A PRESENTATION ON FDI TRENDS IN OIC COUNTRIES Prepared for the Seminar on Investment policies towards sustainable development and inclusive growth Organized by The Secretariat of the United Nations Conference on Trade and Development (UNCTAD), the Islamic Development Bank Group (IDB) Investment Promotion Technical Assistance Program (ITAP) and the United Nations Economic and Social Commission for Western Asia (ESCWA) 10-13 December 2013 Rabat, Morocco Venue: Golden Tulip Hotel
OIC Region The OIC is a large international organization which includes members that belong to several sub-regional groupings. They comprise 57 countries in four continents. They include newly industrializing countries and least developed countries. Some OIC countries are resource rich and others are resource poor. In principle, this diversity in factor endowments and economy should foster exchange of goods and services, and capital..
FDI in OIC countries Intra- investments between OIC countries are widespread: in each and every OIC country, there is presence of firms from other OIC countries. Much of these investments are small scale, reciprocal and regional, and between neighbouring countries. OIC countries include major FDI players countries and companies that are active globally, across regions, and they play a lead role in stimulating investment among our countries.
FDI Trends in OIC Countries Foreign direct investment (FDI) in developing countries has increased steadily in recent decades and reached record levels in all regions in 2007. Figure 1, shows that even after the 2008 financial crisis, FDI to developing countries recovered to a new peak in 2011. The OIC countries are participating in this increase but are new entrants and could be more active. The OIC countries share of world FDI inflows (10%) is much less than the overall share of developing countries (52%).
2,500 Figure 1 - OIC countries can be more active in FDI (UNCTAD data, inflows, billions of dollars) 2,000 1,500 1,000 World Developing coountries OIC countries 500 0 1980 1988 1996 2004 2012
OIC Countries are now more open to FDI OIC countries are now more open to FDI (Figure 2.) The reasons are several but could include: FDI is the largest source of external financing for developing countries. FDI is more important than official development assistance, portfolio investment and bank loans. In addition to capital, FDI brings technology and know-how and provides access to regional and international markets. Also, FDI can play an important role in economic growth and development, by serving as a catalyst for innovation, and for upgrading productivity and competitiveness
Figure 2 - OIC countries are now more open to FDI (UNCTAD data, inflows, percent of GDP) 4 3 2 OIC countries Developing countries 1 0 1980 1984 1988 1992 1996 2000 2004 2008 2012
OIC country experiences by region Country experiences vary. (Figure4.) FDI is attracted to the populous markets of Asia and the natural resource endowed countries of the Middle East and North Africa (MENA) and our economies in transition.
$350 $300 $250 $200 $150 $100 $50 Figure 3 - OIC country experiences vary by region (UNCTAD data, inflows per capita, dollars) $0 ASIA (8) MENA (19) SSA (22) Economies in transition (7)
OIC country experiences by region The smaller economies in sub-saharan Africa receive less FDI. Many of the challenges they face in attracting FDI are related to low levels of development: a weak skills base and infrastructure, and a small private sector. For this reason, our African member countries rely on FDI more for capital formation. (Figure 4) At the same time, we should remember that FDI is a complement not a substitute for domestic investment.
Figure 4 - African members rely on FDI more for capital formation (UNCTAD data, inflows, percent of gross fixed capital investment) 40 35 30 25 20 15 10 5 0 1980 1985 1990 1995 2000 2005 2010 ASIA (8) MENA (19) SSA (22) Economies in transition (7)
Largest OIC recipients of FDI The major recipients of FDI in 2012 were Indonesia, Kazakhstan, Turkey, Saudi Arabia, Malaysia, United Arab Emirates and Nigeria. Together they account for 61% of the FDI flows to the OIC countries. Even among the top performers there are varying experiences, with Indonesia, Kazakhstan, Malaysia and Nigeria continuing to receive increased inflows after the global financial crisis. (Figure 5.)
Figure 5 - Top 10 host economies for FDI
Largest OIC providers of FDI The largest recipients of FDI are also among the most active outward investors. (Figure 6.) This, again, reflects the development role of inward FDI, where equity and other relationships with foreign companies can help domestic companies grow and upgrade into regional and global players, investing abroad. Indonesia is an active player in Asia. Turkey is a regional player in Central Asia and West Asia. Malaysia and Kuwait invest across regions.
Figure 6 - Largest OIC providers of FDI (Source UNCTAD)
Intra-OIC FDI: acquisitions OIC countries invest globally but also among themselves. The global focus is visible in our cross-border acquisitions. (Figure 7) These rose rapidly since 2004 but fell as rapidly after the global financial crisis. Since then, OIC acquisitions have recovered more rapidly globally than within the OIC, relative to the purchases of foreign companies.
Figure 7 - Intra-OIC FDI: acquisitions have slowed (UNCTAD data, billions of dollars)
Intra-OIC FDI: acquisitions The retrenchment in intra-oic acquisitions since 2008 is visible in the reduced purchases of our main buyers. (Figure 8.) It is also visible in the destinations, where the 10 principal destinations before 2009, were since reduced to mainly 2. (Figure 9.)
Figure 8 - Intra-OIC FDI: main buyers (cross-border acquisitions)
Figure 9 - Intra-OIC FDI: main locations (cross-border acquisitions)
Intra-OIC FDI: greenfield projects We see a more promising pattern in our intra-oic Greenfield investments. (Figure 10) Most of the new projects announced by OIC companies tend to be located in other OIC countries, where they likely have a competitive advantage. That is, they enter and operate in markets where they are relatively more at ease in doing business than non-oic firms. The Greenfield projects are mainly in the services sector (construction and business activities). (Figure 11) There have also been large intra-oic purchases in banking and telecommunications.
Figure 10 - Intra-OIC FDI: greenfield projects (UNCTAD data, estimated capital expenditure, billions of dollars) world
Figure 11 - Intra-OIC FDI: main industries (UNCTAD data, greenfield projects, 2003-2012, capital expenditure, billions of dollars)
Characteristics of FDI Trends in the OIC region: FDI is concentrated only in a limited number of countries. FDI flows remain small relative to the size of the regional economy, in comparison with other developing regional groups. FDI is attracted to only a limited number of industries: intraregional FDI is concentrated in telecommunications (through mergers and acquisitions (M&As)) and construction including real estate development (through greenfield investments). The United Arab Emirates (UAE) is by far the largest intraregional investor, accounting for half of the total intra- regional FDI projects through M&As and greenfield investments. Intra-regional FDI recipient countries are more diversified. Egypt is the largest recipient
Challenges faced by the OIC in advancing intra-regional FDI Several countries in the OIC s sub-regions produce and export similar products that compete with one another. Host country constraints, such as weak infrastructure and limited market access, explain the slow pace of integration. Attention is diverted away from efforts towards deeper integration in the region because of the increased number of bilateral agreements between OIC member states and non-oic partners. The present regional investment agreement among OIC member states needs to be reviewed in light of the recent evolution in international investment policy making. A lack of political will and weak institutional capacity in some countries negatively impact intra-regional FDI and regional integration efforts.
To enhance FDI in OIC member countries more open investment policies are needed and that includes: Reduction of barriers to FDI (opening up more sectors to foreign investment, lifting of ownership restrictions, employment of non-nationals, etc) Strengthening of standards of treatment (national treatment, legal protection to foreign investors, etc) Enhancing the functioning of the market (supervision of banking and financial services, protection of intellectual property rights, environmental standards, etc) Investment promotion and facilitation (image building, one-stop service, aftercare, policy advocacy, etc) Incentives
Enhancing FDI benefits Channels Education and training Support for SMEs Backward linkages Linkages with technology partners Forward linkages with customers Participation in global supply chains Outward investment Benefits Production efficiency Productivity growth Technological and managerial capabilities Entrepreneurial activity Market diversification Upgrading of production Export growth
Recommendations encourage investment among the OIC countries, through intergovernmental agreements, financing facilities and joint investment projects to improve cross-border transactions and infrastructure. Mandate your envoys in OIC countries to promote intra-oic FDI. expand knowledge sharing within the OIC on FDI, using existing institutions and involving private sector. Intensify cooperation among investment promotion agencies. generate reliable data on FDI at the country level that is comparable across OIC countries in conformity with international standards.
References: UNCTAD Global Investment Monitor, Special Edition - No. 14 18 November 2013. A paper by Prof. Khalil Hamdani presented to the COMSEC Ministerial Exchange of Views - Istanbul, 20 November 2013
Thank You MOHAMMED BUKHARI, ACTING HEAD, IDB GROUP'S INVESTMENT PROMOTION TECHNICAL ASSISTANCE PROGRAM (ITAP)