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EMERGING ECONOMIES KEY TO INVESTMENT GROWTH
BY ALEX HESS
Investment is headed south, but in a good way.
That was the message conveyed at the second World Association of
Investment Promotion Agencies (WAIPA) regional investment conference
in Sharm Al Sheikh last month. Representatives of Africa’s
various investment promotion agencies (IPAs) gathered for an opportunity
to swap experiences on securing a share of the world’s $133
billion of foreign direct investment (FDI) for the continent.
Kai Hammerich, the head of WAIPA, a Geneva-based NGO with 200 member
agencies from 151 countries, explained that FDI plays a major role
in economic growth and stability. He also stressed that it’s
important for countries to court investors. “We know that
those countries and those regions [that] were successful in attracting
foreign investment... will be more successful than others when it
comes to economic development and employment,” he said.
But competition is fierce, he noted, stressing that FDI is a limited
resource. Countries must compete to capture it and reap its rewards.
At the same time, the nature of the game is changing. “In
the past, we were used to companies being in competition with each
other. Today, we know that countries and regions, just like companies,
are very much competing [to attract] these investments,” he
said.
Cross-border investments have traditionally been concentrated in
developed countries, which still remains true today. However, as
Hammerich points out, developing countries are increasingly becoming
attractive FDI destinations. “Emerging economies are playing
a much more important role today than they did 10 to 12 years ago.
Today, developing countries account for some 36 to 37 percent of
the total inflows... I am quite sure that in five to 10 years, this
trend will continue [unabated],” he predicted.
Moreover, developing countries are, for the first time, contributing
to the world’s FDI. “Developing countries... are not
only important recipients of foreign investments, but they are now...
becoming important overseas investors and that is actually something
which is quite new.”
A recent survey by the United Nations Industrial Development Organization
(UNIDO) of 15 sub-Saharan African nations emphasizes this trend.
The findings, presented by Mithat Kulur, head of UNIDO’s Investment
Promotion Unit, revealed unprecedented growth in FDI inflow driven
by investments from fellow developing nations. “Of the companies
that have been in Africa since before 1980, about 80 percent are
from developed countries [in the] North,” says Kulur. By contrast,
“of those that arrived since 2000, more than 60 percent are
from [countries in] the South.”
Moreover, the survey found that FDI from countries in the South
was creating jobs at a faster rate than FDI from the North. Employment
by companies from fellow developing countries has been growing twice
as fast as employment by their counterparts in the North for the
past three years, a trend that is expected to slow down but continue,
Kulur said. He argued that this trend offers great potential for
African countries to develop their industries and economies. But
that will require more inter-regional cooperation. “The one
thing that will pave the way for [further development] is to improve
regional trade [through] better functioning of regional trade agreements,”
he said.
Yet the prevailing South-South investment pattern does raise some
concerns. “The expectation was that operations from the South
would have higher local content in terms of input and we were surprised
to find that this is not true.” Contrary to expectations,
“North FDI does a better job of adapting local inputs into
their operations than South FDI,” Kulur said. While unsure
of the exact cause, he suggested that this might be a result of
the fact that investments from companies in the North tend to be
older and more established, while those from countries in the South
tend to be by companies with less experience working in a multi-market
environment.
Anne Miroux, head of the Investment Issues Analysis Branch at the
United Nations Conference on Trade & Development (UNCTAD), said
one fact often overlooked by IPAs is that FDI is not always inherently
good for a country. “With all foreign investments, [there
are] risks in terms of monopoly... [and] problems of government
and corporate social responsibility,” she said.
Yet even with the drawbacks, she acknowledged, developing nations
have little choice in today’s global economy but to continue
to actively pursue FDI, while doing their best to mitigate its negative
impacts. Egypt, like many other developing countries in Africa,
is no exception. Hammerich pointed out that Egypt’s ability
to attract $5.4 billion worth of FDI in FY 2004-05 is an example
of how free-market reforms in developing countries can attract significant
FDI inflows. “Egypt is a very good point of reference to what
is now taking place regarding relations between developed [and]
developing countries, and the surge [in FDI] that we see among the
developing countries.”
The praise was welcomed by Minister of Investment Mahmoud Mohieldin,
whose ministry is entrusted with luring foreign capital. Speaking
at the conference on behalf of Prime Minister Ahmed Nazif, he stressed
the importance of a competent investment promotion agency and coherent
regulations to attract FDI. He was particularly upbeat about the
recent transformation of Egypt’s investment authority, the
General Authority for Investment & Free Zones (GAFI) into a
catalyst for FDI growth. “Today, GAFI is a one-stop shop that
managed to establish more than 10,000 companies from July 2004 to
June 2006 [and] is viewed as a model of reform in Egypt,”
he said.
Mohieldin outlined major government initiatives to rationalize the
investment environment, including the reduction of property registration
fees, banking law reform, a restructured tax system, tariff cuts
and improved customs efficiency. He stressed the importance of protecting
investors from corrupt business practices, noting that the newly
created Egyptian Institute of Directors has issued “the first
corporate governance code in the Arabic language... in addition
to another code for state-owned enterprises, both based on the OECD
principles and guidelines.” The government has also created
a competition law, which investigates anti-competitive behavior
such as price gouging.
These reforms, he says, have been a resounding success. “FDI
reached $6.1 billion, or 6.5 percent of GDP, for the last fiscal
year, 2005-06, compared to only $509 million in the year 2000-01,
or less than 0.6 percent of GDP,” he announced. And, unlike
previous investment, the new FDI is fairly diversified. “For
the first time, [we’re] seeing the non-oil sector attracting
significant investment, representing 70 percent of the total inflow
of FDI this year.”
Much of this investment is coming from the Gulf region. Gulf investors
poured over $550 million into Egyptian projects in FY 2005-06, about
9 percent of total FDI inflow. Gulf investments, traditionally concentrated
in construction and real estate development, have expanded to include
the capital market, telecommunications and the development of transport
and maritime projects. While Egypt has also managed to attract some
investments from Asia, most recently Turkey and China, the bulk
of its FDI inflow comes from American and European investors.
Among them is AstraZeneca, an Anglo-Swedish drug-maker, one of the
largest contributors of FDI to Egypt outside the oil sector. In
2002, the pharmaceutical giant took the decision to sink $35 million
into building a factory in Sixth of October City.
Ahmed Zaghloul, general manager of AstraZeneca Egypt, described
the challenges his company faced in setting up shop in Egypt. He
said it took him over five years of hard work to convince AstraZeneca’s
leadership to invest in the country. The most difficult part was
overcoming a negative perception of Egypt abroad based on development
indicators, perceived corruption and political instability. “I
always had faith that there was an opportunity in Egypt for a multinational
company like AstraZeneca,” he explained. “We need to
sell the idea, we need to sell the country; we need to improve the
perceptions.”
Despite concerns over intellectual property rights, price controls
and exchange rate risk, AstraZeneca’s investments are paying
off. “The Egyptian pharmaceutical market is growing... with
a double-digit figure compared to the most of the developed countries,
which [have] one or two percent growth,” he noted.
Mohieldin echoed this sentiment, pointing out that a continued push
for reform in terms of streamlining bureaucracy, dispute settlement,
land acquisition and access to finance is still needed. “The
successes and good performance we have achieved so far should not
distract us or make us complacent with respect to the remaining
obstacles facing our business people and foreign direct investors,”
he said.
Should these issues be sufficiently addressed by the government,
FDI will continue to pour into Egypt from traditional as well as
new FDI sources, conference delegates agreed. This will free up
Egyptian capital to invest both at home and abroad, creating positive
feedback in the system. While the Egyptian private sector has been
slow to invest abroad, particularly in Africa, the increasing global
trend in South-South capital flows may encourage Egyptians to look
to their own continent. If they do so, the benefits to the domestic
economy could be tremendous.
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