UNCTAD's newly released World Investment Report 2004 has revealed the extent by which Egypt's foreign direct investments have dropped. Mona El-Fiqi reports Egypt is among 17 African countries that witnessed a decline in foreign direct investment (FDI) inflows in 2003, according to the World Investment Report 2004, issued by the United Nations Conference on Trade and Development (UNCTAD). UNCTAD's annual report, which provides comprehensive figures on investments in 190 countries, said that foreign direct investment flows worldwide have been on the wane for the third year in a row. While 111 countries saw their FDI inflows rise, 82 countries saw a decline. Foreign direct investment in Africa grew by 28 per cent to reach $15 billion in 2003; further growth is expected this year. "The region's quick turnaround from a downturn in 2002 was led by investment in natural resources and made easier by liberal foreign direct investment policies," the report said. American University in Cairo (AUC) economics professor Heba Handousa credited Africa's success on the signing of 35 bilateral investment treaties and nine double taxation treaties, in addition to ongoing negotiations on free trade agreements among groups of African countries and major entities like the United States and Europe. The report also predicted that the continent's FDI inflows were expected to increase again this year. "Africa's outlook for FDI in 2004 and beyond is promising, given the region's natural- resource potential, buoyant global commodity markets and improving investor perceptions of the region," said Karl Sauvant, director of UNCTAD's investment division. Much of this increase will come from investment in natural resources, meaning "the region's natural- resources-rich countries such as Algeria, Angola and Guinea are expected to receive more FDI," the report said In 2003, inflows as a percentage of gross fixed capital formation rose to 14 per cent from their 12 per cent level in 2002. Moreover, the value of cross- border mergers and acquisitions involving African firms rose from $4.7 billion in 2002 to $6.4 billion in 2003. Thirty-six of the continent's countries contributed to the rise in FDI, partly as a result of modest increases in inflows to the manufacturing and services sectors. While Morocco was Africa's largest recipient of FDI inflows (which climbed from $0.5 billion in 2002 to $2.3 billion last year), Egypt's share of FDI declined from $0.6 billion in 2002 to $0.3 billion in 2003. Handousa said that despite the fact that Egypt was among the first countries globally to open its markets to foreign direct investments during the 1980s. Today, Egypt ranks a disappointing 123 in attracting FDI inflows, according to the UNCTAD report. In fact, FDI has declined from seven per cent of the total size of investments in Egypt to just two per cent in 2003. Handousa said it wasn't all bad news, however. Egypt's FDI stock (the accumulated capital of foreign investments) represents 26.2 per cent of the national income today, while it was only 10 per cent in the 1980s. "Egypt still has the chance to catch up and attract multinational companies, particularly from Europe, which is now the main capital exporter, although it was the USA for a long time," Handousa said. Much hope has been placed on the newly formed Investment Ministry to improve the situation by creating a more business friendly environment. Bilateral trade agreements with 55 countries may also help Egypt attract more FDI. The fact that 40 of the world's top 100 multinational companies already do business in Egypt is another plus. "If Egypt makes better use of its potential," Handousa said, "its rank can go from 123 to 70 in attracting FDI." The UNCTAD report also outlined the most promising investment sector in the next phase -- services -- which it said, "represents the cutting edge of a global shift in production activity that is creating a new international division of labour in the production of services." New IT and telecommunications developments mean that information- intensive services can be broken down into their constituent parts and traded in the same way goods are. This "trade-ability revolution", according to the report, enables the production of services to be distributed internationally. "Not only do developed countries host more than two thirds of the world's total services, they currently host most of its off-shoring services as well," the report said. The fact that this was set to change would be a major boon for the developing world. The off-shoring of services was estimated to be worth $32 billion in 2001; off-shoring of IT-enabled services alone is forecast to increase from $1 billion in 2002 to $24 billion by 2007. "But it could be much bigger," the report said. There is tremendous potential for both developing and transition economies to benefit from the off-shoring of services, with the resulting benefits accruing to areas such as increased export earnings, job creation, higher wages and the upgrading of skills. It can also create further positive spillovers in terms of raising the competitiveness of human resources and improving IT and telecom infrastructure. The potential for off-shoring is not unlimited, however. "For many services, proximity to markets, interaction with customers, trust and confidence outweigh the possible benefits of off- shoring, in addition to some technical limits. Regulations and legal requirements may raise transaction costs and hence limit off-shoring," the report said. The report recommended the maintenance of an enabling international framework that allows all countries to benefit from the advantage offered by the services trade-ability revolution.
