Factors of foreign direct investment in Algeria - Essay Example

The cultural, social and economical factors and the implications of foreign direct investment in Algeria From the British point of view, foreign direct investment in the Middle East has cultural, social and economical implications. These factors have a significant impact on the direct investments in the country. In order to have a successful investment, there are some factors which an investor needs to consider in realizing attractive results. This study gives an analysis of these factors in detail. This information will be of great significance to investors as it will act as a guide to them. The study gives a critical analysis of the issue at hand in an attempt to understand the general issue. This understanding will help in the process of coming up with the solutions which can effectively solve this problem. This study concentrates in Algeria to represent the Middle East since the study cannot cover the entire Middle East. In this study, France is used as the main example. Introduction Foreign direct investment can be defined as a foreign ownership of the productive assets in a country. These assets can be mines, land, factories among others. In the present world, the issue of the foreign direct investment has become very important since foreign investments promote economic Globalization. Foreign direct investments also have a significant implication to the domestic economy. There are several cultural, social and economical factors which favours the domestic investments. In each of these categories of factors, some aspects favour while others discourage foreign direct investments. Currently, the Algerian government has discovered the importance of the foreign direct investment. In connection to this, the government has employed several factors in an effort to promote the foreign direct investment. Literature Review A glance at of FDI in Algeria; the Past and the present Over the past, direct investments have been faced with numerous issues. Some have been against while others have been facilitating the direct investments in the country. For instance, several codes have been implemented with some obstructing the direct investments. Foreign investors in Algeria can be traced long time ago. Fort instance, there were several British firms in Algeria by 1954. Between 1963 and 1983, the investment codes during the time were very restrictive. Under these codes, foreign investors were not allowed to own an independent company or investment venture. In other words, the foreign investors were only allowed to own joint ventures with state-owned companies. Instead, foreign investors were supposed to hold hands with state companies. However, they were still entitled to a fraction, of the investment. In 1900s, this restriction was softened through the credit law which permitted foreign owned ventures in almost all the sectors in the economy. However, this did not include the electricity, transport, telecommunication, and the hydrocarbon sectors. This implies that foreign investors were not allowed to take part in sensitive sectors. They were only allowed to venture in the less sensitive activities which does not affect the economy significantly. However, foreign investors were later in 1991 allowed to exploit the existing oil fields in Algeria. They were however supposed to conduct this in partnership with the state oil firms. From the above observation, it can be seen that the Algerian government is encouraging foreign investment in the country with time. This has increased the rate of the foreign direct investment. In 1993, the code which was developed did not distinguish between the investments owned by the Algerians from the investments made by the foreigners. This had a significant impact on the foreign investment. The new code provided the new investors with limited tax exemptions as well as reduction of duty on imported goods. Therefore, the new code was more favourable to the foreign investment. Later in 1990s, the government continued with its efforts to boost the level of investment. These efforts were as a result of realization of the importance of the foreign direct investment in the economy. Direct investments play a significant role in improving the standards of living of the nationals through employment creation. In 1995, the Algerian government set up a program known as the National Agency of Investment Development and regional investment promotion agencies. The agencies were meant to serve as network of regional one-stop shops in order to get rid of the layers of bureaucracy for the investors. The following year after its formation, this program approved more than 50 foreign investment programs in the country. This included twenty French projects. In other words, the Algerian economy has been restrictive to the direct foreign investment over the past. The foreign investors were not allowed to have an independent investment in the country. They were supposed to invest through joint ventures with the state companies. However, the situation has changed with time. The government has been softening its restrictions with time. By 1990s, the government had changed to a greater extent on its attitude towards the direct investments. In fact, the government developed programs to facilitate foreign investments. This effort has significantly promoted the foreign investments in the country today. From the government’s effort to promote FDI, the level of investments has been increasing in the country. In 1997, the level of the direct foreign investments in Algeria averaged to $260 million which rose to $482 million. Between the years 2000 and 2001, several foreign investors acquired some of the domestic firms. This led to the doubling of the foreign domestic investment to $1,196 million. Therefore, we can see that FDI is performing well in the country. A glance at of FDI in Algeria in the Future Based on the past and the current situation of the foreign investment in Algeria, the foreign investment is expected to be better in the future. The government is much determined to promote the foreign direct investment in the country. For instance, the government has removed the restrictions which had been hindering the domestic investment in the country. For example, the government has been allowed foreign investors to venture in many sectors to which they had been restricted over the past. This has developed as good environment for the domestic investment. In the modern world, the level of globalization is increasing each and every day. Different economies are becoming more and more integrated. The world has become a global village. The level of interdependence has equally increased. This situation favours the proliferation of the foreign domestic investment. As the process of globalization intensifies, the foreign direct investments are expected to be higher. Currently, Algeria is one among the countries with the highest level of per capita income. The country is stable economically with huge oil deposits. This attracts foreign investment in the country. Positive aspects of FDI in Algeria for British investors Both Algeria and Britain share a very close relationship, the fact that has favoured activities between these two countries. This relationship has a favourable base for British investors in the country. There are several things which has favoured from United Kingdom to Algeria. To start with, The United Kingdom has a huge stake in Algeria. For instance, UK has a big stance at the Algerian hydrocarbon sector as well as in higher education (Henderson et al, 2008). In other words, the two states have enjoyed a good close relationship, the fact which has favoured economic interaction between these two states. In fact this relationship has gone for a period of more than four hundred years (Henderson et al, 21008). As a result, investors from UK have advantage of investing in the Algerian economy rather than other countries in Africa. According to Henderson et al (2008), another factor that has favoured British investment in Algeria is the fact that the security levels in the country has significantly improved. During his speech as the UK ambassador to Algeria, Henderson argued that the security level in the country was improving at a promising rate. Therefore, Henderson advised investors from the United Kingdom to deviate their investment in Algerian economy. Henderson also promised of an economy which was undergoing a revival at a high rate (Henderson, 2008). Negative aspects of FDI in Algeria for British investors Despite of the good relationship between the two states, there were some hindrances that threatened the success of the foreign domestic investment in Algeria for British investors. To start with, Algeria faced a destructive wave of terrorism in 1990s which left many people dead (Henderson 2008). This scared the foreign investors away from investing in the country. Many investors from foreign countries withdrew from the country from this wave. During this time of destructive terrorism, a lot of assets were destroyed which led to huge losses to both domestic and foreign investors. This had a significant impact in the foreign domestic investment in the country. Meanwhile, the country was undergoing through hard economic times which were characterized by political crisis and severe economic crisis. The combination of these factors threatened the performance of the foreign domestic in Algeria for the United Kingdom. Current investors in Algeria In Algeria, there are a wide rage of investors from different parts of the world and investing in different sectors of the economy. The Algerian government’s step to facilitate foreign investment has significantly attracted many investors in the country over the past. One of the main investors in Algeria is France. France has a significant investment in Algeria in hydrocarbon production. The two countries have enjoyed a close relationship which has facilitated their economic interaction. Another major investor in Algeria is Britain. Britain is one of the largest investors who have invested in energy production in Algeria. The two countries have also been trading for a long time. There are also several British firms which have been operating in the country for a long period. Turkey is another significant investor in Algeria. The company has a significant fraction of the total FDI in the country. Implications or problems faced by the current investors in Algeria in the process of investing There are several problems that the foreign investors face in their attempt to invest in the Algerian economy. These problems are both from the government as well as the general environment. One of the main problems which have been hindering the foreign investments in Algeria is the Islamic fundamentalist terrorism. The issue of terrorism has significantly affected the foreign investment in the Algerian economy. Terrorism levels have been too high in the country over the past. This has discouraged the foreign investors as they fear the risk of losing their assets from the terrorism attacks. This fear has also intimidated the existing investors from expanding their investments. During the year 2010, it was detected that the level of the foreign investment was a falling at a higher rate. According to Brook (2011), this problem was as a result of the government tax policies. These policies have been very tough for the foreign investors, the fact which discouraged them from investing in the country. Since every investor is determined to maximize their returns, they will choose to divert their investments in the countries where there is a low level of tax. One of the main sectors where foreign investment has been discouraged by excessive taxation is the energy sector. The sector has also been faced by a number of scandals. These complications have negatively affected the level of the foreign investments in the country. For instance, the scandals in the energy sector led to firing of Sonatrach’s CE and replacement of the Energy Minister Khelil who left the leadership to Yousfi (Brook, 2011). In addition, other sectors in the country have also been equally affected by the tax policies. For instance, the dispute has led to the sale of the Orascom Telecom unit in Algeria, Djezzy (Brook, 2011). However, the government is trying to resolve the issue in order to bring back things to normal. Currently, there have been some policy measures which the Algerian has taken which have threatened the performance of the foreign investors (Bougherira and Aghrout, 2004). For instance, the Algerian government has implemented controversial directions concerning the foreign investment. For example in 2009, the government implemented an investment policy which required that all foreign investment can only be realized in 49/51 partnership with the domestic investors (Buyusa, 2010). In other words, the policy demands that more than 51 per cent of the share be owned by the domestic investors. This policy contradicts the government’s effort to encourage FDI. This policy indicates that there are still some traits of biasedness of the Algerian government in an attempt to protect domestic investors. There is a need to allow free operations in order to get effective foreign direct investment in the country. Another problem facing the foreign investment in Algeria is the aggressive labour unions. In Algeria, there are tough labour union policies to which investors; both domestic and foreign must conform to. The ruling that the Algerian government and the state owned companies can reject or accept all transfers of shares of the foreign shareholders is also controversial. It also seems to be biased towards the domestic producers. As already noted, the main of every investor is to maximize their profits. However, labour union restrictions have significantly increased the expenses to the investors. These restrictions are biased towards the employees. Therefore, this has discouraged many investors from investing in the Algerian economy. For instance, high labour costs have increased operational costs hence reducing their profit margins. In order to maximize their profits, many investors will be tempted to divert their investment in other countries. Another problem of the direct foreign investment in Algeria is the widespread mistrust of both foreigners and privatization. Transitions and changes in FDI and how these changes have an impact on FDI in Algeria today Algeria can be considered as one of the largest countries in Africa. The Algerian government has been very strict to the foreign investment. This has led to stagnation of the Algerian Economy for a very long time in the past compared to other countries in the region (Anonymous 2011). As already noted, the country has now changed its attitude towards the foreign investments. The country is determined in modernizing its operations as well as diversifying its economy (Anonymous 2011). These changes have brought changes in the FDI in the country. In most cases, the foreign investments are made in terms of equipments, fixtures, buildings and machinery. More often, the foreign investment has been in form of mergers and acquisitions. This system has been very common in the traditional modes of production (Economy Watch, 2010). However, there has been a drastic change over the recent past. Over the past, the level of technology has risen at a very high rate. There has also been increased level of the internet usage in production. This has changed the foreign investment significantly. Another change which has taken place in the foreign investment is that many companies in the modern world do not now require huge manufacturing plants and large warehouses to keep their inventory. Many people from the host country especially those who are economically backward are significantly affected in case the foreign investment is interrupted with. This is because foreign investment has become very important to them in the current world. This overdependence in the foreign investment poses a major problem as people are adversely affected in case it fails. This is more so in the current business world where there is increased globalization process which is encouraging more foreign investment in domestic economies. In most cases, the large companies have a significant role in the small high tech oriented companies (Going Global, 2005). However, the big companies are not like before acquiring smaller companies outright. There is however several risks which the company faces in adoption of these high tech ventures. There is a risk that the company may not sell enough capacity of the products which are produced. This is one of the major problems which face Algeria through the changes in FDI. Another risk lies on the fact that high tech ventures require longer incubation period (Going Global, 2005). This implies that the product will require a longer duration of time before it develops fully. For the intellectual property as well as the software, the products are characterized by constant changes where it changes even before reaching the marketplace (Going Global, 2005). Therefore, it becomes very difficult for the investors to make investment decisions. It is very difficult to predict what the value of investments will be in the case of high tech venture. The investors are forced to make decisions in uncertainty. This has affected investment in Algeria as many people are scared from taking risks. In other words, the expanded role of intellectual property and technology has significantly changed the foreign direct investment today. In the current world people are travelling in various countries in their mission to invest. In Algeria for instance, foreign investors are from various countries all over the world. This has encouraged interaction among people from various places around the globe (Kessing, Konrad and Kotsogiannis, 2007). Through increased investment levels, the issue of environment concerns has increased. This is more so with those companies whose production have adverse impacts to the environment. These problems have posed a great barrier to the foreign investors. The issue is made more complex when it comes to the carbon restriction. Currently, direct investments in Algeria are experiencing a number of problems. The government policies are still biased towards the domestic investors despite of the government efforts to promote FDI. In other words, the government is implementing development in the country at the expense of the foreign investment. These factors have significantly led to the decline in the level of domestic investments. The policies have led to exit of several investors from the country in search of better economies for investment. For instance, the level of investment fell by 26 per cent from the previous year (Brook, 2011). Unfortunately, the country is facing tough economic times. There is extremely high level of unemployment, unfavourable political crisis, and a slow service delivery pace. These conditions imply that the government is not in a position to solve the problem. For instance, it will be difficult for the government to cut the tax bearing in the mind the current crisis in the country. Therefore, this poses a great threat to the performance of the foreign investment in the country. How the Obstacles Can Be Overcome As already noted, the changes in the foreign direct investment have significantly affected foreign direct investment in Algeria. This poses a major threat to the well being of the whole economy in general. There are several options through which these obstacles can be overcome in order to encourage foreign investment in Algeria today. One way through which these problems can be overcome is through providing incentives to the foreign investors. For instance, the government can consider improving on the communication and transportation networks which are very important for the investors. It is also important to consider improving on the security levels in the country. In order to encourage more foreign investment, it is also advisable for the host countries to consider adjusting their policies accordingly in order to induce foreign investment. For instance, the labour unions in Algeria have very strictly policies (Busse and Groizard, 2008). These policies discourage foreign investment because there are associated high production costs. It is therefore advisable for the government to have the necessary changes in the labour policies in order to promote foreign investments in the country. This may be done through negotiations which will lead to an agreement between the members from both sides. Negotiations will lead to policies which are favourable to both sides. As already seen, FDI has become more important to the people especially the economically individuals in the country. The failure of the FDI therefore has adverse effects to the nationals. It poses a big danger to the well being of the citizens. In order to solve this problem, it is advisable for the Algerian government to try to improve the living standards of its people by applying other methods. For instance the government can create more job opportunities rather than people over relying on foreign investment for employment creation. This will significantly help in solving these problems. FDI from general point of view French investors In general, French investment in Algeria is doing well so far. According to the French ambassador to Algeria Xavier Driencourt, three hundred French companies has set subsidiaries in Algeria, a fact which has led to creation of 103,000 direct and indirect jobs in the country (Nine, 2008). This clearly indicates that French investment in Algeria is doing well. France is one of the largest foreign investor in Algeria in the carbon sector where the foreign investments were valued at $229 million in 2007 (Nine, 2008). In general, France has been ranked as the largest foreign investor followed by the United States According to France ambassador to Algeria, the good performance of the France investments in Algeria can also be attributed to the French banks dynamism in Algeria. Algeria country also exports a significant amount of hydrocarbon and electronic equipments to France. On the other hand, 23 percent of the France exports to Algeria are composed of food products (Nine, 2008). France also exports cars and pharmaceutical products to Algeria. In summary, France investment in Algeria is effective. France investors have enjoyed good economic relationship between the two countries in order to maximize its investment in the country. Middle Eastern/ Turkish Investors The Algerian government and the Turkey government have a close economic relationship which has encouraged the Turkish investors in the country. These investments have recently been triggered by the reduction of the terrorist activities which has been facing the country. There has also been market liberalization in the Algerian government, a situation which has encouraged the Turkish investors to invest more in the country. The Turkish and the Algerian governments have also made arrangements which provide Turkey with 10 per cent share of the 80 billion dollars investment (Anonymous, 2007). These measures have encouraged the Turkish investment in Algeria. The two countries have for long period enjoyed close relationship which has facilitated economic activities between these countries. In fact, Algeria is one of the most important trading partners in Algeria. A significant fraction of the exports from Turkey to Algeria, are finished and semi-finished goods. Recently, Algeria has become one of the best targets for Turkey and it is determined to take the necessary steps in order to promote the development of the market. This has been triggered by the process of liberalization, a fact which has made the relationship between thee two countries to be more dynamic. British investors Britain is another country which enjoys good relationship with Algeria economically. These states are closely linked together through various economic activities. Recently, the two has partnered in growth. This is characterized by jointly fighting against terrorism by working closely together on security and foreign policy issues. Good relationships between these countries have attracted many investors from Britain to Algeria. These countries have been involved in a close partnership. For instance, the two have partnered in energy production. Several countries from UK Shell, BG Group and Shell have significantly contributed in energy production, the factor which has helped in driving production in Algeria. In addition, the two countries are determined in revitalizing and modernizing economic relationship between themselves. Early 2010, the two governments signed an agreement to extend the relationship which bond them through energy production to other sectors (Foreign & Commonwealth Office, 2010). Other than energy production, there are other investors in other sectors from Britain. For instance there are several British firms which have been operating in the country for a long period. For instance, Uniliver opened its operations in Algeria in 1954 and this is one of the firms which have created the largest number of foreign employers in the country (Foreign & Commonwealth Office, 2010). Currently, the leaders are committed to intensify this relationship to cultural levels in an effort to create strong economic bond among them. Alistair Burt commented that, “If we are to really harness our potential we must also develop our cultural links. Together we are already encouraging more Algerian students to come to the UK and Algerian companies to set up schools and colleges in Algeria in partnership with the UK. Algeria understands the importance of its people learning English. The British Council recently partnered with the Ministry of Education in training 1,000 middle school teachers and more than 70 inspectors in English.” (Foreign & Commonwealth Office, 2010). In other words, two countries are seeking for cultural relationship in an effort to build more stable investment base among them. Comparison between the Four Points and Findings Generally, the discussion above has clearly shown that majority of investors in Algeria are encouraged by the economic conditions in the country. Recently, the country has experienced good economic conditions which are characterized by stable level of economic growth. These conditions have attracted the foreign investment in the country. Algeria is also rich in resources. For instance, the country has large oil deposits. This has attracted many foreign investors, a situation which has significantly contributed to the stability of Algerian economy. This analysis has indicated that the countries from which the investors originates have close economic relationships other than just FDI. For instance, most of these countries are not just engaged in investment they are also involved in exchange in trade. There is a lot of interaction in terms of exports and imports between these countries. This is likely the main base on which FDI between the countries can be based. Methodology Interview Interview will be of great significance in this study. Interviews will be conducted in an effort to retrieve information about the nature of investment in Algeria. In this case, both qualitative and quantitative aspects will be integrated in interviewing some of the domestic as well as foreign investors in Algeria. In this case, structured questionnaires will be used. These questionnaires will then be filled by different investors from the sample. The sample will be chosen randomly in order to avoid data biasedness. The data collected will then be used in drawing the final conclusions. Problematic issues with FDI in Algeria Key problems in receiving FDI from France from an Algerian point of view For a long period, France and Algeria has enjoyed good economic relationship which has encouraged foreign investment in the country. However, this has posed some problems in the country. The main problem is that the foreign investment from France to Algeria offers competition to the domestic investors. This competition may lead to collapsing of the domestic companies. Therefore, the government puts some restrictions in order to protect the domestic companies from being kicked out of the market by the foreign companies. In addition, French banks are dominant in Algeria as a result of the FDI from France (Nine, 2008). This has posed a great competition to the domestic banks. Key problems in receiving FDI from Turkey from an Algerian point of view Just like in the case of the France investment, FFDI from Turkey also poses a major threat to the domestic companies. The investors apply sophisticated methods of production. These methods are characterized by a relatively higher level of efficiency. In this case, the Turkish investors will produce cheaply and therefore their products may under price the Algerian companies’ products. This also poses a problem in the country. Therefore, there is a problem of the foreign companies dominating domestic companies. Another problem is that the foreign investors may use Algeria jus as a way to dispose low quality products. Key problem in receiving FDI from Britain from an Algerian point of view The British investors also pose a great danger to the domestic companies in Algeria. These investors are able to under price the domestic investors since they can afford to employ high technology equipments and methods of production. This may eliminate the domestic companies in the market which May lead to over reliance on FDI. Problems French investors face when seeking to invest in Algeria One of the main problems which the French investors face in their venture in the Algerian economy is the labour union policies. French investors are mostly engaged in hydrocarbon sector. This production is labour-intensive and therefore very sensitive to issues regarding the manpower. In Algeria, the union provides tough restrictions which require France investors to incur extra costs. This lowers the performance of the French investors in Algeria. Another problem for investing in Algeria to France is the fact that this investment creates job opportunities for the Algerians. For instance, France investment Algeria created more than 3,000 direct jobs (Nine, 2008). This may create employment problems in France. Problems Turkish investors face when seeking to invest in Algeria One of the main factors which are important for the investors’ decision to invest in a country is the infrastructure. In some parts of Algeria, infrastructure is not adequately developed to attract foreign investment. This is one of the problems Turkey investors face in their effort to extent their investment in Algeria. Turkey experienced major reforms and political momentum after 2002 which led to improvement in the economic conditions in the country significantly (Vardar, 2010). This led to increased GDP per capita hence general improvement in the country. However, the Algerian government was still holding some unfavourable policies which did not favour foreign investment. For instance, the government retained the 51/49 ration in the ownership of shares in joint investments. This is another problem which faced Turkey investors in their efforts to invest in Algeria. Problems British investors face when seeking to invest in Algeria Just like other investors from other countries, the major problem which British investors face in Algeria is based on the policies which are employed in foreign direct investment in the country. Despite of the government’s effort to promote the direct investment, the policies remains somehow tough to the foreign investors. These policies have hindered British investors in their effort to promote their investment in the country. Solution to the problems The discussion above has clearly indicated that the problems faced by Algeria for receiving investments from various countries are almost similar. However, the study has indicated that the relationship between Algeria and each of these countries can affect the effectiveness of their investment relationship. Good relationship between Algeria and the country of the origin of the investor facilitates the investment of such investors. As already seen, there are several problems which face the foreign direct investment in Algeria. These problems pose a major threat not only to the foreign investment in Algeria, but also to the entire Algerian economy. For instance, it poses a threat to the level of employment in the country. Therefore, it is advisable to have the necessary measures in order to overcome this problem. As already seen, most of these problems are based on the government policies. It is therefore advisable for the Algerian government to adjust the [policies to accommodate FDI accordingly. Significance of foreign direct investments at Algeria Through the foreign direct investments, foreign countries offer competition to the domestic companies. This has an impact of improving on the performance of the domestic companies. For instance, the government developed a plan to have Sonatrach compete on equal privileges with the foreign oil companies by developing two agencies which were independent. Another advantage of the foreign investment to the country is that it provides a source of new technology. This has improved the performance of the domestic investment in the country, the fact which has led to improvement of the domestic level technology. When the foreigners invest in a country, they introduce machines in the case of the technical investment in the host country. This leads to flow of the new technology into the country. In these foreign companies, people are employed from the Algerian government. Consequently, this has led to flow of skills from the other countries to Algeria. According to Aghrout and Bougherira (2004 foreign investments are becoming more important in the current business world which is characterized by a very high level of competition. Aghrout and Bougherira noted that “foreign investment is vital in this regard, for it can provide competition for family-owned businesses in Algeria, which often enjoy exclusive markets, as well as for privatized state-owned enterprises.” (2004). Foreign investment also leads to flow of managerial skills from the foreign countries into Algeria. This contributes in increasing the productivity level of the citizens. Consequently, there is increased average level of productivity of the domestic citizens. This raises the living standards of living of the people. Through direct investment, the domestic companies get a chance to enjoy co-production, joint marketing and joint ventures with local partners. In this case, the domestic investors can share the risks with foreign investors in their ventures. Both partners can more easily contribute for initial capital rather than venturing independently. This has also contributed significantly in the expansion of production levels in the country. Conclusion In conclusion, this discussion has clearly shown that there is a significant relationship between cultural, social and economical factors and the foreign direct investment in Algeria. These factors have significantly affected the development of FDI in Algeria. Some factors have favoured foreign investment while others are against the development of the foreign investment in the country. The study has indicated that government policies, labour unions and the Islamic terrorism have significantly affected the level of investment in Algeria negatively. Strict labour union has also threatened the performance of foreign investment. Therefore, it is advisable for the Algerian government to come up with the necessary measures in its attempt to increase the level of foreign investment. For instance, the government can reduce the tax for the investors. This will reduce their operational costs. The government must also employ the necessary measures in order to curb terrorism in the country. This will provide security to the foreign investors. In most cases, foreign investors seem to cluster in those states with high level of security. It is therefore advisable for the Algerian government to consider improvement of the security levels and infrastructure in order to attract more foreign investors. It is also advisable for the country to adjust its policies accordingly to accommodate foreign investors. Other wise, investors will refrain from putting their investment in countries where their investment will not be secure. 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