Foreign Direct Investment In Lebanon

by joyceasmar (student)

University Degree Business and Administrative studies

International Business

Fall semester 2012-2013

Done by:

Joyce El Asmar

Definition of FDI:

An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.

Overview of Foreign Investment Climate:

Lebanon is a country that, by tradition, remains open to foreign direct investment. Over the last seven years, the Government of Lebanon (GOL) has passed several laws and decrees to encourage such investment. The Investment Development Authority of Lebanon (IDAL) possesses the authority to award licenses and permits for new investments in specific sectors. IDAL also has the authority to grant special incentives, exemptions, and facilities to large projects, whether implemented by local or foreign investors. IDAL's Export-Plus program provides subsidies to encourage agricultural exports, and IDAL’s "Investors Matching Service" facilitates the creation of strategic international-local partnerships through joint ventures, equity participation, acquisition, and other vehicles. IDAL continues to work on setting up its Investor Support and Information Center (ISIC), a data bank that will provide comprehensive, reliable, and up-to-date investment-related information to prospective investors.

Lebanon has much investment-enabling strength that has encouraged foreign companies to set up offices in the country. Lebanon's key advantages include a free-market economy, the absence of controls on the movement of capital and foreign exchange, a highly-educated labor force, good quality of life, and limited restrictions on investors.

Lebanon was not severely affected by the global financial crisis due to sound banking regulations that prohibit investing in structured products, and commercial banks continue to record high liquidity levels. Although they are the largest lenders to the GoL, commercial banks also are interested in financing the government's privatization programs. The banking sector continues to record significant capital inflows, albeit at a slower pace than during previous years. Capital inflows reached $14.8 billion for the first eleven months of 2010 and were projected to reach $16-17 billion by the end of 2010. This is attributable to the perception that Lebanon's banking sector is relatively safe, given its high liquidity and high interest rates on deposits. Moreover, the number of tourists in 2010 which rose by 18% over the previous year, contributed to capital inflows.

Banking sources have adopted a "wait and see" attitude to the level of political risk in 2011, but investment and consumption are both expected to continue to grow, albeit at a slower pace. As a result, the Lebanese economy may slow down to five-percent growth (compared with eight-percent growth in 2010). The GoL is expected to increase capital investment in 2011, should it ratify the 2010 budget, which would support growth and increase deposits to the banking sector.

Foreign Direct Investments in Lebanon

According to Siddiqi (2008), foreign direct investment flows into MENA countries increased fourfold from 2002 to 2007, to an expected $80 billion in 2007, with Saudi Arabia and UAE receiving 40% of the FDI inflows.

Lebanon in particular is enjoying a surge of GCC investments in its real estate and tourism sectors, not to mention remittances by Lebanese expatriates who work in the Gulf.

The Ministry of Economy and Trade (MOET) reported the creation of 44 foreign companies, including seven U.S. companies opened offices, representative offices, or branches in Lebanon, in 2007.

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Lebanon in particular is enjoying a surge of GCC investments in its real estate and tourism sectors, not to mention remittances by Lebanese expatriates who work in the Gulf.

The Ministry of Economy and Trade (MOET) reported the creation of 44 foreign companies, including seven U.S. companies opened offices, representative offices, or branches in Lebanon, in 2007.

The annual report released by the Inter-Arab Investment Guarantee Corporation (IAIGC), listed Lebanon as having received the third largest share in Arab multilateral investments in 2005. According to the UNCTAD World Investment Report of 2006, Lebanon is classified as a country with a high FDI potential and high FDI performance. However, the majority of capital inflows to Lebanon are not due to FDI, but from remittances, repatriated capital, and investments in Treasury bills and Eurobonds.

An earlier UNCTAD’s World Investment Report in September 2004 reported that FDI in Lebanon had the following distribution: 83.2 percent was invested in the services sector (Mostly real estate), 12.4 percent in industry, and 4.4 percent in agriculture. In 2004, Saudi Arabia was the leading Arab investor in Lebanon (38.4 percent of total), followed by Kuwait (22.5 percent) and the United Arab Emirates (22.3 percent).

Reasons for the rising level of FDI in Lebanon

In the past couple of years there has been an observed change in GCC investor preferences; they have started managing their fortunes by themselves, and are opting to invest their petrodollar fortunes in Lebanon’s recovering sectors of tourism, construction, real estate development projects. This is a sharp contrast with their previous tendency to invest in international banks, USA treasuries, as well as portfolios designed to preserve capital (Middle East Company News 2007).

Following the hostilities of the 2006 summer and the political stalemate that Lebanon has been enduring in the past couple of years, FDI did slow down, however, real estate prices continued to soar. A recent trend has been for Arab investors to become the largest developers of real estate projects particularly in Beirut’s Central District. These projects target mainly Arab buyers.

Arab investors have been showing a real interest in real estate acquisitions and construction activities related to the hospitality and tourism sectors. FDI in Lebanon’s service sector is expected to increase as the efforts to privatize the service sector such as mobile sector and electricity sector gain momentum.

Total and Arab FDI in Lebanon in $ Mn (2002-2006)

2002 2003 2004 2005 2006

Arab FDI in Lebanon 650 850 1050 1780 2500 *

Total FDI in Lebanon 1737 2015 1863 2573 4500 *

% Arab FDI 37.4 42.2 56.4 69.2 55.6

Source: Investment Development Authority of Lebanon (IDAL)

* Estimated by IMF, IDAL

Why Lebanon for Investments?

Located at a strategic geopolitical crossroads situated on the eastern coast of the Mediterranean Sea, Several factors help to contribute to providing Lebanon with a suitable environment for local and international investments.
Indeed, with its liberal economic regime, it safe business environment, the wide access it gives to the markets of the Middle East and its extremely highly-skilled labor force, the country can guarantee investors the very best conditions for the development of their businesses.
Not to forget a solid, secure and banking system with full professional secrecy.
The Legal framework and taxation, give investors as well incentives to invest in Lebanon.

At a first glance there do not seem to be too many reasons to . However, according to Nabil Itani, Chairman and General Manager of the , known as , the Levantine state is better than its reputation. "Regarding instability in the region, you know that the country is located in an area that is unstable. In Lebanon we have the basic fundamentals for sound investment inflows," said Itani.

Lebanon is in urgent need of foreign investments (FDI): oil and gas have been discovered offshore but the hidden treasures under the Mediterranean Sea have yet to be explored, the national debt-to-GDP ratio stands at a whopping 130% and unemployment is high, with estimates suggesting that up to 30 per cent of young professionals have no regular income (ironically, Beirut's hotels mostly employ armies of expatriates from Asian and African countries).

Itani, however, believes that Lebanon's greatest asset is its people. "We have an 80-90% literacy rate in Lebanon, and you can access these skilled human resources easily and at a very competitive cost." Lebanon ranked 12th globally in the overall quality of , and 6th globally in the quality of math and science education. Lebanon ranked 3rd in the MENA region in the skills index which captures ICT skills and capabilities.

In their country analyses, foreign banks always stress the fact that Lebanon has one of the freest economies in the region and every government respects the country's traditional laissez-faire, laissez-aller politics.

Nabil Itani's mission is to convince investors that against all the odds, an will pay off. That mission has become trickier over the last two years, as Dubai, being a politically stable and economically liberal hub bridging East Asia and Europe, has attracted capital and companies like a magnet; another reason is that Gulf emirate benefited from the Arab Spring.

IDAL was established in 1994 by a decree from the Lebanese Council of Ministers with the purpose of spearheading Lebanon's investment promotion efforts. Itani points out that Lebanon's strong sectors also unveil weak points. "Some areas in the MICE tourism sector (conferences and exhibitions) are good, there is Forum Beirut in BIEL, but we need more infrastructures for these sectors."

Unfortunately, not all regions benefit equally from the flow of foreign investments. "Law 360, the Investment Law of Lebanon, was enacted in 2001," said Itani. "Over these ten years we have noticed in our practice of this law that there is a demand in some areas, because our law has two main aims: job creation and balance development. After practicing the law for ten years we have noticed that the huge projects, or 80% of these projects, are located in Beirut and Mount Lebanon, which is close to the capital Beirut."

The people of Lebanon can be tough negotiators, but are also loyal business partners. The easiest way to invest in Lebanon is to buy shares listed on the (BSE). Founded in 1920, the BSE is the third oldest capital market in the region, after Alexandria (1883) and Cairo (1903).

The market's trading activity is dominated by Solidere, the company that is spearheading the rebuilding of Beirut Central District. Shares of Solidere are also traded on the London Stock Exchange and on the largest German bourse in Frankfurt/Main. A total of 10 companies are listed in Beirut.

What Makes of Lebanon an Attractive Market for the Real Estate Properties and Projects?

Real Estate has always been one of the piles of the economy's life in Lebanon.
Believe or not, Real estate properties in Lebanon never knew a crash or even significant decrease.
Another important fact is that the demand in Lebanon is real and not subject to exaggerated speculations and for most of the cases (As the governor of the central bank mentioned few days ago, Mr. Riad Salameh, most of the demand, over 80% is real and linked directly to the end consumer).
Other Factors encourage foreign ownership in Lebanon and foreign investments these are mainly:
reduced interest rates, high liquidity in the banking sector and especially lately after the crisis with the flow of money coming from Lebanese expatriates and Arabs, low and favorable taxation, long-term mortgages and in a certain period the rise of the oil prices on the market.
Since 1969, the law and legal framework governing real estate and foreign investments into that sector in Lebanon was amended many times to encourage the acquisition of real estate by foreigners and therefore to encourage the foreign direct investments in Lebanon.
That leads us to our next topic which is the legal framework for foreign ownership or investments in Lebanon.

Factors that affect FDI:

Based on the conceptual framework on the determinants and risks of FDI, the dimensions of independent variables in the survey are formed in three main groups; economical, political and cultural factors.

They suggest that political factors (as a main group and as subgroups) are the most important factors that affect FDI inflows to Lebanon.

Political variables

Six variables were been used to construct the first important political subgroup (stable political environment. They are: stable leadership, politically stable country, welcoming to foreign investment, free and fair elections, freedom of beliefs, and protection of political rights and freedoms. The mean scores show that the most attractive variable was stable leadership, whereas, protection of political rights and freedoms has the marginal effect.

Six variables also were been used to construct the external conflicts factors. They are: peaceful country, safety boarders, and political ties with the parent firm’s country, status of political relationship with the surrounding countries, the effect of Palestinian-Israeli conflict, and the effect of the Iraqi war. The vast majority of external conflicts variables were perceived as important variables as for the internal conflicts factors we construct three variables. They are: strong internal security system, organized demonstrations, existence of internal conflicts.

Economical variables

Nine variables have been created to construct most important economical subgroup (Attractive investment climate. They are: income and corporate tax structure, tax on capital profits and profit repatriation, tax incentives and advantages, cost of logistic services, availability of free zones, import restrictions, level of industry competition, export restrictions, and restrictive environment law. The fist variable’s mean score shows that Lebanon’s income and tax structure doesn’t have a significant role on the foreign investors’ decisions. Whereas, the mean score of the last variable shows that Lebanon doesn’t have a restrictive environment law.

Cultural variables

The most important cultural subgroup (Social-cultural and traditions closeness) was constructed from nine variables. They are: lovely tradition country, command of at least one foreign language, friendly people and easy to communicate, well educated, sharing the same language with the firm’s parent country, cultural closeness to firm’s parent country, traditionally complicated but can be adjusted, women play an effective part in the society, and finally traditionally complicated but can be ignored. The Lebanese lovely traditions were attractive element to foreign investors, as it possesses the highest among the other variables.

Foreign Direct Investment Statistics:

There are no official statistics available on foreign direct investment (FDI). Banking sources estimated that construction and real estate account for the largest part of foreign investment.

According to the Arab Investment and Export Credit Guarantee Corporation, FDI in Lebanon reached $4.8 billion in 2009, making it the fifth largest recipient of FDI out of 18 Arab countries. This constituted a rise of 33.2% compared to 2008 and a 10-year high. Lebanon’s share of aggregate Arab FDI reached 5.95% in 2009, up from 3.79% in 2008, and Lebanon was among the few Arab countries witnessing an increase in FDI in 2009. Meanwhile, investment from Lebanon in Arab countries was valued at $725.5 million in 2009, dropping 68.4% compared to 2008, according to the same report, and it was the seventh largest source of inter-Arab investment, accounting for 3.8% of aggregate inter-Arab investment in 2009. Saudi Arabia was the largest destination of Lebanese direct investment, valued at $414 million or 57% of total investment.

According to the UN Conference on Trade and Development (UNCTAD), FDI inflows to Lebanon rose by 10.8% reaching $4.8 billion in 2009, up from $4.3 billion in 2008. The increase was mainly attributed to investments in the real estate sector. Lebanon was the fourth largest recipient of FDI in nominal terms among 20 MENA countries. FDI inflows constituted 14% of GDP in 2009, the highest in the Arab world. Meanwhile, FDI outflows from Lebanon also rose by 14% reaching $1.1 billion in 2009, up from $987 million in 2008.

European and Asian companies have won most of the government contracts in the fields of electricity, water, telecommunications, transportation and infrastructure. This could be attributed to either the unstable political and security situation in Lebanon that discouraged U.S. companies from bidding on projects or bilateral financial protocols signed between Lebanon and some European countries that provide grants and soft-term loans. However, U.S. companies have won contracts in solid waste treatment and landfill and some contracts in the power sector, air transport, and media.

The U.S. Embassy in Beirut tracks U.S. companies' activities in the Lebanese market. The Embassy actively lobbies to support U.S. companies bidding on projects, providing equal support to all U.S. bidders via letters and direct meetings with senior Lebanese government officials and demanding fair consideration of U.S. companies that are bidding on business opportunities in Lebanon. In some cases, the Embassy and the U.S. Department of Commerce have provided higher-level advocacy from Washington. The Embassy encourages U.S. companies bidding on projects to contact the Embassy's Economic\Commercial Section for assistance and advocacy.

Graphs:

Lebanon’s GDP by sectors, 2002:

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