A study examining foreign direct investment in Armenia: Incentives for FDI

Abstract

The aim of this Master’s essay is the examination of Foreign Direct Investment (FDI) in Armenia. Particularly the essay was focused on investment incentives created by Armenian government to attract FDI as well as identification of other factors positively or negatively affecting the inflow of FDI in Armenia. The essay consists of the following major parts: Introduction, Theoretical Part, Analyses of Armenian Legislation on FDI, Conclusion and Recommendations. Introduction includes general information about the inflow of Foreign Direct Investment and its possible effects on the world economic development as a whole. Then the focus narrows down to the countries of the Former Soviet Union and Armenia. Most importantly, introduction includes hypothesis, research questions and methodology of the study. The next major part of the essay is theoretical one which includes the following information: (1) definitions of types of FDI and factors affecting the inflow of FDI into a country, (2) literature review of studies concerning FDI. The essay also refers to the agencies responsible for FDI promotion as well as provides analyses of Armenian legislation on FDI and investment in general. Evaluation of investment climate as well as business environment in Armenia is also discussed. Based on all these examinations and analyses findings and recommendations were presented. Findings mainly present answers to the research questions. It is interesting to find out that, in spite of implementation problems, legislation in Armenia is very attractive including many policy incentives for foreign companies to locate their firms in Armenia and feel protected. In addition to appropriate legislative environment, there are also other factors such as skilled labor force, favorable privatization opportunities, attractive sectors of economy, comparative advantage in certain sectors of economy, which can promote FDI in Armenia. Besides positively affecting factors, obstacles constraining FDI were also identified. These obstacles have been classified into controllable, semi-controllable, and uncontrollable ones. Among controllable obstacles are those that can be corrected by policy intervention (government intervenes by creating appropriate legislative field in the country). Semi-controllable factors include political instability and unresolved Karabagh conflict. But most importantly, there are factors which are out of the control of the government such as small market size, landlocked location and remoteness from major markets. Final part of the essay contains conclusions and recommendations. As the scope of the study did not allow to develop specific recommendations for the government, they were grouped into several general clusters, where we thought positive changes would improve overall attractiveness of the country for FDI. Recommendations mainly include the following: (1) Armenian tax legislation and tax administration should be amended to provide increased transparency and efficiency of tax administration, improve fairness of treating business entities, etc, (2) the Law on Foreign Investment needs to be revised to decrease the number of inconsistencies and omissions, (3) private sector should be engaged in the process of drafting laws and government decisions to reduce policy instability and uncertainty in the business environment, (4) major attention should be paid to the improvement of rural roads, irrigation and telecommunication infrastructure, (5) clear strategy should be defined for FDI promotion, such as identification of new sectors and their promotion in international forums to potential investors, etc, (6) the process of privatization should be continued to attract even more FDI, and finally (7) the corruption should be more aggressively combated to curtail shadow economy and increase the competitiveness of all companies doing business in Armenia.