estonia
regained its 1989 level of GDP per capita. Economic growth
continued at a remarkably high rate for most of the decade: real
GDP growth was 7–8 per cent for 2001–2004, 10–11 per cent in
2005 and 2006, then slowing to 6.3 per cent in 2007 before sliding
into recession. Exports also grew strongly between 1993 and 2008.
Estonia has been committed to prudent macroeconomic policies,

8 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

regional integration and liberal economic institutions, joining the
World Trade Organization (WTO) in November 1999 and becoming
a member of the European Union (EU) in 2004.

Estonia was quickest among new European Union members
to meet the EU’s financial convergence criteria. However, the last
decade of remarkable growth also led to rapid wage increases,
eroding labour cost competitiveness, and to inflation above the
threshold set under the EU Maastricht Treaty for the adoption of the
euro. Plans to join the Euro Zone within the European Union,
initially scheduled for 2006–2007, were delayed until at least 2011.
The recent financial crisis has further complicated these plans as
Estonia’s economy contracted by 3.6 per cent in 2008 and around 13
per cent in 2009. However, the country has maintained a responsible
budgetary policy, with a public sector deficit of about 4 per cent of
GDP, and the recession appeared to be easing as of late 2009.

Jamaica was colonized by Spain and subsequently the
United Kingdom, before becoming independent in 1962. Since then,
there has been a well-established parliamentary democracy and
relative political stability. The post-war boom years of the 1950s
and 1960s represented a period of liberal trade and industrial
development. In 1972, the new Government took a different
approach, promoting self-sufficiency, import substitution and
nationalization. The country’s experiment with democratic socialism
was associated with capital flight, a large exodus of skilled
Jamaicans and a decline in tourism. Beginning in the early 1980s,
there was a return to a generally liberal economic policy and an
emphasis on policy continuity despite changes in Government.

Trade liberalization was instituted following a World Bank
Structural Adjustment Agreement in 1983. This led to the removal
of all quantitative restrictions and licensing requirements for imports
and exports in 1991, as well as tariff reforms. As a result, external
market liberalization took place rapidly in the years between 1989

Chapter II 9

UNCTAD Investment Advisory Series B

and 1992, with the removal of exchange controls and the adoption of
a floating currency (managed float) in 1991. Jamaica was one of the
founding members of the Caribbean Community (CARICOM) in
1973 and joined WTO in March 1995. Privatization has taken place
over an extended period, and has often involved foreign investors.
Between 1987 and 1990, 40 per cent of FDI inflows were due to the
sale of State assets, primarily in the hotel sector, which had been
largely nationalized in the late 1970s. In addition, there was partial
privatization of some banks in the late 1990s and the Government-
owned cement company was privatized in 1999. Some infrastructure
privatizations to foreign investors have also occurred since then.

Economic growth, however, has been held back by a
continuing public debt problem and fiscal deterioration, as well as
low productivity in the manufacturing and services sectors. A
financial sector crisis in the mid-1990s was a major cause of the
huge deficit in public finances, which resulted in national
Government debt reaching as high as 135 per cent of GDP. This
debt load continues to constrain the Government’s policy options.
The recent global recession has harmed Jamaica’s economy,
primarily through a decrease in tourism, reduction in remittances, as
well as lower demand for bauxite exports. Real GDP contracted by
1.2 per cent in 2008 and by more than 2 per cent in 2009. The
resulting stress on the Government budget exacerbated Jamaica’s
debt problems, and the country was approved for an International
Monetary Fund (IMF) loan of $1.27 billion in February 2010.

External economic relations and FDI
Following the break-up of the Soviet Union, Estonia

pursued rapid integration into global trade and investment flows,
beginning first at the regional level. Estonia is one of three Baltic
States (the others being Latvia and Lithuania) and has long-standing
links with the nearby Nordic countries (Denmark, Finland, Norway
and Sweden). Nordic countries together have a population of 25
million with similar historical backgrounds and political systems.

10 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

The seven countries together make up the Baltic Sea region.
Although Estonia’s external economic relations have largely been
limited to this area, it has more recently expanded its relationships
with other continental EU countries. Internationally integrated
sectors of the Estonian economy include real estate, wholesale and
retail trade, and especially banking and manufacturing, where
foreign companies are dominant.

FDI flows: Since the 1970s, Estonian enterprises – although
then part of the Soviet Union – have been able to export directly to
foreign markets, and from the 1980s they were permitted to form
joint ventures with Western firms. Estonia’s Nordic neighbours
were an obvious target for both FDI inflows and trade links, and
these economic relationships became dominant in the years
following independence. Since the early 1990s, and especially as of
the 2000s, Estonia has seen a significant rise in inward FDI (figure
I.1). Annual outward FDI flows over these periods have been
modest, but began to expand more rapidly from 2005-2008. In terms
of source regions, Nordic countries supplied 76 per cent of Estonia’s
FDI inflows between 1994 and 2008, with the Baltic States adding
another one per cent (figure II.1). Other EU countries accounted for
11 per cent, having significantly increased their share from only 3
per cent in 2006.

FDI characteristics: Since liberalization in the early 1990s,
inflows of FDI to Estonia have primarily gone to the financial
sector, although other important sectors in terms of capital value
include wholesale and retail trade, real estate activities,
manufacturing, and transportation services. The manufacturing
sector drew a significant share of early FDI (figure II.2), and was
often associated with the country’s privatization programme, which
had largely ended by 1996–1997. Wholesale and retail trade was
also an important sector during these years, as the economy
stabilized and purchasing power rose. A banking crisis in 1998 led

Chapter II 11

UNCTAD Investment Advisory Series B

to a string of domestic mergers and acquisitions (M&As), with some
of the resulting larger banks purchased by foreign investors.

Figure II.1. Estonia – FDI inflows by region of origin (1994–


Other EU



Source: Bank of Estonia.

In the early 2000s, FDI inflows in wholesale and retail
trade, as well as real estate activities, became increasingly
important. From 2003 onwards, Estonia gained from a regional
relocation of manufacturing production, but increased costs and
labour shortages have limited this trend. As of 2005, there have been
massive inflows of financial FDI, mostly due to the expansion of
foreign banks that entered the market in the late 1990s. Since the
same year, more than two-thirds of Estonia’s inward FDI has been
in the financial services, real estate and business services sectors.
There have also been several major investments in transport, storage
and communication. In general, FDI in Estonia has proven quite
profitable, with reinvested earnings having constituted the majority
of inward FDI since 2002.

12 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B






l d




f i



I i











f E



Chapter II 13

UNCTAD Investment Advisory Series B

Interestingly, as with inward FDI, financial services, real
estate and business services are also very prominent in Estonia’s
outward FDI position. This similarity in inward and outward FDI
patterns is reflected in the close relationship between inward and
outward FDI at the company level. The top five companies in
Estonia (ranked according to their inward investment) recently
accounted for almost half of Estonia’s gross outward direct
investment position.1

Jamaica enjoys a strategic geographic position in close
proximity to large markets in the Americas, as well as to Europe via
the country’s colonial links with the United Kingdom. While
Jamaica also has a long tradition of emigration, this has been
exacerbated by economic stagnation and the domestic crime rate.
The World Bank estimates that remittances from Jamaicans abroad
grew to $2.18 billion by 2008, representing around 15 per cent of
GDP. The Jamaican diaspora represents a huge network, the benefits
of which extend well beyond remittances to include, for example,
services exports in tourism, sports and music. In most recent years,
the economy’s international integration is underpinned by tourism,
alumina and remittances, which dominate capital inflows and

FDI flows: Jamaica’s inward FDI flows were small until the
early 1990s, but since then have grown significantly (figure I.2).
The United States has been by far the largest source of Jamaica’s
inward FDI (accounting for nearly 80 per cent of inflows from 1991
to 2002) (figure II.3). The backdrop is, however, a poorly
performing economy with low growth and a weak manufacturing
sector. FDI outflows exceeded inflows in the early years of the
1980s, in part a continuation of the capital flight experienced in the
1970s. Subsequent modest outflows are primarily associated with
the internationalization of a number of competitive Jamaican-owned

14 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Figure II.3. Jamaica – FDI inflows by region of origin (1991-



Source: UNCTAD, WID.

FDI characteristics: Since as early as the 1960s, FDI
inflows to Jamaica have primarily gone into the mining (mostly
bauxite) and tourism industries. From 1998 to 2008, these industries
were the first and second largest recipients of FDI and, when
considered together with the growing information and
communication technology (ICT) sector, typically account for the
majority of Jamaica’s annual inflows (excluding retained earnings)
(figure II.4). Recent investments in mining have been associated
with the expansion of local processing capacity to refine bauxite into
alumina. The tourism sector has continued its role as a major
destination of FDI to Jamaica, much of which driven by investment
in large-scale hotels and all-inclusive resorts. An increasingly
important sector in recent years has been ICT, where foreign
investors have set up call centres and, more recently, software
development facilities. Moreover, several foreign investments have
been made in the telecommunications network. In recent years,
some limited FDI has also gone into agriculture and manufacturing
(especially in 2003 and 2005, for example), although these remain
small in relative terms.

Chapter II 15

UNCTAD Investment Advisory Series B






l d




f i



I i












f J


, (h










16 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Although reinvested earnings made up over a third of total FDI
inflows in the late 1990s, a dramatic increase in equity investments,
combined with consistent repatriation of profits, has since
significantly lowered the role of reinvested earnings, which made up
only 8 per cent of total inflows in 2008.

B. Attracting FDI to small economies

Small countries must carefully assess and leverage assets
that are most likely to attract inward FDI. Due to what was
conceptualized above as “demand” constraints, these countries often
cannot compete with large economies for many market-seeking or
scale-oriented foreign investments. However, with the right policies,
small countries can still capture investors’ interest. In addition to
standard determinants of investment attractiveness, these countries
need to focus on expanding market size through regional and
international arrangements. Another potential strategy is the
promotion of location-specific advantages, such as natural resources
abundance or tourism assets, or a set of fiscal incentives. This
section reviews policies pursued by Estonia and Jamaica with
respect to FDI policy, business climate, macroeconomic stability
and access to international markets.

FDI policy

In Estonia, FDI had a central role in the formulation of
Government objectives designed to stabilize and reorient the
economy following the country’s separation from the Soviet Union.
FDI was seen as important for the immediate objectives of earning
foreign currency for much needed imports, obtaining information on
foreign markets, compensating for the loss of the Soviet market,
finding new ways to utilize existing production potential and
gaining access to foreign technology. Privatization was a key
vehicle for channelling FDI inflows to meet these objectives. FDI
was an integral component of a liberal free market approach
implemented over a very short period of time, and was also seen as

Chapter II 17

UNCTAD Investment Advisory Series B

playing a key role in longer-term economic growth and

Equal treatment of foreign and domestic investors and
unrestricted repatriation of profits have been overarching principles
in Estonian policy. The 1991 Law on Foreign Investments was one
of the first pieces of legislation of the independent nation. It aimed
to reassure investors and create an attractive investment climate.
Since then, foreign investors have been free to invest in any areas of
business open to the private sector and take up to 100 per cent
ownership. Some earlier requirements for investment licensing have
been replaced by “activity” licensing, applied on a non-
discriminatory basis. National treatment has become such a
cornerstone of Estonia’s economic and political philosophy that the
law on foreign investments was repealed in 2001. Business
establishment measures are now dealt with by the Commercial Code
of 1995. In effect, Estonia has substantially reduced its legislative
capacity to restrict or apply conditions on FDI entry. Current
exceptions to national treatment relate only to real estate. Licences
are required in mining; energy, gas and water supply; railroad and
transport; waterways, ports and dams; and telecommunications.
These procedures are applied to foreign and national investors alike
on a non-discriminatory basis. Openness to FDI extends to
privatization, and only a small number of enterprises remain state-
owned: the main port, power plants, the postal system and the
national lottery.

Estonia has moved quickly to entrench international
standards of treatment and protection of FDI by signing bilateral
investment treaties (BITs) with its main partners early in the reform
process. Four years after independence, 16 BITs had been signed,
including with major future FDI source countries such as Sweden
(1992), Norway (1992) and Finland (1992). According to
UNCTAD, there were 23 BITs in force as of 2009.

18 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Jamaica has historically been open to FDI and has
integrated it into its greater economic policy objectives. However,
until the late 1980s, foreign investment was governed by a
somewhat restrictive regime. Major liberalization began to occur in
the late 1980s and early 1990s. The Foreign Exchange Control Act
was repealed in 1991, facilitating the repatriation of profits. Around
the same time, the list of “prohibited sectors” for foreign firms was
abolished, and investors were effectively granted national treatment.
Moreover, Jamaica began to aggressively pursue BITs, signing its
first one with the United Kingdom in 1987, followed up by another
eight by 1994. As of 2009, Jamaica was party to 16 BITs, including
with the United States, China, Germany and Netherlands, among

Foreign investment was also affected by the National
Industrial Policy (NIP), a major integrated policy programme
launched in 1996 (Government of Jamaica, 1996). The NIP’s focus
included investment in targeted areas of competitive advantage, a
push for expansion and diversification of exports, and an increase in
the overall rate of investment and savings. It identified growth
opportunities in natural resource–based primary products (e.g.
bauxite/alumina) and tourism, but in the longer term aimed to
diversify the economy into high-skill and high-productivity
activities. Five industrial clusters were targeted: tourism,
entertainment and sports; telecommunications and ICT; agriculture
and manufacturing; apparel and light manufacturing; and minerals
and chemicals. These sectors have been key destinations for FDI
inflows. Despite setbacks experienced by the programme,2 the basic
principles of an open market economy and of the need for a small
country like Jamaica to embrace globalization have subsequently
been shown to be an important legacy of the NIP.

In Estonia, there has been no formal targeting of FDI,
except for privatization of State-owned enterprises, which was an
important starting point in FDI attraction in the early 1990s. While

Chapter II 19

UNCTAD Investment Advisory Series B

the Ministry of Economic Affairs and Communications handled
early business contacts, Enterprise Estonia was established as a
separate body in 2000 to promote general business and regional
development. The Estonian Investment and Trade Agency operates
within Enterprise Estonia to promote trade and FDI. The agency
currently operates 10 small foreign offices to help overcome the
inevitable low profile of a small country in the investment
community. For FDI projects, the agency now offers assistance for
negotiations with other agencies and facilitates university linkages,
as well as cluster and supply-chain development at a post-
investment stage.

Jamaica, on the other hand, has a history of formally
promoting FDI, targeting sectors and granting investment
incentives. Jamaica Trade and Invest (JTI) has been the main
organization promoting and facilitating both investment and trade. It
currently employs around 80 people, of whom 15 work on FDI-
related activities. Overall, JTI handles around 35–40 per cent of
prospective foreign investment into Jamaica. Projects in bauxite,
airports and some tourism attractions are handled by other
Ministries. In addition, some investors can bypass both JTI and the
Ministries, seeking approval directly from the Prime Minister, while
other investors use the banks to handle investment facilitation. A
general criticism levelled at JTI has been the long timeframe for
investment approvals, variously quoted as between 6 and 12 months,
followed by calls for the establishment of a “one-stop shop” to
improve turnaround times. Major JTI successes in recent years relate
to the growth of FDI in tourism, particularly associated with a
number of major Spanish hotel projects and ICT investments
(principally call centres).

20 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Business climate

Providing an attractive operating environment for business
has been a foundation of Estonian policy since early on. Key
features have included (a) observance of private property rights and
intellectual property rights; (b) an independent judiciary; (c)
regulations and penalties to combat corruption; and (d) transparent
policies to foster competition, although instances of favouritism still
“are not uncommon”. Estonia’s 1993 competition law did not have
merger control provisions, but since 2001 it has been harmonized
with the EU legislation. After many organizational changes, a well-
staffed Competition Authority now oversees regulated industries. A
Financial Services Authority was also established in 2001 under the
auspices of the Central Bank to undertake financial supervision on
behalf of, but independent of, the Government. These initiatives are
especially important given that Estonia’s small market size presents
competition issues, particularly in areas such as banking, where a
small number of foreign-owned firms make up the vast majority of

Estonia’s efforts to develop a regulatory environment that
protects the public interest, while remaining conducive to business,
have been recognized by many international rankings on business
climate. For example, the country was ranked 35th out of 133
countries in the 2009–2010 World Economic Forum Global
Competitiveness Rankings, and 27th out of 180 countries in the 2009
Transparency International Corruption Perceptions Index. From
1996–2008, Estonia improved on nearly all of the World Bank
Governance Indicators (table II.1). Most recently, Estonia ranked
24th out of 183 economies in the World Bank’s “Doing Business
2010” listing. The range on specific business topics was large,
however, from ranking 161st on “employing workers” to ranking
third on “trading across borders”. This disparity reflects some
inflexibility in labour regulations, but great success in facilitating
trade relationships with regional and EU partners.

Chapter II 21

UNCTAD Investment Advisory Series B

Table II.1. Estonia’s and Jamaica’s Percentile Rank on
Governance Indicators

Estonia Jamaica
Governance indicator 1996 2008 1996 2008
Voice and accountability 75.6 83.2 69.9 66.3
Political stability 61.1 67.0 45.2 34.9
Government effectiveness 73.9 84.8 43.1 57.8
Regulatory quality 96.6 91.8 71.2 63.8
Rule of law 66.2 84.7 42.9 39.2
Control of corruption 55.8 79.2 38.8 35.7

Source: World Bank, Governance Matters VIII, 2009, Governance
Note: Indicates rank of Estonia and Jamaica among all countries in the

Unlike most other Central and Eastern European countries,
Estonia has not offered any incentives specific to foreign investors.
In 2000, however, a new tax regime was introduced which applies
zero corporate taxation until profits are distributed. Upon
distribution, the underlying profits are taxed at 21 per cent. This
provision offers a stimulus to investment and capital accumulation,
and likely accounts for the large share of retained earnings in total
FDI inflows. As a consequence, this approach may have encouraged
TNCs to use their affiliates in Estonia as a base for outward FDI.
Foreign affiliates’ profits made in Estonia would be free of tax if
invested abroad rather than distributed as dividends, which is helpful
in facilitating outward FDI through foreign affiliates in Estonia.
There are also four customs-free zones near Estonian ports and
inland, with duty-free status for imports and re-exports. Most of
these zones will not be allowed to function beyond March 2011.

Evaluations of the regulatory and business environment in
Jamaica show a mixed picture. Key challenges relate to governance,
crime and violence, and taxation. Governance problems lead to
lengthy and cumbersome procedures. One study indicated that

22 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

entrepreneurs have to make 72 payments and spend 414 hours to
pay taxes. Similarly, it takes 18 steps and 202 days to implement
business contracts, an issue which is paralleled in the lengthy period
required to facilitate FDI projects (World Bank, 2005b). Jamaica’s
ranking on some key World Bank Governance Indicators has
dropped since 1996, including on “regulatory quality” (table II.1).
Research for this study indicated some improvement in respect of
business establishment time and processes. The slow pace of
settlement through the judicial system was acknowledged, but the
independence of the judiciary had improved significantly.
Intellectual property rights (IPR) protection, although weak until
recently, is seen to have improved, partly due to domestic concerns
over protection of the country brand (particularly ownership of the
reggae music brand).

Problems of crime and violence are pervasive across the
Caribbean, with the murder rates and assaults well above world
average. A report by the World Bank and the United Nations Office
on Drugs and Crime (2007) estimated that reducing the region’s
murder rate by one-third could more than double the Caribbean’s
per capita economic growth rate. A different World Bank (2003)
report estimated that rampant crime costs Jamaica at least four per
cent of its GDP, including lost production, health expenses and
spending on security. The report goes on to note that the high crime
rate also encourages migration, especially among the more educated
and internationally mobile population.

The costs of crime are real for business. For exporting firms,
security costs may reach five per cent of sales. Small firms’ losses
from various forms of crime may be up to nine per cent of revenues
with an average of three to six per cent for firms in manufacturing
and distribution (World Bank, 2003). From an FDI perspective, the
issue goes beyond costs for established foreign investors. TNCs may
simply eliminate Jamaica as a potential location during their
screening process because of concerns about crime and violence.

Chapter II 23

UNCTAD Investment Advisory Series B

One response to these issues has been to carve out
investment packages that offer better conditions than the general
environment (JTI, 2007). This approach is evidenced in Jamaica’s
use of tax incentives and the creation of free zones with streamlined
procedures. Jamaica has applied a wide range of incentive schemes,
including tax concessions and duty-free access for imports of inputs
and capital goods. Some schemes are geared at promoting exports
(e.g. Export Industry Encouragement Act and Foreign Sales Act);
others apply to all industry (Modernization of Industry Programme);
while others are industry-specific (e.g. Bauxite Encouragement Act).
Box II.1 illustrates the Hotel Incentives Act that helps promote FDI
in the tourist industry.

Box II.1. Incentives in the tourism sector in Jamaica

Tourism is a critically important sector in Jamaica. As a labour-
intensive industry directly employing about 85,000 people (9 per cent of
the labour force) in a fragile economy, tourism has a significant role in
poverty alleviation; it is also a major source of foreign exchange, estimated
at $1 billion in 2000. The Caribbean is the most tourism-dependent region
in the world. Jamaica ranked fifth in number of arrivals in 2004 after the
Dominican Republic, Cuba, The Bahamas and Puerto Rico, or second
within CARICOM.

The strategy for tourism FDI as implemented by JTI focused on
hotels and attractions. The Hotel Incentives Act offers income tax and duty
concessions of up to 15 years for hotels with at least 350 bedrooms and 10
years for smaller hotels. An Attractions Package launched in 2003 provides
for the importation of specific items free of consumption tax and customs
duty for a period of five years, in addition to a five-year exemption from
corporate taxes. This package is designed to enhance tourist spending
within the country. The two incentive packages may be somewhat at odds
with each other, since the large hotel complexes are commonly “all
inclusive” with a single cost.


24 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Box II.1 (concluded)

There have been major successes in attracting very large Spanish
hotel complexes, a strategy pursued by JTI to diversify the tourism base
from United States visitors. The first of these investors was Riu Hotels in
2000 with over 400 bedrooms, followed by other Spanish hotel
investments. Significant FDI projects have also begun in the attractions
sector, such as the Dolphin Cove facility. The National Planning Summit
2007 proposed a grand plan for the Montego Bay area, envisioning the
creation of a business, shopping and entertainment playground for the

Source: World Bank, 2003; Clayton and Karagiannis, 2007; Government of
Jamaica et al., 2007.

Fiscal and export-based incentives are also offered to
export-oriented industries in the country’s free zones (FZ). Under
the Jamaican Free Zones Act of 1982, aside from duty-free
importation, the major incentives are tax holidays. Initially, a 100
per cent tax holiday was offered in perpetuity, but the tax break is
now only available until 2012. In 1996, the Act was amended so that
firms outside the FZ complex could benefit from a single entity FZ
status. Historically, garment manufacture was the main FZ activity,
but now the Cazoumar Zone, for example, specializes in ICT
operations. In addition to fiscal incentives, Jamaica also provides
loans with concessionary financing to investors.

As is common in many host countries, some local
companies feel that foreign investors are getting a better deal.
However, the guiding principle of the incentive regime is non-
discrimination between local and foreign investors, except in
offshore banking, which is reserved to 95 per cent foreign-owned
firms. Interviews revealed an acceptance of the inevitability of
incentives until other conditions in the country improve (e.g. crime
and the costs of protecting personnel and property). Several
interviewees commented that, in a small country such as Jamaica,

Chapter II 25

UNCTAD Investment Advisory Series B

“companies dictate the incentive package”, creating conditions of
“economic capture”. It was suggested that the incentive system was
probably outdated, and that an overhaul of the tax system would
provide better incentives to investors.3

Macroeconomic environment
Consistent with the country’s overall policy stance, Estonia

has emphasized basic macroeconomic stability. Inflation in the early
transition period has been brought under control. Government debt
has been negligible, primarily because maintaining a balanced
budget on an annual basis has been the norm since the early 1990s.
Despite a prudent approach to financial management, however, the
country recently encountered serious problems. The policy of
maintaining a fixed exchange rate pegged to the Euro kept interest
rates low despite fast income growth and rising inflation, decreasing
Estonia’s competitiveness. The trade deficit worsened from 10 to 18
per cent of GDP between 2005 and 2008.

To cover this deficit, loans were available on the private
capital market, largely through intra-group borrowing from foreign
parent banks of local branches. This trend weakened the net foreign
asset position of Estonian affiliates and increased external financial
stability risks. Loans denominated in foreign currencies exceeded 80
per cent of all private loans and were 95 per cent at flexible rates.
This financing permitted excessive domestic consumption, driven
primarily by a housing investment boom fuelled by high expected
income growth and accommodated by tax incentives and cheap
credit from foreign loans. When the global financial crisis hit, access
to capital dried up and domestic demand collapsed, throwing the
economy into recession. Still, Estonia’s responsible management of
fiscal policy maintained a high credit rating. In fact, the Government
announced in October 2009 that it would pay back early a Euro 50
million loan it had obtained from Swedbank in May. Improved
coordination in supervising cross-border financial groups among the
Nordic countries is also being explored.

26 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

In Jamaica, macroeconomic conditions have not been as
supportive of FDI attraction. Growth has been low in the period
under study (see key facts table). Inflation has been reduced, but has
often exceeded 10 per cent. The major problem has been and
remains the very high level of public debt, deriving partly from the
financial crisis of the late 1990s and the decision of the Jamaican
Government to prop up illiquid banks and provide an implicit 100
per cent protection to depositors. Public debt levels led to significant
declines in the manufacturing sector, both domestic- and foreign-
owned: high interest rates (derived from the high level of internally
funded Government debt) constrained domestic borrowing and led
to an appreciation of the real exchange rate and declines in both
manufacturing exports and manufacturing employment from the
mid-1990s (Bloom et al., 2001; World Bank, 2003).

According to World Bank figures, Jamaica’s public debt as
a share of GDP has been consistently above 100 per cent since 2001.
Consequently, high fiscal surpluses are required simply to balance
the budget and avoid increasing debt levels.4 Nearly 60 per cent of
the national budget currently goes to debt servicing and recurrent
expenditures, leaving little to fund social and physical infrastructure
needs. To compound the problems, public sector wages and salaries
presently amount to 10–12 per cent of GDP, which is higher than
many comparable countries in the Caribbean and Latin America.
The outcome has been a crowding out of capital expenditures which
declined substantially, thereby also hampering the Government’s
ability to invest in infrastructure and public goods (IDB, 2006).

The recent global economic crisis added further
complications, particularly when the United States recession led to a
decrease in demand, especially in the tourism sector, and reduced by
10–13 per cent Jamaica’s substantial remittances from overseas.
Recessionary conditions also decreased global demand and prices
for commodities, leading to the closure of several bauxite mines and
alumina refineries, further reducing Jamaica’s export, tax, and
foreign exchange earnings. As of late 2009, concerns over the

Chapter II 27

UNCTAD Investment Advisory Series B

Jamaican Government’s ability to meet its debt payments led major
rating agencies to downgrade the country’s sovereign credit rating.
The Government has since been approved for an IMF loan in order
to meet its obligations.

Externalization policy – liberalization and trade
With the reconstitution of the Republic of Estonia in 1991,

virtually the entire policy and legislative framework of the country
had to be re-created. There have been four prongs to external trade
and investment policy: unilateral – abolition of tariff and non-tariff
barriers; bilateral – trade and investment agreements with major
trading partners; regional – EU membership; and multilateral –
membership in WTO.

Estonia moved very rapidly to sign free trade agreements
(FTAs) with larger neighbours and with more advanced economies.
FTAs with Sweden and Norway were signed by 1993, and an
agreement with the European Union was signed in 1995. Estonia did
not seek to form a regional trade arrangement with the other Baltic
States, yet given Estonia’s ties in the Baltic Sea region, it was
inevitable that its policy would focus on this area. Other major trade
policy developments include membership in WTO in 1999, and
accession to the European Union in 2004.

FDI inflows into Estonia appear largely related to initial
trade integration with Nordic countries in the 1990s, as well as the
regionalization of financial and manufacturing industries in the
2000s. Since 1995, Estonia’s Nordic and Baltic neighbours have
been the destination for more than one half of Estonia’s goods
exports (figure II.5). This is unsurprising given the role of the
Nordic countries in supplying three quarters of Estonia’s FDI
inflows. The EU membership and the prospect of accession to the
euro zone have likely played a role in securing further inflows of
foreign capital to Estonia. This prospect provided investors with an
additional guarantee in terms of the future stability of the Estonian

28 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

economic environment and simplified customs procedures, thereby
speeding up trade with the other EU member States, which represent
20 per cent of Estonia’s goods exports. On the other hand, the effect
of EU membership on FDI inflows is difficult to distinguish from
the much broader trend towards global relocation of economic
activities (Copenhagen Economics, 2006). By 2005, around half of
Estonian composite exports to Finland, Sweden, Denmark and
Germany involved intra-industry trade, that is, the re-export of
imported raw materials and intermediate products after processing in
Estonia (Tiits, 2007).

Figure II.5. Estonia’s goods exports by region of destination



Other EU


Source: UNCTAD, WITS Database.

In Jamaica, external liberalization took place rapidly
between 1989 and 1992. Exchange controls were removed and the
currency floated in 1991. By contrast, the trade liberalization
process took nearly two decades up to membership of the WTO in
1995. Jamaica is now an open economy with low tariffs and
generally few barriers to trade (except in traditional agricultural

Chapter II 29

UNCTAD Investment Advisory Series B

As shown in figure II.6, almost two thirds of Jamaica’s
goods exports are split between the United States and EU markets,
with the remainder going to other regions. Jamaica was a
beneficiary of the United States Caribbean Basin Special Access
Programme for Apparel, which gave duty concessions for locally-
assembled garments of United States-made materials. While
important in the past, the signing of the North American Free Trade
Agreement (NAFTA) adversely affected exports of apparel from
Jamaica and the programme has become much less significant for
exports to the United States (USITC, 2007). Jamaica has historically
benefited from preferential access to European markets through the
Lomé Conventions and the more recent Cotonou Agreement,
particularly in various agricultural sectors.

By contrast, the CARICOM region absorbs only four per
cent of Jamaican exports. CARICOM was set up in 1973 to establish
a common external tariff (CET) on non-community imports,
alongside modest coordination initiatives.5 Despite the CET, rules
allow for “suspensions”, thereby maintaining fragmentation within a
small grouping in a global context. To date, the progress and
contribution of regional integration in the Caribbean has been slow
and limited. The market is still small, not only because of small
populations, but also limited purchasing power in some countries;
and large TNCs from CARICOM countries have outgrown the
Caribbean region. In general, regional integration to date has not
stimulated FDI because the overall market remains small and
fragmented, and thus access to the United States and EU markets
has been the cornerstone of Jamaica’s efforts to increase its effective
market size for foreign investors. Indeed, the reliance on foreign
markets by CARICOM is highlighted by the recent signing of an
economic partnership agreement between the regional institution
and the European Union.

30 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Figure II.6. Jamaica’s goods exports by region of destination





Source: UNCTAD, WITS Database.

C. Maintaining FDI inflows

Successfully attracting FDI in order to export to world
markets can quickly lead to supply-side constraints in a small
domestic economy. This effect may be manifested in labour and
skills shortages, as well as infrastructure bottlenecks. As illustrated
by the cases of Estonia and Jamaica, the speed and extent of these
constraints are difficult to anticipate and address in small countries.
Pro-active education, immigration and infrastructure policy are key
strategies to alleviate these limitations.

Labour and skills policy
Estonia’s earlier labour cost advantage, which may have

helped drive FDI in manufacturing in the early 2000s, has eroded in
face of annual wage increases of 10–15 per cent. Most FDI was
traditionally directed to the capital, Tallinn, where these increases
were most prominent. The ratio of labour costs to productivity in
Estonia is now similar to the average of the enlarged European
Union. Some efficiency-seeking FDI has thus started to shift to

Chapter II 31

UNCTAD Investment Advisory Series B

lower cost locations outside the country. The closure or relocation of
economic activities that are no longer cost competitive in Estonia
has begun triggering adjustments in the country’s economic

A survey of foreign investors undertaken by Enterprise
Estonia (2006) confirmed the problem of labour and skills. Investors
identified a lack of qualified labour as the number one problem, as
well as issues such as weaknesses in the continuing education
system, the quality of existing labour, and insufficient vocational
training. Although Estonia outperforms both the OECD and the
European Union on secondary and tertiary educational attainment
(table II.2), the total number of new graduates in 2007 in all fields
was only 12,612 according to UNESCO. Interviews revealed that
the lack of a critical mass of specialized skilled workers made it
difficult to attract large TNC outsourcing services in research and
development (R&D) and software design operations. Ultimately, the
limited pool of labour makes it difficult to develop highly
specialized skills sets (in one example, Estonian accountants tend to
provide both general and international tax advice). These skill
constraints have increasingly become a barrier to the attraction of
higher value-added FDI.

Table II.2. Education in Estonia

Population with at least
upper secondary
education (%)

Population with
tertiary education (%)

Denmark 75 32
Finland 81 36
Iceland 65 30
Norway 79 34
Sweden 85 31
Estonia 89 33
OECD average 70 28
EU 19 average 71 24
Source: OECD.
Note: Age group 25-64.

32 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Migration flows and policies in Estonia have not made up
for the gap between the supply of labour and skills and the demand
for these resources from foreign investors. According to UNCTAD,
net migration rates in Estonia were negative in the early and mid-
1990s, mostly due to emigration to the Russian Federation after the
fall of the Soviet Union. Since then, however, net migration rates for
2000–2010 (realized and projected) have been neutral or slightly
positive. In general, Estonia lacks a pro-active immigration policy
that could help address the shortage of labour and skills. There
appears to be a negative stance towards immigration, with lengthy
and complex procedures.

Estonia’s problems with labour supply may also be related
to regulatory barriers. As mentioned earlier, in 2009, the World
Bank ranked Estonia 161st with respect to the ease of “employing
workers” (World Bank, 2009). Identified problems include
significant limitations on the use of fixed-term contracts, several
restrictions on working hours as well as complications and costs
related to redundancies. These barriers to hiring and firing may
reduce the availability and mobility of Estonia’s existing labour
stock, and thus exacerbate the supply constraints facing foreign

Historically, Jamaica has made a strong commitment to
education but there is a mixed record on the availability of highly
skilled people. Public spending on education has remained relatively
low (four per cent of GDP in 2004 and seven per cent in 2007), yet
this remains above the average among Latin American and the
Caribbean countries (four per cent of GDP in 2004 and 2006).
Moreover, this spending does not seem to have proportionately
translated into a more educated population.

For example, enrolment at primary and secondary schools
has been relatively high according to World Bank figures, but there
are concerns about the quality of education as evidenced in

Chapter II 33

UNCTAD Investment Advisory Series B

consistently high illiteracy rates (20 per cent of the population in
1999. Although tertiary enrolment rates have been rising, they
continue to lag behind the regional average. The University of the
West Indies and the University of Technology have excellent
reputations, but there has been widespread criticism of the
performance of university graduates.6 At the micro-level, the latter is
reflected in concerns of ICT professionals about the qualifications of
university-trained programmers. Moreover, the lack of Spanish-
English bilingualism limits wider opportunities in the ICT sector.
Although job training is used to customize education and training to
sector and company requirements (Jamaica has a three per cent
payroll tax to fund such training), there are questions as to whether
it delivers commensurate benefits.

Overall, the quantity and quality of trained and trainable
labour acted as supply-side constraints on Jamaica’s competitive
position for FDI. Adding to the problem, Jamaica’s skill attraction
and retention policies have not been sufficient to stem net outward
migration. Since at least 1990, there has been a significant and
constant net outflow of labour (an average of 20,000 per year from
1990 to 2005), a large share of which are skilled workers, and there
are no signs of a reduction in the near future. Although remittances
make up for lost tax revenues, the outflow of skilled labour
continues to be a major drain on Jamaica’s small economy, thus
limiting its attractiveness as a destination for foreign investment.

Infrastructure policy
Estonia regained independence with an overall reasonable

standard of infrastructure, though with some exceptions such as
telecommunications. The severe decline in economic activity in the
early years took the pressure off demand and requirements for
capacity expansion, especially in the backbone areas of business
infrastructure such as sea ports, roads, rail and electricity. The road
network did not require much expansion in the early to mid-1990s,

34 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

growing by only eight per cent from 1991 to 1997. Moreover,
according to the World Bank, electricity consumption in 2006
remained below the 1991 level.

However, key infrastructure expansion in Estonia has
occurred in areas consequential to attract foreign investors: office
facilities, housing, telecommunications, as well as passenger air and
sea transport. For example, air passenger numbers expanded by 410
per cent (1993-2007) and the number of fixed and mobile telephone
subscriptions rose drastically from 24 per 100 people in 1993, to 225
per 100 people in 2008. Fixed broadband internet connections also
rose quickly in recent years. Furthermore, from 1998 to 2005, the
road network expanded by 18 per cent. Public infrastructure policy
has also been related to the country’s privatization programmes:

• Telecommunications infrastructure inherited by Estonia in
1991 was in relatively poor condition and privatization was
a priority. 49 per cent of fixed and mobile services were
sold to Finnish and Swedish telecom companies, and in
December 1992, a concession agreement gave the newly
established Estonian Telephone Ltd. a monopoly for
services until 2000. The small size of the Estonian market
was likely a factor in providing such exclusive rights in
order to attract a well-capitalized investor. Ending this
monopoly position was a condition to joining the European

• Railways. In August 2001, the Estonian railway was
privatized to a consortium of foreign and local investors.
This sale was expected to lead to new investment and
efficiency gains. In the following years, however, private
owners sought to divest their stakes and a series of
negotiations took place with prospective buyers. Finally, in
November 2006, the Government of Estonia re-nationalized
the railways. In 2007, the transit of Russian oil via Estonia

Chapter II 35

UNCTAD Investment Advisory Series B

was reduced, placing renewed pressure on Estonian railways
to restructure.

• Electricity. Privatization of the electricity infrastructure was
delayed until late in the privatization process. In the early
2000s, a subsidiary of United States-owned Enron was very
close to finalizing a deal for state-owned Estonian Energy
Ltd., the main electricity producer in Estonia. With the
bankruptcy of the parent company in the United States,
negotiations were ended and Estonian Energy was taken off
the privatization list.

Backbone infrastructure services are considered by many
foreign investors to be a key determinant of FDI inflows to Jamaica.
Public–private partnerships have played an important role in
expanding this infrastructure, but pure state ownership remains in
certain areas. While privatizations were at their height in the late
1980s, there has been renewed interest in recent years.

• Electricity was privatized in 2001, with United States-
owned Southern Energy Inc. taking an 80 per cent stake.
The Government’s 20 per cent remaining stake was
acquired by Japanese Marubeni. Reliability of power supply
has improved compared with the pre-privatization era but,
despite a large investment programme, island-wide
shutdowns still occur. This continuing unreliability of
supply, plus high costs compared to many countries, means
that power still represents a constraint to growth.
Nonetheless, according to the World Bank, electricity
consumption between 1991 and 2006 increased more than
three times.

• Water and sewerage infrastructure is the responsibility of
the National Water Commission, a statutory body
established in 1980. A continuing programme to install new

36 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

and upgrade existing systems across the island has failed to
match demand requirements and there are regular supply
disruptions. Very large investments will be needed to meet
the needs, for example, of large-scale tourism FDI.

• Ports. The publicly-owned Port Authority of Jamaica is
regarded as an efficiently-performing enterprise and has
regulatory authority for both privately- and publicly-owned

• Airports. Privatization via concession agreements has been
planned for the two international airports. One such
privatization occurred in 2003, when a consortium of
foreign investors secured a 30-year concession to operate
and manage Sangster International Airport. This airport
serves the island’s principal tourist location and
privatization led to expanded capacity and improvements in
service delivery. Privatization of the second airport is still
pending. Air Jamaica was privatized in 1994 (75 per cent
privately owned) but its viability continues to represent a
drain on public resources.

There is particular interest in Jamaica’s experience with
telecommunications and roads in a small country context:

• In telecommunications, Jamaica’s population of 2.7 million
has over 3 million telephones (2.7 million cellular and over
300,000 fixed-line telephones, based on 2008 data).
Telephone lines increased from 5 per 100 people in 1991 to
12 per 100 in 2008. Initial privatization occurred in 1988,
but there was widespread criticism of the monopoly TNC
operator, Cable & Wireless. By contrast, the entry of Irish-
owned Digicel in 2001, and broadband company Flow in
2005 (owned by Barbados-based Columbus

Chapter II 37

UNCTAD Investment Advisory Series B

Communications), has had a positive impact on access,
coverage and costs of telephone services. 7

• Jamaica has an extensive network of roads for a small
island. This network expanded 28 per cent (road length)
between 1991 and 2006. Continuing problems exist with the
level and cost of maintenance. The Highway 2000 project,
the first toll road in the country, attracted controversy over
the level and variability of tolls and the Government
subsidy to the French operator. It is questionable whether
further toll roads will be built in the near future. The
Government’s philosophy holds that tolls should not be
imposed on roads where the development is funded by
taxpayers. Thus, the latest large highway project in the
north of the island is not tolled.

Budget constraints incline Jamaica towards seeking private
investment to augment backbone infrastructure, especially in power
and telecommunications. Yet, the experience of Jamaica also shows
the need for high-quality regulation and the benefits of introducing
competition where possible.

D. Maximizing contributions from FDI

In small economies, the direct contributions of a rapid build-
up of FDI are immediately evident. Direct FDI contributions can
include high levels of capital formation and strong output growth,
substantial job creation as well as export expansion and
diversification. Indirect contributions of FDI come from raising
productivity in the domestic economy through inducing greater
competitiveness in local firms and by upgrading the business
activities of foreign affiliates themselves.

38 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Direct contributions

Although the countries took different approaches with
respect to FDI attraction, they both received significant FDI inflows,
which set the foundation for direct contributions to the local
economy. The most obvious contribution of these inflows has been
the impact on capital formation. For example, from 2003 to 2006,
FDI inflows made up 40 per cent of Estonia’s gross capital
formation, compared to an average of 24 per cent for other small
developed countries. In Jamaica, from 1998 to 2006, the share was
23 per cent, compared to an average of 19 per cent among small
developing countries. In addition to its role in capital formation, this
section examines the immediate contributions of FDI to Estonia
(Stephan, 2003; Piech and Radoševic, 2006) and Jamaica,
specifically in terms of exports, employment, research and
development, and market structure.


A significant portion of FDI in Estonia has gone into
services directed at the domestic market, particularly in the banking
sector. However, growing outward FDI from this sector may be
associated with rising exports of financial services. Estonia also
exports travel (including tourism) and transportation services (figure
II.7). Manufacturing exports have grown strongly and have
generally made up the majority of total exports. A study on the
Estonian manufacturing industry, using data from 1996-2001,
showed that foreign affiliates are larger and indeed more export-
oriented than domestic firms (Hannula and Tamm, 2001). Inflows of
manufacturing FDI in the early to mid-2000s have played a
significant role in the rapid rise of exports from this sector in recent
years. Other important exports include agricultural goods and fuels
and mineral products, although FDI has played a limited role in
these sectors.

Chapter II 39

UNCTAD Investment Advisory Series B























40 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Figure II.8 shows changes in the scale of Jamaica’s export
structure and diversification. FDI has contributed strongly to growth
in services exports, particularly with the construction of new hotels
and tourism-related services. Tourism revenues make up the bulk of
service exports. More recent FDI in the ICT call centres has led to
an increase in ICT exports, yet the overall share remains low. These
investments helped offset the decline in apparel exports after
NAFTA decreased Jamaica’s competitiveness in those sectors. The
important role of bauxite, which has received substantial FDI, and
the relatively steady contribution of agriculture are also evident.
Exports of fuels have also begun to play a role in recent years.

Foreign investment in Estonia’s manufacturing sector has

had a strong employment impact. A study of Estonia’s
manufacturing firms (with 100 or more employees) found that
foreign affiliates (comprising 29 per cent of the total number of
firms) accounted for 56 per cent of the workforce in manufacturing
(Damijan et al., 2003) and were clearly a major support factor
during a very difficult period of reorienting manufacturing to
Western standards and markets. The respective employment
contribution of manufacturing foreign affiliates in Lithuania, Latvia
and Poland was much lower. In addition, wage levels in Estonian
manufacturing affiliates were found to be 40 per cent higher than
those paid by domestic firms. While no similar data are available for
the services sector, foreign affiliates are also likely to have been
significant employers in banking.

Total employment data in Jamaica show a 29 per cent
increase between 1991 and 2008 (with a population increase of
around 14 per cent). While there is no data on the proportion of jobs
in foreign affiliates, interviews conducted for this study indicated
that TNC affiliates have positive effects on employment levels.
Employment gains can be primarily linked to the expansion of the
tourism sector. Having attracted significant FDI, tourism contributed
nine per cent to the country’s total employment

Chapter II 41

UNCTAD Investment Advisory Series B























42 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Research and development

FDI in Estonia has boosted the country’s technological
intensity. According to the World Bank, high-technology exports as
a share of total manufacturing exports rose from 6 per cent in 1995
to a peak of 37 per cent in 2000. Yet, they have fallen since then to
an average of around 20 per cent per annum. Estonia’s national
R&D expenditure has improved as a portion of GDP, increasing
from 0.6 per cent to 1.2 per cent of GDP between 1998 and 2006.
The private sector’s share of GDP has roughly doubled between
2000 and 2007 (although it had been quite low prior to that, perhaps
due to a lack of significant tax incentives for business R&D). This
increase was likely due to the rise in foreign manufacturing affiliates
which, in 1998, accounted for 90 per cent of R&D investment in the
sector (Damijan et al., 2003). This figure outweighs significantly the
relevant contribution of foreign affiliates in R&D investment in
other countries, such as Lithuania, Latvia and Poland.

Although comparable statistics are not available for
Jamaica, data for 2002 reveal a very low rate of R&D expenditures,
at less than 0.07 per cent of GDP (World Bank). Since then,
however, the Government has been encouraging expansion of the
ICT sector into software development, which may help raise these
figures (box II.2).

Box II.2. Shifting from apparel to ICT

Aided by the United States Caribbean Basin Initiative (CBI), FDI
in apparel was a big initial success story for the Free Zones initiative in
Jamaica. Exports to the United States under the favourable CBI terms rose
from $5 million at the end of the 1970s to $127 million at the end of the
1980s (King, 2001). Employment in the Kingston Free Zone alone grew
from under 500 in 1980 to 10,500 in 1987, nearly all in garments (Watson,
1988), while total employment peaked at 40,000 people. From 1994,
NAFTA gave Mexico a strong competitive edge and termination of the


Chapter II 43

UNCTAD Investment Advisory Series B

Box II.2 (concluded)
multi-fibre arrangement (MFA) sealed the decline of the industry in
Jamaica. Among United States firms which closed or drastically reduced
their operations were: Jogtogs (1997); Hanes, a subsidiary of Sara Lee,
(April 1998); and Oneita Strathleven (May 1999).8 Large numbers of jobs
were lost in this sector, overwhelmingly women.

Jamaica recognized the need for restructuring in the face of
changing global competition in the National Industrial Policy of 1996.
Development of Jamaica’s ICT sector is an excellent example of the
benefits from a policy of rapid adaptation following the decline of the
apparel sector. The Free Zones in Montego Bay were prime movers in the
Government-driven shift to ICT from the second half of the 1990s
(Mugione and Castillo, 2001). However, the principal facilitating factor for
FDI in ICT was the liberalization of Jamaica’s telecommunications sector.
JTI implemented an FDI attraction strategy designed to grow offshore
(“nearshore”) outsourcing, followed by movement up the value chain
towards software development and offshore training, as well as the
establishment of Technology Parks with foreign collaboration. There are
currently around 23 outsourcing (mainly call centre) companies in Jamaica
employing an estimated 14,000 people. Employees are largely women with
high school level qualifications. The major companies are listed below in
table II.3. ACS, a Dallas-based TNC, is the only company presently
undertaking payroll processing. A broad estimate of business process
outsourcing (BPO) exports is $400 million, with 90 per cent to North

The software development sector is still in its early stages, but a
Software Developers Association is being created to formalize the sector
and identify training requirements. Opportunities are expected to encourage
diaspora software engineers to return from North American universities to
establish new offshore software ventures. Challenges for the industry
include shortages of space, the availability of graduates for upgrading
activities, telecommunications costs, and the existence of co-location
facilities. Crime and corruption do not appear to be significant deterrents
for investors, but they avoid potentially dangerous areas like inner city
Kingston. If Jamaica is to attain its goal of moving up the value chain in
ICT, policies should support an integrated and fast-moving sector strategy,
including international benchmarking, since ICT is a sector where country
level performance information is routinely shared around the world.

44 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Table II.3. Outsourcing companies in Jamaica

Company Type of service Number of

BPO, Technical

support, Customer


ACS BPO, Payroll, Customer service Approx. 1,400

Vista Print Graphic design 250
Alliance One Debt collection Approx. 500

West Corp BPO, Customer
service Approx. 600

Tympana Debt collection, Customer service Approx. 200

Accent Tech support, Customer service Approx. 250

Professional Axxess Debt collection Approx. 150
West Indies Call Center Customer service 60
National Asset Recovery
Services Debt collection Approx. 900

Flow Jamaica Ltd.
Broadband services,
Internet, Telephone
and cable services

Approx. 400

Subtotal 7,410
Approx. 12 such other
operations with a further 5
projects coming on stream in
financial year ending 2008


Total (approximate figure
provided by JTI) 14,000

Source: JTI.
Note: All above companies have Free Zone Status.

Chapter II 45

UNCTAD Investment Advisory Series B

Market structure

FDI can have both positive and negative effects on market
structure in host countries. On the one hand, the entry of a foreign
investor may add supply to local markets, lowering prices and
pressuring local firms to improve their production processes and
product quality. On the other, due to the scale of some international
firms, they can reduce competition in various sectors, or hurt
domestic firms with their high demand for local factors of
production, a problem especially acute in small economies.

There is some evidence that FDI entry into Estonia has
reduced competition and has crowded out indigenous firms in the
banking sector and, to a lesser extent, in wholesale and retail trade.
This effect may be related to the small size of the market (Tiits,
2007). Nevertheless, there is also evidence that high levels of
profitability have induced new entrants, a result that has occurred in
the banking sector with established banks challenged by a new
foreign entrant. Telecommunication privatization in 1992 also
resulted in a monopoly position for Estonian Telephone, although
this sector was subsequently opened up to competition as a
condition of entering the European Union.

In Jamaica, the attraction of larger-scale foreign hotels has
led to concerns of crowding out in the tourism sector (box II.3).
Other structural issues arose when initial privatization of
telecommunications resulted in unsatisfactory performance by a
monopoly foreign investor. After a renegotiated agreement to permit
more competition, another foreign investor, Digicel, entered the
market with markedly better results. Similar difficulties exist in
electricity infrastructure where a privatized joint venture among
foreign affiliates has not yet achieved needed levels of investment
and service reliability.

46 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Box II.3. Size matters in tourism
There are two major size issues in tourism, related to foreign large

all-inclusive hotel developments: the socio-economic challenges and the
competitive difficulties facing small Jamaican firms.

There has been controversy surrounding FDI in large all-inclusive
Spanish hotels located in the north coast of Jamaica in the 2000s. The
employment associated with such 400 bedroom hotels is substantial. Wages
are relatively low, but there is some skills development through the
minimum standard training requirements for employment and subsequent
training undertaken by the hotels themselves. However, there are concerns
about the ability of a small region within a small country to cope with
large-scale projects. A major burden is placed upon the environment and
supply of utilities (e.g. electricity and water). In addition, there are
challenges in transporting large numbers of hotel employees from outlying
areas especially at night-time given crime problems. Also, the lack of
accommodation for employees could encourage squatting and associated
social problems. Without careful long-term planning, there are clear limits
to the ability of a small country to assimilate a concentration of such large
projects, whether in tourism or other industries.

Another challenge derives from the ownership of hotels in
Jamaica. While there are a number of large, up-scale Jamaican-owned TNC
hotel groups, the majority of Jamaican hotels are small. For example, the
Hibiscus Lodge/Almond Tree restaurant has 26 rooms and 40-50 staff. It
focused historically on North America and meals for tourists. The number
of meals served has however dropped from 75,872 in 1987 to 47,000 in
2007, in part because of the all-inclusive hotel competition. Rates in all-
inclusive hotels are very competitive making it difficult for small hotels to
compete for labour. The rate of decline of meals served slowed in the
2000s as the hotel/restaurant diversified into the domestic wedding and
Government conference markets, but Hibiscus Lodge has not been able to
access the growing cruise ship market. This traditional local hotel is
perhaps typical of many, requiring investment to upgrade facilities (the
Hotel Incentives Act applies to all hotels with at least 10 bedrooms), more
active marketing, and a new generation of owner/managers. Although the
Jamaica Hotel Tourist Association has not provided active support for
small hotels, joint marketing programmes might help.
Source: Based on interview with Hibiscus Lodge, 19 January 2008.

Chapter II 47

UNCTAD Investment Advisory Series B

The challenges of market size are also apparent in the
infrastructure sector. Sufficient scale is essential to attract the
quality of FDI needed to improve key assets, but maintaining some
degree of competition generates more effective outcomes. One
potential solution is to retain state ownership in some sectors, but
this approach showed mixed results. Estonia failed to complete a
privatization of electricity and had to renationalize the railway
system, although it continues to struggle. Jamaica’s Government
operated ports efficiently, but lagged behind in expanding and
modernizing water and sewerage.

Indirect contributions
There is little evidence of Estonia adopting policies

specifically aimed at maximizing the indirect contributions of FDI.
Similarly for Jamaica, in contrast to the active programmes to target
and promote foreign investment, policies to generate longer term
contributions were quite limited until very recently. Moreover, little
research has been done in this area, making it additionally difficult
for decision-makers to weigh policy choices and evaluate their
potential outcomes.

Though difficult to link to specific government policies,
there are still some examples of indirect, longer-term contributions
from FDI in Estonia and Jamaica. These have been visible
principally through spillovers from foreign affiliates to the local
economy (although less so in the case of Jamaica), as well as the
upgrading of TNC affiliates. Partly related to these processes, a new
phase of outward FDI has been underway in both countries, led by
foreign affiliates and indigenous companies seeking to expand into
larger markets.

Spillovers from FDI

Foreign affiliates need to establish close links with the
domestic economy if local firms are to enjoy the full benefits from

48 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

FDI inflows. These benefits can come about through several
channels, including, for example, linkages with local supplier firms,
pressure on local competitors to upgrade their technology and
production processes, and labour mobility between foreign and
domestic firms (Blomström et al., 2000).

In Estonia, there is evidence suggesting that linkages
between foreign affiliates and local suppliers have been weak.
Foreign affiliates identify the main impediments as shortages of
potential local subcontractors, high costs, insufficient scale of
production, poor quality of labour, and inadequate technological
capability among Estonian firms (Foreign Investor Survey 2006). In
general, these findings point the lack of absorptive capacity among
local firms, which partly reflects differences in the relative size of
TNCs and indigenous firms in small economies. Few policy
measures or TNC initiatives have been put in place to overcome
these weaknesses.

Yet, there are still some examples of domestic firms in
Estonia having benefited from the presence of foreign affiliates. One
study noted that “spillovers are of considerable magnitude in
Estonia” (Sinani and Meyer, 2004, p. 461), though this result has
been conditional on the type of FDI involved.9 The same study
suggested that spillovers might have taken place through
“competition effects”, forcing domestic firms to use existing
technology more efficiently or to look for new technology. By
upgrading their operations, domestic firms have been able to
compete with more efficient foreign firms, while inefficient
indigenous firms have been driven out of the market. Spillovers
have also likely resulted from a similar, yet conceptually distinct,
“demonstration effect,” where domestic firms have observed foreign
affiliates operating at higher levels of technology and have adopted
that approach. Labour mobility effects – whereby local firms attract
and retain workers previously employed by foreign affiliates – have
not likely been significant in Estonia, because foreign firms have

Chapter II 49

UNCTAD Investment Advisory Series B

typically employed and retained the most qualified local labour by
offering higher wages.

In Jamaica, there is only limited evidence of indigenous
technology development and technology transfers from FDI to local
firms (Barclay, 2005). This is primarily due to the lack of interaction
between foreign affiliates and local firms and institutions. In many
areas of economic activity, such as tourism, apparel and information
services, the TNC-owned sector has tended to operate separately
from the domestically-owned sector.

There has been particular concern regarding the ability of
Jamaica to assimilate and benefit from major projects in the tourism
sector. The leakage rate for the industry in Jamaica is estimated at
50 per cent, making the country fourth among the 11 Caribbean
countries for which data were available (the highest leakage was in
the Bahamas where the figure was 85 per cent). Leakages derive
from the very high import content in tourism, limited local supply
and weak inter-sector linkages. A major challenge thus relates to the
need for improved linkages in a sector where so much of the value
chain is currently handled outside Jamaica.

More recently, however, several programmes in Jamaica
have aimed at boosting the capacity of local firms to interact more
intensively with TNC affiliates. For example, the JTI Corporate Plan
2007–2010 focuses on creating integrated intra- and inter-industry
clusters. Sectoral targets include creative industries, ICT,
manufacturing, agribusiness, professional services, and tourism. All
of these areas are to be developed as clusters to enhance indirect
contributions through: increasing the range and value of local
components in the cluster’s international value chain; encouraging
linkages among sectors and clusters; facilitating value added
strategies among firms including branding; and enhancing
innovation. JTI has collaborated on these initiatives with other
Government agencies and international partners.10

50 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

TNC affiliate expansion and upgrading

Though limited, there are notable examples of TNC affiliate
expanding and upgrading in Estonia and Jamaica. Over the long run,
these can increase positive contributions associated with FDI
through the relocation of supplementary and higher value-added
activities to local foreign affiliates, including regional headquarter
(RHQ) status. Often, upgrading entails more deeply embedding a
firm in the local economy, and thus may also increase the likelihood
of spillovers.

One significant example of foreign affiliate expansion and
upgrading in Estonia is Hansabank (box II.4). Now fully-owned by
Swedbank of Sweden, Hansabank had responsibility for group
banking services in all three Baltic countries and had expanded its
operation into Bulgaria, Romania and the Russian Federation. Other
foreign banks have followed this model. Upgrading appears to have
been more limited in the manufacturing industry. The original
strategy used by TNCs of outsourcing to low cost Estonian affiliates
has been vulnerable to rising labour costs. There is some evidence of
indigenous firms meeting these challenges by upgrading, but less
evidence of foreign affiliate upgrading. More commonly, foreign
affiliates have responded to rising costs in Estonia by relocating
production to another country.

Box II.4. Hansabank and the Swedbank Group

Hansabank was established in the early 1990s as a local bank in
Estonia. In the late 1990s, as a means of overcoming the constraints of
small market size, the bank expanded into Latvia and Lithuania. In the
aftermath of 1998 financial crisis, Hansabank merged with the second
biggest bank in Estonia (Hoiupank). In turn, a majority of Hansabank
shares were acquired by Swedbank of Sweden and the bank’s expansion in
the region became even stronger.


Chapter II 51

UNCTAD Investment Advisory Series B

Box II.4 (concluded)

Hansabank has provided cross-border banking services in all three
Baltic States as well as in the Russian Federation. For example, in 2006,
FDI into Latvian, Lithuanian and Russian affiliates totalled $868 million,
all of which was consolidated on the company’s balance sheet in Estonia.
The Baltic economies have been treated as a single market, with Estonia
acting as its RHQ, although services have been provided on a country
basis. New services and products have been primarily developed and tested
in Estonia, and then transferred (with adaptation to local needs and tastes)
to Latvia and Lithuania. Similar to smaller Estonian-owned investment
banks, Hansabank became increasingly active in Bulgaria, Romania and
elsewhere. Reasons for Swedbank using its Estonian affiliate as a platform
for outward FDI relate to better knowledge of the local situations and the
particularities of developing markets; readiness to take higher risks; faster
decision making; and the lower costs of operating from Estonia.

ICT systems development has also been a key competence of
Hansabank, as the bank is among the largest software companies in
Estonia. The adoption of Hansabank-developed ICT systems, not only in
the Latvian and Lithuanian subsidiaries but also by Swedbank, is an
example of reverse spillovers from the foreign affiliate to its parent after
the acquisition.

In recent years, Hansabank accounted for about one third of
Swedbank’s profits and 20-25 per cent of its assets. In 2005, Swedbank
purchased 100 per cent of Hansabank shares, completing its acquisition,
and in 2009 Hansabank changed its name to operate as Swedbank.

Source: UNCTAD interviews and survey with Hansabank and other

In Jamaica, examples of TNC affiliate upgrading and
expansion exist in the bauxite, manufacturing and
telecommunications industries, but the country faces challenges
when it comes to establishing itself as a major centre for RHQs. In
the bauxite industry, foreign affiliates have increasingly located
their processing activities in the country, which has increased the

52 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

value of these exports (box II.5). In the manufacturing sector,
Jamaican-listed Desnoes & Geddes, brewer of the iconic beer Red
Stripe, and 58 per cent owned by United Kingdom-based Diageo,
has expanded its operations and enhanced value added in the
Jamaican economy. Following a sizeable investment (approximately
$87.3 million) in a new production facility in 2001 (substantially
supported by Government incentives), an international marketing
specialist was appointed to systematically develop export markets.
The company has always been a major exporter to diaspora markets,
where the United States accounts for 75 per cent of exports.

Box II.5. FDI in Jamaican bauxite

FDI in bauxite has a volatile history in Jamaica. In the 1960s,
there was substantial investment by United States and Canadian companies,
but this dropped thereafter, due to the non-conducive political environment
for foreign business from 1972 to 1980. After industrial and labour disputes
were resolved, FDI began to pick up again in 1998, although productivity
gains were offset by low world market prices in the aftermath of the Asian
financial crisis. FDI in Jamaica has been strongly influenced by the
industry’s investment climate and potential profitability. An important
recent development has been the entry of Russian-owned Rusal into the
industry. Alcoa has also expanded capacity at the Jamalco refinery. The
recent ownership structure is presented in table II.4.

A major positive development has been the growth of refining in
Jamaica, keeping much more of this higher value-added step in the country.
Currently, 70 per cent of bauxite is processed in Jamaica, whereas in the
past approximately the same proportion was shipped as raw bauxite. The
Jamaica Bauxite Institute (JBI), first established in 1976, now has a
mandate including pollution control and environmental monitoring.
Appreciating the socio-economic impact of the industry, the Bauxite
Community Development Programme (BCDP) was created in 1996 (and
managed by JBI) to reinvest earnings from the industry in communities
close to mining operations, including social and physical infrastructure, and
to implement income and employment generating projects.

Chapter II 53

UNCTAD Investment Advisory Series B

Table II. 4. Ownership structure in Jamaica’s bauxite industry

Company Ownership per cent
St Ann’s

Century Aluminium and Miranda Inc. 49 per cent;
Government. 51 per cent

Windalcan Rusal (Russian Federation) 93 per cent; Government. 7

per cent
Jamalco Alcoa 50 per cent; Government. 50 per cent
Alpart Rusal (Russian Federation) 65 per cent; Hydro

Aluminium (Nordic) 35 per cent
Source: Jamaica Bauxite Institute, March 2008.

In telecommunications, Digicel, an Irish-owned mobile
phone operator (box II.6) illustrates the significant positive
economic contributions that a single TNC can make through its
expansion. The company was launched in Jamaica as a new TNC
venture by a foreign entrepreneur and employs 250 people at the
corporate headquarters for its domestic and, increasingly,
international operations. Digicel’s success has influenced
international perceptions of Jamaica, though the company is not a
brand-name global TNC.

Recognition as a regional centre or headquarters for the
Caribbean area is an important step in the process of affiliate
upgrading for Jamaica. However, aside from the example of Digicel
and the country’s role as a cargo hub for several European TNCs,
Jamaica has had difficulties competing with other countries in the
region. Trinidad and Tobago commonly acts as RHQ for
manufacturing companies, and some United States pharmaceutical
TNCs operate out of Puerto Rico. In financial services, Citibank’s
RHQ, originally in Jamaica, was moved to Miami in the 1970s at the
time of the socialist Government. Other companies like Nestlé and
Cable & Wireless report directly to their headquarters in Europe,

54 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

and sometimes to their United States RHQs. Jamaica’s rather limited
role as an RHQ can be partly attributed to poor macroeconomic
conditions, the decline of manufacturing, as well as the absence of
specific policies for these purposes.

Box II.6. Telecom liberalization and TNC upgrading

This case of Digicel provides two important lessons for small
countries: the contribution of FDI in the liberalization process and the key
role which a single TNC can play in economic transformation and the
benefits associated with RHQ operations based in a small emerging

In 1988, as part of its telecom privatization programme, the
Jamaican Government granted Cable and Wireless (C&W) a 25-year
monopoly over local and long-distance traffic, with no bidding process.
Dissatisfaction with performance led the Government to negotiate a new
agreement with C&W allowing for full liberalization; and an auction led to
the entry of Irish-owned mobile phone operator Digicel in April 2001.The
Irish entrepreneur behind Digicel was looking to invest in liberalized
markets where an existing monopoly situation existed (and with high rates
and charges to local customers, low penetration, poor customer service and
growth potential). Initially targeting Trinidad and Tobago, the company
moved into Jamaica because of its earlier liberalization. By 2008, Digicel
had 1.9 million Jamaican customers, an 82 per cent market share of the
mobile market, and coverage of 72 per cent of the population.

Contributions of Digicel to the Jamaican economy have been:
direct employment of 700 people, including 250 Group HQ employees;
about 7,000 jobs in distribution; capital expenditure of over $1billion,
annual maintenance spending of $30-40 million; 22 per cent duties on
imports of phones and towers; marketing expenditures of 10-12 per cent of
revenues; staff training; raising of funds on the local market; lower prices;
better customer service; and planned new technologies. Positive effects
associated with the Irish connection were also indicated e.g. Irish civil
servants have been helping to improve the investment climate in Jamaica.


Chapter II 55

UNCTAD Investment Advisory Series B

Box II.6 (concluded)

Potential challenges associated with Digicel’s operations have
included: exchange rate depreciation; Government bureaucracy; skills gap
and lack of experience/unwillingness in the regulatory bodies to allow
human capital to be imported; crime, especially in respect of vandalism of
towers and theft of generators.

Started as a new venture, Digicel Jamaica has benefited from its
status as group HQ, established in 2004. From its Jamaican base and using
its experienced roll-out team, the company launched into Saint Lucia and
Saint Vincent and the Grenadines in 2003, and in the rest of the Caribbean
and Central America thereafter, and has begun lobbying for a third license
in Honduras. Paralleling these expansions, the company has ventured into
the South Pacific including Papua New Guinea and Vanuatu, with
Jamaicans as managers.

Sources: UNCTAD interviews and survey with Digicel and other
respondents; Wint 2003.

Moving to outward FDI

Outward FDI of local firms or foreign affiliates to foreign
markets presents an opportunity for enterprises in small economies
to attain economies of scale and thus can be considered a “second-
generation” method of relieving demand-side constraints in small
countries. Tax, regulatory and foreign policies that facilitate outward
investment, along with successful measures to remove supply
constraints and raise firm productivity are important building blocks
to this end. In both countries, this trend is closely linked to foreign
investors and local affiliates, who can demonstrate international
practices, partner with indigenous firms through joint-ventures, or
help provide the necessary resources for their foreign expansion.

Between 2004 and 2007 outflows of FDI in Estonia rose
steadily (from $268 million in 2004 to over $1.1 billion in 2006, and
around $1.7 billion in 2007). With the financial crisis, outward FDI

56 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

dropped in parallel fashion with inward FDI during 2008, decreasing
to near the $1 billion mark, or roughly one-half the inflow total. As
mentioned, there has been a tendency for these investments to be in
the same sectors as FDI inflows to Estonia, including banking, real
estate and commercial services.

Estonia has not introduced policies specifically aimed at
encouraging outward FDI, yet it has retained an open approach to
capital outflows, including the absence of foreign exchange controls.
The lack of corporate tax for reinvested profits may also have
indirectly encouraged firms to seek new investment opportunities
abroad. More generally, the streamlined business environment with
low transaction costs allows smaller, more entrepreneurial foreign
investors and indigenous firms to expand into foreign markets.

Gaining a foothold in larger markets has been the driving
force behind the outward expansion of Estonian enterprises.
Securing a supply of raw materials has been a less important reason,
and lower production costs and investment incentives elsewhere
have played virtually no role in strategic overseas expansion (Liuhto
and Jumpponen, 2002). This finding is not unsurprising given that
the share of manufacturing-related FDI in Estonia’s outward FDI
flows has been low. Outward FDI is commonly undertaken through
mergers and acquisitions (M&As), especially in less developed

The outward expansion of indigenous firms in Estonia is
also associated with new FDI in the form of joint ventures or pro-
active financial investors. Typically, these have been smaller
entrepreneurial foreign investors such as CV-online (box II.7).
Recently, a number of investment funds – often registered overseas
but managed and owned locally – have begun operating in Estonia
to assist the domestic and then international expansion of indigenous
enterprises.11 These funds typically consolidate foreign institutional
and local investment. Their targets are in Estonia and the other

Chapter II 57

UNCTAD Investment Advisory Series B

Baltic States, Poland, Ukraine and other countries in the
Commonwealth of Independent States (CIS).

There is evidence suggesting that rising outward investment
may contribute to improvements in labour productivity in the
Estonian economy. A study drawing on 2002 data for Estonia
(Vahter and Masso, 2005) suggests that foreign-owned and
indigenous Estonian firms that have themselves invested abroad
tend to have higher levels of productivity. This has the case in both
the manufacturing and services sector.

Box II.7. Example of an Estonia-founded firm that

CV-Online, a recruitment agency, was founded in 1996 by four
Estonian entrepreneurs. Constrained by a small local market, the company
began to internationalize early by expanding to Latvia and Lithuania. In
January 2000, the company obtained investment from venture capitalists
LHV Ventures (Estonia) and Esther Dyson (United States). LHV was
selected for its entrepreneurial experience and Esther Dyson for its contacts
in Europe and knowledge of the on-line recruiting sector. Both companies
acquired a 35 per cent stake in CV-Online, for $1million each. With these
investments, CV-Online was able to enter major Central and Eastern
Europe (CEE) markets.

In 2001, the company expanded further through the participation
of 3TS Venture Partners, one of the leading Central European investment
funds. By October 2002, CV-Online had over 330,000 registered
jobseekers in the CEE region and offices in Estonia and six foreign
countries: the Czech Republic, Hungary, Latvia, Lithuania, Poland and
Slovakia. In that year, it ranked 14th in Deloitte & Touche’s “Central
European Technology Fast 50”, with 731 per cent revenue growth between
1999 and 2001. New capital and expertise enabled CV-Online to
internationalize quickly although it remains Estonian-managed. The
company is developing proprietary services and technological solutions.
There has also been important financial support from the Estonian
Technology Agency in the form of a $268,000 loan to help the company
develop its online recruiting system.

58 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

FDI outflows from Jamaica have been more modest ($102
million in 2008). As in the case of Estonia, Government policies
have permitted outward FDI without explicitly promoting
internationalization as a path to growth. The majority of outward
FDI comes from Jamaican-owned firms have ventured abroad in
tourism and entertainment (e.g. Sandals and SuperClub Hotels),
agro-processed food and beverages (e.g. Grace, Kennedy and Co.
and Jamaica Broilers), printing and publishing (e.g. The Gleaner
Company), finance and insurance (e.g. Jamaica National Building
Society), and retail and distribution (e.g. Island Grill). For these
firms, innovation, strong leadership, commitment to high standards
and international benchmarking, and strategic alliances have been
important to their success (Wint, 2003 and UNCTAD interviews).

Motives for internationalization have varied. A number of
firms have expanded overseas to serve the diaspora market after
building competitiveness domestically with well known brands.
Others have outgrown the Jamaican and Caribbean markets or
developed internationally as trade liberalized or earlier trade
preferences were eroded. Acquisitions have also been a route into
international markets. For example, Grace, Kennedy and Co.
established important links with Canadian interests in support of its
brand and more recently acquired food distribution operations in the
United Kingdom.

Conclusions on FDI contributions
The growth witnessed in Estonia and elsewhere in CEE has

been built predominantly on direct contributions of FDI. Indirect
effects, such as FDI linkages and spillovers, and the accumulation of
technology and skills in indigenous industry have been relatively
limited,12 although the upgrading and internationalization of local
firms and foreign affiliates in recent years has shown promise. In
part, these mixed results are a consequence of initial weaknesses in
the capacity of indigenous firms in Estonia to absorb knowledge and
technology introduced by TNC investors. The rise of an investment

Chapter II 59

UNCTAD Investment Advisory Series B

banking industry that provides credit to Estonian firms, however,
may be improving this capacity.

Similarly, the benefits of FDI in Jamaica appear to have
come primarily from direct contributions, which are typically more
evident. Foreign affiliates have a strong presence, as measured by
their role in capital formation, job creation and services exports.
There are some examples of foreign affiliates providing indirect
contributions, but to date such cases are not abundant. Although
there are signs of internationalization by local foreign affiliates and
indigenous firms, the growth of outward FDI has been more limited
compared to Estonia.

60 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B


Third quarter of 2007, based on data from the Bank of Estonia. These

top five companies include three subsidiaries of Scandinavian universal
banks that operate across the Baltic region, one publicly listed
telecommunications company with controlling Scandinavian
ownership, and a transport and transhipment (oil and petrochemicals)

Macroeconomic instability in the late 1990s undermined some of the

NIP’s objectives (Wint, 2003). In addition, the programme has been
criticized for not adequately involving the private sector (JCCP 2006)
and for its slightly protectionist leanings with respect to import
substitution and protection of infant industries.

The National Planning Summit 2007 proposed a new set of tax

incentives for both local and foreign investors, as well as incentives for
targeted sectors.

The World Bank (2005a) calculates that reducing debt to 100 per cent

of GDP within seven to eight years would mean running a primary
surplus of 12 per cent of GDP in the absence of major shocks.

Total population of member States is just over 15 million, the largest

country being Haiti with a population of 8.7 million (and also the
poorest in terms of GDP per capita). Jamaica (2.8 million) is the second
largest country in CARICOM and ranks 10th in terms of GDP per

See Government report on “A Transformed Education System”, cited in

Witter (2006).
Tympana, a call centre company, noted that telephone costs had

decreased from $7,000 per month with Cable & Wireless to $1,000 per
month with the broadband company Flow.

The Government also launched the Apparel Industry Special Assistance

Programme as a response to the closures. The government also
established a Productivity Centre for small and medium-sized
enterprises (SMEs) and a Fashion Industry Secretariat providing
technical services in production, technology, design and marketing.

Sinani and Meyer (2004) find that labour-intensive FDI generates larger

spillover effects than capital-intensive FDI. Vahter and Masso (2005)
find low spillovers to local firms in manufacturing but higher levels in

Chapter II 61

UNCTAD Investment Advisory Series B

services. Other studies find higher spillovers in industries oriented
towards the domestic market.

Two collaborative initiatives are the Jamaica Cluster Competitiveness

Project (JCCP) (assisted by DIFID and USAID funding) and the Private
Sector Development Project (PSDP) (supported by EU funding).

Estonian tax policy is still not considered stable enough to register

investment funds in Estonia.

This applies much more broadly for the CEE countries (e.g. Piech and
Radoševic, 2006).


Small countries face unique challenges in designing policies
to attract and benefit from FDI. An examination of recent
experiences in Estonia and Jamaica reveals some similarities but
also significant differences in approaches and results. The outcome
of this study provides useful lessons for policymakers in small
developing countries. Whether the overarching economic approach
is more liberal, as is the case in Estonia, or involves a higher degree
of Government intervention, as in Jamaica, policymakers should
recognize the demand and supply side constraints in small
economies. They should also formulate, taking into account the size
factor, FDI policies that maximize direct economic benefits and
generate indirect contributions that are important for long-term

The generalized lessons from the two country cases are that:

• Policies to remove cross-border barriers to capital and
increase access to foreign markets are imperative to
reducing demand-side constraints in small economies.

• Initial success in attracting FDI can quickly generate
supply-side constraints in small economies (particularly
with respect to skills and infrastructure). This will limit
economic benefits and discourage further FDI unless
government action addresses early bottlenecks.

• Successful FDI attraction to small countries provides
the most visible direct benefits in terms of capital
formation, exports and employment. On the other hand,
the impact on R&D and market structure is less certain
and more dependent on specific country conditions and

• Small countries generally have small domestic-market
companies that do not automatically benefit from

64 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

interaction with foreign affiliates. In this regard, policies
on FDI that foster indirect effects through linkages,
upgrading and spillovers could assist indigenous
company development and ultimately enable a new
generation of outward FDI.

1. Adopting policies to facilitate access to larger markets

Generally, a significant proportion of FDI inflows are in
businesses that can serve the domestic market. This is also the case
for small countries. However, if small countries wish to outperform
in the attraction and contribution of FDI, it is important to recognize
small domestic market size as a constraint and pursue policies to
offset this disadvantage. Jamaica formally acknowledged this goal
in its NIP development plan, stating that “given the small size of the
domestic market, there is no alternative avenue for sustained growth
other than through exports”. Estonia’s rapid negotiation of FTAs
with neighbouring countries and later its membership of the
European Union and the WTO showed a similar recognition that
liberalization policies could expand its market size.

Prioritize trade agreements that add market scale for export-
oriented FDI

The two countries are located close to neighbouring markets
with which they had close ties that were formalized through FTAs
and membership of regional integration agreements. Estonia
energetically pursued trade relationships with relatively larger
Nordic countries, signing free trade agreements with the
neighbouring economies of Sweden and Norway within two years of
independence. The Nordic countries and Baltic neighbours have
accounted for more than half of Estonia’s exports, effectively
expanding the market available to domestic enterprises or foreign
affiliates. Estonia also placed a high priority on attaining early entry
to the European Union, initially achieving a free-trade pact that was

Chapter III 65

UNCTAD Investment Advisory Series B

operative within four years of independence, before attaining EU
membership in 2004. From 1995 to 2008, the EU market (aside
from the Baltic and Nordic countries) absorbed 20 per cent of
Estonia’s exports, a share which has been growing in recent years.

By contrast, Jamaica spent much time as a founding
member of CARICOM, a small and fragmented block whose
common external tariff and coordination policies have been
incompletely or inadequately implemented. Jamaica was already a
major economy relative to the CARICOM region and thus did not
significantly alter its small market constraint. In practice, the
volume and sophistication of intra-regional trade in CARICOM was
low, representing less that five per cent of Jamaica’s exports from
1991 to 2008.

Successful domestic companies understood the constraints
of a “small region” with limited disposable income and looked
beyond the Caribbean to pursue their interests. Government policies
provided limited assistance in opening up these larger opportunities.
However, Jamaica’s inclusion in the Caribbean Basin Special
Access Programme for Apparel provided preferential access to the
United States market that spurred apparel exports, although these
exports were later displaced by NAFTA. Bilateral agreements with
the United States and the European Union, complemented by an
EU–CARICOM economic partnership agreement, provided some
trade benefits that enhanced business assessments of Jamaica’s
market potential. From 1991 to 2008, nearly two thirds of Jamaica’s
exports were split between the United States and the EU.

Focus on trade agreements with likely capital exporting countries

A key feature of Estonia’s FTAs is that initial partner
countries were also the most likely source of inward FDI. The
Nordic countries accounted for over three fourths of Estonia’s FDI
inflows, dwarfing the 1 per cent represented by the other Baltic

66 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

States and the 11 per cent by other EU countries. A part of Estonia’s
manufacturing trade took the form of intra-firm supplies. Thus,
Nordic TNCs outsourced some of their components production to
new affiliates in Estonia, taking advantage of zero tariffs, lower
labour costs and Estonia’s proximity for just-in-time supply. The
integration of FDI and trade was also evident in the banking sector
where substantial inward FDI, in particular from Sweden, was
linked to trade in services that reached outward to broader regional
markets. Estonia’s number three ranking on “Trading Across
Borders” in the 2010 World Bank’s Doing Business report reflected
both the unilateral lowering of trade barriers and the simplified
customs and other procedures in trade agreements that facilitated
inter-affiliate business coordination in TNC networks.

In contrast, Jamaica could expect to receive relatively little
FDI from its CARICOM neighbours; they were not the home
countries of significant TNCs. The historically dominant United
States proportion (nearly four fifths) of Jamaica’s FDI inflows
appeared largely unrelated to trade in the manufacturing sector, at
least after NAFTA superseded the Caribbean apparel trade accord
that had attracted some United States FDI into Jamaica. Except for
the alumina exports, most other trade-related FDI arose from trade
in services, primarily tourism and ICT (including call centres),
which does not seem related to particular trade agreements other
than those under the WTO.

Avoid over-dependence on regional economic ties

Estonia drew three fourths of FDI inflows from the Nordic
countries and sent half of its exports to the Baltic Sea region. These
ties constituted the quickest, most natural way to forge new
relationships as the country reoriented itself from the trading
patterns established under the Soviet era. However, Estonia’s
liberalization policy clearly set entry into the European Union as a
priority, seeking broader regional ties and enhanced stability that

Chapter III 67

UNCTAD Investment Advisory Series B

would accompany an EU membership and accession to the Euro
zone. As a result, the EU countries outside the Baltic Sea region
have increasingly become sources of inward FDI and export

Jamaica also displayed a highly dependent pattern for FDI
inflows, historically drawing four fifths from United States sources.
However, only one third of its exports and its imports were directed
towards the United States and EU market respectively. Some
Jamaican programmes now seek to diversify the country’s FDI
dependence, for example, by promoting tourism opportunities to
hotel TNCs in Spain whose new FDI projects can help offset the
United States dominance. Russian FDI had also helped diversify
source countries and increase competition in the alumina sector.

2. Promoting location-specific advantages to attract FDI

Evaluate options ranging from broad-based efforts to sub-sector

A wide range of options is available to countries to deal
with their small size constraints. For instance, unique location-
specific advantages can be promoted through fiscal and financial
incentives or by showcasing other advantages, including natural
resource endowments.

Estonia chose not to pursue policies that actively targeted
inward FDI in specific sectors. Estonia depended instead on its
broadly “open door” policy and non-discriminatory national
treatment guarantees to establish an investment climate that would
draw needed FDI to help spur its transitional economic growth and
development. The rapid transition from socialism to a market-based
economy provided the opportunity for such a wide-ranging
programme of liberalization. The Estonian Investment and Trade
Agency focused essentially on information dissemination and

68 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

project facilitation activities. This approach matched the country’s
policy on attracting FDI; facilitating market-directed flows by
removing obstacles (including a lack of information) without relying
heavily on the use of incentives. However, evidence suggests that
the zero per cent corporate tax rate for re-invested earnings
increased the attractiveness of Estonia to foreign investors as a
location for production and as a base for further regional expansion.

Jamaica followed a more activist FDI targeting policy
during the period under study. The economy had been largely based
on three economic pillars – mining (bauxite/alumina), tourism and
remittances. The NIP sought to expand growth opportunities in
mining and tourism while promoting diversification to other
activities, including apparel and light manufacturing, ICT,
entertainment and sports. Unfortunately, unfavourable
macroeconomic conditions limited the NIP’s success. Effectively,
while tourism and mining continued to attract new FDI, the growth
of FDI inflows into the ICT sector was offset by the demise of the
apparel’s initial promise.

Jamaica's IPA was more pro-active than the one in Estonia.
It promoted FDI in most sectors targeted by the NIP, while other
ministries only handled a few types of investments, such as in
mining. Free zones, tax incentives and concessionary financing were
used to attract FDI in targeted sectors and/or for export promotion.
These incentives also served to offset some of the less attractive
features of Jamaica’s investment climate.

Adopt proactive measures to tap the FDI attraction potential of
privatization programmes

When a country’s existing State enterprises become part of a
privatization programme, simply allowing foreign investors to
acquire them is an indirect or passive form of targeting. Using more
proactive measures, such as preferential arrangements for investors,
can on the other hand lead to better outcomes, especially in sectors

Chapter III 69

UNCTAD Investment Advisory Series B

where the attraction of FDI could be more challenging. This is
indeed the case for infrastructure, such as electricity, roads or
telecommunications, where expansion and upgrading can provide a
solid basis for FDI attraction in other sectors. In these cases,
decisions on the sequencing of infrastructure privatizations, the
provision of fiscal or financial incentives and choices to retain some
areas under state ownership with a view to investing in these areas
prior to their privatization will significantly help in shaping the
country’s investment climate.

For example, Estonia’s privatization programme effectively
channelled some FDI to infrastructure, including in the
telecommunications sector which needed significant upgrading. The
concession agreement gave the new company, created by Finnish
and Swedish investment, a monopoly over services until 2000. This
was seen, at the time, as a necessary condition to attract quality
investors to a small domestic market. In the case of Jamaica,
attractive privatization opportunities were also seen as a way to
upgrade existing infrastructure. In 1988, Cable & Wireless was
granted a 25 year monopoly in the telecommunications industry.
The recent privatization of Sangster International Airport similarly
granted a 30 year concession for the operator. Although preservation
of preferential market positions may help attract market-seeking
FDI, careful attention and regulation is necessary to ensure positive
outcomes for consumers.

3. Minimizing supply-side constraints for effective TNC

Overcoming supply constraints is difficult
The experiences of small countries show that successfully

attracting FDI to produce for large external markets can quickly lead
to local supply constraints. Significant FDI inflows and/or very large
investment projects can strain supply-side resources. In small
economies, bottlenecks in labour, skills and infrastructure can

70 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

appear rapidly. Labour cost advantages may soon erode when
conditions tighten in a small labour market. Sections of the
workforce may be high-skilled but there may not be a critical mass
of relevant skills for business expansion. Increased demands on
ports, airports, water and power systems can also arise more quickly
than anticipated. Estonia and Jamaica both experienced difficulties
in maintaining adequate supply of labour and skills. While the two
countries managed to expand infrastructure capacity significantly,
they also experienced problems associated with introducing private
sector investment.

Retaining FDI by expanding the labour supply and/or upgrading
production processes

The initial phase of FDI in Estonian manufacturing attracted
Nordic TNCs seeking nearby lower labour cost. Estonia’s small
labour pool was quickly absorbed, leading to real wage increases of
10 to 15 per cent annually. Despite losing population at the time to
migration, Estonia did not ease its immigration policies to import
workers to relieve the labour shortage. As a result, FDI based on low
cost labour increasingly looked for opportunities in other countries,
closing facilities no longer cost competitive in Estonia. By using
immigration to import workers, a small country might gain time to
promote policies that encourage foreign affiliate upgrading to less
labour-intensive processes that also increase domestic value-added
production. However, this strategy must be complemented by skills
policies (e.g. education and vocational training) that meet the needs
of these more sophisticated processes.

Jamaica’s labour supply problems have been more
localized. For example, some large tourism projects exhausted
available pools of labour in nearby settlements. Policies and advance
planning to integrate labour policy with transportation infrastructure
can, in such cases, encourage labour mobility. While significant
emigration from Jamaica continued, it is questionable whether this

Chapter III 71

UNCTAD Investment Advisory Series B

posed a serious labour pool constraint on growth, as the country
continued to experience relatively high rates of unemployment and
underemployment. In fact, the negative effect of migration on the
investment climate is more related to a “brain-drain” effect than
general labour supply issues.

Building skills development capabilities adapted to evolving FDI
needs and to increased value-added activities

Small internal labour markets limit the level of human
capital specialization. Surveys of foreign investors rank Estonia’s
major problem as a lack of qualified labour, with insufficient
vocational training and continuing education capacity to meet FDI
requirements. Similar to policy options for dealing with a general
labour shortage, easing immigration procedures for skilled labour
could loosen this constraint. Nevertheless, by relying on market
forces to determine economic growth sectors, Estonia has limited
capacity to determine the industrial structure through skills policies.
Instead, it must rely on national education and training resources
capable of responding to private sector developments. Cooperative
programmes with universities and training institutes would help
reassure investors regarding such a national capability and

Jamaica pursued a more proactive policy toward skills
development, if aimed initially at a somewhat lower attainment
level. However, questions arose about the educational quality of
public schools and many qualified graduates of tertiary schools
migrated. Jamaica levied a 3 per cent payroll tax (three times the
Caribbean average) to fund customized training programmes to meet
sector and company requirements. For example, when the demise of
Jamaica’s apparel sector cost thousands of jobs, mainly women, the
Government promoted FDI in the ICT sector to offset this loss.
Some 14,000 new jobs were filled mainly by high-school educated
women. Although the sector currently requires only training

72 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

appropriate to call centres, the Government is already promoting
upgrading into software development. A Software Developers
Association was set up to identify training needs and possible
initiatives to encourage the return of trained diaspora software
engineers to develop this sector.

Using the diaspora as a potential pool of labour and skills

Although Estonia’s migration dissipated after 2000,
members of the earlier diaspora possess knowledge and skills
valuable to the national economy. Stemming the migration outflow
has been important, but fostering returns among the diaspora would
add new capabilities to the country’s available human skill base.
Using former emigrants to help fill labour and skill gaps may also be
politically more feasible than relying on new immigrant groups.

Improving conditions concerning violence and crime in
Jamaica may encourage the return of skilled citizens who are part of
the country’s large diaspora. Although remittances constitute a
significant capital inflow for the country, the missing human capital
seriously limits Jamaica’s capacity to fully tap the benefits of the
country’s investments in public education. Many returning
individuals would possess an entrepreneurial spirit as well as
knowledge and training in overseas businesses. They could
introduce new ideas and transfer more efficient processes to
Jamaica, sparking opportunities for local business development and

Anticipating infrastructure bottlenecks from large exporting or
tourism projects

Investor surveys in Estonia make little mention of
infrastructure, in part because quality infrastructure services are
expected in developed economies. Also, the sharp reduction in
output following independence created a cushion of excess
infrastructure capacity, particularly in the electricity sector.

Chapter III 73

UNCTAD Investment Advisory Series B

Nevertheless, infrastructure shortages emerged faster than expected
e.g. in the Tallinn airport. Other pressures on office facilities and
housing may recur as the economy recovers from the current global
economic slowdown.

Infrastructure deficiencies are a key aspect of Jamaica’s
supply barriers. The tourism sector highlights the difficulties for a
small country when large FDI projects are not accompanied by
adequate infrastructure improvements, especially in airports, roads,
water and sewerage. Jamaica’s severe fiscal budget problems
constrained a public sector response to infrastructure bottlenecks.
On the other hand, some aspects of infrastructure policy, such as the
Port Authority of Jamaica and the privatization of Sangster airport,
have been important for supporting FDI-related activities in tourism.

Introducing private participation to address more quickly
infrastructure constraints

In Estonia, privatization programmes had mixed impact.
The early entry of Finnish and Swedish telecommunications
investors was associated with rapid increases in mobile phone and
Internet services. There were, nevertheless, signs of problems. For
example, the granting of an exclusive concession to Estonian
Telephone Ltd. in 1992 led to fears of market abuse. The
privatization of Estonia’s railway system to a foreign and domestic
consortium failed to increase investment and achieve efficiency
gains, leading to the renationalization of the railway after five years.
An expected sale of the electricity system to Enron collapsed with
the United States company’s bankruptcy.

These outcomes highlight the need for adequate regulation
and for careful planning and sequencing. For example, the potential
for monopoly abuse by Estonian Telephone was effectively
addressed when entry to the European Union required ending the
company’s exclusive market control. The phasing out of the

74 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

company’s special position was interpreted as a way to balance the
need for initially attracting infrastructure FDI to a small market
while encouraging competition in the sector could eventually
emerge in the longer run.

Jamaica had a similarly mixed experience with private
participation in infrastructure. A key infrastructure privatization
occurred in 1988, when Cable & Wireless gained a 25-year
monopoly in telecommunications with no bidding process.
Subsequent dissatisfaction with performance led to a new agreement
in 2001 that opened the sector to competition, leading to new FDI
by Digicel. This led to lower prices, improved service delivery and
fostered FDI in the targeted ICT service sector. By contrast, FDI in
the electricity sector has been less successful with cost and
reliability still being a concern for businesses ranging from mining
to tourism. Controversy over tolls charged by a French highway
operator showed the difficulties of legitimizing and explaining the
rationale of private participation to the population. This record of
FDI in infrastructure made it difficult to further promote
privatizations in spite of the fact that the Government lacks funds to
upgrade infrastructure. For instance, business expansion would
require road maintenance while large-scale hotel projects would
greatly benefit from water and sewerage improvements.

4. Fostering FDI direct contributions while monitoring
potential negative effects

Adopting a systematic approach to measure FDI contributions and
design policies to maximize them

FDI in Estonia and Jamaica made up a larger share of
capital formation than in other small economies. Foreign affiliates in
Estonian manufacturing employed half of the sector’s workforce,
had a higher export propensity and accounted for 90 per cent of
private sector R&D. In Jamaica, foreign affiliates have contributed

Chapter III 75

UNCTAD Investment Advisory Series B

to job creation, particularly through labour-intensive investments in
tourism and ICT calls centres. These have been instrumental in
driving exports of services which now surpass exports of goods.
Both countries have benefited from FDI-driven export growth and
diversification. To further these types of contributions, proactive
inducements, as those that Jamaica has introduced in the ICT sector
to encourage a shift from call centres to software development,
would be necessary.

Policies to maximize direct contributions presuppose the
collection of data on the significance and benefits of FDI in a host
country’s economy. For example, UNCTAD measures the
significance of FDI to a host economy through a transnationality
index.1 Estonia ranked third in 2005 among 33 developed economies
for which UNCTAD computed this index. Jamaica ranked fifth
among developing countries, an important improvement compared
to its 16th position in 1998.

Remaining vigilant with FDI potential negative consequences

In terms of market structure, issues can arise concerning the
concentration of market power or the “crowding out” of local
enterprises. These potential problems relate to the country’s small
market relative to the size of many large TNC projects. In this
context, the competition framework becomes a priority. In this
regard, it may be useful to attract FDI from multiple small or
middle-sized TNCs to gradually assess the capacity of communities
to absorb larger projects.

In Estonia, competition issues emerged due to large market-
seeking foreign investments in the telecommunications and banking
sectors. These issues were dealt with by further opening up sectors
to further foreign investment, which was attracted by above-market
rates of return. In these cases, competition was stimulated by

76 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

reducing Government barriers to entry and increasing cross-border

Jamaica’s experience with telecommunications in many
ways mirrors that of Estonia. While a foreign investor was granted
an exclusive market, the unsatisfactory outcomes led to the
introduction of additional foreign players in the sector. As a result,
the market share of the initial foreign investor declined leading to
increased coverage and quality and to lower prices for consumers.

In the tourism sector, the country’s success in attracting FDI
for large, all-inclusive hotels has sometimes been associated with
negative effects on the surrounding communities. The labour and
infrastructure needs of these foreign-owned hotels can lead to social
and environmental issues as well as raise costs for local firms. For
instance, the inclusion of a variety of tourism services in foreign-
owned resorts reduced the sales of local hotels and restaurants.
Moreover, since these resorts often rely on imports over local
supplies, the reduction in demand for local tourism services is not
compensated by increased sales by local suppliers.

Monitoring and compensating for increased economic exposure to
global shocks

Liberalization policies and the promotion of location-
specific and sectoral advantages can compensate for the small
market size in some countries. At the same time, they also increase
the vulnerability of these economies to external shocks. Careful
monitoring of such risks and compensatory policies and regulations
are necessary for effective macroeconomic management. The 2008–
2009 global financial crisis and subsequent recession showed that
this is important for both Estonia and Jamaica.

Estonia received the majority of its FDI in the financial
sector. The rapid expansion of this sector in Estonia and its exposure

Chapter III 77

UNCTAD Investment Advisory Series B

to external shocks made the country especially vulnerable to
instability in global financial markets. Consequently, as in the other
Baltic States, it was severely hit by the financial crisis in the late
2008. The concentration of foreign ownership in the banking sector
(nearly 100 per cent of banking assets were foreign-owned)
combined with inadequate financial supervision in the host and
home countries, resulted in excessive accumulation of foreign debt.
This led to a collapse of domestic demand when global financial
pressures arose. However, the country maintained a strong fiscal
position and remained on track to join the euro zone. This contrasts
with neighbouring Latvia, which was forced to seek IMF support in
December 2008.

FDI inflows to Jamaica went primarily into bauxite and
tourism. As a result, these sectors became major sources of exports,
foreign exchange and Government revenues. However, the world
prices of bauxite and tourism sales are very sensitive to global
economic conditions. Therefore, when the world economy slowed
down in 2008–2009, the Jamaican economy was hit hard and the
Government requested the financial assistance of the IMF. Given
high existing levels of public debt, adequate fiscal management is
essential to complement policies that rely on external markets and a
limited range of economic activities. Furthermore, efforts to
diversify the economy, as attempted by targeting FDI into the ICT
sector, can also help in limiting the impact of external shocks.

5. Promoting long-term indirect FDI benefits

Identifying spillover mechanisms

Spillovers from FDI operations (i.e. intangible benefits
brought by the exposure of the local economy to sophisticated
foreign production processes) can help improve the national
productive capacity of indigenous firms. These spillovers can come

78 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

from a variety of mechanisms, including supplier linkages,
competition and demonstration effects, as well as labour mobility.

In Estonia, there is some evidence of spillovers that
increased productivity of local manufacturing firms. These effects
were difficult to link to specific policies and seemed to largely
depend on competition and demonstration effects from FDI
operations. Local firms lacked sufficient scale, skill specialization
and technological capacity to create significant sourcing linkages
with TNC affiliates and capture significant benefits from spillovers
through expanded cooperation.

In Jamaica, foreign-owned industry had little interaction
with local firms to help develop indigenous capabilities. In some
cases, the sector or segment of the business chain was simply not
conducive to local linkages, such as in apparel, where FDI
manufacturers typically moved locations to essentially seek lower-
cost production factors. In other instances, the nature of FDI projects
limited local linkages. For instance, attracting large FDI hotel
projects brought direct capital and employment to Jamaica.
However, the “all-inclusive” hotel format internalized much tourist
activity, thereby diminishing the spillovers previously enjoyed by
local restaurants and smaller providers of leisure activities. As
Jamaica seeks to attract FDI, paying more attention to potential FDI
indirect contributions could be beneficial. For example, larger FDI
projects should not necessarily be strongly promoted if “all-
inclusive” hotels isolate tourists from the local economy.

Building absorptive capacity of local firms

The starting point for encouraging spillovers in a host
country is to enhance the absorptive capacity of the local economy.
It is especially important to enhance the absorptive capacity among
indigenous firms if foreign investors are to increase linkages with
local suppliers and if local companies are to benefit from technology

Chapter III 79

UNCTAD Investment Advisory Series B

transfers. Government financial support may be needed for local
SMEs seeking to improve their capabilities (quality or quantity) to
become suppliers to foreign affiliates. Collaborative arrangements
with local universities and research organizations can also provide
valuable assistance and upgrade SME skills. Even if there is equal
treatment between foreign and indigenous enterprises, there should
still be initiatives seen to support domestic firms to ensure buy-in
and social cohesion. Other aspects of policy include skills
development in domestic business and professional sectors as well
as in science and engineering.

The absence of more pro-active programmes in Estonia
reflected the Government’s liberal approach. Yet, Estonia’s IPA
recently proposed some assistance to foreign affiliates to develop
linkages with local suppliers. In Jamaica, linkages between FDI and
indigenous businesses were promoted through a cluster approach.
Jamaica’s NIP put emphasis on the development of linkages in five
sectors. The idea was to strengthen the base of existing activities,
such as in tourism, entertainment and sports, or develop new
business areas such as telecommunications and ICT. The idea
behind the clusters was to focus promotional efforts and incentives
on attracting FDI to sectors where proximate enterprises can exploit
potential synergies and develop sufficient scale to compete in export
markets. The risk, of course, was to pick the wrong targets rather
than relying on market forces. Moreover, the weak linkages in these
industries demonstrate the challenges associated with improving the
capabilities of domestic firms to the level necessary to connect with
foreign affiliates.

Encouraging the upgrading of foreign affiliates

The role of successful foreign affiliates is likely to change
as their parent TNC’s products and processes evolve. FDI longevity
is associated with adjustments that lead affiliates to outsource some
of their standard operations to concentrate on new or more

80 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

sophisticated processes. In this context, opportunities arise for local
companies to become suppliers of foreign affiliates generating
deeper links with the local economy and leading to potential
knowledge and technological transfers. Host countries can thus
enjoy a double benefit. The TNC affiliate’s local operations make
higher value-added contributions to the national economy while
local firms capture the outsourced production, expanding and
upgrading their own business capabilities.

The two country experiences contain some evidence of
foreign affiliate upgrading; particularly with respect to regional
headquarter activities, although the overall level of upgrading has
remained fairly limited. The Estonian banking sector had some
success, most notably with the experience of Hansabank which,
after its purchase by Swedbank, expanded operations into
neighbouring countries. Yet, Estonia might have been more pro-
active in advertising itself as a “hub” for the Baltic Sea region or
even the CEE and the Russian Federation by emphasizing its
physical and communications infrastructure. In light of some
constraints that have developed as a result of successful FDI
attraction (for example with the Tallinn airport and available office
facilities), a promotional programme could have been useful in
identifying potential infrastructure “bottlenecks” earlier and
facilitated steps to address them.

Jamaica has not specifically targeted FDI for developing
“hub” operations, yet a few examples nevertheless exist. For
instance, Digicel established its group headquarters in Jamaica in
2004, just three years after entering the country’s
telecommunications sector. The group headquarters employed 250
people and served as the basis for Digicel’s expansion into other
countries in the Caribbean and Central America. A few TNCs also
used Jamaica’s efficiently-run port facilities as a “hub” for their
cargo operations while maintaining offices in other Caribbean
countries. However, Jamaica confronted difficulties in attracting

Chapter III 81

UNCTAD Investment Advisory Series B

other FDI for the purpose of establishing regional TNC “hubs”, the
most prominent challenge probably being the high violence and
crime rates. Aside from regional headquarters, the bauxite industry
upgraded in recent years, as foreign firms began to locally process a
larger share of total exports in this sector. Efforts are also being
made to push ICT activities towards software development.

Using inward FDI to stimulate outward FDI

Outward FDI is generally associated with higher domestic
labour productivity and is likely to generate indirect contributions
provided that emerging TNCs retain higher value parts of their
production chain within Estonia and Jamaica. In the two countries, a
new phase of outward FDI recently unfolded; at times led by local
companies seeking larger markets.

The two countries had permissive rather than intentional
supportive policies towards outward FDI. The absence of foreign
exchange controls facilitated outward FDI and, in the case of
Estonia, the domestic corporate tax system allowed foreign affiliates
to reinvest their profits abroad without being taxed. Moreover, both
Estonia and Jamaica have double taxation treaties that were
originally signed to support inward FDI. However, they now
facilitate outward FDI to treaty partners.

In Estonia, the entry of Nordic banks, and Swedbank in
particular, was associated with increased outflows of banking FDI,
as these banks used the country as an investment base to access the
region. Another development included pro-active investment funds
playing the role of identifying and facilitating significant inward and
outward FDI. A new breed of local private equity houses acquired
and consolidated small companies in the Baltic and CEE countries
in order to develop these operations. The transaction costs of entry
for new investors are generally low, which enables private
investment houses to work efficiently.

82 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

In Jamaica, much of the outward FDI was in the agro-
business from companies which survived the decline of the
manufacturing sector since the 1970s. So far, the involvement of
foreign affiliates in this process did not seem significant. Lacking
the stimulus of competition in the domestic market, international
benchmarking was an important driver of competitiveness. Other
factors included the exploitation of historical niches and brand
reputations as well as a focus on serving diaspora markets. Some of
these efforts have been assisted by small foreign investors.

Successful indigenous outward investors are attractive targets for
additional FDI inflows

Successful local outward investors from small countries
may become sufficiently large and attractive to be the targets for
acquisition by new inward FDI. This could indeed be a natural exit
strategy for the founding investors. For example, the expansion of
Hansabank into the Baltic region started before its acquisition by
Swedbank and continued thereafter. While both Estonia and Jamaica
did not show signs of resisting this type of development through
some form of a protective “national champions” policy, this issue
was not addressed. A possible response would be to develop policies
to retain the higher value parts of the group activities in the country
and ensure the supply of high value goods and services to the group
operations by domestic suppliers.

Chapter III 83

UNCTAD Investment Advisory Series B


The index is calculated as an average of four elements: (a) FDI inflows

as a percentage of gross fixed capital formation; (b) FDI inward stocks
as a percentage of GDP; (c) value added of foreign affiliates as a
percentage of GDP; and (d) employment of foreign affiliates as a
percentage of total employment.


Small countries face special challenges in attracting and
retaining FDI, and in designing policies that will maximize its
associated benefits for national economic growth and development.
While Estonia and Jamaica outperformed their small country peers
in attracting FDI over the past two decades, they pursued different
approaches which reflected their country conditions and
development priorities. The two countries made use of liberalization
policies to expand their small market size but Estonia’s liberal
policy contrasted with Jamaica’s planned FD targeting approach.

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.


Barclay LA (2005). The Continuing Mystique: Multinationals,
technology transfer and the development of indigenous
technological capabilities in Caribbean countries. Department
of Management Studies, University of the West Indies,

Blomström M, Kokko A and Globerman S (2000). The
Determinants of Host Country Spillovers from Foreign Direct
Investment. Centre for Economic Policy Research, No. 2350.

Bloom DE et al. (2001). Globalization, Liberalization and
Sustainable Human Development: Progress and challenges in
Jamaica. Jamaica Country Assessment: Occasional Paper

Clayton A and Karagiannis N (2007). Sustainable Tourism in the
Caribbean: Alternative Policy Considerations. Institute for
Sustainable Development, University of the West Indies.

Copenhagen Economics (2006). Study on FDI and regional
development. December.

Damijan J et al. (2003). “Technology transfer through FDI in TOP-
10 transition countries: How important are direct effects,
horizontal and vertical spillovers?” Working paper 17, Institute
of Economic Research, Ljubljana.

Enterprise Estonia (2006). Foreign Investment Survey.

Government of Jamaica (1996). National Industrial Policy Growth
and Prosperity: The Way Forward. Government of Jamaica,

88 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Government of Jamaica, Private Sector Organization of Jamaica and
PricewaterhouseCoopers (2007). Jamaica Tomorrow: National
Planning Summit, Kingston.

Hannula H and Tamm K (2001). Impact of foreign owners on the
restructuring process of Estonian manufacturing enterprises.
University of Tartu.

Inter-American Development Bank (IDB) (2006). IDB Country
Strategy with Jamaica (2006–2009). 3 August.

Jamaica Cluster Competitiveness Project (JCCP) (2006).
International Workshop on Public–Private Dialogue. Working
Group 4 Case Study-Jamaica. Paris, 1–2 February.

Jamaica Trade and Invest (JTI) (2007). Incentives Available in
Jamaica. JTI, Kingston. Mimeo.

King D (2001). Globalization, Trade Policy, and Sustainable
Human Development in Jamaica. Department of Economics.
University of the West Indies.

Liuhto K and Jumpponen J (2002). The Outward Expansion of the
largest Baltic Corporations – Survey Results. Baltic Journal of
Economics. 3(1), 50–75.

Mugione F and Castillo P (2001). Foreign Direct Investment in
Jamaica. UNCTAD New York and Geneva.

Piech K and Radoševic S, eds. (2006). The Knowledge-based
Economy in Central and Eastern Europe: Countries and
Industries in a Process of Change. New York, Palgrave

References 89

UNCTAD Investment Advisory Series B

Sinani E and Meyer K (2004). Spillover of Technology Transfer
from FDI: The Case of Estonia. Journal of Comparative
Economics. 32 (3).

Stephan J (2003). Evolving Structural Patterns in the Enlarging
European Division of Labour: Sectoral and Branch
Specialization and the Potentials for Closing the Productivity
Gap. Institut für Wirtschaftsforschung Halle, 5.

Tiits M, ed. (2007). Kaupmeeste riik [The Nation of Merchants].
Tallin, Estonian Academy of Sciences.

United States International Trade Commission (USITC) (2007). The
Impact of the Caribbean Basin Economic Recovery Act.
Eighteenth Report 2005-2006, USITC Publication 3954,
Washington, D.C., September.

Vahter P and Masso J (2005). Home versus Host Country Effects of
FDI: Searching for New Evidence of Productivity Spillovers.
Working Paper 13, Bank of Estonia, Tallin.

Watson NN (1988). Evaluating the Net Economic Benefits of Free
Trade Zones in Theory and Practice: Applied to the Kingston
Export Free Zone in Jamaica. PhD Thesis, Simon Fraser
University, Canada, November.

Wint AG (2003). Competitiveness in Small Developing Economies:
Insights from the Caribbean. Kingston, Ian Randle Publishers

Witter M (2006). Jamaica. In Laird S and de Córdoba Santiago
Fernández Coping with Trade Reforms: A Developing-Country
Perspective on the WTO Industrial Tariff Negotiations.
Palgrave MacMillan and UNCTAD, London and Geneva.

90 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

World Bank (2003). Country Economic Memorandum: Jamaica:
The Road to Sustained Growth. Report 26088-JM, Latin America
and Caribbean Region World Bank, 4 December.

World Bank (2005a). A Time to Choose: Caribbean Development in
the 21st Century. Washington D.C.: The World Bank.

World Bank (2005b). Public Expenditure Review. Washington, D.C.

World Bank and United Nations Office on Drugs and Crime (2007).
Crime, Violence and Development: Trends, costs and Policy
Options in the Caribbean, March.

World Bank (2009). Doing Business Report.



(For more information, please visit www.unctad.org/en/pub)

World Investment Reports
(For more information visit www.unctad.org/wir)

World Investment Report 2010. Investing in a Low-Carbon Economy.
Sales No. E.10.II.D.1. $80.

World Investment Report 2009. Transnational Corporations,
Agricultural Production and Development. Sales No. E.09.II.D.15. $80.

World Investment Report 2008. Transnational Corporations and the
Infrastructure Challenge. Sales No. E.08.II.D.23. $80.

World Investment Report 2007. Transnational Corporations, Extractive
Industries and Development. Sales No. E.07.II.D.9. $75. http://www.unctad.org/

World Investment Report 2006. FDI from Developing and Transition
Economies: Implications for Development. Sales No. E.06.II.D.11. $75.
http://www.unctad.org/ en/docs//wir2006_en.pdf.

World Investment Report 2005. Transnational Corporations and the
Internationalization of R&D. Sales No. E.05.II.D.10. $75.
http://www.unctad.org/ en/docs//wir2005_en.pdf.

World Investment Report 2004. The Shift Towards Services. Sales No.
E.04.II.D.36. $75. http://www.unctad.org/en/docs//wir2004_en.pdf.

World Investment Report 2003. FDI Policies for Development: National and
International Perspectives. Sales No. E.03.II.D.8. $49. http://www.unctad.org/

92 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

World Investment Report 2002: Transnational Corporations and Export
Competitiveness. 352 p. Sales No. E.02.II.D.4. $49. http://www.unctad.org/

World Investment Report 2001: Promoting Linkages. 356 p. Sales No.
E.01.II.D.12 $49. http://www.unctad.org/wir/contents/wir01content.en.htm.

World Investment Report 2000: Cross-border Mergers and Acquisitions and
Development. 368 p. Sales No. E.99.II.D.20. $49. http://www.unctad.org/wir/

Ten Years of World Investment Reports: The Challenges Ahead. Proceedings
of an UNCTAD special event on future challenges in the area of FDI.
UNCTAD/ITE/Misc.45. http://www.unctad.org/wir.

Best Practices in Investment for Development

How to Integrate FDI and Skill Development: Lessons from Canada and
Singapore 70 p. Sales No. E.10.II.D.16

How to Create and Benefit from FDI-SME Linkages: Lessons from
Malaysia and Singapore 92 p. Sales No. E.10.II.D.12

How Post-Conflict Countries can Attract and Benefit from FDI: Lessons
from Croatia and Mozambique, 125 p. Sales No. E.10.II.D.18

How to utilize FDI to improve transport infrastructure – roads Lessons
from Australia and Peru, 113 p. Sales No. E.09.II.D.14

How to utilize FDI to improve infrastructure – electricity Lessons from
Chile and New Zealand, 95 p. Sales No. E.09.II.D.13

International Investment Policies for Development
(For more information visit http://www.unctad.org/iia)

Investor-State Disputes: Prevention and Alternatives to Arbitration, 129
p. Sales No. E.10.II.D.11. $20.


UNCTAD Investment Advisory Series B

The Role of International Investment Agreements in Attracting Foreign
Direct Investment to Developing Countries. 161 p. Sales No. E.09.II.D.20.

The Protection of National Security in IIAs. 170 p. Sales No.
E.09.II.D.12. $15.

Identifying Core Elements in Investment Agreements in the APEC Regions.
134 p. Sales No. E.08.II.D.27. $15.

International Investment Rule-Making: Stocktaking, Challenges and the Way
Forward. 124 p. Sales No. E.08.II.D.1. $15.

Investment Promotion Provisions in International Investment Agreements.
103 p. Sales No. E.08.II.D.5. $15.

Investor-State Dispute Settlement and Impact on Investment
Rulemaking. 110 p. Sales No. E.07.II.D.10. $30.

Bilateral Investment Treaties 1995—2006: Trends in Investment Rulemaking.
172 p. Sales No. E.06.II.D.16. $30.

Investment Provisions in Economic Integration Agreements. 174 p.

Preserving Flexibility in IIAs: The Use of Reservations. 104 p. Sales No.
E.06.II.D.14. $15.

International Investment Arrangements: Trends and Emerging Issues. 110 p.
Sales No. E.06.II.D.03. $15.

Investor-State Disputes Arising from Investment Treaties: A Review. 106 p.
Sales No. E.06.II.D.1 $15

South-South Cooperation in Investment Arrangements. 108 p. Sales No.
E.05.II.D.26 $15.

International Investment Agreements in Services. 119 p. Sales No.
E.05.II.D.15. $15.

94 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

The REIO Exception in MFN Treatment Clauses. 92 p. Sales No. E.05.II.D.1.

Issues in International Investment Agreements
(For more information visit http://www.unctad.org/iia)

Scope and Definition: A Sequel 149 p Sales No. E.11.II.D.9. $25

Most-Favoured-Nation Treatment: A Sequel. 141 p. Sales No.
E.10.II.D.19. $25

International Investment Agreements: Key Issues, Volumes I, II and III. Sales
no.: E.05.II.D.6. $65.

State Contracts. 84 p. Sales No. E.05.II.D.5. $15.

Competition. 112 p. Sales No. E.04.II.D.44. $ 15.

Key Terms and Concepts in IIAs: a Glossary. 232 p. Sales No. E.04.II.D.31.

Incentives. 108 p. Sales No. E.04.II.D.6. $15.

Transparency. 118 p. Sales No. E.04.II.D.7. $15.

Dispute Settlement: State-State. 101 p. Sales No. E.03.II.D.6. $15.

Dispute Settlement: Investor-State. 125 p. Sales No. E.03.II.D.5. $15.

Transfer of Technology. 138 p. Sales No. E.01.II.D.33. $18.

Illicit Payments. 108 p. Sales No. E.01.II.D.20. $13.

Home Country Measures. 96 p. Sales No.E.01.II.D.19. $12.

Host Country Operational Measures. 109 p. Sales No E.01.II.D.18. $15.


UNCTAD Investment Advisory Series B

Social Responsibility. 91 p. Sales No. E.01.II.D.4. $15.

Environment. 105 p. Sales No. E.01.II.D.3. $15.

Transfer of Funds. 68 p. Sales No. E.00.II.D.27. $12.

Flexibility for Development. 185 p. Sales No. E.00.II.D.6. $15.

Employment. 69 p. Sales No. E.00.II.D.15. $12.

Taxation. 111 p. Sales No. E.00.II.D.5. $12.

Taking of Property. 83 p. Sales No. E.00.II.D.4. $12.

National Treatment.. 94 p. Sales No. E.99.II.D.16. $12.

Admission and Establishment.. 69 p. Sales No. E.99.II.D.10. $12.

Trends in International Investment Agreements: An Overview. 133 p. Sales
No. E.99.II.D.23. $12.

Lessons from the MAI. 52 p. Sales No. E.99.II.D.26. $10.

Fair and Equitable Treatment.. 85 p. Sales No. E.99.II.D.15. $12.

Transfer Pricing.. 71 p. Sales No. E.99.II.D.8. $12.

Scope and Definition. 93 p. Sales No. E.99.II.D.9. $12.

Most-Favoured Nation Treatment.. 57 p. Sales No. E.99.II.D.11. $12.

Investment-Related Trade Measures. 57 p. Sales No. E.99.II.D.12. $12.

Foreign Direct Investment and Development.. 74 p. Sales No. E.98.II.D.15.

96 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

Investment Policy Monitors

Investment Policy Monitor. A Periodic Report by the UNCTAD
Secretariat. No. 3, 7 October 2010.

Investment Policy Monitor. A Periodic Report by the UNCTAD
Secretariat. No. 2, 20 April 2010.

Investment Policy Monitor. A Periodic Report by the UNCTAD
Secretariat. No. 1, 4 December 2009.

IIA Monitors and Issues Notes

IIA Issues Note No. 1 (2010): Latest Developments in Investor–State
Dispute Settlement.

IIA Monitor No. 3 (2009): Recent developments in international
investment agreements (2008–June 2009).

IIA Monitor No. 2 (2009): Selected Recent Developments in IIA
Arbitration and Human Rights.

IIA Monitor No. 1 (2009): Latest Developments in Investor-State Dispute

IIA Monitor No. 2 (2008): Recent developments in international
investment agreements (2007–June 2008).

IIA Monitor No. 1 (2008): Latest Developments in Investor– State
Dispute Settlement.


UNCTAD Investment Advisory Series B

IIA Monitor No. 3 (2007): Recent developments in international
investment agreements (2006 – June 2007).

IIA Monitor No. 2 (2007): Development implications of international
investment agreements.

IIA Monitor No. 1 (2007): Intellectual Property Provisions in
International Investment Arrangements.

IIA Monitor No. 4 (2006): Latest Developments in Investor-State Dispute

IIA Monitor No. 3 (2006): The Entry into Force of Bilateral Investment
Treaties (BITs).

IIA Monitor No. 2 (2006): Developments in international investment
agreements in 2005.

IIA Monitor No. 1 (2006): Systemic Issues in International Investment
Agreements (IIAs).

IIA Monitor No. 4 (2005): Latest Developments in Investor-State Dispute

IIA Monitor No. 2 (2005): Recent Developments in International
Investment Agreements.

IIA Monitor No. 1 (2005): South-South Investment Agreements

98 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

United Nations publications may be obtained from bookstores and
distributors throughout the world. Please consult your bookstore or write:

For Africa, Asia and Europe to:

Sales Section
United Nations Office at Geneva

Palais des Nations
CH-1211 Geneva 10

Tel: (41-22) 917-1234
Fax: (41-22) 917-0123

E-mail: unpubli@unog.ch

For Asia and the Pacific, the Caribbean, Latin America and North America

Sales Section
Room DC2-0853

United Nations Secretariat
New York, NY 10017

United States
Tel: (1-212) 963-8302 or (800) 253-9646

Fax: (1-212) 963-3489
E-mail: publications@un.org

All prices are quoted in United States dollars.

For further information on the work of the Division on Investment and
Enterprise, UNCTAD, please address inquiries to:

United Nations Conference on Trade and Development
Division on Investment and Enterprise

Palais des Nations, Room E-10054
CH-1211 Geneva 10, Switzerland

Telephone: (41-22) 917-5651
Telefax: (41-22) 917-0498


Best Practices in Investment for Development

Case Studies in FDI: How to Attract and Benefit from FDI in
Small Countries

Lessons from Estonia and Jamaica
Sales No. E.10.II.D.12

In order to improve the quality and relevance of the work of the
UNCTAD Division on Investment, Technology and Enterprise
Development, it would be useful to receive the views of readers on this
publication. It would therefore be greatly appreciated if you could complete
the following questionnaire and return it to:

Readership Survey
UNCTAD Division on Investment and Enterprise

United Nations Office at Geneva
Palais des Nations, Room E-9123
CH-1211 Geneva 10, Switzerland

Fax: 41-22-917-0194

1. Name and address of respondent (optional):

2. Which of the following best describes your area of work?

Government † Public enterprise †
Private enterprise † Academic or research
institution †
organization † Media †
organization † Other (specify) ________________

3. In which country do you work? _______________________

100 How to Attract and Benefit from FDI in Small Countries

UNCTAD Investment Advisory Series B

4. What is your assessment of the contents of this publication?

Excellent † Adequate †
Good † Poor †

5. How useful is this publication to your work?

Very useful † Somewhat useful †
Irrelevant †

6. Please indicate the three things you liked best about this publication:

7. Please indicate the three things you liked least about this publication:

8. If you have read other publications of the UNCTAD Division on
Investment, Enterprise Development and Technology, what is your
overall assessment of them?

Consistently good † Usually good, but with
some exceptions †
Generally mediocre † Poor †

9. On average, how useful are those publications to you in your work?
Very useful † Somewhat useful †
Irrelevant †

10. Are you a regular recipient of Transnational Corporations (formerly
The CTC Reporter), UNCTAD-DITE’s tri-annual refereed journal?

Yes † No †
If not, please check here if you would like to receive a sample copy

sent to the name and address you have given above: †

United Nations

For more information please visit
http://www.unctad.org, e-mail iif@unctad.org

or contact James Zhan, Director,
Division on Investment and Enterprise

at +41 (22) 917 57 97