The sectoral composition and direction of foreign direct investment (FDI) into West Asia is changing, moving away from the oil industry and into manufacturing and services, according to a new study issued today by UNCTAD.
Immediately after reaching a record high in the early 1980s, the share of West Asia in world FDI flows declined sharply to a small and stable level of less than 1 per cent (annex table 1). Over the last decade, that share has not changed much. The decline reflected mainly the decreasing flows to Saudi Arabia, from an average level of US$5 billion yearly during 1982 - 1985 to only US$700 million yearly during 1990 - 1995.
This profound decrease indicates that oil-related FDI is losing importance. Recently, FDI into non-oil producing economies (Cyprus, Israel, Jordan, Lebanon, Areas under the Palestinian Authority, Syrian Arab Republic and Yemen) has been growing faster than that in oil-producing economies (Bahrain, Islamic Republic of Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) (annex table 1).
In the early 1980s, the oil-producing economies dominated investment flows, accounting for over 96 per cent of the total inflows to the region. By the late 1980s, the share of the oil-producing economies had declined substantially to 67 per cent. By the mid-1990s, flows to West Asia were almost equally distributed between the groups of oil and non-oil producing countries. Among the latter group, Israel has emerged as a significant FDI recipient.
The World Investment Directory Volume VI. West Asia(1)-- the final volume of a set of six regional volumes(2) -- presents time-series data on both inward and outward flows and stocks of FDI, the importance of that investment to national economies, basic financial data of the largest transnational corporations (TNCs) in and from these economies and the regulatory framework affecting TNCs for 15 economies in West Asia [Bahrain, Cyprus, Islamic Republic of Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Areas under the Palestinian Authority, Qatar, Saudi Arabia, Syrian Arab Republic, United Arab Emirates and Yemen]. In addition, the Directory provides an overview of FDI trends for West Asia, the principal findings of which are presented below.
The growing importance of non-oil producing economies points to increasing FDI in manufacturing and services. In these economies, services account for the bulk of all investment. Half of Israel´s inward FDI, for example, was in its mechanical goods and electrical and electronic goods industries (annex table 2). Naturally, in the oil-producing economies, FDI in petroleum still accounts for the overwhelming share of all investment. But, even there the share is declining. For example, Oman´s petroleum industry received 84 per cent of that country´s FDI inflows in 1995, compared with more than 95 per cent in the early 1990s.
West Asia´s FDI pattern in terms of source countries has a historical character. Traditionally, special treatment has been granted to Arab-sourced capital, encouraging Arab investment. In recent years, however, foreign investors from developed countries have become quite active in the region. Their combined outflows to West Asia had doubled by the early 1990s compared with the late 1970s and 1980s. France and the United Kingdom stand out as the most active investors. Germany, though less tied historically to most of West Asia (Iran is the exception), has increased substantially its presence there in recent years. Increasingly, Japanese investors are also being attracted to that region´s petroleum and other natural resources.
In some West Asian countries, Arab-sourced FDI no longer enjoys special treatment. Jordan, for example, now treats Arab and foreign investors equally -- in 1995, Law 10 of Jordan repealed the 1992 Law regulating Arab and Foreign Investments which made a distinction between Arab and other foreign investors.
Improving their image to non-Arab investors has been a major objective of West Asian countries recently. Although the pace of liberalization of investment frameworks may have been slower in West Asia than in other parts of the world, investment-promotion agencies have been set up to welcome and guide potential investors through the investment-approval process. Examples include the Yemen General Investment Authority and the Palestinian Investment Authority. Many of these new agencies also have the authority to approve and monitor investment projects.
Despite strong economic ties among West Asian economies, facilitated by strong trade relations among the Gulf Cooperation Council (GCC) states, the number of bilateral investment treaties signed among them is quite small. As of August 1996, intra-regional bilateral treaties accounted only for nine out of the total number of 104 bilateral treaties signed for the promotion and protection of FDI (annex table 3).
Traditionally, most FDI from West Asia has been directed to other countries in the same region. Israel is one exception. Its FDI outflows increased substantially during the 1990s, with their main destination being the United States and Western Europe. While West Asian TNCs invest mainly in petroleum in their neighbouring countries, there is also some investment in the financial sector (annex table 4). Lebanon, the former financial centre of West Asia, has considerable FDI in other countries in this sector.