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Evaluation of Georgia’s Foreign Direct Investment

Foreign Direct Investments (FDI) has acquired a vital importance for both developed and developing markets in the contemporary globalizing world.

According to the preliminary report by Geostat, the national statistics service of Georgia, the country drew 1.35 billion USD FDI in 2015, down 23% compared to the 2014 final indicators.

Since the announcement of independence, Georgia has drawn more than 14.6 billion USD FDI. It should be noted, a bulk of FDI inflows is directed to the capital city of Tbilisi (75% over the past 5 years), while the Ajara Region preserves constant second position (see Chart 1).

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The Georgian and international experience proves that a set of various indicators affects the inflow of major and long-term foreign direct investments.

Georgia’s negative factors are as follows: small consumer market; low-qualified workforce (despite a high-rate literacy and nationwide aspirations for higher education degrees in our society); two conflict zones; permanent political instability and many other factors. Nevertheless, the country embraces positive aspects too such as: continuous improvement of the legislative basis; low taxes; conclusion of the EU association agreement; convenient geographic location and so on.

Georgia is listed among attractive countries for drawing foreign direct investments. Though, at this stage, foreign investors are mainly interested in cheap workforce and taking roots on the domestic market and their contribution to development of the high-technology and export-oriented fields is unimportant.

It is interesting that the most favorable sectors for FDI inflows are power sector; transports and communications; finance sector; real estate and development markets; processing industry. The ratio of these sectors in total FDI inflows accounts for 80%, according to the 2015 preliminary report.

Investors are less interested in other sectors. For example: despite the Georgian government has announced the agriculture sector as a priority direction, investments in this field are unimportant and the sector’s ratio in total FDI inflows is less 2% over the past 5 years (see Chart 2).

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According to Geostat, today the ratio of exports by organizations with Georgia-foreign capital exceeds 50% in total exports. This signifies foreign investments make much contribution to formation of Georgian exports. However, these activities are carried out at the expense of exploitation of low-technology sectors.

To raise the Georgian economy to an essentially new level and to improve its exports from the structural and absolute points of view, we should be oriented on the directions such as modern technologies, but these directions cannot be developed without injecting considerable resources in the education sector (vocational and technological centers, high and higher education). If the country manages to develop high-level technologies, we will ensure long-term development preconditions.

Over the past 5 years the European Union was recorded as the most active region from where Georgia could draw major foreign direct investments. However, according to the 2015 preliminary report, the EU has been replaced by a group of the CIS countries (see Diagram 1) that reflects a sharp upturn of FDI inflows from Azerbaijan (from 341 to 543 million USD), while FDI inflows have nearly halved from Russia (from 82 to 49 million USD). At the same time, a bulk of FDI inflows from Azerbaijan is related to transport and communications projects of regional importance that serve expansion of Georgia’s transit potential. (See Diagram 1) Based on a detailed analysis, under the UN standards, we can conclude that over the past 5 years (2011-2014) FDI contributors were making focus on employing the domestic market resources (80%).

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Efficiency-oriented investments ranks second with 17% ratio and resource-oriented investments rank third with 3% ratio. In the light of the past 20-year dynamics, these indicators prove that foreign investors do not consider Georgia to be a market of cheap resources any more, but we see diversification of motivations and their increased inclination to efficiency-oriented fields. In whole, these tendencies point to growing development of the domestic market and progress.

Vakhtang Charaia TSU Analysis and Prognosis Center