In order to attract foreign direct investment, the GCC states need to offer potential investors more than few economic incentives.
Specifically, investors look for good business environment more so than tax breaks.
Such was the message made during a recent conference held in Bahrain on attracting FDI to the region. Bahrain Centre for Studies and Research organised the gathering last week that attracted a number of speakers
According to UNCTAD statistics, the US remains the largest recipient of FDI in the world having attracted $120 billion (Dh440.4 billion) in 2004. China is second by attracting $60 billion (Dh220.2 billion) or some $1.2 billion weekly. Other top recipients include the United Kingdom, France and Singapore.
Mehmet Ogutcu of OECD argued that in order to investments, it was no longer sufficient for a country to liberalise FDI restrictions, as most have done so. Specifically, the offer of tax benefits for instance would not simply attract FDI. Rather, international enterprises pursue good business environment. Survey findings suggest that investors consider business climate, market size, quality of infrastructure and worker productivity as key factors in selecting investment location.
The significance attached to special favours such as tax breaks falls behind other factors. Trouble is most developing countries offer some form of fiscal incentives, thereby allowing little room for distinctions. Still, Ogutcu noted that it was difficult to measure fiscal incentives, as they depend on the assumed level of investment that would have occurred anyway if no inducements were offered.
Yet, fiscal incentives could prove costly to the treasury. An OECD study carried out last year revealed that revenue costs of incentives range from 0.7 per cent of gross domestic product in Vietnam to that of 1.7 per cent in Malaysia.
Ogutcu contended that it was not possible to use FDI as a source of solving economic development problems. However, FDI should be viewed as a valuable supplement to domestically provided capital rather than as a primary source of finance.
Nazha Benabbes Taarji of UNCTAD noted change in the structure of FDI with shift towards services. The speaker attributed the phenomenon to growing deregulation, liberalisation and the role of privatisation. Other forces include increasing significance of services in economic activity, non-tradability of numerous services as well the role of IT developments.
Yet, even within the services sector, FDI is moving away from the traditional industries. For example, the share of FDI in financial services dropped from 40 per cent in 1990 to 29 per cent in 2002. Likewise, within the same period, the share of FDI in trading fell from 25 per cent to 18 per cent.
Conversely, the share of FDI in business services doubled from 13 per cent in 1990 to 26 per cent in 2002. More notably, telecommunications accounted for 3 per cent of FDI in services in 1990 only to jump to 11 per cent in 2002.
In fact, the experience of telecommunications within the GCC proves point. The opening of mobile service within the telecommunications sector has resulted into boosting intra-regional investments at the least.
For example, Etisalat of the UAE, MTC of Kuwait and Q-Tel of Qatar had entered mobile markets of Saudi Arabia, Bahrain and Oman, respectively.
Quoting published research findings, Edward Graham of Institute for International Economics in Washington, argued that FDI has a positive effect on economic growth and productivity acceleration. China emerged as the best example overall. Nevertheless, according to Professor Graham, research fails to prove that FDI creates significant technological spillover.
Undoubtedly, the GCC states need FDI to help address economic challenges including creating employment opportunities for locals entering the job market. Yet, the right business environment and not tax favours would attract inward investments.
The writer is assistant professor, College of Business Administration, University of Bahrain.
Gulf News
