The Middle East and North Africa (Mena) as well as parts of West Asia are currently experiencing a realignment of FDI flows as a result of the Arab Spring. While previously FDI was mainly oil and gas based, today investments are increasingly targeting other sectors of importance for developing and frontier economies in the region, such as infrastructure and housing.
Approximately two-thirds of FDI into Mena used to flow into the hydrocarbon sector. But this sector is highly capital-intensive and generates few jobs in proportion to its levels of investment, says the Arab World Competitiveness Report 2013, jointly released by the World Economic Forum and the European Bank for Reconstruction and Development. It recommends that the region’s investment promotion agencies should encourage types of FDI that have greater job-creating potential.
As per latest available figures for the entire region, FDI into Arab States rose by 9.8 per cent in 2012 despite unrest in some countries, but remained well below its level in 2010, when the Arab Spring erupted. Arab States attracted FDI worth $47.1 billion (Dh173 billion) in 2012 compared to $42.9 billion in the previous year, Kuwait-based Arab Investment and Export Credit Guarantee Corp says in a report. But that was 28.5 per cent lower than the $66.2 billion of FDI in 2010.
West Asia’s two main recipients used to be Saudi Arabia and Turkey. But the two countries registered significant declines of 19 per cent (to $9.9 billion) and 15 per cent (to $11 billion) respectively, in 2013. Turkey witnessed virtually no large FDI deals. In addition, the worsening political instability in parts of the region has caused uncertainty and negatively affected investment.
The UAE was a notable exception as it attracted FDI worth $12 billion last year, and the Ministry of Economy forecast that this year should see FDI worth $14.4 billion, up almost 20 per cent.
“Last year, the UAE was able to attract three times more FDI than expected and is among the most attractive countries in West Asia for FDIs, according to United Nations Conference on Trade and Development (UNCTAD) figures,” says Abdullah Bin Ahmad Al Saleh, Under-Secretary of the Foreign Trade Sector at the UAE Ministry of Economy.
The main recipient in North Africa in 2013 was Morocco, where FDI saw a solid growth of 24 per cent to 3.5 billion.
However, some challenges still remain to be addressed to boost the total FDI level in Mena back to where it was in 2008 — at around $94 billion.
Economic reforms and diversification
Many Mena countries are yet to implement economic reforms and set policy priorities in order to avoid getting lost in what experts call the resource trap. This term means that investment in oil and gas is expensive, but has the least effect on job creation in relation to the amount of capital injected. FDI needs to diversify away from these industries and be encouraged to focus on areas that have a greater impact on boosting job opportunities for up to three million people who enter the regional job market every year. This can be achieved by economic policies focused on developing alternative sectors.
“The absence of significant economic reforms, combined with political and macroeconomic instability, especially in the transition economies, will keep investment and growth below potential not only in the short run, but in the years to come, unless there are remedial actions,” says Shanta Devarajan, Chief Economist of the World Bank for Middle East and North Africa.
Investment regulations
A big issue is the fragmented system of investment regulations in Mena. While most Gulf countries are open and have a high level of competitiveness, others are yet to introduce a transparent and accountable regulatory framework to create a favourable business climate for foreign investors. In many countries, key industries as well as the banking sector are still prone to government intervention and suffer from high concentration and low competitiveness. Government institutions need to set up investment regulations that include clearly defined and enforced property rights. They need to be supported by efficient and transparent public administration, a fair and independent judiciary, provision of physical security and high corporate governance standards to create a competitive ecosystem.
“The private sector, the most important engine of job creation, cannot thrive in context of low national competiveness encountered in the region,” says Margareta Drzeniek-Hanouz, Director and Lead Economist, Global Competitiveness and Benchmarking Network, World Economic Forum, supporting the idea of deregulating the banking sector first.
“Fiscal lassitude, high government debt or inefficiencies in the financial system can result in high interest rates, restraining both public and private investment,” he adds.
Skills development and education
With jobless rates of about 40 per cent among the youth in some Mena countries, it is clear that countries cannot move up the development ladder without investing in higher education and training, as more complex products and production processes require a skilled workforce. Currently, there is a widespread mismatch between workforce skills and business needs in some countries accompanied by low labour market efficiency.
Technological readiness
This issue can best be addressed by countries through adoption of foreign technology, which has productivity enhancing effects, but needs favourable and sophisticated business conditions and a clear framework for intellectual property rights. What follows is innovation by developing one’s own technological advances and home-grown products and services.
Understanding the Arab consumer
The Arab region has a large middle class of some 150 million people, with more than half of the entire population of 340 million below 25 years of age. In fact, Arab consumers have the same demands as people elsewhere, but a few special patterns of consumer behaviour have to be taken into account.
“Arab consumers are brand-conscious. For them, buying is a social act and status symbols are important to them,” says Jordan Boshers, founder of Jordan-based IstiZada, a Middle East-focused online marketing agency.
“Religion and language also play a big role when selling goods and services to Arabs,” he adds. All aspects are important to the success of any organisation looking to do business and invest in Mena.
