In the early 2000s, the MEDA region, which includes the European Union’s Mediterranean partner countries (Algeria, the Palestinian Authority, Egypt, Israel, Jordan Lebanon, Morocco, Syria, Tunisia, Turkey, and Libya as an observer country) did not feature on the global investment map. While the region accounted for 4% of the world’s population, it only received about 1% of foreign direct investment (FDI) flows. Its growing economy, however, has gradually attracted increasing interest in recent years and it now enjoys a normal share of global FDI flows (4%).

The Figures

As data from different sources (UNCTAD World Investment Report, ANIMA Mediterranean Investment Project Observatory, or MIPO) , demonstrate, FDI inflows to the region have been growing considerably for several years:

• According to the UNCTAD, which measures macroeconomic flows in national accounts, FDI flows to the MEDA region grew from US $12billion in 2000 to US $30 billion in 2005, and are expected to have exceeded US $40billion in 2006 (Tables 1 and 2);

Table 1. Growth in FDI Flows to 3 Host Countries 1997-2006

Table 2. Growth in FDI Flows to the MEDA Region from 1997 to 2006 (US $ m)

• According to ANIMA (through its European-based MIPO, founded in 2003 under the umbrella of the Invest in France Agency, otherwise known as AFII), the announced microeconomic flows to the region (calculated from data for individual investors) increased by the same proportion (Table 3). The MIPO measures announced investments in year x, which is when the investor (or sometimes even the National Investment Commission) publicises or confirms a project for implementation that will lead to payments or transfers in the same or following years (year x + 1 etc.). The data provided by ANIMA-MIPO is therefore forecasted data.

Table 3 Announced FDI in MEDA Countries (EUR m)

A time-lag is evident in comparing announced flows in euro (ANIMA-MIPO) and real flows in dollars (UNCTAD) (Figure 1): whereas ANIMA-MIPO measures potential investment, UNCTAD measures actual transfers.

Graphic 1. Announced FDI in MEDA-10 Countries (excluding Cyprus and Malta).

The Increasingly Important Role Played by FDI in Foreign Revenues

What share of external foreign flows to the MEDA region does FDI account for? Capital inflows are growing sharply (Table 4), whereas public aid for development has dropped to moderate levels. Other forms of income, however, are becoming increasingly important, including remittances (which have doubled in ten years), tourism earnings (which tripled from US $12.5 billion to US $42.7 billion between 1995 and 2005) and FDI (relatively lower initial levels but increasing rapidly). By 2006, for example, FDI (over US $45 billion) could become the region’s primary source of foreign capital.

Table 4. Main Foreign Revenue Sources in the MEDA Region

Capital outflows are also considerable (US $8 billion annually in foreign investment from the central Maghreb region, a total outward stock of US $100 billion, according to the IEMed, and dividends paid out by foreign companies in Tunisia alone of US $1.5 billion in 2004). It is evident, however, that the MEDA region as a whole, taking into account its insufficient level of savings, has recently begun to benefit from the net inflow of foreign capital, which has offset and  often compensated the weak level of domestic productive investment (thereby indicating the importance of joint ventures).

What Lies Behind This Interest in the MEDA Region?

After a long period of neglect by foreign investors, the region has recently begun to attract interest again. The reasons are as follows:

• Most of the countries have made a genuine effort to reform by implementing legislation and regulations that protect the interests of companies, developing competitive logistic systems and technologies, and actively promoting the region (see box below). Although a lot remains to be done, but the market response indicates that investors have receives the message.
• A strong energy-driven economic surge has had a triple effect in terms of the development of oil and gas projects (prospection, pipelines and refineries), the reinvestment of substantial sums of petrodollars in the Mediterranean, and the announcement of major Algerian-style infrastructure programmes (US $80-100 billion over 5 years), which have attracted investors, capital, and projects.
• There has been an increase in the creation and trading of banking and insurance networks and in the creation of funds, sometimes involving substantial investment (e.g., in Egypt, Turkey, Syria and Algeria), accompanied by the development of many privatisation and licensing projects (with a particular impact in Egypt, Syria and Algeria in 2006, and in Turkey in 2005).
• There has been a sharp acceleration (a 3.5-fold increase in flows) in the real estate, public works, and tourism sectors, particularly in terms of investments from the Gulf region (huge projects in Morocco, Syria, in the Dead Sea and Red Sea areas, etc.).
• There is a growing awareness in Europe of the growth (new markets) and productivity (lower costs) opportunities offered by neighbouring regions (Eastern Europe and the Mediterranean). These markets are more easily entered than China or India by the frequently cash-strapped European small and medium-sized enterprise (SME). This trend is also accompanied by the relocation (although rarely referred to as such) of subcontractors and service providers to the region (Axa-Morocco is one example).
• Many companies from China and other emerging economies are taking the plunge and setting up in markets such as Egypt and Algeria, which, until recently, have been relatively protected (especially the heavy industry, chemicals, metallurgy and public works sectors).

Specific examples from each country serve to illustrate spectacular performances. Turkey, for example, is benefiting from the opportunity-driven effects of its status as an EU candidate country, with a surge in industrial projects (in the automotive, chemicals, supply-chain sectors, etc.), and with the western part of the country witnessing a chain reaction that is one of the main driving forces in the economy. Israel, meanwhile, continues to specialise in technology (and not just information and communication technologies), while Syria, with a potential market of 30 million inhabitants and an industrialised culture, has become a magnet for businesses.

The transformation of ANIMA into a powerful European institutional network consisting of 19 founding organisations (Euro-Mediterranean development agencies and employers) has monitored and strengthened this trend.

The Weakness of Industrial Investment

Table 5, which shows inflows by project type for 2006, reveals how production projects (whether greenfield, expansion or relocation activities) represented only a small proportion of total investment—accounting for around 39% of all projects but only representing around 31% of investment.

Expansion projects represented less than 10%, strongly contrasting with a figure of 50% for Europe. Finance-related projects (shareholdings and privatisations) accounted for only about 19% of all the projects but almost half (48.6%) of the sums invested, generally in three main sectors: banking network purchases, telecommunications licences, and start-ups.

The rest of the portfolio consists of commercial projects (branches, chain stores, franchises and offices)—which accounted for just under 21% of projects but a relatively small proportion of total investment—and partnership-type projects (joint ventures and distribution agreements)—which accounted for 13.3% of total projects and 7.3% of total investment.

Table 5. Breakdown of Projects 2006

Leading Sectors: Real Estate and Banking

A sector-by-sector analysis confirms the importance of finance-related activities (Figure 2). The seven main sectors, in decreasing order of importance, are as follows: real estate and transport (119 projects and €16.8 billion), banking (107 projects and €15.3 billion), telecommunications (28 projects and €6.2 billion), software and computer services (42 projects and €5.8 billion), energy (67 projects and €5.4 billion), tourism (54 projects and €3.6 billion), and finally, cementand other minerals and materials industry (27 projects and €3.3 billion). This leaves little room for non-financial sectors, with a few exceptions such as chemicals, agrobusiness and pharmaceuticals (the latter two of which showed growth with respect to 2005).

The Arrival of Major Operators

The investment portfolio announced in 2006 included 54 large-scale projects worth over €500 million each. Given that this compares to 30 such projects in 2005, it is evident that there is increasing interest in investing in large-scale projects.

The portfolio also contains 99 major projects (€100-€500 million), compared to 73 in 2005, and 51 significant projects (€50-€100 million), compared to 36 in 2005. Of the 720 definite FDI projects for 2006, 204 crossed the €50-million threshold. The remaining 516 projects included 119 standard projects (€10-€50 million), 130 subsidiary office set-ups without major investment, and 267 relatively modest projects (partnerships representing FDI of less than €10 million).

According to the MIPO, the average amount invested in projects keeps increasing —to €92 million per project in 2006 compared to €64 million in 2005 and €30 million in 2003. These figures are known for 75% of projects (official amounts for 55% of cases and projects involving the creation of few jobs in 20% of cases). This figure would confirm the arrival of major operators, but also confirms a trend that was already becoming evident in 2005, namely, increasing investment in large-scale real-estate and tourism projects (major resorts and new urban centres)—which are often questionable in terms of sustainability, environmental impact, and their effect on urban and social diversity. Investors are looking for high returns, minimal risk (bricks and mortar), rapidly assessable environmental impact, and quick maturity—just the opposite, in fact, of what the region needs.

The Gulf Region Replaces Europe as the Lead Investor

Europe—responsible for 42% of projects but just 21% of total investment—no longer accounts for the greatest share of FDI in the MEDA region. The share of the USA (around 25%) has been on the rise since 2003 due to energy demands. What is surprising, however, is that the Gulf states and other MENA countries (Middle Eastern and North African countries, i.e. non-MEDA Arabic countries plus Iran) have overtaken Asia (8% and rising) and the MEDA region (2.4%) in terms of total investment. Averaged out over the period 2005-2006, 50% of FDI came from developed countries (Europe and the USA) and 50% from new sources (two thirds from the Gulf and one third from emerging countries).

Table 6. Sources of FDI in the MEDA Region 2006.

The Pace is Stepping Up in the Near East

Despite a geopolitical scenario that continues to be complicated—and particularly for Lebanon in 2006 (which yielded high returns to investors in the first half of 2006)—the near East is performing remarkably in terms of announced FDI inflows (Map 1). Egypt, which has traditionally been a favoured destination for United Arab Emirates (UAE) investment, has overtaken Turkey, for which possible accession to the EU continues to play a role, and Israel, which is breaking all records in terms of computer development company sales. Nor are Syria and Jordan lagging behind, and the Maghreb has doubled announced FDI with respect to 2005.

Map 1. FDI in Terms of Amounts (2003-2006), Destination, Number of Projects and Sectors.

Leading Projects

A detailed list of projects, compiled by the MIPO, can be consulted at http://www.animaweb.org. Described in the box below are announced projects worth over €1 billion, although these are not necessarily the most interesting nor the most significant projects[1].

Results to Be Used to Promote Economic Growth

The FDI figures for the MEDA region in 2006 confirm that the poorest part of the Mediterranean basin is attracting renewed interest, which is good news indeed. However, although substantial FDI in terms of quantity has been achieved, the challenge remains to improve quality. National governments and economic development agencies need to focus on two issues in particular, namely, employment creation and the multiplier or leverage effect—i.e. the direct and indirect tangible impact of a project (the return for each euro invested in local activities in the customer-supplier chain).

Viewed from this perspective, governments need to urgently implement measures aiming at:

• Enabling both foreign and national SMEs to operate in a secure environment, as this will foster the development of a more resilient, professional and integrated industrial fabric.
• Fostering investment in infrastructures that are necessary for economic activity.
• Defining realistic industrial priorities that underpin targeted territorial marketing strategies (for different sectors, depending on the country—the ICTs, petrochemicals, light industry, food processing, consumer goods, services for companies, subcontracting, etc.).
• Attracting socially responsible and sustainable investments that increase and protect the human and natural wealthof the fragile economies of the southern and eastern Mediterranean basin.

Notes

[1] These large-scale projects mainly affect the real-estate, tourism, finance and telecommunications sectors. The figures in the MIPO database are based on announced FDI flows divided by the number of years the project is scheduled to last (typically 3 to 10 years for real-estate projects).