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Theories of investment climate fundamentally deal with the conditions of the investment environment and how it can be improved to impact positively on economic development. The theories encouraged the use of investment climate assessment surveys which are supposed to be conducted in a space of three years (World Bank, 2011). Investment climate assessment surveys (business environment surveys) originated from United States of America (USA) in the early 20^th century when increased competition between western and eastern states was measured to find out the pull and push factors in the respective regions. The results of such surveys were used to construct index of business-attractiveness to guide firms from across the states, places or regions.

The dynamic nature of the investment environment made many theories of investment climate to be focused on aggregate factors affecting the business environment and their implication for economic development. Below are some of the theories:

i. Complexity Theory of Investment Climate

This interdisciplinary theory, which is drawn from natural sciences, used the complex adaptive system to describe uncertainty and non-linear series. It helps to explain how firms or organisations adapt to their environment to cope with the uncertainty of the environment.

(Ramalingam & Jones, 2008). Investment climate parameters are usually macro or economy-wide variables but which impact is observed at micro or firm’s level. Complexity theory advocated that the dynamic complex relationship of the investment climate variables be examined at both firm and economy wide levels in an integrated form (Sergei, 2003). According to Sergei these determining variables of investment in a country borders on current opportunities, environmental threats, financial development, interest rate, institutional arrangement,

information constraint, political factors, degree of capital safety, transaction cost or cost of doing business, income level for potential patronage, government spending and degree of monopolization of the economy to conscript competition.

ii. Location-Factor Theory of Investment Climate.

This theory emphasised the identification of investment promotion factors that attract private investors to a particular location or locality. Location factor index are thus constructed to describe the degree of attractiveness of the regions to investors. In early times, natural resources and size of market for the output of a firm were used as main indices of investment attraction to a place (Lahimer, 2007). But in later years, human capital development (quality labour/expertise), institutional quality, geographical factors and others were incorporated in the index equation.

Geographical factors are natural environmental factors such as raw materials, mineral resources, adequate rainfall and sunshine while institutional factors border on human factors such as social groupings, culture, consumption pattern, governance, regulations and provision of infrastructures.

The most important investment climate factors for consideration today are: reduction in cost of production and transportation, market size, labour availability, production infrastructures, low tax rate, friendly regulations, security, international trade, better ownership system, favourable macroeconomic policies, good governance, and others (World Bank, 2011). Location factor theory has extended to international dimension where international trade rules, regulatory policies and treaties are used in assessing the suitability of an investment environment by investors. In this regard, international conglomerates and multi-national corporations have established a sort of checklist of investment climate conditions that must hold in a country before coming to such a country to do business (Independent Evaluation Group, 2013). The check list include imponderables which are factors and issues that are generally not explicitly included in the investment climate assessment surveys but which are critical to the incentives required by investors to invest and made the returns for all types of firms high. These factors are geographical, rainfall regimes, sunlight, natural disasters (floods, erosion, spillages, fire outbreak, earth quake, wind ravage, tsunamis etc), external shocks from other economies, accident rate, sanitation, health, epidemic, market size and niche, localisation and agglomeration

advantage, level of economies of scale to be enjoyed by a firm and the degree of response of consumers and competitors to business strategies etc.

Localisation of firms can boost up rapid infrastructural development for use by all the firms’ in the locality, area or region to reduce the cost of doing business. For instance, if the government provides electricity in a localised area of firms, it will help to minimise the purchase and use of individual power generating sets which are expensive to run as well as increase the cost of production. Conducive weather condition, climate, timely rainfall or sunshine can be an incentive to firms and investors (especially those in agribusiness). Some diagnostic locational factors and possible action of government to mitigating them are set out in the table below.

Table 2.1: Summary of Diagnostic Factors and Government Actions on a Healthy Investment Climate

S/N0 Investment

climate factors

Factor details Government action towards healthy investment climate

1 Macroeconomic environment

Economic policies, Policy uncertainties. Better macroeconomic, regulatory and investment-friendly policies.

2 Political Atmosphere

Political instability, anxiety, electoral manipulations.

Increasing political stability; Credible elections, smooth succession; Reduction of anxiety.

3 Legal System Rule of law, Human Rights, Patent, property right, Justice

Upholding rule of law; reduction in human rights abuses as well as patent and property rights; Promoting Justice and judicial freedom

4 Tax High and excessive taxes, multiple tax Grant tax holidays to new investors; Avoid double or multiple taxation

5 Infrastructures Electricity/Power supply, Roads, Rail, Water, Telecom, Airports, Health and educational/training institutions.

Regular supply of electricity and water; Construction of good roads, rail system; Provision of standard airports, health centres, education and manpower training institutions

6 Security Robberies, Kidnappings, Assassinations, Stealing, Insurgences, Vandalisms

Provision of better security arrangements for investors through effective and well equipped police and other security networking.

7 Business Regulation

Registration, patent/trade mark, remittances, social responsibilities, trade, tariff, product standard regulations etc.

Providing easy/fast registration; Granting of patent or trade mark; Placing less social responsibility burden on businesses;

Relaxing external trade restrictions; regulating product standard.

8 Financial Access Loan/credit facilities’ availability, collaterals hindrances

Developing financial institutions to provide credit at low interest rate or cost; Demanding less collaterals from investors 9 Labour Policies Skills, entrepreneurship,

technical-know-how, minimum wage, contract terms, gender-labour issues

Provide skill training for labour development; Evolving friendly labour contract terms; Providing protection for female entrepreneurs

10 Corruption Red-tape and delays in administration, denial of access to public or official service/facility

Fighting corruption, transparent leadership, accountability and commitment; Open transactions in public places to create unsafe environment for corruption.

11 Competition Shield market, subsidies Government to avoid `frequent market interventions that discourages competition.

12 Imponderables Firms’ agglomeration, rainfall, sunshine, natural disasters, external shocks, economies of scale, accident, sanitation, health, epidemic, market size, niche, competitors’

powers etc.

Government to take quick ad-hoc ameliorative measures when they occur.

Source: Researcher’s Compilation from

(i) IEG World Bank Portfolio Review Table on Investment Climate Intervention p.38 (2015). (ii) Nwogwugwu &

Onwuka’s Factors that Shape Opportunities and Incentives for Firms to Invest, Table p.2 (2012).

The essence of investment climate diagnoses is to provide a better understanding and informed-basis for policy decision on what reforms to embark upon to regulate and improve the investment environment as demonstrated on Table 2.1.

iii. Comprehensive Investment Climate Theory

This theory emphasised a comprehensive or aggregate factors approach to making the investment climate attractive to both producers and consumers. The theory emphasised complementarities, scrutiny and integration of both endogenous and exogenous factors of the investment climate for aggregate indexing of its state beyond the frontiers of the country to international level (Silva-Leander, 2005). It is important to note that the condition of the investment climate of a country is not only affected by domestic factors but also by international or external factors from other countries’ economic and political activities. Thus the comprehensive investment climate theory proposes that both micro (firm level) and macro (economy-wide and rest of the world level) variables of the investment environment be put together and integrated for social benefit of firms and individuals of a country. The comprehensive theory advocated an in-depth analysis of the numerous aspects of the investment climate such as the interaction between business firms and the consumers of their products as vital element of promoting economic development. For instance, the firm in its activities can create job opportunity, training, provision of social amenities for host community of operation while the community in turn provides labour and security services as well as market for the firm’s products.