Can foreign direct investment improve the resilience of health systems?

By Iris Mantovani of the Investment Division in the OECD Directorate for Financial and Enterprise Affairs

Health systems are facing the most serious global pandemic crisis in a century, sparking discussions among policymakers on how to strengthen their resilience. In developing countries, domestic investment – public and private – is not enough to guarantee widespread access to primary healthcare, even in “normal” times. The World Health Organization (WHO) estimates that an additional USD 370 billion per year are needed for primary healthcare to achieve the SDG targets on universal health care in low- and middle-income countries.

Against this backdrop, foreign direct investment (FDI) into health systems has been rising steadily, with a growing share pouring into health infrastructure and services, particularly in developing countries. Can FDI help fill the financing gap in healthcare? How can FDI increase resilience of health systems while also expanding affordable access to healthcare?

Healthcare – made up of goods, services and infrastructure – is subject to varying degrees of state regulation and private sector participation. The private sector tends to prevail in supplying medical goods, while its role in deploying and operating health facilities, and in supplying health services is somewhat more controversial. This varies considerably across countries, with close to zero private sector participation in Nordic countries, and over 80% in Japan, the United States and the Netherlands (Figure 1). Developing and least developed countries appear at both ends of the spectrum, suggesting that this variation is not necessarily linked to income level or stage of economic development. The prevailing types of private healthcare providers also differ across countries, with French private hospitals primarily profit-seeking, and Japanese or Dutch ones primarily not-for-profit.

Figure 1. Private provision of health infrastructure

The pandemic has exposed the weaknesses of globalised medical goods

Healthcare goods – i.e. medical devices, pharmaceuticals and biomedical technologies – are global goods and their production has long been fragmented across countries and regions. With containment measures arresting economic activity, interrupting international supply lines and exacerbating shortages in essential medical supplies, the current pandemic has called into question these global value chains (GVCs), exposing weaknesses, dependencies and bottlenecks that were hitherto unknown or tacitly accepted.

Over 90 governments addressed these shortages by restricting exports of medical goods, and over 100 liberalised imports. Some countries responded by enhancing their foreign investment screening mechanisms, or introducing new ones, to prevent potential acquisitions of sensitive assets considered critical for the supply of healthcare goods. Among OECD members, countries that screen acquisitions of biotechnologies or medical devices almost doubled from 11 to 21, since the onset of the pandemic. Across developed and developing countries, investment promotion agencies (IPAs) also played their part in the fight against the pandemic, by activating their business networks to help find alternative ways of producing essential medical goods.

In the aftermath of this crisis, governments may need to reconsider the resilience of the GVCs that underpin medical supplies and the inputs used to produce them, in order to increase their preparedness against potential future health crises. In order for open trade and investment regimes to continue to deliver allocative efficiency, but also guarantee access to essential health products where needed in times of crisis, existing international frameworks and commitments may need to be rethought. A new deal could, for instance, require the elimination of import tariffs by importing governments on selected medical goods in exchange for acceptance on the side of exporting governments of qualified rights to introduce temporary export curbs on shipments abroad. Other commitments may address investment policy aspects, such as investment screening or investment incentives.

FDI can improve health services if necessary safeguards are in place

Foreign control of healthcare infrastructure and services has historically been more heavily regulated and restricted for national security concerns, but has been experiencing gradual liberalisation in some countries in the last decade, and is actively promoted in others. In Southeast Asia, foreign investors are in many cases permitted majority ownership of health-related assets and governments have adopted a number of policies to promote FDI in healthcare and the development of medical tourism hubs, including targeted industry events, fiscal incentives and special economic zones.

Table 1. Policies in support of FDI in healthcare in ASEAN

The most immediate appeal of FDI in the health sector is debt-free investment that increases physical capacity and infrastructure and alleviates pre-existing shortages in the supply of healthcare. This increased capacity may be particularly beneficial in low-income countries that suffer from underinvestment in health infrastructure, as it eases pressures on public finances. In addition, FDI can raise the overall quality of host country health services by spreading innovations in medical technology, drugs and health services, as well as superior management techniques, organisational skills and information systems.

The flip side of the coin is that, public health services may suffer, as the presence of foreign investors that offer higher wages and better equipment may entice qualified personnel away from public (and private domestic) facilities, creating or aggravating an internal brain drain. By one estimate, an increase of 100,000 additional foreign patients in private hospitals in Thailand leads to an internal brain drain of 240-700 medical doctors. With fewer resources, the quality of public health services is likely to deteriorate.

In short, as FDI increases capacity of health systems, alleviates pressures on government finances, and improves quality and choice for nationals of the host country who can afford private health services, it can worsen inequality. By drawing away resources from public health services, it can aggravate a two-tier system, with high-quality care for the rich and low-quality for the poor. The impact of FDI on equity, costs, and quality of healthcare depends on the safeguards that are in place to ensure affordable access for all. Health is a public good and FDI objectives in the health sector should be compatible with other social objectives like universal access. FDI promotion in the health sector is not about deregulating, but better regulating and complementing the public sector by expanding the range of services available and raising their standards and efficiency.

Table 2. Risks and opportunities of FDI in healthcare

Can FDI improve the resilience of health systems?

On 1 October 2020, at the virtual OECD Roundtable on Investment and Sustainable Development, policymakers, private sector representatives, and experts from the investment and health communities will discuss the key challenges and opportunities associated with FDI in the health sector, and the conditions under which FDI can contribute to expanding access to high quality healthcare.

JOIN US 1 October, 13.30-15.30 (CEST)

Register online

Agenda

Roundtable background note

More OECD work on international investment

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