Leveraging FDI to catalyze economic development

REPORT LeveragingFDItoCatalyzeEconomicDevelopment AblueprintforunlockingthepotentialofFDI Contents Page 3 ExecutiveSummary 4 ForeignDirectInvestmentOverview FDISignificanceanditsBenefits 8 KeyElementsforSuccessfulFDIAttraction StrategicDirectionandVision InvestmentEnablers RobustGovernance 13 Conclusion 2RolandBerger|LeveragingFDItoCatalyzeEconomicDevelopment ExecutiveSummary A midstthebackdropofarapidlyevolvingglobaleconomy,foreigndirectinvestment(FDI)isemergingasaneffectivecatalysttospureconomic developmentandgrowth.Governmentsarecompetingtoattractinvestments,seekingnotonlythesizeablecapitalinjections,butalsothevariousaccompanyingbenefits,includinginnovations,technologytransfers,andknowledgespillovers. ThesignificanceofattractingFDIisevidentingovernments’stridestoincentivizeandretainforeigninvestments.Governmentsareestablishinglong-terminvestment attractionstrategies,introducingincentives,andsettingupdedicatedentitiestooverseeandeaseFDIregulationstoenableandfacilitateforeigninvestments. Inthisarticle,wehighlighttheroleofFDIanditsimportanceasatooltodeveloparobustandresilienteconomy.Additionally,weexaminethreekeycomponentsrequiredtoestablishanenablingfoundationtoattractFDIandunlockitspotential,including: 1.Thecriticalityofestablishingastrategicdirectionandvision 2.Theimportanceofhavinginvestmentenablersinplace 3.Thesignificanceofadoptingawhole-of-governmentapproachandhavingcomprehensivegovernance 3RolandBerger|LeveragingFDItoCatalyzeEconomicDevelopment 1 ForeignDirectInvestmentOverview FDIisconsideredaninvestmentfromaforeigneconomy(the“home”country)intoabusinessorcorporationinanothereconomy(the“host”country)toestablishalastinginterest1.FDImaytakevariousforms,includingtheacquisitionofvotingstockinaforeignentity,mergersandacquisitions,jointventures,andexpansionintoaforeigneconomy (greenfieldorbrownfieldinvestments). 1CorporateFinance Institute 2UNCTADstatFDIInflowsDatabase,accessedMay2024 3UNCTADGlobalInvestmentTrendsMonitor,No.46 Variouseconomic,social,andpoliticalfactorsinfluenceFDI.GlobalFDIinflowshavebeenfluctuatinginrecentyearsmainlyduetothepandemic,politicalunrest,andrisingcommodityprices(figureA)2.The46thissueoftheUNCTADGlobalInvestmentTrendsMonitorReportestimatesthat2023FDIflowsrecoveredandincreasedmarginallyby3%.However,excludingEuropeanconduiteconomies,globalFDIinflowsdeclinedby18%,triggeredbycontinuedglobaleconomicconcernsandgeopoliticalrisks3.Governmentscontinuouslyevolveinvestmentpoliciestoreacttotheseexternalfactors,andseveralcountriesareadoptingmeasurestocounterexpecteddownturns. AGlobalFDIinflows[USDbillion],5-yearperiod(2018-2022)2 USDbn 1,800 1,706 -44% -11% 1,600 1,400 1,383 1,482 1,315 1,200 1,000 800 958 ImpactofCOVID-19 600 Impactofglobalpoliticalunrest,highpublicdebt,andrisingcommodityprices 400 200 0 2018 2019202020212022 Source:UNCTADstatFDIInflowsDatabase,accessedMay2024 4RolandBerger|LeveragingFDItoCatalyzeEconomicDevelopment BFDIinflows[USDbillion]forGCCcountriesandtotal,5-yearperiod (2018-2022) 60 57.3 55 49.1 50 45 40 35 30 28.1 24.3 23.2 25 23.1 22.7 20 19.9 20.7 15 17.9 10 4.0 5 1.6 3.7 0 -5 20182019202020212022 Qatar SaudiArabia Bahrain Kuwait UnitedArabEmirates Oman TotalGCC Source:UNCTADstatFDIInflowsDatabase,accessedMay2024 1UNCTADstatFDIInflowsDatabase,accessedMay2024 2UNCTADGlobalInvestmentTrendsMonitor,No.46 3UNCTADWorldInvestmentReport2023 4KSANationalInvestmentStrategy GlobalFDIactivityidentifiesvarioustrendsandpatterns.First,emergingmarketslikeChina,Brazil,andseveralSoutheastAsianeconomiesarebecomingincreasinglyattractiveforFDIduetorapideconomicadvancement(althoughtherewasaslightsetbackin2023).Second,FDIactivityisbeingchanneledtowardsglobalvaluechain(GVC)-intensivesectors(e.g.,automotive,machinery),aswellastechnologyandinnovation-drivensectors(e.g.,ITandelectronics).FDIisalsobeingdirectedtowardsservice-orientedsectorsthatcomplementmanufacturingsectors.Lastly,governmentsarealsoattractingFDItowardssectorsrelatedtotheUnitedNationsSustainableDevelopmentGoals(SDG),includinginfrastructure,renewableenergy,water,sanitation,agrifoodsystems,andhealthandeducation1,2,3.Thesetrendsfollowapushbycountriestosafeguardtheireconomiesandensuresustainability.Whetherthesetrendsremainorchangedependsonmacroeconomicfactorsandglobaldynamics. ZoomingintoGulfCooperationCouncil(GCC)countries(FigureB),FDIinflowsgrewatan18.9%CAGRbetween2018and2022,significantlyhigherthanothergrowthhotspotssuchasSoutheastAsia(10.6%)1. TheKingdomofSaudiArabia(KSA)andtheUnitedArabEmirates(UAE)arekeyGCCeconomiesthatattractandinfluenceregionalFDIinflows.AspartofVision2030,theSaudiArabiangovernmentispushingtoincreaseFDI,anditisaimingforUSD103billioninannualFDIby20304.Between2018and2022,KSA’sFDIinflowgrew23.3%,thesecondhighestamongG20countriesafterJapan1.Similarly,theUAE’sFDIinflowgrewatanimpressive21.6%CAGRfrom2018to2022,reachinganall-timehighofUSD22.7billion,rankingtheUAEasthe16thglobaldestinationforinvestmentattraction1. OverallgrowthinFDIinflowsacrosstheGCCcanbeattributedtolegalreforms,thelaunchofstrate