Home / Economy / GEORGIA’S FOREIGN DIRECT INVESTMENTS (FDI) – FUNDAMENTAL ANALYSIS

GEORGIA’S FOREIGN DIRECT INVESTMENTS (FDI) – FUNDAMENTAL ANALYSIS

Georgia’s foreign direct investments (FDI) dynamics shows foreign investors have been demonstrating growing interest in Georgia’s various fields. This interest was raised by such important factors as global economic boom and global financial crisis, political unrest in Georgia and the fact the world community has appreciated some achievements.

Despite the negative FDI net indicator, a FDI outflow is also registered from Georgia to the abroad and last years have recorded an outflow of quite considerable amounts from Georgia. Georgian businessmen have strengthened their positions in Georgia and their aspirations for penetrating foreign markets may be an explanation to the FDI outflow tendency. The table, however, clearly demonstrates that cataclysms act controversially on scales of FDI inflows and outflows; political and economic unrest grows FDI exports and shrinks imports, while the opposite tendency grows FDI imports and lowers exports.

A major part of foreign investments represent not new investments, but only reinvestments collected from the old investments. For example: in 2008 1.1 billion USD from 1.650 billion USD FDI represented reinvestments from the old investments. Reinvestments ratio in the 2013 total FDI of 1 billion USD marked over 400 million USD.

Despite FDI’s positive affects (new job places, technological advancement, growth in revenues to the state budget and so on), there are some affects that drive an outflow of money resources from Georgia. Namely, foreign investors make quite huge profits in Georgia and direct these profits to the abroad. The indicators of 2011, 2012 and 2013 years show FDI inflows and outflows are almost equal to each other.

Another issue of discussion is how dangerous is the fact foreign investors direct profits gained in Georgia to the abroad. Indeed, it would be better if investors reinvest the old investments in Georgia, but such decisions are made by investors themselves. The year of 2014 has showed better tendencies in this respect.

EU shows major activity in terms of making FDI in Georgia. In 1997 to 2013 and in January to September 2014 the EU ratio in Georgia’s total FDI made up over 41%. After the associated membership agreement conclusion this indicator may be further improved.

It should be also noted CIS countries show less activity in making FDI in Georgia, while Azerbaijan is quite active in this respect for the last years.

From 1997 to September 2014 Georgia has drawn over 12 billion USD FDI, in which 70% were made by 10 top countries, including the USA ranks first with 1.3 billion USD, the Netherlands is second with 1.29 billion USD and the UK is third with 1.2 billion USD.

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According to GeoStat, the National Statistics Office of Georgia, FDI portions in various sectors in 2007 to 2013 were as follows (8 billion USD): transportation and communications field – 1.5 billion USD; processing industry – 1.2 billion USD; power system – 1.3 billion USD.

The agriculture sector’s ratio in total FDI made up only 1% and this fact is explained by less level of profitability. In turn, the energy sector’s ratio in total FDI is 16% and this field is one of the priority directions of Georgia. Foreign investors also put considerable funds in transportation and communications field and this is also a positive tendency to improve Georgia’s investment environment.

It is worth noting over 10 countries in the best 20 investor countries are members of OECD, while the USA, the UK and the Netherlands share the first three leading positions. It should be noted FDI inflows, initially, were registered from the very OECD countries, as they were capable and financially able to make investments in Georgia that time.

As a result of active steps of our neighbor Azerbaijan, as well as UAE and other countries, for the first time, nonmember countries of OECD surpassed OECD member countries in terms of investments in Georgia, but this was an only case and it was not repeated next years.

The analysis of the 2011 indicators in Georgia show FDI, to be precise, the companies founded by Georgian-foreign capital, make essential affect on the Georgian economy. The research results show in Georgia like other developing economies a major role is played by physical job sectors compared to intellectual job sectors. It is also clear the companies founded by foreign capitals emerge as major market players and these companies constitute a main core of the economic activity of Georgia. The ratio of the companies founded by Georgian-foreign capital in total exports makes up about ½ and this signifies Georgian exports are largely developed thanks to foreign investments.

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Source: composed by the author on the ground of UNCTAD and GeoStat reports for 2011.

Under the research, the results show for the last 7 years (from 2008 to April 2014) FDI makers were making focus mainly on strengthening positions on the domestic market (80% in total FDI). Efficiency-oriented investments rank second with 17%, resource-oriented investments emerged third with 3%. The 2007 indicators lead to the same conclusion (change limit = 1%). Consequently, foreign investors do not any more consider Georgia as a market of cheap resources and we witness diversification of motivations. The 17% ratio of efficiency-oriented investments in total FDI is also very important and this is precondition of competitive capacity.

Sectoral Structure of FDI inflows due to years (in millions of USD)

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* Since 2009 the Financing Sector also includes FDI indicators in the banking, microfinance and insurance organizations;

**   Trade; Education; Public Utilities, social and personal Services;

Tbilisi State University Center for Analysis and Prognosis

Vakhtang Charaia, Otar Anguridze, Irakli Doghonadze