Foreign Direct Investment in Egypt Essay

Foreign direct investment (FDI) is investment directly into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. In the global economy today, we see many developing countries competing for foreign direct investment. FDI is said to be an important factor for spurring the development of a nation. Foreign direct investment (FDI) an important vehicle for economic growth in emerging markets countries. Since 2006/2007, Egypt has become the leading attractor of overall foreign direct investment (FDI) on the African continent. Up till 2008, Egypt has attracted 56 foreign investment companies in the textile sector, employing 14,169 workers with total investment value of $ 172. million, and total production value of $ 370. 6 million. Furthermore, Egyptian-Foreign joint venture companies totaled 150; employing 30,635 workers; with an investment of $ 515 million, and a total production value of 509. 4 million in 2008. Egypt has experienced profound political changes over the past two years. On February 11, 2011, President Hosni Mubarak’s 30-year rule came to an end under intense popular pressure as hundreds of thousands of Egyptians converged on Tahrir Square. Transition to democratic rule has been marked by advances and challenges. Egypt has seen several prime ministers and multiple cabinet changes since the revolution, and many investors have reported that the constant shuffle and interim tenure of government officials have contributed to a difficult business environment. Nonetheless, in January 2012 Egypt seated its first parliament elected in free and fair elections, and many of the members have identified increasing foreign investment as a top priority for the government. Even though political uncertainty and economic downturn in Egypt , this African country still present a lot of opportunity to make profit for foreign direct investor especially in textile and apparel industry . Foreign Direct Investment In Egypt Investing in Egyptian Apparel and Textiles Industry 2-Apparel and Textile Industry Egypt is home to the only fully vertically integrated textiles industry in the Middle East, with the entire production process —from the cultivation of cotton to the production of yarns, fabrics and ready-made garments —carried out domestically. Egypt is the largest producer in Africa and worldwide of long (LS) and extra-long staple (ELS) cotton, accounting for 50 percent of world production in 2008, it has built a brand reputation for its quality of cotton. The sector plays an extremely central role in the Egyptian economy. It is the second largest producing sector after agro-industry and the first in terms of jobs accounting form30% of local employment in 2008. It accounts for 3% of the GDP, 30% of industrial output and around 13% of Non-Petroleum exports in 2010 / 2011, according to the Central Bank of Egypt. There are more than 6,700 textile-related companies registered with the Industrial Development Authority. The power player within the sector is readymade garments (RMG), worth 75% of the textile and garment industry. The RMG subsector produced more than 313million pieces in 2009, with global brands such as Marks & Spencer, GAP, Wal-Mart, Levi Strauss, Target and Calvin Klein sourcing from and investing in Egypt. Of the 25% of the industry focused on textile production, home textiles constitute 12% of the industry, and cotton yarn 8%, while the remaining 5% is attributed to other cotton fabrics and textiles. The majority of spinning (50%), weaving (60%) and hemming (60%) capacity is owned by the public sector while 90% of garmenting capacity is private. For the spinning and weaving industry, medium-to large-scale companies dominate the industry with a strong public sector presence in spinning and weaving. The government’s strategy is to boost exports to the European garment market by moving up the quality ladder in garments, vertically integrating the garment production value chain (e. g. use local extra-long staple (ELS) cotton, improve design and patternmaking offering) and defending leadership in low-end garmenting by establishing strong brands at both country and supplier levels. Also on the agenda is restructuring the domestic textile industry by privatizing mills and leveraging on low cost and provided labor in addition to large domestic supply of high-quality cotton. Currently, the main markets for the sector were EU countries with about 34% of total exports in 2010, Arab c ountries and USA with 16% and15% respectively, according to General Organization of Export and Import Council (GOEIC) 3- Country Summary As one of the most influential nations in the Middle East, Egypt has encountered mixed success in transitioning from an economy driven by natural resources to one with a healthy amalgam of industry and services over the past 50 years. Although it has successfully diversified its economy, Egypt remains one of the poorest of its regional neighbors on the basis of per-capita income, and a succession of unstable governments have left the nation with inconsistent political institutions, weakening social infrastructure, and a legacy of corruption. Long-term national competitiveness will require a clear economic strategy and continuity of effort. Egyptian cotton is recognized globally for its unmatched quality, fueling a textile cluster that has historically been an important component of the national economy. Bolstered by superb endowments and several advantageous related industries, the textile cluster faces new challenges as falling structural barriers to trade boost the intensity of global competition Egypt is located strategically between the Mediterranean Sea and Red Sea, at the crossroads of Africa and southwest Asia. Bordering Sudan, Libya, and Israel, Egypt is home to the Nile, the longest river in the world. The nation’s rapid population growth from 23M citizens in 1960 to 83M today —has increased Egypt’s regional importance but also deeply changed Egypt’s character. Egyptian urban areas have become some of the most crowded in the world, with Cairo itself recently laying claim to the title of world’s most densely-populated city. Agriculture is similarly constrained; only 3% of the country’s total land mass was under cultivation in 2008 (AFDB, 2009). By 2010, Egypt was the fourth-largest economy in the Middle East. Recent economic performance has been positive, with 4. 75% annual GDP growth from 2001 to 2010. Per capita GDP remains relatively low compared to regional peers. Egypt’s economy is diversified as compared to its largest regional neighbors, many of which depend heavily on commodity petroleum exports (Saudi Arabia, Iran, and the UAE). As of 2010, the largest sector in the economy was the manufacturing sector (16. 9%), followed by mining (14. 4%), and agriculture (14%). Exports are concentrated in the hospitality and tourism, transport and logistics, and petroleum products clusters. Egypt’s shifting export product mix over the past 20 years is symptomatic of a broader economic change —from a singularly natural resource-focused economy to one that is less factor driven. Egypt’s national competitiveness is aided by favorable endowments and some positive microeconomic elements, ranking 63rd out of 138 countries in business sophistication and 26th in market size. But Egypt has been hamstrung by adverse macroeconomic conditions, ranking only 129th in macroeconomic environment, 133rd in labor-market efficiency. Egypt’s strongest competitive advantages lie in its natural endowments. The country’s position at the crossroads of three continents has made it a historic trading hub, amplified by the construction of the Suez Canal in 1869. Roughly 10% of the world’s maritime volume has passed through Egyptian waterways, and the canal spawned a robust shipping and logistics cluster that facilitates export of goods like textiles. The Nile Delta, an area of northern Egypt where the Nile River spreads into distributaries and drains into the Mediterranean Sea, has served as Egypt’s breadbox for over five millennia (Baines, 2011). Twenty years of redistributive economic policies have left Egypt with inefficient, low-quality social institutions —the nation boasted a 29% illiteracy rate despite 96% enrollment in primary education. In an economy characterized by a high degree of centralized planning, Egypt spent only3. 7% of its government budget on education and 6% on healthcare. Corruption and unreactive centralized economic planning constitute major challenge to Egyptian macroeconomic competitiveness. a- Background To Business in Egypt Egypt has recently been through the most profound of changes with a popular revolution, widely referred to as ‘ the Arab Spring’, sweeping away the decades long, semi-totalitarian rule of Hosny Mubarek and replacing it with†¦? Time will tell how successful the putative new, democratic institutions will be but despite all of this Egypt remains one of the fastest growing economies in the world and a country which many economists predict will become increasingly successful and influential in the region. Egypt is, in a strange way, both a secular and a religious state and it is worth bearing these two important strands in mind on any business trip to the country. It could be said that the Egyptian economy is ‘mixed’ in two vital, but differing ways. Firstly, many businesses were nationalized after independence, during the prolonged period of ‘Arab socialism’ which typified the Egyptian approach in the 1960’s and 1970’s. The government still plays a vital role in setting both business and macro-economic agendas but the past couple of decades have seen the proliferation of larger-scale private companies which may be locally (usually family) owned or joint-venture operations with overseas conglomerates. Secondly, companies fall into the category of either Islamic or non-Islamic in orientation. Those companies which are Islamic in orientation will govern their approach to business through the strict interpretation of classical Shari’a law which impacts on such varied issues as attitudes to borrowings, shareholder profile and HR policies. Before entering into business negotiations in Egypt it is important to do some homework on any potential contacts. Is the company state-owned or private; is it Islamic or secular in approach? b- Egyptian Business Structures Many companies in Egypt operate according to Islamic, rather than secular law and this impacts on a number of key areas of business structure and performance. One key issue is that, due to Islamic strictures on avoiding usury, the difference between companies and banks are less defined than in western economies. Companies tend to be financed through a combination of equity capital and short-term loans where the lenders do not charge interest but take a share of profits or losses (PLS loans. ) Thus all risks are shared equally amongst the shareholders and lenders. In addition, many companies have a religious Supervisory Board comprised of Islamic jurists whose role is to ensure that the company’s operations comply with the strictures of Shari’a law. Thus employees must be Muslims and work stops for the regulatory prayer sessions every day. Firms are expected to make reasonable, but not excessive, profit and managers have a social as well as corporate responsibility – they are expected to balance the interests of the company with the interests of society at large. None of the above applies to the workings of those firms that are non-Islamic in orientation (remember that 10% of the Egyptian population are Coptic Christians) or joint-ventures with overseas organizations. c- Egyptian Management Style Most Egyptian companies tend towards extremely hierarchical structures and this is reflected in the management style most frequently manifested within these companies. The approach is often described as ‘managing authority consultatively’ which implies the need for discussion without any loss of perceived status or power. Thus Egyptian managers (who are on the whole men) will consult widely with colleagues but be expected to make the final, firm authoritative decision. This decision will rarely, if ever, be delegated to a subordinate – even if the subordinate is a member of the family. After a decision has been reached, subordinates are expected to follow it to the letter and dispute or criticism are not expected or appreciated. Thus consultation has a ‘socializing’ aspect within an organization, but questions have to be asked as to the true extent of its impact on any final decisions. Management is expected to be cautious and not take too many risks – thus decision-making can seem extremely slow and cumbersome by US standards. It is also important to remember that religious considerations could form an important element in the final decision – something Western businessmen often forget within the negotiating process. It is important to factor this into any negotiating stance. d- Egyptian Business Meetings As in most of the Arab world, personal relationships are key to a successful meeting and good quality relationships can help to cut through the tendency towards an overly bureaucratic approach. Who you are and who you know really matter and for that reason it is often important to appoint a local go-between who has ready-made contacts who can operate on your behalf ‘ (and local often means local to the city or town. ) Initial meetings can often seem very formal to western businessmen and involve coffee, cake and lots of small talk – even when time is very short. Do not make the mistake of seeing these formalities as a waste of valuable time, as they form an integral part of the early relationship-building process. If time is not restricted, these formalities can start to eat away at the day and it is sometimes difficult to schedule more than one meeting per day. If concrete issues are discussed, it is advisable to ensure that specific actions are agreed upon and that individuals are tasked to perform them. If this is not done, things can very often drift and several months can elapse without any discernible progress being made. Time is very elastic and agreed start and finish times should not be relied upon. Patience is very necessary. It is not a good idea to arrange meetings on a Friday (or even Thursday) as these are the days of rest. It is advisable to travel to Egypt on business with a good supply of gifts, which can be given to key contacts. Gifts should be small and it is quite a good idea if they convey something of where you come from. However, when giving gifts be conscious of Muslim sensitivities and avoid the following: alcohol, pork, pigskin, perfumes with alcohol e- Egyptian Teams Working Teams revolve around a strong leader who usually allocates tasks rather than specific roles or functions. Individuals within the team expect direct access to and feedback from the leader. Thus teams tend to be more a grouping of individuals working independently towards a common objective. Many private companies are family-run and owned and family members would fill most management positions. Thus, the most obvious team grouping in a typical private company would be family-oriented but even this would be fairly hierarchical in nature. f- Egyptian Communication Styles  As in most of the Arabic world, people stand quite close to one another when communicating and many other cultures may feel that their personal space has been invaded. When this close proximity is coupled with strong same-sex eye contact and large amounts of tactility, many overseas business people can feel extremely uncomfortable. When attempting to build good relationships it is important that these differences in approach to body language do not become a barrier. Arabic conversation can be very hyperbolic with much use of flowery language and flattery. This is a protocol of the language and is expected. Do not misinterpret this approach as insincerity or a tactic. Try to express yourself in a similar fashion – especially when establishing relationships. It may sometimes appear that Egyptians are shouting at each other and in the throes of a very heated, acrimonious argument. Remember that emotion is used to convey conviction and that an overly reserved approach could be misconstrued as detachment or even lack of interest. Egyptians are proud of their country and Egyptian achievements (both ancient and modern. ) Egypt’s standing in the world, its history and local sport are all positive topics of conversation. However it is best to avoid discussing political issues or enquiring about female relatives of business acquaintances. When dealing with government officials, it is important to learn the titles of any contacts as titles are of considerable importance, denoting hierarchy and status. Do not address government officials in a familiar way unless specifically requested to do so. g- Women in Business in Egypt Women play a much less significant role in business life than in the West but are more active than in the Gulf States such as Saudi Arabia. Most senior business people are men, but it may be possible to meet a senior female employee. There would tend to be more women in prominent positions in joint-ventures, family businesses and companies owned by Coptic Christians. When dealing with women in business in Egypt keep a respectful, professional distance and do not try to ask personal questions. h- Egyptian Dress Code Appropriate dress in Egypt is both conservative and modest. Standard dress for men would be trousers, jacket, and shirt and tie in formal business meetings. Women should dress modestly, wearing long sleeves. Skirts hould be of a reasonable length (not too short). Do not wear native attire, as this might be considered offensive. Top 20 Tips For Doing Business In Egypt Tip 1. It is important to research any company before approaching it in order to determine whether it is state-owned or private and secular or Islamic in orientation. Tip 2. When doing business with an Islamic oriented organization, do not overlook the potential impact of religious issues on any decision- making process. Tip 3. Business is driven by relationships and therefore a great deal of resource and time should be allocated to the development of key contacts. Tip 4.  Who you are and who you know are important issues in Egypt; therefore it can be difficult to break into business without access to the right initial contacts. Tip 5. In order to help develop the all-important initial contacts it is often necessary to appoint a go-between who can arrange meetings and act as a bridge into the culture. Tip 6. It may be necessary to appoint a number of different go-betweens who know the locality (i. e. one for Cairo and one for Alexandria). Tip 7. Egyptian companies tend to be hierarchical and power usually rests in the hands of a small number of key senior managers who make all the major decisions. Tip 8. Managers tend to give direct instructions and subordinates are not expected to show initiative. If something is not specifically requested, it may not get done. Tip 9. Meetings can involve sitting in rooms with unknown people who are simultaneously meeting your contact. In effect, several meetings may take place at the same time. Tip 10. Initial meetings can be very time-consuming and appear to deliver very little in terms of tangible returns. Tip 11. Time is very flexible and meetings may start very late (if at all) and last for many hours. It is difficult to schedule a series of meetings on the same day. Tip 12. Meetings may start with coffee and a great deal of non-business related small talk. Do not try to rush this process Tip 13. It is important to offer lavish compliments to your host – and be prepared to receive them in return. Tip 14. Do not try to do anything on Thursday or Friday and avoid key issues during the month of Ramadan. Tip 15. People may stand much closer to you than you are comfortable with. Try not to back away as this can seem stand-offish. Tip 16. Levels of eye contact are very strong and strong eye ontact denotes sincerity and trustworthiness. Tip 17. Avoid touching anybody with your left hand or pointing feet at people as both of these are seen as extremely rude behaviour. Tip 18. Do not comment on the political situation in the Middle East or make any adverse comments about the influence of Islam. Tip 19. Women are less prominent in business than in the West but play a more prominent role than in some other Middle Eastern countries (i. e. Saudi). Tip 20. Dress conservatively, but very smartly. You will be judged partly on your appearance.