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Foreign Direct Investment (FDI) on the Rise in OIC Economies
Turkey, UAE, and Egypt attract largest FDI while UAE drives Intra-OIC investments

In a globalized world what matters is not simply the size of an economy but also the flows which support it. In other words, while GDP helps us understand how much a country produces we don’t really come to understand how connected it is to the rest of the world. One way to do this is to look at some of the components of GDP including imports and exports. But another increasingly important measure on global interconnectedness is FDI or foreign direct investment.

While trade flows tell us how much buying and selling is going on between countries FDI statistics help us to paint a picture of how appealing an economy is or, alternatively in the case of outward FDI, how aggressive an economy is in tapping new opportunities. What the numbers tell us is how appealing the people, resources, enterprises, markets and overall businesses environment of a particular country are to international investors. Effectively, FDI is recorded when these aspects present a compelling case for investment for which the investing entity is willing to bear the commensurate risks associated with investing in a foreign country.

Recent FDI news

OIC countries have showcased strong FDI growth recently. According to EIU (Economist Intelligence Unit) 2006 estimates, FDI inflows to OIC were led by Turkey, UAE, Egypt, Indonesia, Kazakhstan and Malaysia with strong growth in FDI from year before (Turkey estimates show 100% growth while Kazakhstan estimates show 177% growth). According to Loco Monitor a FDI research resource, the largest foreign investments to OIC countries during the 2002-07 period (by # of projects) come from the US, Germany and Japan. In addition, a large swath of OIC countries have embarked on programs of cross border intra-OIC FDI of which the UAE is the biggest investor by the number of projects.

Pakistan has been one of the major FDI benefeciaries, with its Economic Advisor to Ministry of Finance Dr Ashfaq Hassan Khan stating recently that Pakistan has attracted $ 4.6 bln of FDI in the last eight months as compared to $1.9 B during the same period a year ago. This growth was tied largely to the privatization of select industries (led by telecom) which drew large investments from the UAE and elsewhere.

Turkey has also been the subject of international investment interest. A conference held by the Turkish-US Business Council recently drew a significant crowd from the FDI community which discussed Turkey’s appeal as a destination for FDI flows even after the economic crisis of 2001. Government policies for controlling the macroeconomic environment were credited with making the country an attractive investment opportunity.

FDI flows into Saudi Arabia and Kuwait, among the other Gulf states, are seen to grow significantly in the near to mid term as well as these countries opening up a number of sectors to foreign investment including telecommunications, desalination and power sectors.

Types of FDI

Broadly speaking, FDI can be categorized under 5 major heading:

1. Greenfield investment - (a new operation)
2. Brownfield investment (expansions or re-investment in existing foreign affiliates or sites)
3. Mergers & Acquisitions (M&As)
4. Privatization and equity investment
5. New forms of investment (joint ventures, strategic alliances, licensing and other partnership agreements)

Each of these types of FDI presents varying amounts of risk and reward to the investing entity and the host country. For example, a Greenfield investment benefits a host nation by creating jobs and production capacity while also transferring in expertise and technology. The latter benefits help the nation in the long term by allowing them to better compete in the global marketplace. On the other hand, the host nation’s indigenous industry may suffer as a result of the Greenfield investment’s crowding out effect. In addition, the host country will have to decide how profits are taxed and if profits from the investment are repatriable to the investing nation. Answers to these questions will affect the governments direct revenue collection from the enterprise as well as the long term effects of reinvestment.

The chart below summarizes the positive and negative aspects for both host nation and investor in typical FDI scenarios.

Promoting FDI – Inward and Outward

Trade Promotion Organizations (TPOs) are government based entities which are tasked with the increasing exports and attracting FDI to host countries. According to Richard J. Hunter, Jr., Professor of Legal Studies at Seton Hall University, the role of TPOs in attracting FDI extends into a number of areas which include:

1. Generating foreign investment activity and interest by identifying suitable domestic partners;
2. Providing professional management assistance;
3. Pointing out specific FDI opportunities;
4. Creating and fostering a favorable domestic climate for FDI;
5. Monitoring and reporting on FDI activities;
6. Providing the necessary “market entry” data; and
7. Providing necessary information on taxation, administrative regulations, and other legal and financial matters.

While the above list focuses on inward FDI flows, the United Nations Conference on Trade and Development (UNCTAD) also focuses on outward FDI trends. Similar to the relationship with imports and exports this categorization allows us to understand both how attractive a country is foreign investors as well as how aggressively it is promoting its own industry in the global markets. According to UNCTAD, facilitating outward FDI requires TPOs to:

1. Provide information to prospective overseas investors
2. Act as match makers
3. Conduct feasibility studies
4. Provide legal support
5. Support training
6. Issue incentives for outward investment
7. Coordinate investment guarantees

Malaysia was singled out in the 2006 World Investment Report as it has a range of agencies to promote outward FDI. These include:

• EXIM Bank
• Malaysian Export Credit Insurance Berhad (MECIB)
• Malaysian South-South Association (MASSA)
• Ministry of International Trade and Industry (MITI)
• Malaysia External Trade Development Corporation (MATRADE)
• Small and Medium Industries Development Corporation (SMIDEC).

The work of each of these agencies is coordinated by MITI which operates a network of trade offices and overseas all activities from its HQ in Malaysia.

FDI in the OIC

There are two important aspects to examine when looking at FDI trends in the OIC. First, we need to get a good picture of where FDI is coming from outside the OIC. This will help us understand who the strongest partners are. Secondly, gathering a sense of Intra OIC trends will tell us which member countries are looking to tap each other for capital/expertise and/or markets/resources.

According to data collected, the top five non-OIC countries investing in OIC countries (by number of projects) are:

Top 5 Countries Investing in OIC Countries Jan 2002- Feb 2007

The number of projects from the United States exceeds the combined number from Germany, Japan, India, and France making it the single largest provider of FDI to OIC countries.

FDI inflows to OIC countries exceed estimates

A survey of FDI inflows to select OIC countries highlights the extent to which they have exceeded estimates. In fiscal year 2006-2007 Pakistan’s inward FDI flows were estimated at $2.6 billion by EIU while current estimates put the number at close to $7 billion. This is up from less than $1 billion in 2002. The 2006-2007 estimates are likely to increase as FDI flows into Pakistan from Qatar and Kuwait will reach $4 billion in the power, hotel, insurance and oil refinery sectors. Recent key FDI flows include Etisalat’s purchase of a 26% stake in PTCL for $2.6 billion and Emaar’s projects worth $2.4 billion.

According to UNCTAD, the Gulf and the Middle East in general, including Turkey, also exceeded estimates with over $43 billion in funds flowing to the region bolstered by the windfall in oil prices and the liquidity it has generated as well as strong macroeconomic and sectoral performance in retail, energy, and financial/business services drawing much of the flows.

Intra-OIC FDI

Leaders from OIC countries have called for increased intra OIC trade for some time. Since most OIC member countries are categorized as developing countries it is gratifying that UNCTAD has recognized that FDI flows between developing countries have increased significantly. According to the 2006 World Investment Report South-South FDI has expanded particularly fast over the past 15 years.

The report also highlighted that the bulk of South-South FDI is intraregional in nature. In fact, during the period 2002-2004, average annual intra-Asian flows amounted to an estimated $48 billion. Transnational corporations (TNCs) from developing and transition economies have become important investors in many LDCs and while most of these TNCs are relatively small a number of large ones with global ambitions have also appeared on the scene including Petronas and Orascom.

Data gathered by LocoMonitor from 2002 to February 2007 showed that the UAE was the largest contributor of FDI (by number of projects) among OIC countries. As the chart below shows the combined number of projects by the other four countries is still less than the UAE.

Largest Contributor of FDI Among OIC Countries Jan 2002- Feb 2007

The top five recipients OIC countries of FDI inflows from other member OIC countries (by number of projects from 2002-Feb 07) are Saudi Arabia (27), Jordan (26), Syria (26), Indonesia (25), and Lebanon (25).

As stated previously, South-South flows are exhibiting new trends. Sub-regional flows among OIC countries are a part of these trends. For example, Malaysia is the contributor of the greatest number of projects from an OIC country to Indonesia. The same is true for the number of projects the UAE has backed in Saudi Arabia. Other Arab countries also maintain active programs of FDI exchange.

The Outlook

Estimates and forecasts from the Economist Intelligence Unit (EIU) present an interesting picture. While forecasts cannot be verified the current FDI picture does show variance from actual results as shown in the case of Pakistan and the Middle East.

What to take away

This article serves as an introduction to FDI in OIC countries by highlighting recent news as well as which countries OIC countries are receiving FDI flows from. Coming to a clearer picture of FDI in these countries requires knowledge of the sectors drawing investment as well as the TNCs most involved in these exchanges. For the moment data examined shows an active FDI market between OIC countries and burgeoning FDI flows into OIC countries in general.