How to boost foreign direct investment (page 2 of 2)

The influx of foreign capital tends to force the maturation of financial and capital markets - either by precipitating a crisis that leads to restructuring, as in Southeast Asia, or, preferably, by the simple fact of necessity: capital needs a reliable home.

Veteran economic observers of the Arab world regularly lament the region's illiquid and immature capital markets.

Despite these problems, the Arab world is not without success stories. Dubai, and the UAE in general, lead the charge in attracting FDI. Tunisia, Morocco, Jordan and Oman have also seen their FDI rates rise in the past few years. The big picture, however, remains gloomy.

So what's holding back FDI? Sami Haddad, the International Finance Corporation's director for Middle East and North Africa, identifies six key impediments to FDI growth in the Arab world: conflict and regional instability; unpredictable macroeconomic conditions and public policy choices; weak institutions and high administrative barriers; inadequate infrastructure; underdeveloped financial sectors; inadequate availability of a skilled and flexible workforce.

"All of these, in varying degrees, contribute to a poor foreign investment environment," says Haddad.

Ziad Abdelnour, a New York-based investment banker, notes that even when non-oil FDI makes it way to the Arab world, returns are low by global standards, causing large capital flows to go elsewhere. The World Bank concurs, noting that the Middle East/North Africa region had the lowest rate of return on investments in the world last year.

In fact, Arabs aren't even investing at home. Some 85 percent of the investments of wealthy individuals from Gulf countries are located abroad, a figure approaching $1 trillion.

As one Gulf investor told Arabies Trends, "We might invest in a hotel here or there, but the real money is going abroad, into Western capital markets. Until the environment for investment changes, I just don't see that money returning to the Arab world."