Friday, March 14, 2008

Why so little foreign investment?

In 2006, foreigners invested about $1 billion in Georgia, $3.7 billion in Azerbaijan, and $20 billion in Turkey. In contrast only $450 million was invested in Armenia. Obviously this represents a tremendous growth, about 100 percent, when compared to the invetsments in 2004 and 2005. But it is low in comparison to the neighboring countries, and very low relative to the country's needs.

For 2007 the final figure may be well over $500 million (350 over the first three quarters). Nevertheless, this is still very low. Obviously, we have come a long way, but don't seem to have gone far enough.

Quarterly FDI figures for 1993-2006 are posted on aea .am

April 1, 2008: Armstat reports FDI of $670 million for 2007.


R said...

FDI is an important measure of development and confidence. However giving global numbers is a little misleading. A fairer comparison would perhaps be on a per capita basis:

Turkey $20B for 70 million people = $285/person
Georgia $1B for 4.5 million people = $222/person
Armenia $450 million for 3 million = $150/person

armen said...

do these foreign investment numbers count the $ value for real estate purchased or developed by outsiders in Armenia?

Ara said...

May be it is better to compare FDI with the GDP and look at FDI GDP ratio or FDI as a percentage of GDP.

--If Azerbaijan’s FDI is $3.7B, while the GDP is $31.07B, then FDI as a % of GDP is 12%.
--If Georgia’s FDI is $1B while the GDP is $9.553B then FDI as a percentage of GDP is 11%.
--If Armenia’s FDI is $0.45B, while the GDP is $9.27, then FDI as % of GDP is 5%.
--If Turkey’s FDI is $20B, while the GDP is $482B, then FDI as a % of GDP is 4%.

In this case we see that Armenia’s relative FDI is better than Turkey’s! However Armenia's relative FDI is less than half of Georgia's and Azerbaijan's

Anonymous said...

Lets not forget that Armenia is a Landlocked country and is blockaded by its neighbors. While Azerbaijan has its oil and gas. Most of the investment is in that field. Georgia has its sea where it has many opportunities for export. And turkey is a country of 70mil people and has a big tourist sector. I think Armenia is doing well from the position it is in. We just need more people from the diospra to invest. One reason that the diospra does not invest in Armenia more,is because of corrupt government. How many times have we heard stories of people investing in Armenia and getting cheated or lose their business. So I belive first of all we need democracy in Armenia. This is just my opinion. I could be wrong.

David said...

Idealy you would want a measure of the FDI stock and not the annual flows, and that's why I plotted the trend which should provide a rough idea of what cumulative investments look like. Obviously 2006, and most likely 2007, are banner years.

But ultimately you have to ask the question of how much FDI the country needs so that per capita income becomes $10,000, $20,000, or $50,000 as in the West. Obviouly much of the investment that is necessary would have to come from abroad given the small size of domestic savings. With per capita GDP in 2006 of about $2,120 (perhaps closer to $3000 in 2007), cumulative FDI, and even that observed in 2006, is at best a fraction of what the country needs.

Ara: Turkey has higher per capita gdp than Armenia, and so I am not sure the comparison of FDI to gdp is very useful. Obviousy, the size of GDP is endogenous to past investments.

Armen: It is not clear whether some of the purchases of new homes by the diaspora is labeled as remittances rather than FDI. Either way, FDI investment in the non-residential sector is once again small relative to the country's needs.

r: I provided the FDI for other countries to generate some interest. Again, the ultimate question should be how much is needed to get us to prosperity. Armenia has done a bang up job in recent years, nothing short of a miracle. But I am not sure what will happen in 2008 and beyond.

nazarian said...

Do these FDI figures include the Armenian capital that flows out of the country, gets repackaged abroad in an offshore company and then flow back to Armenia to take advantage of incentives? Technically, these moneys are from foreign sources but ultimately it is repackaged Armenian capital.

One more thing. Instead of asking 'why so little FDI', I think it's more appropriate to ask 'how come so much FDI'?

David said...

I have heard these arguments before. Unfortunately, these bring embarrassment not only to those who espouse such exaggerated views, but also to Armenia and all Armenians.

The investments in the telecom, airport and other transporation, banking, hotels, IT, among many other sectors are real and made my Russians/Norwegians, Germans, British, French, Greeks, Lebanese, Americans, Argentinians... and the flights by Air France, British Air, Lufthansa, Austrian Air, ... are real too ... and so is the acquisition of the stock exchange by Nasdaq ... and the Fitch rating.

FDI in Armenia is the equivalent of 6 Airbus 320 planes. So keep things in perspective. This is little investment, but granted much higher than it was in the 1990s.

Of course one may still make the argument that this is too "high" given the government's anti-foreign privatization policies that began 16 years ago. Armenia was a CIS leader in privatizing homes and farmland, but lagged in privatizing businesses. A western advisor once told me in Yerevan in 1994, reflecting on his experience in Romania, that privatization will not fully take place until the "locals" figured out a way to steal much of what they can. Food for thought!

David said...

Dear R,
I am happy to post your comments. But please do not post or reproduce full articles from the media. Most of us get our news from the same sources. Also it would be good to share your views on their content.

Gayane said...

Nazarian asks the right question: why so much foreign investment? Maybe because there was a marked improvement in the economic climate in Armenia during Kocharian's time, and I am hopeful that things will continue their improvement with the new government. Of course this is relative, as complete government control was at its worst during the LTP years. I find at least the rhetoric (from PM Sargsyan especially) to be the most western oriented since independence.

Armen G. said...

FDIs in Armenia are marginal at best, and we shoul not be searching for a fig leaf or justifications. Comparing Armenia to Azerbaijan should be done only if we think of Armenia as corrupt as Azerbaijan, or to Georgia if we thought of Armenia as with a weak statehood as Georgia. FDIs in Armenia are not adequate: hence still the very lagging productivity. If you want to break down Armenian indicators per capita, lets get really dirty: we have exceptionally week productivity. FDIs bing higher productivity, since foreign capital comes with strings attached, harder work and higher productivity. Armenian mini-aligarchs may be running "high-profile" and "vanity fair" businesses, still dont make neither their moneys or "manpower's" worth. The real reason FDIs are low in Armenia are: small domestic market and the unhospitable attitude by the dual system of the state backed by mini-aligarchs/parlament members who creat all the barriers of serious foreign capital inflow. If we take out Russian capital (Russians will send hitman to exterminate their opponents if they surface) and cottage industry investments made Diaspora, we have almost none of FDIs left. Do we have any investments by Global Fortune 500 investments in Armenia (Lycos is not GF500!!!)? That is what going to count, and improve productivity