Having small economy, limited resources, and two closed borders, Armenia is highly dependent on inflow of foreign investments in order to assure stable economic development.

Banks.am shares the article of Ara Makaryan, Investor Relations Manager of Capital Locus LLC, which covers the importance of Foreign direct investments (FDI) in Armenia, dynamics of past years and the ways to attract new investments.

Foreign money as a boost for economic growth

It’s impossible to underestimate the role of foreign investment in development of any economy. It’s more obvious for developing countries, where investing in economy via domestic savings isn’t realistic.

FDI provides the host countries with a number of advantages. It serves as a source of external capital for developing countries and accelerates economic growth. Additionally, FDI benefits sectors such as employment, business culture, and market competition.

Another advantage is that foreign investments from developed countries bring along know-hows, new approaches and technologies to the host country.

The importance of foreign investments is recognized in Armenia at the state level. Armenia’s strategically important sectors such as communication, energy, and utility services operate on foreign investments. The mentioned sectors would develop much slower without external capital flows, relying on just domestic savings.

Despite the significance of foreign investments, small and medium size enterprises mostly find it difficult to organize the process on their own. Consulting and investment companies might come to their rescue in this matter. Capital Locus provides services of that kind, enabling private businesses to attract investments from international financial organizations, private funds, and asset management companies, thus making private equity market of Armenia more active and facilitating the FDI inflow increase.

Past 10 years’ investment in numbers

The period between 2001 and 2008 was rather successful for Armenia in terms of foreign direct investments. According to the National Statistical service, FDI increased by almost 14 times in those years, amounting to USD 1bn in 2008.

Nevertheless, the “boom” didn’t last long, replaced with a downfall after the international financial crisis of 2009-2010. Since 2013, the decrease in FDI measures in times rather than percents. Foreign direct investments in Armenia amounted to USD 130.4m last year, which is almost eight times less than the 2008 index.

As for the sources of foreign investments, Russia is the prevailing one. From 2007 to 2011, the Russian Federation was the leading investor in Armenia, giving up its positions to France during 2012 and 2013. Other direct investors are Argentina, Germany, Luxemburg, Switzerland, and USA.

An important index for understanding the level of FDI is the FDI to GDP ratio. It made 8.58% in 2008 and declined to 1.23% in 2016, while GDP growth was rather modest.
For comparison, the neighbor country Georgia had FDI to GDP ratio of 11.2% in 2016 (based on the data from Statistical Service of Georgia). Every cloud has a silver lining, though – this ratio tells about big potential of improvement of FDI level in our country.

For the past ten years, were electricity, gas, telecommunications, land and air transport sectors, mining, agriculture, real estate, and manufacture of beverages (Source: armstat.am) were the leading sectors for FDI in Armenia. However, this statistics doesn’t mean those sectors will remain attractive for investors in the coming years, therefore, it’s necessary to analyze global economic trends and investors’ preferences.

How to attract more FDI

Foreign investors often don’t find it reasonable to spend time and resources on detailed analysis of sectors in the given country. They are much more likely to use analysis, indices, and ratings by renowned international agencies.

One of such sources is World Bank’s Doing Business report. It currently ranks Armenia at 38 (a 5-point improvement from the previous year’s rank).

Heritage Foundation’s Economic Freedom Index ranks Armenia at 33 among 180 countries, marking it as moderately free economy.

Progressing in these international ratings will play an important part for raising Armenia’s attractiveness to investors.

The regional attractiveness of the country is an important factor as well. For instance, potential investors would consider opportunities in Georgia, Turkey, Azerbaijan, and Iran before investing in Armenia, so Armenia needs to develop and promote its relative advantages to come out a winner in that competition.

Protection of property rights is very important for investors. Countries with relatively poor legal protection of assets and a high degree of political instability generally exhibit high rates of expropriation and this makes investment less attractive. The government should guarantee fair protection of property rights of foreign investors and take action to gain and maintain reputation of stability.

Trade agreements with other countries makes domestic investment environment more active and provides resident and foreign enterprises access to new markets. By signing such trade agreements, the Armenian Government will encourage investors who are interested in our region and the EAEU market.

Diaspora’s role in attracting investments shouldn’t be underestimated as well. Analysis of the FDI inflows from countries such as Argentina, Switzerland, and Russia shows that a great part of them comes from organizations owned by Armenians. That is Armenia’s unique advantage with potential to be fully realized yet.