Incentives and Diversification of Foreign Direct Investment

Sofiane Ghali - Co-Author: Sami Rezgui, 06 Mar 2015

Relative to other developing countries and comparators in the Arab World, Tunisia has maintained relatively high levels of Foreign Direct Investment (FDI), which have contributed to growth performance. The creation of an offshore regime in 1971 enabled a shift from an inward development orientation to an outward development orientation, reduced the anti-export bias inherent in the strict import-substitution policy of the 1960s and contributed significantly to economic performance. It also allowed Tunisia to attract FDI, break into global manufacturing chains and create massive jobs in the clothing and other manufacturing sectors. Two major factors have contributed to the steady inflow of FDI: generous incentives and opportunities for diversification.

 

Generous Incentives

 

Numerous policy measures have been adopted by Tunisian policy makers to attract FDI, for the purpose of introducing modern technology, enhancing productivity, and stimulating export-led growth. Over the years, Tunisia has provided a wide range of incentives such as tax relief up to 35% on reinvested revenues and profits (30% starting in 2007), exemptions from customs duties, and a 10% reduction in the value-added tax (VAT) for imported capital goods with no Tunisian manufacturing equivalent, a suspension of the VAT and sales tax on locally produced equipment at company start-up and optional depreciation for capital equipment older than seven years. Additional incentives are provided to offshore industries or exclusively exporting industries such as full exemption on corporate profits earned on export for the first 10 years and a 50% reduction thereafter (also granted to partially exporting firms); full tax exemption on reinvested profits and income; and total exemption from customs duties on imported capital goods, raw materials, semi-finished goods, and services necessary for business.

 

Diversification

 

By the 1990s, net FDI flows as a share of GDP reached 2.2%. Until the first half of the 1990s, however, FDI was mainly concentrated in the petroleum and gas sector (about 80% compared to 8% for the manufacturing sector). By 1998, and coincident with the privatization program, there was an increasing share of total FDI in the manufacturing sector relative to the petroleum and gas sector (35% and 58%, respectively). Moreover, at the level of firms, the manufacturing sector creates almost all enterprises and jobs. In 2002, 84% of foreign-owned firms and 90% of the jobs created by them were in manufacturing sector.

 

During the last decade, FDI inflows rose as a share of GDP, particularly after 2004. Removing the large spike in Tunisia’s FDI flows in 2006 due to the partial privatization of Tunisia Telecom that year results in an average FDI/GDP ratio for the 2000s of 3.2%

 

Continued FDI inflow could help significantly contribute to planned innovation, research and development and improved private sector performance.

 

 


Sofiane Ghali is a full professor of economics and Dean of the Higher School of Economic and Commercial Sciences of Tunis (ESSECT, University of Tunis). His fields of specialization are in the areas of industrial organizations and international economics. He has published papers in internationally refereed journals and contributed to several studies for Tunisian national agencies and organizations such as the ITCEQ and IACE, and international organizations like the World Bank, OECD, EIB, FEMISE, ERF, and GDN. He holds a Ph.D. in Economics.

 

Sami Rezgui is a full professor at the University of Manouba in Tunisia. He is specialized in the areas of macroeconomic policies, international economics, industrial economics and innovation policy. He is author of several research papers published in international journals and he is also consultant and contributor to various reports for international agencies (OECD, World Bank, Femise, Mediterranean Institute) and national institutions (Institute of quantitative Studies, Arab Institute of Business Managers, Ministry of Trade, Investment Agency Promotion). He Holds a Ph.D. in Economics.

Sofiane Ghali - Co-Author: Sami Rezgui Sofiane Ghali - Co-Author: Sami Rezgui
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