Foreign Direct Investments

The investment policy could not be implemented until RA establishes bilateral and multilateral cooperation with other countries. At this extent, RA aims the following objectives ():

         - Signing of multilateral and bilateral agreements by RA in the field of trade-economic cooperation
          - Organization of intergovernmental commission works on trade-economic and scientific–technical cooperation with foreign countries and implementation of agreed during session’s issues

- Assistance to participants introducing Armenian products in Domestic and International exhibitions.  

In fact, RA has signed 21 bilateral agreements with different countries. However, these agreements are not yet performing. Further establishments of Trade Representations in European Union, United States as well as Russia will definitely contribute to trade-economic relationship as well as investment process development between Armenia and other countries.

However, Armenia’s Investment Freedom Index is calculated 75.0 in 2010. Points are deducted from the ideal score of 100 for each of the restrictions found in a country’s investment regime.  

Statistical dynamics of FDI in RA (includes attractive spheres of FDI)

According to the World Bank, Armenia is ranked first amongst Commonwealth Independent States countries in terms of FDI features (Doing Business in Armenia, 2008) World Bank). Due to its economic dynamism, the country has earned the nickname "The Caucasian Tiger". Undoubtedly, the financial crisis has its negative impact on investment flow to Armenia. It is apparent from the graph that in 2009 foreign investments flows increased by almost 500million USD, whereas FDI flows decreased by 300million USD-this was one of the main impacts of financial crisis in Armenia. However, the statistics shows that starting from the year of 2004 the amount of FDI have only ascended year by year. Especially, it doubled in 2008 in comparison with 2007. Surprisingly, in 2008 Armenia was ranked at the first place for dramatic rise (45%) of FDI.  (http://www.un.org.al/subindex.php?faqe=news&newsid=184)

Over all, RA if not enhanced, has at least kept its position equal in comparison with 2008. In fact, during these years Armenia has improved its position considering Performance index which has reached to 16th position (see Chart 1).

Significant investments were made by the Armenian diaspora living outside the country (nearly 6 million people). Armenian Diaspora plays a big role in involving FDI. It is estimated (EV and CRRC, 2006) that during 1994-2004 69% of foreign investors that invested in Armenia were Diaspora-connected investors and 68% of FDI-recipient companies were Diaspora-connected.

In 2009, the most considerable foreign investments Armenia got from France (USD 146 million) and Russia (USD 122 million) constituting 38 and 32 percent of the total, respectively. France got the major investor position due to its investments in telecommunication industry-Orange-Armenia (see Chart 2).

“FDI dynamics in 2007-2009”

 

Source: UNCTAD        Chart 1                                                        

Russia continued its investments not only in energy sector but also in telecommunication considering that both “MTS-Armenia” and “Beeline” have Russian shareholders. Argentina was the third biggest investor in 2009 contributing to air transportation infrastructure. In fact, foreign investments contributed by Eduardo Ernekyan are the biggest in transportation sphere.

It is obvious from the chart 3 that the absolute advantage by amount of FDI in real sector belongs to Russian Federation. Next immense investor is France.

“FDI in real sector by countries, 2009”

Undoubtedly, it is interesting where FDI mostly goes?

According to US report “Doing business in Armenia”, 2010 the very fields and sectors in RA to invest in are:

• Information Technology (IT)

• Tourism and Travel Services

• Note on Restaurants and Franchising

• Mining and Metallurgy

• Light industry

• Financial Services

• Construction

• Agriculture

The statistics in real sector states that FDI are distributed in following order:

1. Telecommunication and transport-57%
2. Production and distribution of electricity, gas and warm water-20%
3. Growing industry-6%
4. Construction-5%
5. Mining industry-3%
6. Agriculture-1%
7. Other-8%

''Distribution of FDI in real sector, 2009''

Source:www.armstat.amIn the first term of 2010, preliminary estimate of foreign investments were USD 326 million, from which USD 220 million were FDI. In comparison with the first semester of 2009 foreign investments increased by 4.7%, however FDI decrease by 10.6%.

Russian Federation continues to be the biggest investor-partner of Armenia. In fact, it holds 35% of total foreign investments. Still, the dominant share of these investments (70.2) goes to electricity, most of which is done through ''HayRusGazart''. The second major field Russia invests in is telecommunication as was mentioned above. In this field, overall, were done USD 109 million foreign investments which is 24.5% less than the same data in 2009. From this portion of foreign investments USD 67.5 belongs to France (Orange-Armenia). It is very strategic verity that in 2010 Austria has first entered Armenian telecommunication market with small in quantity but immense in its meaning foreign investments.

The third largest investor in Armenia is Argentina due to Armenian investor about whose contributions were already mentioned above.

US in first semester of 2010 performed USD 12.5 million foreign investments which is 4.6% less than the same feature of 2009. Approximately 8 times declined foreign investments from Italy.

• IT sector as a strategic sector attracting FDI

Having a full understanding of the dynamics of FDI lets consider the particular case of IT sector. After Armenia gained the independence from former Soviet Republic in 1991, the industry switched its focus to the software development and IT services. The government of Armenia has an ambitious national vision for IT and supports the leading role of IT through its. In fact, the software and services segment really gained its drive during the last 10 years, during which the sector grew at 27% per annum. Just for comparison lets consider the fact that the IT industry’s weigh in GDP was 1.1% whereas in Germany’s GDP it was only 1.4% (Armenian Statistical Service). In recent years, IT sector was also observed as major inflow of foreign investors. More than 55% of industry’s output is exported over 20 countries in list of which are USA, EU and CIS.

Development and competitiveness of IT sector is mainly based on foreign branches of well-known organizations as from the USD 129.9 million of industry total income USD 80.3 million is gained through foreign branches income. In the majority of cases, the foreign branches of multinational technology firms are development centers for the parent companies. Foreign companies usually setup small development centers, and with an effective operating team in place, they start increasing the number of employees and move into higher value added activities to Armenia. Later, the whole cycle of a company's technical activities including R&D, design, coding, testing, and support, may be moved to Armenia. In addition, some companies have also started relocating a part of their business related functions such as marketing and customer support to Armenia. The practice of sending local professionals to the customer sites outside of Armenia to provide implementation and customer support has become increasingly common

Armenia's expertise in High Tech industries has been slowly gaining global recognition thus fostering foreign investments in the sector. So what are the reasons for these kinds of facts and growth of the importance of IT sector??? As “Software and Services report”, 2009 Armenia has the following advantages for investing in IT sector:

1. Well educated and talented workforce with a high degree of technical skills. As the study of “Brainbench Global Skills IQ” report in 2006 Armenia was ranked second in the world after USA in the number of IT certifications received per capita.

“Country ranking based on certifications received”

                                                                                                

Chart 4

Source: EIF/CAPS Industry data

2. Strong university programs with specializations in computer and related sciences, strong institutions. Armenia's highly qualified IT workforce is based on a traditionally strong education system and leading research institutions. Armenia was the leading center of computing technologies. It was the location of one of the first and largest schools of cybernetics in the world, which was established in the mid 1950s (the Mathematical Machines Research Institute) and, by 1960, had produced its first computer.
3. Highly competitive cost of labor,

 “Cost of labor in different countries”

Source: EIF/CAPS Industry data

Chart 5

Table clearly shows the competitive advantage of the Armenia IT companies in cost  the staff salaries make 80% cost of the IT company on product development and "taking on account high technical level and low cost of development of IT products, it can be stated that the Armenia IT companies provide the best quality/price ratio among worlds leading countries.        

        

4. Continued robust growth of the industry. During the last 10 years, the industry saw a sharp increase in the number of newly formed companies, both local start-ups and branches of foreign companies. Nearly 90% of the foreign companies were established in 2000-2009. The number of operating IT companies in 2009 reached around 200 representing nearly 17% growth from 1998 to 2009. In fact, by the year of 2009 the revenue the foreign branches gained was USD 80.3 million, from which 62% was received from IT sector. Comparing with the year of 2006 the following results are observed: foreign branches gained USD 47.6 million from which only 69% was gained from IT sector.
5. Strong and successful Diaspora in Europe and North America. Diaspora investors have been on the forefront in recognizing the attractive business opportunities that can be generated by utilizing Armenian's high technical and productive labor skills. Increasingly, however, other investors from a variety of countries are discovering the benefits of investing in Armenian IT enterprises.
6. Extensive experience with large multinational companies. In fact, among Armenian IT investors are: Alcatel Lucent France, EPAM Systems, Luxoft, Lycos, Microsoft Corporation, Synopsys and others.
7. Attractive IP system. Armenia has created a modern system that protects Intellectual Property rights. Currently, intellectual property related matters in Armenia are regulated by the Civil Code, the law on copyright, the law on patents, the law on trademarks, service marks and appellations of origin, the law on protection of topographies of integrated circuits and the law on protection of the economic competition, as well as by a number of international treaties. Armenian legislation on IP has been harmonized with the requirements of the Agreements on Trade Related Aspects of Intellectual Property Rights (TRIPS).

So, all these facts make Armenia attractive to IT sector investors.

• FDI in RA Balance of Payments (BOP) and GDP

To have a closer look to FDI’s weight on the aspect of the whole economy in this part of the paper will be examined the Balance of Payment during 2006-2009. Balance of Payment (BOP) is a record of all transactions made between one particular country and all other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports. A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa. The part of “Direct investment in reporting country” shows the features of FDI. It is counted in Financial Account part.

It is apparent from the chart that Direct Foreign Investments from Armenia to abroad have increased in 2009 comparing with the features of 2008. In 2009 Direct Investments abroad reached up to USD 52.72 million which is 5 times more than investments in 2008

 “The dynamics of Balance of Payments, Financial part, 2006-2009, mln US dollars”

Source:                                                         Chart 6                                        

Foreign Direct Investment In percent of GDP

Source: IMF, staff estimates and projections                                Chart 7

When comparing the weight of FDI in GDP with the impact of financial crisis the following can be observed. In 2009, the weight of FDI in GDP was approximately 8%, which is more comparing with Republic of Belarus, Kyrgyz Republic, Union Serbia and Montenegro and others. However, financial impact had negative influence almost on all country FDI features. So, in 2009 FDI’s percentage in GDP was halved comparing with the year of 2008 decreasing to approximately 4% in RA. The sharpest decrease is noticed in Republic of Tajikistan.

Balance of Payments together with GDP show the value and weight of foreign direct investments in the economy.

Comparison of FDI weak and strong points in Armenia

As the previous chapter stated the quantity of FDI flows in Armenia compared with other countries are relatively high. Thus, it can be assumed that the Government measures to motivate FDI and to create trust climate are quite supportive. Due to observations of the Ministry of Economy, RA the advantages for investing in Armenia are:    

• Investment oriented legislation,
• Developing economy,
• Equal treatment for foreigners,
• No limitation for foreigner ownership
• Well educated and skilled work force
• Stable banking system and local currency,
• Worldwide Diaspora,
• Membership in the World Trade Organization
• Continuous support by international donor community to reforms in Armenia,
• Strong government involvement in economic and structural reforms

What is important to mention is that being a member of WTO is dual advantage: it regulates tax and tariffs regimes within a country which is advantage for investors and creates trust climate among foreign investors.

The weak points observed during the study are the following:

1. Armenia is a small country with small domestic market and high transportation costs. Because of some national conflicts with Turkey and Azerbaijan the only chance to be tied to global economy is Georgian border. This fact hinders the development of Armenian economy. However, in the last two years the political and diplomatic relationships with Turkey are going on normalization. There is a hope that in near future the imposed embargo will be nullified. Thus, this weak point may really be turned into a strong and motivating one for attracting FDI.
2. Issues concerned with corruption, nepotism are also major problem for discouraging FDI. Though the government efforts to minimize their negative influence the problem still exists with all its unconstructive impacts.
3. The country’s poverty is also a thesaurus factor, especially during times of crisis as the social climate and domestic consumption could be jeopardized.
4. Natural catastrophes as earthquake are also considered to be negative point.

Examining the strong and weak points for investing in Armenia, the following conclusions and suggestions could be drawn:

1. Armenia has a big potential of attracting FDI. The factors mentioned above as strong points, especially the presence of big diaspora serve as full representation of attractiveness of Armenian economy.  
2. The weak points mentioned not only are considered to be limitations of attracting FDI but the economy development as a whole. For instance, the issue of Armenian-Turkish border is a barrier to Armenian economy development in this case particularly to attracting FDI. Thus, theses issues couldn’t be solved at once and are not only based on the institutions responsible for attracting FDI. The suggestion concerning weak points is that the policy of attracting FDI should be part of and integrated into general economic development and economic reform policies; they should not be seen in isolation.
3. The responsible institutions should not only be centralized on attracting FDI but also in successful implementation of those investments.
4. It is generally known that the more developed a country is, the better able it is to attract quality FDI. In particular, countries need to strengthen unique national competitive advantages, which would be of particular interest to foreign investors, including brand name recognition. Thus, Armenia should develop such competitive advantages in order to be more attractive to foreign investors.
5. Policies and strategies for the promotion and attraction of FDI should be implemented in conjunction with effective privatization and overall private sector development policies and measures, with emphasis on the development of SMEs.

 

Suggestion

While studying the FDI uniqueness in Armenia and taking into consideration the developed conclusions and suggestions the following project is proposed. The Ministry of Economy in cooperation with the RA government as well as domestic producers and Armenian Development Agency should create an online database for business-proposals. In this database will be demonstrated not only the business-plans of existing industries and companies but also strategic development-offers of new industries. The projects should also take into consideration the privatization process.

This project will give a chance to attract FDI in long-term and diversify the Armenian economy by directing FDI to perspective but not developed spheres.

Conclusion

Foreign direct investments are considered to be the powerful force in every economy. Thus every country is eager to attract as more of this pie as possible. For this purpose countries improve their investment climate by providing privileges for foreign investors as well as protecting and supporting them.

For a small country like Armenia is, FDI undoubtedly play a major role in Armenia’s economy. Taking into account this fact Armenia tries to create trust climate within foreign investors to attract more FDI. Recent economic indicators state that Armenia has a big potential to attract investments, especially considering the case of Armenian diaspora existence.

To promote FDI and to diversify Armenian economy is suggested to create online-database for business producers.

Bibliography

1. Concept on Investment policy, 2007 retrieved at 12/10 from http://www.mineconomy.am/files/docs/35_en.pdf
2. Enterprise Incubator Foundation, Ministry of Economy of the Republic of Armenia,  Armenian IT sector; Industry report, 2009 retrieved at 25/10 from

       

3. EV Research Center, Attracting MNCs to Armenia, Yerevan, 2007
4. Grand Thornton, Commercial Guide for investors in Armenia, 2010 retrieved at 12/10 from
5. EV and CRRC, “The role of diaspora in generating FDI in Armenia”, 2006
6. USAID, Foreign Direct Investments; Putting it to work in developing countries, 2005
7. US Commercial System, Doing business in Armenia, 2010 retrieved at 10/10 from http://armenia.usembassy.gov/uploads/Nf/H_/NfH_XWTan3xHMji4k9yAJQ/ccg_2010.pdf
8. World Bank, Doing Business in Armenia, 2008

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