Global trade routes converge on a factory floor symbolizing local investment and global exchange.

Unlocking Global Growth: How Investment Climate and Outward Orientation Boost Manufacturing Productivity

Lena Voss in Business & Economy August 2025 • 4 min read.

"Discover the critical factors that fuel manufacturing success in developing economies, from infrastructure to international trade."

Manufacturing has long been recognized as a key driver of economic progress. Its ability to foster innovation, embrace technological advancements, and achieve economies of scale makes it a vital engine for growth, especially in developing nations aiming to catch up with more advanced economies.

The convergence hypothesis suggests that improving manufacturing productivity is an effective way for countries to enhance their economic performance and close the gap with leading economies. The role of manufacturing has been reaffirmed by economists who see it as the most realistic path toward sustained growth for low-income, low-skilled, and labor-abundant developing countries.

Developments in economic literature have also emphasized the importance of a business-friendly investment climate for robust economic performance. But what exactly constitutes a conducive environment for businesses to thrive, and how does it impact their productivity? This article explores these critical questions, drawing on research and data from developing economies around the world.

What is an Investment Climate and Why Does It Matter?

Global trade routes converge on a factory floor symbolizing local investment and global exchange.

An investment climate encompasses the policy, institutional, and regulatory environment in which firms operate. Key factors include the rule of law, the quality of the judiciary system, the control of corruption, the level and complexity of taxation and regulation, the quality of infrastructure, the quality of the labor force, and the cost and availability of financing, the security and the political stability.

A favorable investment climate facilitates the functioning of markets and reduces the transaction risks and costs associated with investing in, starting, operating, and closing down a business. It can also create new opportunities and put competitive pressures on firms. A better business environment contributes to the effective delivery of the public goods necessary for productive business.

Improved Infrastructure: Reliable power, transportation, and communication networks reduce operating costs and improve efficiency.
Access to Finance: Affordable credit and investment opportunities enable firms to expand, upgrade technology, and increase production.
Skilled Workforce: A well-educated and trained labor pool enhances productivity and innovation.
Political Stability and Security: A predictable and secure environment encourages investment and reduces risk.
Fair Competition: Open and competitive markets promote efficiency and innovation.

In addition to a sound investment climate, outward orientation—a strategy that encourages international trade and foreign investment—is another well-accepted source of improved performance. Foreign exposure increases competition for domestic and exporting firms, motivating them to invest and become more productive. Access to foreign capital goods also facilitates technology transfer from advanced countries.

The Path Forward: Policy Implications for Growth

Improving manufacturing productivity and competitiveness is vital for developing economies seeking to integrate into the global economy and achieve sustained growth. By prioritizing policy reforms that foster a business-friendly investment climate and encourage outward orientation, these nations can unlock their manufacturing potential and create a more prosperous future for their citizens.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.1080/00036846.2018.1488065, Alternate LINK

Title: Investment Climate, Outward Orientation And Manufacturing Firm Productivity: New Empirical Evidence

Subject: Economics and Econometrics

Journal: Applied Economics

Publisher: Informa UK Limited

Authors: M.A. Véganzonès-Varoudakis, H. T. M. Nguyen

Published: 2018-07-19

Everything You Need To Know

What constitutes a favorable "investment climate" for businesses in developing economies, and why is it considered important?

An "investment climate" encompasses the policy, institutional, and regulatory environment where firms operate. Key factors include the rule of law, the quality of the judiciary system, control of corruption, levels of taxation and regulation, quality of infrastructure, quality of the labor force, cost and availability of financing, security, and political stability. A favorable investment climate facilitates market functioning, reduces transaction risks and costs related to starting or operating a business, and creates opportunities while applying competitive pressures on firms. This leads to effective delivery of public goods necessary for productive business.

How does "outward orientation" contribute to improved manufacturing performance in developing countries?

"Outward orientation", which encourages international trade and foreign investment, increases competition for domestic and exporting firms. This motivates them to invest and become more productive. Access to foreign capital goods through "outward orientation" facilitates technology transfer from advanced countries, thereby boosting manufacturing performance in developing economies. This strategy is vital for integrating into the global economy and achieving sustained growth.

What role does manufacturing play in helping developing nations catch up with more advanced economies, and how does it relate to the "convergence hypothesis"?

Manufacturing is a key driver of economic progress because of its ability to foster innovation, technological advancements, and economies of scale. The "convergence hypothesis" suggests that improving manufacturing productivity is an effective way for countries to enhance their economic performance and close the gap with leading economies. Economists also see manufacturing as the most realistic path toward sustained growth for low-income, low-skilled, and labor-abundant developing countries. Investing in manufacturing is a key part of closing the economic gap between developed and developing nations.

Besides foreign investment and trade, what specific improvements within a developing economy's infrastructure are crucial for enhancing manufacturing productivity?

Reliable power, transportation, and communication networks reduce operating costs and improve efficiency. Affordable credit and investment opportunities enable firms to expand, upgrade technology, and increase production. A well-educated and trained labor pool enhances productivity and innovation. Political stability and security create a predictable and secure environment that encourages investment and reduces risk. Open and competitive markets promote efficiency and innovation. These infrastructural elements are critical for fostering a conducive environment for business to thrive.

What policy reforms should developing economies prioritize to foster a business-friendly "investment climate" and encourage "outward orientation," and what is the ultimate goal of these reforms?

Developing economies should prioritize policy reforms that foster a business-friendly "investment climate" by focusing on the rule of law, reducing corruption, streamlining regulations, and improving infrastructure. They should also encourage "outward orientation" by promoting international trade, attracting foreign investment, and facilitating technology transfer. The ultimate goal of these reforms is to improve manufacturing productivity and competitiveness, enabling these nations to integrate into the global economy and achieve sustained economic growth, thus creating a more prosperous future for their citizens.