FDI’s Role in Enhancing Industrial Competitiveness and Sustainable Growth
January 2025
This blog seeks to reaffirm the critical role of foreign direct investment (FDI) as a fundamental mechanism for strengthening national industrial capabilities, enhancing productivity, and increasing export rates to achieve the desired sustainable economic growth in Egypt. This perspective has somewhat receded from focus considering recent calls to prioritize the localization of domestic industries, despite their competitiveness in global markets or their effective integration into supply chains. Within this context, FDI emerges as a cornerstone for fostering industrial and economic development, as demonstrated by numerous successful international case studies.
Boosting Investment and Production Rates Necessary for Achieving Sustainable Economic Growth
The ability of FDI to foster economic growth in countries is a well-established concept, supported both theoretically in academic studies and practically through the experiences of nations that have achieved significant economic progress. Studies conducted on various developing countries have demonstrated that FDI inflows play a pivotal role in advancing economic development by stimulating domestic investment and enhancing productive capacities.
A distinctive feature of FDI is its ability to transfer technology to the host country—an advantage that cannot be fully realized through trade or traditional financial investments. Moreover, FDI bolsters competition in local input markets, encouraging domestic producers to enhance the quality of their products.[1]
The impact of FDI extends beyond traditional economic dimensions, emerging as a cornerstone for enhancing the competitiveness of developing countries and supporting their exports. FDI not only facilitates the transfer of advanced technologies and managerial skills but also contributes to improving the efficiency of the local economy by increasing domestic competitiveness and fostering innovation.[2]
Among the additional benefits of FDI is its contribution to the development of human capital in the host country, as employees often receive advanced training during the operation of new projects. Furthermore, the profits generated by these investments increase tax revenues, enhancing the state’s capacity to finance development plans.[3]
FDI’s role is not limited to creating job opportunities and raising wages; it also serves as a key driver in the development of infrastructure, energy, and water resources—sectors that are essential for advancing development in emerging markets.
The significance of FDI for developing countries lies in its ability to address challenges such as external debt. Developing nations often rely on attracting FDI inflows as a tool to finance economic development and bridge deficits in their balance of payments.[4]
FDI contributes not only to the direct integration of host countries into global value chains (GVCs) by embedding local firms within international production networks but also enhances the quality of inputs and services available to domestic enterprises. These dynamics create significant positive externalities that indirectly amplify the host country’s engagement in GVCs.[5] Moreover, such participation in GVCs serves as a stimulus for attracting additional FDI inflows, reinforcing the cycle of economic integration and development.
The principal advantage of FDI lies in its capacity to deliver stable and long-term financial inflows, rendering it less vulnerable to short-term economic volatility which may lead to Hot money flows, such as those observed during the 1997 Asian Financial Crisis. This characteristic positions FDI as a critical mechanism for enhancing macroeconomic stability in host countries.[6]
The Modest Levels of Domestic Savings and Capital Formation in Egypt Compared to Other Countries
When observing the situation in Egypt, it becomes clear that there is a significant need to attract more FDI due to the modest levels of domestic savings and capital formation necessary to develop the industrial sector adequately and achieve a genuine economic development in the country. In comparison to other nations that have successfully achieved tangible economic growth, these rates position Egypt in the bottom of the list. During the period from 2000 to 2023, Egypt’s average savings rate as a percentage of GDP was only 11%, while the capital formation rate relative to GDP was 16.4%. In contrast, other countries have achieved much higher rates, with China recording 45% and 40%, respectively; Turkey, 25.4% and 26%; and Indonesia,
31% and 28%. Within the region, Morocco achieved rates of 26.6% and 26.9%, respectively, and Saudi Arabia recorded 41% and 22.6%, respectively.
Source: World Bank Database
FDI is considered one of the most sustainable sources of foreign currency, especially given the decline of revenue flows from the Suez Canal due to the ongoing regional conflict, as well as the modest export performance, which did not exceed USD 43 billion in 2023[7]. Additionally, FDI serves as an alternative to external borrowing, which is associated with the challenges of rising external debt, which reached approximately USD 153 billion in June 2024[8]. Furthermore, FDI serves as a substitute for the declining grants and aid from both donor countries and international organizations. From this perspective, this form of investment represents one of the effective solutions to address Egypt’s financing gap, estimated at around USD 17 billion according to the International Monetary Fund (IMF).[9]
The role of FDI in providing crucial support to the Egyptian economy amid various crises in recent years is particularly evident. In the context of the crisis triggered by the foreign currency shortage, foreign currency inflows from foreign investments became a primary source of foreign currency in the fiscal year 2023/2024. In total, foreign currency inflows from FDI, tourism revenues, Suez Canal earnings, exports, and remittances from Egyptians working abroad reached USD 121.6 billion, of which USD 56.6 billion came in the form of FDI, representing 46.5% of these inflows.[10]
FDI inflows to Egypt have experienced significant growth over the past five years, increasing from USD 15.8 billion in the fiscal year 2019/2020 to USD 56.6 billion in the fiscal year 2023/2024, with an average annual growth rate of 49%.[11] The lowest inflows were recorded in the fiscal year 2020/2021 due to the impact of the COVID-19 pandemic on foreign investment, which led to a reluctance among global companies to make new investments, in addition to the suspension of operations by some companies. However, FDI flows quickly recovered and surpassed pre-pandemic levels.
In light of unfavorable regional and global conditions that impacted the inflows from the Suez Canal, Egypt’s primary sanctuary was the influx of investments from the Ras Al-Hekma deal, which stands as the largest FDI transaction in Egypt’s history, valued at USD 35 billion.[12] Following the completion of this deal, the government was able to alleviate the pressure resulting from the foreign currency shortage by currency devaluation. Additionally, it succeeded in securing the necessary dollars to import strategic goods, production supplies, and raw materials.
Foreign companies operating in Egypt represent a model of sustainable investment even in the face of the most challenging circumstances. In the engineering and electronics sector, Samsung stands as one of the inspiring examples. The company established its first factory in Egypt with an estimated investment of USD 250 million to produce televisions and displays. Despite global economic fluctuations that impacted the local situation, the company continued its presence in the Egyptian market and even expanded to establish a factory for localizing tablet manufacturing in Egypt. Additionally, it received the golden license in 2023 to localize mobile phone manufacturing. The company’s exports amount to approximately USD 700 million, representing 30% of Egypt’s engineering sector exports. Furthermore, the company provides around 2,000 job opportunities in its factories and sales outlets.[13]
The Role of FDI in Enhancing Countries’ Exports Performance through Improving Productivity, Increasing Competitiveness, and Expanding Access to International Markets
This is not the case only in Egypt, but a similar scenario can be observed with other companies in developing countries. For instance, the consumer goods giant “Unilever” has been operating in Turkey since 1952. Over the past decade, the company has invested approximately EUR 350 million in Turkey, representing the largest investment ever made in the city of Konya.[14] Similarly, Nestlé has been present in India for over six decades, during which the company has significantly expanded its industrial footprint, with investments totaling approximately USD 850 million by 2020. Despite the challenges posed by the COVID-19 pandemic, the company has announced plans to invest between USD 720 million and USD 780 million from 2020 to 2025. Furthermore, the company plays a vital role in the Indian labor market, providing employment for approximately 9,000 individuals.[15]
Vietnam has significantly benefited from FDI from companies such as Samsung. Samsung established factories in Vietnam, transforming the country into a major hub for the export of smartphones and electronic components. In 2022, Vietnam’s exports of phones and components surpassed USD 50 billion. Similarly, the establishment of Intel’s microprocessor assembly and testing facility in Costa Rica in the 1990s resulted in a substantial shift in the country’s export profile. Technology exports increased from 4% to 37% of total exports within a decade. Moreover, such investments have stimulated infrastructure development and enhanced the skills of the workforce.[16]
The Imperative to Develop a National Strategy for Increasing FDI Flows that Support Industrial Development and Enhance Export Performance
Despite the pivotal role of FDI in fostering sustainable economic growth in many countries, Egypt still needs to attract more foreign investments. In 2023, FDI accounted for only 2.48% of the country’s GDP, a significantly lower contribution compared to its peak of 9.5% in 2006. Furthermore, this rate is lower than in emerging markets such as Argentina, where FDI represented 3.7% of GDP. It is also lower compared to some Arab countries, such as Bahrain (14.8%) and Oman (11.5%), as well as African nations like Namibia (18.5%) and Mozambique (12.5%).[17]
In this regard, the Egyptian government aims to double the contribution of FDI to GDP and achieve cumulative FDI inflows of nearly USD 100 billion during 2024-2030.[18] Several serious steps have been taken toward this goal; however, it is important to highlight the necessity of developing a unified, comprehensive, and integrated strategy to enhance FDI in Egypt, particularly in sectors that support industry, promote exports, and improve competitiveness in global markets. This strategy should include the following key elements:
- Improving the Investment Climate: By simplifying the regulatory framework and procedures necessary for establishing and operating businesses, including permits, licenses, and compliance requirements. Strengthening the Rule of Law: to ensure legal protection for foreign investors, including property rights, dispute resolution mechanisms, and contract enforcement. Enhancing Transparency: by implementing a unified investor services system to provide inquiries, approvals, and procedures aimed at reducing bureaucracy.
- Developing Economic Zones, Industrial complexes, and encouraging public-private partnership: Encouraging the development of specialized industrial complexes in sectors where the country holds a competitive advantage, offering tax incentives, customs duty reductions, and infrastructure designed to meet industrial sector needs. Relying on industrial developers to prepare these complexes and reduce the burden on the state.
- Providing Competitive Incentives, Tax Exemptions, and Support: Offering tax exemptions or reductions in corporate tax rates, or providing support to sectors aligned with national priorities, as well as providing industrial land at low or subsidized costs with ready-to-use facilities for investors. Encouraging innovation through grants or tax incentives for research and development activities and technology localization.
- Enhancing Supply Chains: Facilitating partnerships between foreign investors and local companies to integrate supply chains and benefit from free trade agreements and regional blocs, providing greater opportunities to access markets.
- Promoting the Development of Skilled Workforce: Developing targeted training programs through collaboration with investors to design skill-building initiatives tailored to industrial needs. Expanding the establishment of vocational education and technical training institutions to provide a skilled workforce.
- Marketing and Investor Communication with Global Promotional Campaigns: Highlighting the country’s industrial strengths and success stories through targeted international marketing campaigns (Door Knocking Campaigns). Organizing events and meetings with potential investors to showcase opportunities in the industrial sector. Focusing promotional efforts on high-potential sectors such as manufacturing, textiles, automotive, and renewable energy.
- Leveraging Technology, Innovation, and Smart Manufacturing: Encouraging investment in automation, the Internet of Things (IoT), and artificial intelligence (AI) to modernize the industrial sector. Promoting investment in environmentally sustainable industries and renewable energy projects. Utilizing digital tools to streamline investor services, access data, and map industrial zones.
- Strengthening Policies and Effective Engagement: Establishing forums for dialogue with foreign investors to address their concerns, improve policies, and ensure stability and predictability of industrial and investment policies, thereby building investor confidence.
- Monitoring and Evaluating Performance Indicators: Tracking FDI inflows, job creation, and industrial production to assess the success of strategies, and collecting investor feedback to continuously improve the investment environment.
By implementing an integrated strategy, the country can attract and retain FDI in the industrial sector, driving economic growth, creating job opportunities, and advancing technological progress.
[1] IMF. (2001). How Beneficial Is Foreign Direct Investment for Developing Countries? Retrieved from: https://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htm#:~:text=FDI%20can%20also%20promote%20competition,revenues%20in%20the%20host%20country
[2] مركز المعلومات ودعم اتخاذ القرار. (2024). دور الحوافز في تعزيز الاستثمار الأجنبي المباشر. تم الوصول من: https://idsc.gov.eg/upload/DocumentLibrary/AttachmentA/9040/2.pdf
[3] مركز المعلومات ودعم اتخاذ القرار. (2024). دور الحوافز في تعزيز الاستثمار الأجنبي المباشر. تم الوصول من: https://idsc.gov.eg/upload/DocumentLibrary/AttachmentA/9040/2.pdf
[4] محمود غراب. (2022). أثر الاستثمار الأجنبي المباشر على الناتج المحلي الإجمالي المصري. تم الوصول من: https://jsec.journals.ekb.eg/article_263938_8b3d8a8278f587f5ce4cc8af9e1cb0de.pdf
[5] World Bank.(2020). World Development Report 2020: Trading for Development in the Age of Global Value Chains. Washington
[6] هاني بركات. (2018). الاستثمار الأجنبي المباشر ودوره في تنمية الاقتصاد المصري. تم الوصول من: https://jces.journals.ekb.eg/article_51313_2257601b0d52d1685fa93f961aa6a61a.pdf
[7] جمعية المصدرين المصريين(اكسبولينك). (2023). تقرير التجارة في عام 2023
[8] البنك المركزي المصري. (2024). إحصاءات الدين الخارجي. تم الوصول منhttps://www.cbe.org.eg/en/economic-research/sdds :
[9] IMF, accessed by: https://www.imf.org/en/Publications/CR/Issues/2023/01/06/Arab-Republic-of-Egypt-Request-for-Extended-Arrangement-Under-the-Extended-Fund-Facility-527849
[10]Central Bank of Egypt, Balance of Payments Performance in FY 2023/2024, accessed by: https://www.cbe.org.eg/-/media/project/cbe/page-content/rich-text/bop/october-2024/press-release-balance-of-payments-performance-of-fy-2023-2024.pdf
[11] Central Bank of Egypt (CBE)
[12] رئاسة مجلس الوزراء المصري. تم الوصول من: https://www.facebook.com/story.php?story_fbid=879132140923874&id=100064812882317&mibextid=qi2Omg
[13] GAFI, https://www.gafi.gov.eg/arabic/whyegypt/SuccessStories/Pages/default.aspx
[14] Invest in Turkey, retrieved from: https://www.invest.gov.tr/en/whyturkey/successstories/pages/unilever.aspx
[15]The Economic Times, https://economictimes.indiatimes.com/industry/cons-products/fmcg/nestle-investing-rs-6000-6500-cr-to-expand-manufacturing-ops-in-india-says-top-official/articleshow/107532002.cms?from=mdr
[16] UNCTAD
[17] World Bank Data, accessed by: https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?locations=EG
[18] مركز المعلومات ودعم اتخاذ القرار. (2024). أبرز التوجهاتِ الاستراتيجيةِ للاقتصادِ المصري للفترةِ الرئاسيةِ الجديدة (2024-2030). تم الوصول من: https://www.idsc.gov.eg/Reports/details/8857
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