The benefits of FDI

Rapid-Growth Markets Forecast: July 2013

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By improving technology and skills through partnerships on specific projects, foreign direct investment (FDI) has been shown to boost a country’s potential.

Rising FDI flows are helping to transform trade opportunities across Turkey, the Middle East and Africa, with particular expansion in financial services.

The potential for FDI to help transform economies is well illustrated by the outlook for Turkey.

As outlined in our Turkey attractiveness survey 2013, Turkey plans to attract investment of US$250b in the fields of energy and transportation to help it become one of the world’s top 10 economies within the next decade.

Turkey has a huge domestic market and our forecast suggests that in 10 years’ time, there will be over 11 million households earning more than US$30,000, the same number as in Canada now.

Growth in Turkey accelerated to 3% in Q1 2013, driven by rising consumer spending and investment. The recovery reflects the major easing in monetary policy since the middle of last year that is starting to feed through the economy.

Meanwhile, consumers’ real incomes are benefiting from lower inflation as well as still-buoyant employment growth.

Turkey’s geographic position has helped it benefit from increased trade with Europe, the Middle East, North Africa and Central Asia over the last decade. Around half of Turkey’s FDI came from Europe last year, but the authorities are keen to attract more FDI from other emerging markets over the next decade — particularly from the Middle East.

Non-oil sector buoyant in Middle East

We expect the Middle East region to grow by 3.0% this year, down from growth of 3.7% last year, which partly reflects lower commodity prices.

The recovery in global trade will boost the region next year, underpinning growth of 4% or more. However, our slightly more subdued forecast for activity in China will reduce demand for Middle Eastern exports a little in the medium term.

But in the key Middle Eastern RGMs, a young population is helping to foster entrepreneurship and the growth of the non-oil sector is buoyant, protecting these economies from slower global oil demand.

Despite cutting its oil output this year, Saudi Arabia is still expected to grow by around 4.5% this year and the next, as growth in the non-oil sector has very strong momentum.

In Qatar, growth of 5% this year will be driven by a gain of nearly 10% in the non-oil sector.

FDI flows will boost Africa’s growth

Strong FDI flows, easier access to credit, and the growth in entrepreneurship is fueling the development of new businesses and sectors within RGMs and helping to diversify their economies.

Africa, for example, is attracting more FDI — and not just to natural resources.

The service industry is developing fast in the continent with finance, real estate and insurance representing more than 20% of South Africa’s GDP.

Sub-Saharan Africa: total annual inward FDI

EY - Sub-Saharan Africa: total annual inward FDI

Source: Oxford Economics

Read more about technological advances in Africa.