Casualties of conflict
A US war against Iraq may not necessarily lead to an exodus of US investment from Egypt but, Yasser Sobhi finds that new funds may not be forthcoming
Although the war against Iraq looks inevitable, experts say that US investments in Egypt are unlikely to disappear. However, due to regional tensions, a change in corporate strategies and the less- than-friendly Egyptian investment climate, prospects for attracting new investment look bleak.
"Not a single American company has expressed its intention to leave at the moment," says Hisham Fahmy, executive director of the American Chamber of Commerce in Egypt (AmCham). "Some US companies have even expanded their presence and activities recently. But it's also unlikely that a new American company will target the Egyptian market at the moment."
According to the General Authority for Investment and Free Zones (GAFI), the value of US foreign direct investment (FDI) at the end of 2001 stood at LE2,210 million ($489 million), up from LE2,065 million in June 2000.
This represents 13.5 per cent of total non-Arab, non-petroleum FDI in Egypt. Among the most prominent US investors in Egypt are American Express, Bechtel, Bristol- Myers Squibb, CitiBank, Coca Cola, Eveready, General Motors, Gillette, Heinz, Johnson&Johnson, PepsiCo, Pfizer, Procter and Gamble and Xerox.
However, it is the energy sector that is most attractive to US investors. The total stock of US FDI in the petroleum and natural gas sector amounts to 65 per cent of total US FDI in Egypt. Apache is the largest foreign investor in Egypt, with investment stocks of over $1.7 billion in the oil and gas sector. Other US-based oil exploration and production companies operating in Egypt include BP Amoco, Caltex, ExxonMobil, Phoenix and Texaco.
"They are not interested in leaving because they are long term investors," says Yasseen Mansour, chairman of ManFoods Egypt, which holds the franchise for McDonald's in Egypt. "The war in Iraq will affect everyone, not just US investors. It will also affect consumer psychology everywhere and thus spending patterns. The main problem in the region is not Iraq but the Israeli-Palestinian conflict. It's only when peace prevails that we will see a huge flow of US investment to Egypt."
However, a recent study on US FDI in Egypt, prepared by Lobna Abdel-Latif, professor of economics at Cairo University, shows that there has been a trend for US companies to reduce their FDI and concentrate on their local market of late. The study also says that the US represented 25.9 per cent of global FDI in 1995, which declined to only 12.1 per cent in 2000. The US share of global FDI continues to decline. European countries now represent 49.2 per cent, almost half, of all global FDI.
The study also shows that there are several elements which influence US corporate decisions on whether to invest in a country or not. These include the level of economic development, the size of the government, the tax regime, openness, infrastructure, capital market development, the legislative environment, the size of the local market, and intellectual property rights (IPR) protection.
This explains why US investors are not aggressive in the Egyptian market. Indeed, the study attributes modest US investment in Egypt as a part of a wider decline in FDI due to the lack of an attractive investment climate in Egypt.
Nevertheless, even though American companies are not about to leave the country, American citizens may already have done so. A well-informed source, who asked not to be identified, said that the American community in Egypt has shrunk by almost half since September 2001. Hence, some US companies are now totally run and managed by Egyptians.
Thus, franchising is gaining ground as an alternative to FDI. Franchisees sign a contract where they benefit from US branding, marketing, quality control and training support in return for bearing risks and paying royalty fees. As an added political benefit, the investment becomes 100 per cent Egyptian.
"US companies don't really have to go abroad. They depend primarily on their domestic market. When they do, they prefer franchising as it ensures a full commitment from a local partner who understands the way the market functions better," says Mansour.
But why did McDonald's reduce their presence from investor to franchisor in Egypt last October? Mansour denies that a boycott on US products was the reason. Indeed, the American fast food group has applied a new strategy whereby they either become sole owner of the subsidiary or move out completely, reducing their role to franchisor. They have already done this in six Latin American countries.
He added that McDonald's total sales in the Middle East are around $150 million. This is less than 0.25 per cent of the company's total global sales of $34 billion.
According to US State Department reports, American companies are active in franchising in Egypt, especially in the fast food sector. There are presently 33 American fast food chains in Egypt who represent about 84 per cent, or $116 million, of the overall market. Furthermore, in the non- food franchising sector, US franchisees are estimated to account for almost 35 per cent of total revenues, with about $140 million in sales. These are mainly in car rentals, education, health and fitness, electronics, clothes and cosmetics. The report also said that there are many opportunities for further US franchise activities in the Egyptian market.
Nevertheless, Egyptian officials and businessmen continue to encourage FDI and joint ventures, with American companies coming to the market with their capital and expertise. Still, the likelihood of further boycotts and increased anti- American sentiment are likely to be fuelled by a war in Iraq. This certainly won't help.
