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Al-Ahram Weekly 25 - 31 March 1999 Issue No. 422 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 25 - 31 March 1999 Issue No. 422
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Focus Profile Features Travel Living Sports People Time Out Chronicles Cartoons Letters Attractive but...
by Niveen WahishEgypt has the potential to attract greater and better quality foreign direct investment (FDI) in the years ahead if major reforms of investment procedures are carried out, concludes the Investment Policy Review (IPR) of Egypt issued by the United Nations Conference on Trade and Development (UNCTAD) and prepared in cooperation with the Economic Research Forum (ERF).
The 109-page report, which was drawn up at the request of the General Authority for Investment and the Free Zones, starts out by showing that FDI flows into Egypt increased steadily over the 1990s. Annual inflows were less than $200 million in 1990 and reached $800 million in 1997. A possible cause of this increase is identified as the surge in domestic investments over this time. Khalil Hamadani of UNCTAD, presenting the report during a workshop organised by the ERF, commented that the Egyptian private sector has become increasingly vigorous. "Foreign investors are attracted by domestic investors," he said.
However, while the report says that Egypt attracts more FDI than any other country in the Middle East and North Africa, it points out that its FDI flows remain below those going into areas undergoing similar economic reforms such as countries in Eastern and Central Europe.
However, the report predicts great potential for the economy to absorb higher amounts of FDI. It shows that despite the considerable profit opportunities in such investment, FDI amounts to only one per cent of GDP. The report shows that 1995 data on earnings of US affiliates register an average rate of return in Egypt of 22 per cent, higher than that in other developing regions and twice as much as the average return of affiliates located in Europe.
The report argues that Egypt is an attractive location for businesses because of its proximity to regional markets, a large domestic market that is "a magnet for FDI" and a "competitively priced" workforce as well as an industrial base encompassing labour, energy and technology-intensive industries.
However, the report also says that while current FDI inflows have met the objectives of job creation and output expansion, most industrial projects have so far failed to boost exports: "While manufacturing industries receive more than half of all investment, manufactured products account for only a third of total exports." Inward-oriented development strategies and lack of domestic competition in the past have reinforced this local market focus. The report questions whether "greater investment, both foreign and domestic, can be attracted by industries in which Egypt has a comparative advantage and where export potential remains largely untapped." Such industries include electronics, food, garments, software development, pharmaceuticals and tourism. Egypt's proximity to the regional markets of the Middle East and Africa is another untapped strength, which the report argues could be "deployed in a strategy for FDI upgrading." It concludes that, "Egypt is in a unique position to become an export platform for two distinct regions, the Middle East and Africa."
The report also urges greater partnership between Egyptian and foreign firms to upgrade technology and provide routes into new markets. An essential feature of FDI and the activities of transnational corporations (TNCs) in Egypt is that they encompass "a range of economic influences, not simply capital flows, but also a variety of economic contributions in trade, technology transfer, and employment generation and they can play a role in private sector development." A survey conducted for the report by the ERF contains interesting insights into Egyptian corporations' perceptions of possible benefits from their linkages with TNCs. Affiliates of foreign firms acknowledged that they made gains in terms of technology transfer, training, and association with international brand names as well as improvements in capital utilisation, labour productivity, product development, and research and development.
However the report points out that such advantages are offset by a number of disadvantages which make Egypt a less attractive business location -- factors identified by the same firms which they believe may hamper successful investment. The UNCTAD report stressed the need for greater support of the market economy through improvements in infrastructure and human resource development as well as greater governmental and administrative efficiency. It also calls for reforms in the labour law, trade laws and competition policy, the protection of intellectual property rights, better tax administration and a reduction in trade-related transaction costs as well greater transparency and disclosure.
Farouk El-Kharouf, chief financial officer of the Arab Bank said during the ERF workshop that foreign investors are not concerned with what a country has achieved in the past, but rather with its present policies and development. "To really grow and integrate globally, you have to do more," he said.
The report urges that while carrying out reform, Egypt should market itself effectively. It says that strong competition between countries for FDI means that "marketing and promotion programmes have a critical role, especially in ensuring that Egypt is 'on the list' when investors search for locations for new FDI projects. Attention must be given to marketing the attributes of Egypt to the outside world and to potential inward investors."
Despite their reservations, the firms surveyed were optimistic about future prospects and had positive expectations for potential market growth in Egypt. An indication of this is that many of the companies surveyed had plans for considerable investment expansion over the next five years.
