Encouraging foreign investment in Kazakhstan’s economy
$23,008.7m of foreign investment (FI) was placed in Kazakhstan’s economy in 1993-2002. Foreign direct investment (FDI) made up the bulk of this amount at $15,353.8m (66.7%), trade loans, credits and other liabilities came to $7,316.7m, and foreign portfolio investment (FPI) amounted to a mere $338.2m or 1.5%.
Breakdown of foreign investment by country
Investment trends in Kazakhstan in recent years have undergone no major changes. As before, the United States remains the unchallenged leader in terms of investment. It accounts for $6,660.4m or 28.9% of the total FI in Kazakhstan, $6,286.9m of which is FDI invested in 1993-2002. The US also comes first in terms of encouraging investment in the oil and gas and the transport and communications sectors (table 1).
Britain is the second largest donor, placing $2,404.6m in Kazakhstan’s economy (10.5%). It comes second in the mining sector, and third in the transport and communications industry.
The Netherlands (10%) is increasing its investment year by year. It is especially active in the manufacturing industry: $369.6m. The country leads in sectors such as finance: $661.9m, services to companies (leasing and property transactions): $573.7m and comes second in terms of investment in Kazakhstan’s transport and communications sector.
Despite the rather low total investment of $1,231.5m (5.6%) by Italy over the period under consideration, the past two years have witnessed increased activity from Italian business in Kazakhstan. This is largely due to the successful activities of Italy’s ENI which is a partner in the Karachaganak project. In addition, Italy is a leader in terms of encouraging investment in Kazakhstan’s construction industry at $37.5m.
Foreign direct investment in Kazakhstan’s economy
Altogether, $12,861.1m of FI was placed in Kazakhstan’s economy in 2002, with FDI standing at $4,037m. In 2001 this indicator was $4,048m (excluding the proceeds of privatization under contracts in 2000). Since FDI is prevalent in the FI structure, let’s put its breakdown by type of activity under the spotlight.
The stability of investment flows was due to the ongoing large investment projects for developing the Tengiz, Karachaganak and Kashagan oilfields. The fact that foreign investors augmented the project budgets determined the increase in FDI flow. More than half (51%) of the gross FDI influx in 2002 was accounted for by investment in oil and natural gas production, 19% was due to geological exploration and 14% to metallurgy.
The net inflow of direct investment came to $2,561m, a 9% reduction on the figure for 2001. This was due to the fact that the injection of funds into joint stock Kazakhstani enterprises was overwhelmingly due to the privatization of state-owned shareholdings ($497m), whereas in 2002 privatizations of this type were rare.
In general, transactions of this kind made up $243m in 2002, less than half the amount for 2001. To sum up, in 2002 proceedings to joint stocks fell and the share of borrowed capital and re-investment went up in the structure of FDI (table 2).
Clearly the massive inflow of FDI into the oil and gas sector was due to the favourable investment climate in this sector of the economy. At the same time, FDI in manufacturing was ten times lower in 1993-2002 coming to mere $1,641.2m. Whereas FI used to be comparable across different sectors (e.g. in 1995 FDI in ferrous and non-ferrous metallurgy took up 16% of the total FDI, with 20% in the oil and gas sector), contemporary trends point to the unassailable prevalence of the oil and gas sector (2.6% and 66% respectively).
In addition, foreign investment in the production of metal ores has reduced considerably.
Today the gap between the various sectors in Kazakhstan’s economy in terms of pace of development keeps on increasing, and is consequently influencing the development of the regions: those with a high concentration of oil and gas fields are enjoying the best growth indices.
Summing up international experience
In many countries, multinationals have been crucial in boosting exports due to the establishment of links, whether or not these were related to capital participation. The multinationals’ share of exports varies from country to country, though it is quite large everywhere.
The Republic of Korea, a leading international exporter, has made important economic achievements, even though the presence of FDI-importing multinationals in its economy is somewhat limited. And once again, links not based on capital participation have played an important role in boosting the competitive edge of the large Korean companies that form the core of this Far Eastern nation.
The breakthrough of Hungary, Ireland, China, Costa Rica, Mexico and the like into the cohorts of leading exporters has largely been due to their reliance on FDI as a basis for more dynamic export activity. In addition, each of them had certain specific advantages which allowed them to join international production systems. For example, the gargantuan size of the Chinese economy created an ‘economy of scale effect’ and ensured large exports. Hungary, Ireland and Mexico have preferential access to the major export markets. National policies were the determining factor in Ireland and Costa Rica: they practice a far-sighted approach to encouraging high-tech FDI, and have also found an excellent niche in the international supplier networks.
Yet an excessive dependence on multinationals for the competitive ability of exports has its minus points. Multinationals may focus on the comparative statistical advantages of a host country such as large mineral resources or a cheap workforce. Modernizing exports means increasing the effectiveness of production and transforming the statistical comparative advantages of the country into real ones by establishing links between branches of foreign companies and home businesses, improving the skills of the workforce and implementing high-end technology. Having said all that, a specialization in labour-intensive sectors, even given high-tech exports, may be undesirable in certain circumstances as it brings only limited benefits in terms of staff training and technology transfer without influencing the local economy. In addition, a competitive advantage such as a cheap workforce will disappear as wages rise.