Making foreign direct investment beneficial for job creation

Making foreign direct investment beneficial for job creation

The MENA region benefits from a substantial and growing inflow of foreign direct invest­ment (FDI). In principle, such investment should provide support for stronger growth and employment creation, both directly and indirectly, by spurring structural transformation and sectoral reallocation of jobs into higher value added industries. So far, however, there is little evidence that FDI has led to such changes in the region. This section discusses some of the recent trends and the reasons for the limited effects FDI had on employment creation in the region.

FDI into the MENA region has increased substantially over the past decade (from US$8.7 billion in 2001 to US$94 billion in 2008). However, these inflows were directed to only a few sectors, such as construction, telecommunications and mining, while the manufac­turing and agriculture sectors were neglected (figure 32). In addition, high-technology services sectors have received very little FDI inflows, limiting positive spill-overs onto productivity growth in the region. Moreover, FDI inflows have been highly concentrated in resource-rich countries, with Saudi Arabia receiving the lion’s share (around 44 per cent; OECD and WEF, 2011). More importantly, with the onset of the Arab Spring and the rise of social protest, which has affected the political stability of the region, FDI inflows have declined by 13 per cent, in particular in Egypt and Tunisia.17 So far, FDI in the MENA region has not had the broad-based effect on economic development that was seen in Eastern Europe and Asia over the same period.

         FDI inflows in the MENA region by sector,2003-10(%)

In principle, FDI inflows can promote employment creation through two channels:

*When FDI comes as greenfield investments, new employment opportunities are generated immediately, especially if these investments are directed into labour-intensive sectors such as agriculture, manufacturing, tourism and wholesale and retail trade. Greenfield invest­ment is expected to have a positive impact on employment and to generate positive spillo­vers to the whole economy. Over the past five years, around 90 per cent of FDI in the MENA region was in greenfield operations.

*Alternatively, FDI can flow in through mergers and acquisitions. These typically do not create new job vacancies, and in the short term they might lead to job destruction. In the longer run, this type of investment is expected to increase productivity, which could enhance employment creation through sectoral reallocation of jobs.

So far, neither type of foreign investment has had a significant positive impact on employment in the MENA region. To a large extent, this can be explained by the very limited number of sectors that have benefited from FDI inflows and the fact that they were not labour-intensive sectors. Most FDI has been directed to the hydrocarbons sector, which is capital-intensive. For instance, in Algeria and Tunisia, 50 per cent and 61 per cent, respectively, of FDI inflows were oriented towards the energy sector. In Egypt, 45 per cent of total FDI inflows were directed to the petroleum sector. Not only are these sectors capital-intensive, they offer job oppor­tunities for a very limited number of occupations, such as petroleum engineers, which many MENA countries lack in a sufficient number and so need to import. In countries that are not oil exporters, FDI inflows often went into other capital-intensive sectors, such as telecommu­nications, again creating only limited new jobs. For example, in Tunisia and Morocco, 35 per cent and 33 per cent, respectively, of the FDI received between 2000 and 2007 went to the telecommunications sector.

In addition, where investment went into labour-intensive sectors, such as construction, the native population often benefited very little from new job openings, which were quickly filled with migrants from countries outside the region. Indeed, in the Gulf countries in par­ticular, wage premiums for native workers lead employers to hire migrant workers at lower wages, often with working conditions that would not be accepted by native workers (see also the discussion in ILO, 2013c). Moreover, cultural barriers often prevent women from working in some male-dominated industries.

To ensure that labour markets receive more benefit from FDI, countries in the MENA region need to make substantial efforts to diversify the sectoral allocation of FDI inflows. Often, high barriers to market entry, a low level of perceived governance quality and a lack of proper infrastructure create substantial obstacles for foreign investors who wish to enter new markets. Also, in some countries in the region there seems to be a first-mover bias, where sub­stantial protection from further competition is granted for the first investor in any particular sector, thereby limiting the possibility of a much broader positive employment effect from FDI.