AMMAN, 1 December 2003 — During the past two decades, foreign direct investment (FDI) has taken the place of bank loans and official development assistance as the most important source of development finance in the developing countries. For some countries, FDI plays an important role in shaping economic diversification and the acquisition of new technologies and services. This is why it has become imperative for countries to pursue stable macroeconomic policies and adopt laws and legislations that provide a climate conducive to attract FDI inflows.
According to the United Nations Conference on Trade and Development (UNCTAD), global investment flows are likely to rise in 2004 after steadying this year at the depressed levels reached in 2002. By sector, manufacturing and financial, transportation and communication services have been the hardest hit, but investment in the mining, gas and oil industries, information technology and semiconductors rose. The prospects next year are brighter for consumer goods, oil and gas, pharmaceuticals, electronics and telecom but dimmer for automobiles, metals and machinery and aerospace.
Global FDI inflows to developing countries fell to $162 billion in 2002 from $209 billion in 2001, a drop of 23 percent. FDI to the Arab countries recorded a larger decline of 33 percent dropping from $6.7 billion in 2001 to $4.5 billion in 2002, which accounted for almost 2.8 percent of total FDI in developing countries. The uncertainty caused by the looming war on Iraq in 2002 and the continuing Israeli aggression against the Palestinian territories have reduced investors’ confidence and posed obstacles to sustained FDI flows. In the GCC region, FDI reached $336 million, representing 7.5 percent of total FDI in the Arab countries. Seven out of the 16 Arab countries included in the UNCTAD report recorded declines in FDI. Saudi Arabia, by far the largest Arab economy, had in 2002, its third year of negative FDI out of four. The fluctuations can be attributed to the fact that FDI to the region is heavily influenced by developments in the oil and oil related sectors, where FDI per project tends to be generally large.
FDI to the Arab region is not only small in absolute term, but also is modest in terms of its percentage to GDP. The largest FDI stock is in Saudi Arabia at $26 billion, followed by Egypt at $21 billion, Tunisia at $14 billion and Morocco at $10 billion. With the exception of Bahrain and Tunisia, FDI stock as percentage of GDP amounted to less than 27 percent, compared for example to 263 percent for Hong Kong. Tunisia has been particularly open to FDI from Europe with the ratio of FDI stock to GDP at 66 percent. Bahrain’s ratio is also high at 72.9 percent because it has been able to attract sizable FDI mainly from neighboring states.
According to the Inter-Arab Investment Guarantee Corporation, the flow of inter-Arab investment is estimated to have increased by 10 percent in 2002 to reach $2.91 billion, which is equivalent to 65 percent of total FDI inflows to the region last year. The total stock of inter-Arab investment from 1985 to 2002 exceeded $26.3 billion, with Saudi Arabia being by far the largest destination receiving around $12.8 billion, nearly half the total stock of inter-Arab capital. Kuwait was the second largest recipient of Arab capital of around $3.54 billion, followed by UAE at around $2.4 billion, Jordan $1.1 billion and Qatar $1.0 billion.
The kind of policies needed to attract FDI and reap the benefits from foreign corporate presence are very similar to policies for mobilizing domestic resources. These include pursuing sound macroeconomic policies aimed at achieving high economic growth, price stability and sustainable internal and external imbalances. It has become clear now that FDI inflows go to countries that have no restrictions on capital movement and have put in place a transparent exchange rate mechanism that facilitates the free flow of capital and the repatriation of profits and investments.
Another requirement is to accelerate the implementation of economic reforms which lead to the liberalization of trade and capital movement and promote increased investment including higher FDI inflows. The institutional aspect of the reform process includes having one central agency responsible for matters related to FDI placing it above ministerial rivalry and bureaucratic constraints. Another aspect is to pass laws and legislations that support private sector activities and FDI inflows. The most important of such laws are competition laws, private property and intellectual property rights laws, modernization of judiciary systems and commercial courts.
The slow pace and limited spread of privatization programs in the majority of Arab countries is considered as one of the major reasons behind the reduction of FDI inflow to these countries in past years. Continued commitment to privatization together with the reduction of bureaucracy and red tape would greatly enhance FDI inflows. The adoption of laws that encourage FDI is necessary, but insufficient in the absence of a campaign against mismanagement and corruption, which obstructs the application of those laws. International investors look at the efficiency of infrastructure and financial services, and they often shy away from a country if they feel they will not receive reliable services, even in routine issues like clearing imports, telecommunications, airports and insurance. If services are unreliable, then so will be sales, exports and income.
Since none of the Arab countries are endowed with sufficiently large domestic markets, promotion of regional economic integration will help pave the way for greater Inter-Arab regional investment flows to complement international FDI inflows. Moreover, the integration of Arab countries into world markets is crucial to attract more FDI. Establishing market access abroad is increasingly becoming an important incentive for export-oriented FDI projects. Jordan is a recent example, where integration efforts led to a significant increase in new FDI. A surge in FDI into Jordan’s Qualifying Industrial Zones (QIZ) was motivated by the country’s privileged access to the United States market for goods produced in those qualifying zones. Since 2000, the total amount of investments in Jordan’s QIZ has reached $540 million. The free trade agreement with the United States also contributed to a favorable FDI environment in Jordan. The environment is gradually improving in other Arab countries, as most of them are involved in multilateral and bilateral arrangements for the regional and international integration of goods and services markets.
(Henry T. Azzam is chief executive officer at Jordinvest.)
