Student Policy Seminar Series: Foreign Direct Investment
Thursday, 01 February, 2018

ISET continues its student policy seminar series, this time with Mariam Katsadze, Mariam Dvalishvili, Tsotne Marghia, Elene Ghviniashvili, and Giorgi Nebulishvili presenting their research results under the supervision of Eric Livny, President of ISET, and Yaroslava Babych, head of the Macroeconomic Policy Research Center, at the ISET Policy Institute.

As the students discussed, Foreign Direct Investment played an important role in global business in order to face the dynamic changes of the economic environment. In its classic definition, it is a company doing physical investment from one country to another country. Examples of direct investment include building a factory or investing in machinery, buildings, or equipment. The sustainability of foreign financial inflow plays an important role in the overall economic stability of Georgia as seen from the latest depreciation of the domestic currency, and the fact that Georgia is still a developing country strengthening its infrastructure.

Despite the existence of a wide range of literature regarding the effects of FDI on the economy and economic growth, in particular, there is no straightforward conclusion to this subject. Each country is characterized by its own economic environment and structure, making it difficult to extrapolate one country’s results on another country. This creates the necessity of investigating the particular relationship for each country in order to catch comprehensive interdependence between principle macroeconomic variables.

Through 2010-2016, the most attractive sector for foreign direct investment turned out to be transport and communications, whose share in total FDI in 2016 equaled 43%, followed by the real estate and energy sectors. By origin of FDI, Azerbaijan has been playing a leading role for the last three years in a row, providing 35% of total FDI in 2016. Due to infrastructure and the fact that most firms are registered in Tbilisi, the share of Tbilisi compared to other regions of Georgia is significantly high, equaling on average 75% of total FDI in 2010-2016. However, without Tbilisi, on average the most attractive region seems to be Adjara, due to its high importance as the main source of attraction for tourists. According to Current Account decomposition, FDI seems to be an important source of financing of Current Account deficit, proving the necessity of foreign financial inflows as stabilizers of the economic environment due to the fact that CA deficit highly affects expected changes in exchange rates and price levels. Important attention should be paid to the optimal reallocation of financial resources according to the productivity of each sector. At the same time, the lack of existing data regarding capital equipment, in particular the rate of returns of capital, makes it difficult to provide such analysis due to the inability of estimating precise sector productivity, which will consider both labor and capital productivity. Under the consideration of FDI as a significant proxy of gross fixed capital formation, according to real growth decomposition, FDI explains on average approximately 4% of overall growth, helping exports to overweight the negative effects from the growing share of import in overall trade. In addition, according to quarterly data of 2017, the implementation of “Estonian tax reforms” regarding tax-free reinvestment is already showing its positive impact on the value of reinvestment as an indicator for each quarter exceeding its corresponding values of previous years. Further implementation of the tax reform will allow the economy to keep most dividends earned by foreign firms to stay in the country in place of exchanging them for foreign currency and causing the further devaluation of the domestic currency. In addition, the main issue is that the high volatility of FDI in Georgia is due to highly valued short-run projects. For the improvement of sustainability of financial inflows and decreasing volatility, it is essential to attract long-term investment projects, which are usually associated with land buying. Despite the fact that Georgia is relatively free to international trade and foreign investment, there still remain some barriers, such as the restriction of selling lands to foreigners. In addition, despite the higher values of various indexes in the region, such indexes as the Global Competitive Index and Investment Freedom Index provide some idea of the necessity of the further improvement of the investment environment.

ISET students will continue presenting their research papers; every MA student will be given a chance to present the outcomes of their joint efforts.