Tuesday, September 29, 2009

FDI Inflows to the Arab World Down 6.3%

Foreign Direct Investment (FDI) inflows to the Arab World fell 6.3 per cent to $60 billion (Dh220bn) in 2008 from $64bn in the previous year, said an international study.

The United Nations Economic and Social Commission for Western Asia (ESCWA) released its annual report on Foreign Direct Investment (FDI) inflows to the ESCWA region, which covers 14 Arab countries, showing that the current financial and economic crisis has negatively impacted FDI flows to the ESCWA region during 2008 and has lowered them from US$ 64 billion in 2007 to around US$ 60 billion in 2008 - a decrease of nearly 6.3 per cent.

ESCWA experts expect the FDI inflows to the region to further decline in 2009 as a result of the global economic slowdown and its severe impact on transnational corporations, which has in turn led to delays in the implementation of a number of investment projects in several ESCWA member countries. It is noteworthy that transnational corporations are the main contributor to worldwide FDI flows.

The report identified three countries that captured the lion’s share of total FDI flows to the ESCWA region in 2008; which are in decreasing order Saudi Arabia, the United Arab Emirates and Egypt. They accounted for nearly 76 per cent of FDI flows to the region. The performance of these countries is mainly attributed to their successful endeavors to ameliorate their business environment and to their overall investment-friendly climate. Moreover, the privatization of some of the State-owned enterprises in Egypt has accelerated FDI inflows to that country. Further, the opening of a number of sectors to foreign investors, such as that of construction, has led to more FDI flows to the United Arab Emirates.

In 2008, FDI to Saudi Arabia amounted to US$ 22.5 billion, down from US$ 24.3 billion a year earlier, a 6.5 percent decline. Foreign investments in the Kingdom mainly targeted the real estate sector (21 percent of FDI), petrochemicals (16 percent), and the mining industry (10 percent). In 2008, the United Arab Emirates attracted nearly US$ 13.7 billion of FDI, a decrease of 3.2 per cent compared to 2007. FDI inflows to Egypt amounted to US$ 9.5 billion in 2008, down from US$ 11.6 billion in 2007, a drop of 18 percent. The oil sector attracted around 57 percent of incoming FDI in Egypt during 2008. FDI flows in 2008 also slumped in such other ESCWA member countries as Kuwait, Oman and Yemen.

Meanwhile, five ESCWA countries saw an increase of incoming FDI during 2008. These are Bahrain, Jordan, Lebanon Sudan and the Syrian Arab Republic. During that year, Lebanon and the Syrian Arab Republic witnessed an unprecedented boost in FDI inflows, registering an increase of 32 percent and 43 percent, respectively. FDI flows to Lebanon and Syria amounted to US$ 3.6 billion and US$ 1.3 billion, respectively. Arab investments accounted for nearly 90 percent of total FDI in Lebanon in 2008, with Saudi Arabia representing 70 percent of total FDI and Kuwait 22 percent. The sectoral distribution of FDI in Lebanon reveals that services captured the bulk of FDI, with the real estate sector representing 56 percent of total FDI, the banking sector 20 per cent, and the tourism sector 13 per cent.

The report pointed out that FDI flows to the ESCWA region have been concentrated in three main areas: petrochemicals, financial services and the real estate. The European Union (EU), notably the United Kingdom and France, is the main sending region of FDI flows to ESCWA member countries. The EU is followed by Japan and the United States.

As noticed in the report, there is no evidence that FDI has helped increasing the transfer of technology to ESCWA member countries, nor did it boost the region’s exports. In other words, the benefits of FDI inflows to the region are still not completely reaped. Indeed, little cooperation took place between foreign and local investors, whether in terms of joint ventures between foreign and local firms or in the form of capacity building targeting the enhancement of technical expertise of local workers and the competitiveness of domestic firms. In this regard, the report outlines the meager share of FDI inflows targeting research and development (R&D) in the ESCWA region. In fact, little has been done in terms of investing in research centers and R&D in the region, which deprived member countries from the benefits of research.

The report highlighted several deficiencies still hampering the business and investment environments in ESCWA member countries. Most notable among these are time-consuming procedures for obtaining licenses and implementing contracts, and the lack and/or incompetence of commercial courts to settle disputes between foreign investors and local parties. These impediments deter foreign investors from increasing their assets in many ESCWA member countries and deprive the latter from tapping into gains inherent to FDI.

The report concludes with a number of recommendations to ESCWA member countries. Paramount among them is the one urging member states to reconsider their investment policies in order to re-orient FDI towards more strategic sectors such as agriculture and the agro business industry. Investing in these sectors would help the region dealing with the long-lasting food security crisis in the region. In addition, the report encourages the region’s sovereign wealth funds to increase their investments in the region, notably in the fields of agriculture and industry.