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 KAZAKHSTAN International Business Magazine №2, 2013
 Foreign Investment: From Quantity to Quality
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Foreign Investment: From Quantity to Quality
Sergey Gakhov

In 2012, Kazakhstan reaffirmed its status as a regional leader in attracting foreign investment. A new all-time high was recorded: $22.5 billion of FDI were directed to the economy of our country that is a 7% rise compared to 2011. Moreover, judging by the statements of the government, thanks to the launch of the Accelerated Industrial and Innovative Development Program (AIIDP), positive changes were marked in redistribution of FDI flows from the extracting industries to the processing industries of the economy.

It is known that the raising of foreign investment is one of the most important factors, determining the competitiveness of the national economy. Setting out partnerships with global corporations helps the country, which raises investment, to integrate into the world's manufacturing processes, and makes it possible to accelerate the development of enterprises, to improve the quality of human capital, to create new jobs, to introduce advanced technologies, and to encourage their employment in allied industries. That is why Kazakhstan since the first years of its independence has been focusing on economic growth through the creation of favorable conditions for foreign investors.

Fortunately, the country has much of that that can be offered to foreign corporations. Among the competitive advantages of Kazakhstan, there is the huge potential of natural resources, political and social stability, as well as the neighborhood to large economies, such as Russia and China. Some years ago the government of the republic adopted a policy of continuous improvement of the laws on investment and taxes. As a result today, considering the "Doing business in Kazakhstan" index, the country ranks 49th in the world in terms of favorable conditions for that, 17th in the tax burden, and in terms of investor protection the country is far back, to be among the top 10.

Naturally, in the last 20 years, starting from 1993 through 2012, $171.2 billion of FDI was raised in the economy of Kazakhstan. In the past year, a new all-time high of $22.5 billion was recorded. Speaking about the rate of growth of FDI, over the past 20 years, they make up 27% a year, on average, that is higher than, say, in the United Arab Emirates (26%), Sweden (20%), South Korea (17%), Brazil (15%), and Turkey (14%).

Regarding the geographical structure of the gross FDI inflow, of 120 countries currently investing in Kazakhstan, the main contribution comes from the Netherlands ($7.4 billion, or 33% in 2012), China ($2 billion, or 9.1%), Switzerland ($1.9 billion, or 8.7%), the U.S.A. ($1.3 billion, or 5.9%), and France ($1.04 billion, or 5%).

While providing for global corporations the access to the development of Kazakhstan's natural resources, we were faced with the problem that the investment flows were concentrated exclusively in the raw material sectors. The detachment of the extractive sector from the real economy was evident. This did not stimulate, by no means, the manufacturers of finished products to the setting up of new productions in Kazakhstan. In the best case, the matter concerned the establishment of trade offices.

In the total structure of FDI raised in 1993–2012, 34.76%, or $59.5082 billion was spent for geological exploration and prospecting, and 30.22%, or $51.7488 billion directly for minerals production, and above all hydrocarbons. The percentage of the processing industries in the structure was only 10.2%, or $17.439 billion.

To a more lesser degree foreign corporations were interested in investing in the trade – only 6.28%, or $10.7449 billion, in the finance – 5.76%, or $9.8598 billion, in the construction – 2.1%, or $3.5984 billion, in the sector of information and communications – 1.86%, or $3.192 billion, and in the transportation and warehousing – 1.09%, or $1.8606.

If you walk you can go far

Yet the measures the government takes to attract investors for implementation of the AIIDP let us hope that with time the FDI flows will redistribute from the extracting industries to the processing sector of the economy.

Moreover, certain results have been achieved. First of all, the focusing on the priorities and more specific work with TNC led to a significant increase in FDI. Thus, of $171.2 billion of investments, invested in the Kazakhstan’s economy, as of the end of 2012, 48%, or $81 billion was raised just in the last three years.

But what is more important, the structure of investment has begun changing today. The Minister of Industry and New Technologies Asset Issekeshev in his speech at the meeting of the Government on April 30 emphasized that during the implementation of the AIIDP, the percentage of direct investments made in the production of crude oil decreased by 18%, while in the non-raw material sector, it increased, on the contrary, by 8%. Of the $8.7 billion raised in the processing sectors in 2009–2012, the greater part of the investment was made in the mining sector, machine engineering, chemical industry and food production. Moreover, for the first time FDI were attracted in high-tech industries such as pharmaceuticals, and manufacturing of computers, electronic and optical products. In general, according to Mr. Issekeshev, at the given moment, the state authorities at all levels are working on more than 400 initiatives of foreign investors from 80 countries, and 81 projects of these to the amount of $8.8 billion have already been implemented.

In many respects, this became possible thanks to the creation of a favorable legal framework. In particular, for projects in the priority sectors of the economy the laws provide for land grants (land, buildings, equipment) and for exemption from customs duties on the import of components, raw materials and spare parts. In addition, for strategic projects with investment of not less than $50 million, oriented toward manufacturing of high-tech and science-intensive products, the exemption from the taxes on land and estate is provided for a period of 7 years, and the reimbursement of expenses for gas, electricity, the purchase of land, buildings and structures .

Today, the power to act as "one stop shop" in relations with non-raw material oriented global corporations is given to the Agency for Export and Investment KAZNEX INVEST, which is not only looking for new foreign investors, but also strengthening cooperation with the existing ones. Last year it helped to attract 16 foreign investors whose projects, in prospect, are estimated at about $590 million. These include German Knauf (production of dry building mixes), Funke Kunststoffe (profiles and fittings made of PVC), Claas (agricultural machinery ), Water Future Systems (subsurface irrigation pipes) and Linde Group (industrial gases); Turkish Abdi Ibrahim (medicines), Coca-Cola Almaty Bottlers (nonalcoholic products) and NOBEL Almati (full cycle pharmaceutical factory), French Sanofi (pharmaceuticals), Austrian Frauscher Sensortechnik (products in the area of inductive touch technologies), Swiss ABB (converters and battery chargers for passenger trains); Polish Tines (systems of integrated railway road), EL-IN (factory for hot-dip galvanizing of steel structures and production of divisible centrifuged concrete poles); American Cessna Aircraft (assembling of light aircrafts), and TransCosmoc America Inc. (creation of a call center).

Diplomatic missions, who are given the power to establish the first contacts with potential investors and to assist in organizing visits to our country, act as investment emissaries of Kazakhstan in the international arena. As for the work on spots, today, Centers for Servicing the Investors operate within the structure of local administrations. They provide a full range of services in support of foreign companies.

Moreover, on April 23 of the current year, the Government adopted the amendments to the concept of development of socio-entrepreneurial corporations. According to them, a new challenge for the SEC will be the attraction of domestic and foreign investors to the regions, the development of infrastructure to support businesses and clusters in the priority sectors of the economy, and the rendering of assistance in implementation of projects through equity financing, participation in assets, and allocation of funds under government programs.

Thus, we can state that today’s interaction with the non-raw material oriented global corporations are marked by consistency. However, we can hardly expect that it’s time now to gather the harvest. For example, in February of this year, the OECD presented to the Government of Kazakhstan its findings and relevant recommendations on the improvement of investment laws and harmonization of investment policies. In the opinion of foreign experts, we still have to do a lot for improving the system of financing of agriculture, developing entrepreneurship in the field of information technologies, increasing the participation of investors in infrastructure projects, introducing a responsible approach to running business, reducing the administrative burden on businesses, and liberalizing the trade policy.

The elimination of these and other barriers will be the main prerequisite for accession by Kazakhstan the investment committee and the OECD declaration on international investment by global corporations. This exactly, as the government hopes, will attract attention to us from non-raw material oriented global corporations.

One should not forget about the international competition for FDI. According to the World Investment Report 2012, promulgated by the United Nations Conference for Trade and Development (UNCTAD), in spite of the fact that in 2011, global FDI inflows exceeded their average pre-recession levels, reaching $1.5 trillion, however, it still remained about 23% below the peak of $1.9 trillion in 2007. Analysts believe that the global FDI will be able to reach the level of 2007 only in 2014, and only if no macroeconomic turmoil is to occur.

Despite the gradual growth of global production, global corporations are not in a hurry to convert the profits earned into new investments. According to an estimate of UNCTAD, the cash holdings have already reached more than $5 trillion, including undistributed earnings of foreign subsidiaries. The data on the 100 largest global corporations says that during the global financial recession, they were reducing the capital investment in productive assets and acquisitions, especially abroad, choosing the increasing of their own funds as a favor. The repeated instability occurred in the external financial markets will continue adding to the increase of liquid funds by global corporations and their use for other purposes, for example, for paying out of dividends or reducing the debt.

On the other hand, in 2011–2012, a number of countries tightened the approach to the export of FDI. Due to the high levels of domestic unemployment among them they have a growing concern that investment in projects abroad can promote the export of jobs and the weakening of the national industrial base. The governments are concerned about maintaining a stable exchange rate and the improvement of the balance of payments condition. In this context, they adopted measures aimed, in particular, to limit the import of FDI, and to create stimulus to repatriate from abroad the investments made.

All this definitely evidences that in the coming years the investment pie, "emaciated" by the moment, will hardly be enough for all those who wish for it.

New investment policy

In its latest report, UNCTAD for the first time cited the composite index that assesses the significance of FDI and foreign affiliates for the economy of the country the FDI are directed to, from the viewpoint of value added, employment, wages, tax revenues, exports, expenditure on R&D, and capital gains. According to the said index, in a number of developing countries – Argentina, Brazil, China, Indonesia and the Republic of South Africa – the FDI in economic development of these countries is higher than the world average. This, as a rule, is associated with an active investment policy. In other words, the country tries to raise FDI exactly for those sectors where the most effect is expected, providing various incentives for this. On the other hand, there is a large group of countries which, despite the huge amount of incoming investment, mostly do not feel their positive effect. Basically, such countries are attractive for investment only in terms of the fiscal regime, such as the Netherlands and Luxembourg. In these countries, FDI mostly does not produce any effect on the factors such as value added or unemployment rate. Thus, the new index shows that not all direct investment is equally useful for the economy.

One more observation of UNCTAD is that in recent years the global economy underwent a series of recessions in the financial sector, in the area of food safety and ecology. This all accompanied by chronic global imbalances and complex social problems, in particular, the high level of poverty.

All this has a colossal effect on the formation of policy at the global level. First, the long-term trend of redistributing economic weight between the developed and the developing economies has clearly become apparent. Second, the financial recession has increased the role of the government in the economies. Third, the nature of the problems is that no one country can cope with them alone; this makes it necessary to strengthen coordination at the international level. Fourth, the mobilization of investment and the ensuring that they would contribute to the achievement of sustainable development is a priority for all countries.

Exactly in such conditions the international investment policy of the new generation is emerging. Under this policy, the core essence of raising FDI is the integrated growth and implementation of the sustainable development concept. From its side, UNCTAD developed and introduced the 11 key pillars of such a policy:

1. Investing in sustainable development. The goal of the investment policy is to encourage investment to promote growth and sustainable development

2. Consistency. The investment policy should be based on the overall development strategy of the country. All policy instruments affecting the investment should be consistent and coherent, both at the national and international levels.

3. Governance and institutions. The investment policy should be developed with the participation of all interested parties and should be inscribed in the institutional framework, based on the rule of law, high standards of governance and ensuring predictable, efficient and transparent procedures for investors.

4. Dynamism. The investment policy should be regularly reviewed to ensure its effectiveness, topicality and consistency with the changing dynamics of the development.

5. Providing a balance of rights and obligations. The balance should be met in the investment policy in the establishing of rights and obligations of the countries and investors for the purpose of overall development.

6. The right to regulate. Every country has the sovereign right to determine the terms of entering a market and running activities by foreign investors in accordance with international obligations in the interest of the public and for minimization of possible adverse effects.

7. Openness to investment. In line with the development strategy of every country, the investment policy should provide open, stable and predictable conditions for implementation of investment.

8. Protection of investment. The investment policy should ensure adequate protection of investors. The regulations applied to the global corporations which operate in the country should be non-discriminatory.

9. Encouragement of investment and facilitation of procedures. The policy aimed to encourage investment and facilitate relevant procedures should be consistent with the goals of sustainable development and aimed at minimizing the risk of unwanted competition for investment.

10. Corporate governance and responsibility. The investment policy should facilitate the adoption of, and adherence to, advanced international standards of corporate social responsibility and effective corporate governance.

11. International cooperation. The international community should cooperate to solve common problems associated with the raising of investment in sustainable development, particularly, in the least developed countries. Also, collective measures should to be taken to avoid investment protectionism.

 

It remains to add that for the leadership of Kazakhstan, to whom the problem of transition from quantity to quality in investment seems quite topical, it makes sense to explore new approaches offered by international experts.

 


Table of contents
The Green Alternative   Alexey Nigay 
· 2016 №1  №2  №3  №4  №5
· 2015 №1  №2  №3  №4  №5  №6
· 2014 №1  №2  №3  №4  №5  №6
· 2013 №1  №2  №3  №4  №5  №6
· 2012 №1  №2  №3  №4  №5  №6
· 2011 №1  №2  №3  №4  №5  №6
· 2010 №1  №2  №3  №4  №5/6
· 2009 №1  №2  №3  №4  №5  №6
· 2008 №1  №2  №3  №4  №5/6
· 2007 №1  №2  №3  №4
· 2006 №1  №2  №3  №4
· 2005 №1  №2  №3  №4
· 2004 №1  №2  №3  №4
· 2003 №1  №2  №3  №4
· 2002 №1  №2  №3  №4
· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3





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