The investment climate can be understood as the set of factors in a given location that shape firms’ incentives and opportunities to invest, grow and create jobs. Some of these factors are costs; others are risks; still others are the competitive forces in the economy. Together, they determine the vibrancy and reach of private sector firms in the economy. A strong investment climate is not a serendipitous occurrence: it is the result of country authorities formulating, implementing and enforcing an appropriate set of policies.
There is profound disagreement as to which social, political or economic factors have prevented the development of a strong investment climate. The World Bank, for example, asserts that a good investment climate is not just about generating profits for firms but also about improving outcomes for society including through its impact on job creation, lower prices, and broadening the tax base.
Significantly, it is difficult to make generalisations about what constitutes a strong investment climate. Changes to the investment climate may be favourable or unfavourable depending on the firm, the sector, and the investor in question.