In his book author (RRRRR), wrote that domestic investors of any particular country who engage in investments activity outside their country of residence and this investments earn them returns which are then repatriated to their domestic country are engaging in foreign direct investment. From the point of view of a country, foreign direct investments are the investment made by non-citizens of that country or investment made by citizens in other foreign countries.
Foreign direct investment is attainable where there is a good business relationship between the investing company or parent company and its subsidiary company located abroad. This kind of business relations has led to the emergence of multinationals company that engage in foreign direct investment in many parts of the world. According to (DDDD), a business analyst whose studies refer to only those companies which have a minimum of 10 percent shareholding in foreign subsidiaries as companies that participate in foreign direct investment, also companies which have voting rights in the annual general meeting of foreign subsidiaries engage in foreign direct investments.
Types of Foreign direct Investments
As by the definition, foreign direct investment can be classified in two categories namely the internal FDI and external FDI, the classification of the two categories is mainly guided by the restrictions that are imposed for these investments and the requirements involved for such investments to take place.
External FDI also known as ‘direct investment abroad’ usually supported by the local government due to the benefits it will bring to the country one among them is foreign exchange that will help the country to have a balance of payments in its international trade. The government offers there support by giving such investments tax incentives that will reduce the cost of doing business and as well as make the investment worthwhile without eroding their income. External investments become unfavorable when companies abroad get special treatment by their local governments which in a way give them competitive advantage over the external FDI by granting them subsidies and covering of their risks.
Internal FDI is encouraged by the host country in different manners which include; subsides, elimination of trade or investment barriers that makes doing business for foreign investors hard, lowering of interest on loans granted to them and tax allowances.
Other classifications of foreign direct investment are vertical FDI and horizontal FDI. Vertical FDI occurs when a multinational company that owns more than 10 percent of foreign subsidiary, engage with its subsidiary in business activities whereby the foreign subsidiary is the main supplier of raw materials to the multinational company or it uses the goods and serviced produced by the multinational company. Horizontal FDI is when a local multinational company engages in the same business activity in different parts of the world.
Motives behind Foreign Direct Investment
FDI which are driven by the motive of establishing a strong market presence or venturing into new markets are termed as ‘market-seeking FDI’, while FDI which are driven by the motive of tapping into factors of production like labor, human resource which are in foreign countries and are more efficient in operations and cost are termed as ‘resource -seeking FDI’. FDI motivated by maximizing the opportunities available and reaping on the benefits of economics of scale are termed as ‘efficiency seeking FDI’.
Determinants of foreign direct investment
The main factors which will determine if a foreign direct investment can take place are the economic prospects of the foreign country and the size of the potential market. If the foreign country has wide market then foreign investors will assume that they will be able to grow their investments rapidly and get big returns of it.
The foreign country’s population will also play critical part in making decision on whether to participate in foreign direct investment, because it’s the size of the population that determines the consumer size available thus a big population will mean a big consumer base.
If the foreign country citizens have a reasonably higher per capita income it would mean that they would be ready to spend and to the foreign investor he or she would translate this to potential of good investments.
Foreign investors will also be lured into investing in foreign country if the workforce that’s available is well qualified and competent enough, who will offer to them big returns on their human capital.
The availability of natural resources like gold, oil and diamond will attract foreign investors to these countries, an example is Saudi Arabia, United Arab Emirates and other oil rich countries have all attracted foreign investors into their country to tap into the oil exploration industry that’s unlimited and has good future prospects.
The level of technological advancement and infrastructure that are available in a country will also influence on foreign direct investments. Recent reports and studies have shown that countries which have properly placed infrastructure facilities have experienced a high amount of foreign direct investment.
(PPPPPPPP) studies noted that over the past countries have made tremendous reforms to their economic policies in bid to create conducive environment which can attract more foreign investments and companies that engage in foreign investments have altered their legal framework to make them more transparent and sensitive to their business environment.
Advantages of Foreign Direct Investment in Kazakhstan
According to statistics released by the Ministry of Economy and Budget planning of Kazakhstan they have shown that the country main benefit from foreign direct investment has being the economic development witnessed in that country, especially since the country was referred to as among those economically developing countries in the 1990’s. Foreign direct investment has also being the source of financial assistance for Kazakhstan during times of economic hardships.
Kazakhstan has also witnessed technological advancement since foreign investors who allocate a big percentage of their capital towards technology and research in the field that they plan to invest in.
The workforce in that country has become more skilled and resourceful because the foreign companies bring in new skills and train their human resource according to their high standards, in addition they have contributed to the education development in that country because of the revenues they pay to the Kazakhstan government in the form of corporate taxes which are channeled to building of schools and technology-focused training institutions.
New jobs have being created in the country which can be mainly attributed to FDI that has also led to the rapid development of the manufacturing industry in that country, e employees working in these companies are also paid according to international standards which affords them good lifestyle and increase in the living standards of the countries’ population.
Kazakhstan revenue collection has shot up because now it not only relies on domestic taxes but also taxes that come from these foreign investment made in that country, the increase in revenue collection has played a big role in the growth of the economy. Companies in Kazakhstan that have ventured to foreign markets have being able to increase market for their goods and services thus have being able to earn the country foreign exchange that helps it to attain a balance of payment in the international trade.
The Kazakhstan central bank reportedly has lowered it interest rates on loans made out to business ventures which is attributed to the influence of foreign direct investment. Business can now access capital from the local banks at a low interest rate level; the small and medium sized companies have tapped this advantage and have grown their business to a high level.
Disadvantages of Foreign Direct Investment in Kazakhstan
Operations of the companies, Human resource working for these FDI companies and the distributions of revenues made out of foreign direct investment are the main areas that are prone to suffer from the disadvantages of FDI. The fragile parts of the economy of the host country are also prone to any negative shift in foreign direct investment. Studies done by (GGGGGG) have indicted that negative consequences of foreign direct investment in a host country can be reduced if the government is strict in ensuring that these companies that participate in FDI in their country are engaged in business activities that environment friendly, they abide by the social and legal regulations that the government has established.
In Kazakhstan foreign investment has forced the government to make some economic reforms that which have not being received well by the locals, some of the economic policies do not even favor the foreign investors themselves.
The geographical location of Kazakhstan and also the fact that it is land locked has made foreign investors view it as an isolated region unfavorable for doing business because of the high transport fee to fly in and out of the country especially when moving goods or capital goods that need to be shipped or transported through the railway.
In allowing foreign direct investment Kazakhstan will be placing their local companies at the disadvantage of being taken over by the large multinational companies who are exposed to huge amount of capital to invest. For Kazakhstan local companies which engage in direct investment abroad will be exposing themselves to the danger of nationalized in the foreign country.
The government of Kazakhstan aims at making the economy more liberal to attract even more foreign investment into the country, in doing so they loss control of these companies that operate there as subsidiaries fully owned by multinational companies. When the government does not exercise control over these companies the environment and locals’ interest can’t be represented and employees are exposed to potential exploitation by such companies. Some of the companies will even disregard economic policies set by the government.
Foreign direct investment won’t be of benefit to the Kazakhstan economy if the subsidiaries of multinational companies directly channel their profits to their mother country without making any developments in the country the invest in, there would also be imbalance of payment as more capital will be moving out of the country than capital coming into the country.
Foreign Investment in KZ economy
The foreign investment turnover in Kazakhstan has shown a continuous growth over the past ten years with an annual growth average of 19.1% with a significant growth being recorded in the years between 1995-2006, the rapid growth that was estimated to have reached more than fifty billion US dollars by August the year 2007 was largely associated with the sharp rise in prices of both oil and gas coupled with the significant increase in oil export volumes. Kazakhstan main partner in trade is still viewed to be Russia who are the country largest importers, the country basically enjoy a large export market in the western countries where there are leading in export of oil and metals that are used by industries there as raw materials.
Foreign investment in Kazakhstan economy has increased because investors are attracted to the country by the fact that economy of the country has be experiencing tremendous growth, evidence is shown by figures which show that about eighty percent of all capital inflows that went to the central Asia region were direct towards the country’s economy with the European Union topping the list in terms of source of investments. Author (PPPP), in his studies show that this sharp raises in foreign investment is due to the economic reforms made, stable institutions that have being set up and the development experienced in the banking sector.
Foreign investment led to about eighteen Kazakhstan companies being listed in the London Stock Exchange with four being listed at the main market in the period between the years 2005-2007.
Foreign direct Investment in Kazakhstan;
Sources: Ministry of Economy and Budget Planning of the Republic of Kazakhstan.
Foreign Inflow by various countries to Kazakhstan figures according to the year 2009;
Source: Ministry of Economy and Budget Planning of the Republic of Kazakhstan.
Movement in the key economic indicators
Key economic indicators
Real GDP growth (%)
Consumer price inflation (av. %)
Exchange rate Tenge:US$ (av)
Exchange rate Tenge:â‚¬ (av)
Budget balance (% of GDP)
SOURCES: Kazakh Statistical Agency, Investor’s Guide, Nationalbank
Main exporters and importers
Main destinations of exports 2007
% of total
Main origins of imports 2008
% of total
SOURCES: Kazakh Statistical Agency, Investor’s Guide, Nationalbank
Main export and imports
Major exports 2007
% of total
Major imports 2007
% of total
Chemicals, plastics, rubber
Chemicals, plastics, rubber
Non precious materials, its products
Non precious materials, its products
Machinery, equipment transport, instruments and apparatus
Machinery, equipment transport, instruments and apparatus
SOURCES: Ministry of Energetic and Mineral Resources, Investor’s Guide, Ministry of Agriculture of the Republic of Kazakhstan
Investment Environment in Kazakhstan
Kazakhstan located in the central Asia and Europe region is the ninth largest country in the world that’s landlocked with a gross national income per capita of more than six thousand and a population of more than fifteen million whom according to reports released by United Nation are averagely in the income group of middle income earners.
Kazakhstan currently leads the central Asia in terms of social and economic growth, it has the potential to make the region independent and an economic success, the European Union in the year 2000 elevated the country to the market economy status due to its attraction to international investors and multinational companies who prefer to locate their. The same move was followed by the United States of America who in the year 2002 also elevated the status of Kazakhstan to a market economy up from a non-market economy opening up for their local companies the wider western nations market that includes the US; this conclusion was arrived at after observing economic indicators that showed improvements such as the increase in level of wages for the workforce, convertibility of country’s currency, increase in foreign direct investment, drop in corruption level, control of production, public control and reduction in human rights violation.
The transition to market economy is a journey that started 17 years ago from the former soviet economy to a free market economy. After independence from the Soviet Union in 1991, the high rate of inflation and economic decline that was witnessed in the early parts of 1990’s Kazakhstan engaged itself into a series of political, economic and social reforms. Currently the economic reforms are geared towards diversifying the economy more particular is to remove the economic reliance on natural resources and focus on developing other key sectors of the economy.
Kazakhstan investment environment has seen an overall macro- economic stability coupled with economic reforms that are aimed at making the environment more investment friendly. Figures released by the Index of Economic Freedom show that over the past five years the country has witnessed a recommendable economic growth that can be attributed to the increased revenues from the Oil industry.
The Kazakhstan high corruption level, unfavorable tax rates and lack of access to funds for investment are the main difficulties experienced in the investment environment that has made doing business even harder this is according to the 2009 reports by Enterprise Surveys.
It is important to note that the investment environment in Kazakhstan has shown improvements in these three problematic areas making doing business easier in that country. The most notable improvements were in reduction of costs from 1,431 dollars to 119 dollars which are incurred when applying for construction permits, the other sectors that transformed so as to improve the investment environment was shown by the 10 percent fall in corporate tax, reduction in labor taxes and even compulsory contributions by the Kazakhstan’s working population was lowered. A new tax code and the Kazakh law were also introduced all aimed at making the country a good investment harbor, the new law mainly focused on ensuring that there was equality in the distribution of investment incentives to both local investors and foreign investors, safeguard the rights of investors and establish procedural system that was free and fair in settling disputes of investors. Some of the measures that the new tax code put into considerations included; adjusting the tax code so that it can be in line with the international financial reporting standards, eliminating the advance payments by all but three hundred biggest companies of their corporate tax, extension of loss deferral period to up to ten years, lowering of value added tax from 13% to 12%, gradual introduction of traditional payment scheme for value added tax and the implementation of a common social tax rate of 11% replacing the regressive scale.
The drastic changes and economic policy reforms all paid of when the country was voted as the leading country in CIS because of its efforts in creating an investment environment that was conducive for doing business. International rating agency in 2002 rated Kazakhstan highly in terms of investment and due to the fact that Kazakhstan was the first Soviet Union republic to repay all the loan advanced to it by the International Monetary Fund (IMF) in the year 2000 which was seven years ahead of the repayment schedule, Standard & Poor’s and Fitch confirmed the same in the year 2004 as other surveys and research done by international organizations all showed the same. In particular Fitch analyst pointed out that Kazakhstan’s finance and economy in general was better placed to deal with pressure from Oil and the ever changing oil prices than any other country in the world.
The organization of top forty most industrialized countries (OECD) in the year 2003 put Kazakhstan at position four in terms of export credit rating which was an upward movement from the last rating done by OECD before 2003. The better ratings meant that the country could now enjoy good opportunities for doing trade.
According to figures given out by World Bank business experts they show that out of all the foreign direct investment made in central Asia nearly eighty percent of these investments were made in Kazakhstan, the same report also showed that the country is regarded as being among top twenty countries which are most favorable to foreign investors.
Recent years have seen research and survey place Kazakhstan in the top spot in foreign direct investment per capita which has being increasing steadily. In the period between 1993 and 2005 FDI was reportedly to have grown to be more than 37 billion US dollars, important point to note is that in the period of 2001 to 2003 there was only 4.5 billion US dollars worth of FDI made while in 2004 there was a drastic increase of up to 8.4 billion US dollars worth of investment made in Kazakhstan which was due to the increase in local companies that had foreign direct investment from 6,579 companies in 2003 to 7070 companies in 2004.
Regional distribution of foreign direct investment is the allocation of the investment opportunities and resources in economical manner so that every region gets a piece of the cake.
When Kazakhstan is making strategic planning, they make a regional distribution plan considering the available FDI. It involves distributing FDI among the much needed projects or sectors of the economy and regions in the country. In the strategic planning decisions are made as to what areas or regions need FDI and what amount of FDI is needed, afterwards a contingency mechanism is established which sets out regions or area that should be given more priority than the others incase FDI is limited
Regionally the country enjoys great leadership thanks to its close ties with the Russia, China and the central Asia region also the creation of customs union between the country Russia and Belarus this year has cemented its position as the regional leader.
. Major Key sectors that Kazakhstan has mainly focused on improving through the help of foreign direct investment include; agriculture which offer investment opportunity in over twenty million hectares of farmland with more than a hundred and sixty five million hectares of pasture, the government has tried to promote these sector to investors by putting in place infrastructure facilities that offers smooth transport system. The textile industry also offers investment opportunities that’s backed up by availability of qualified workforce, availability of processing factories that are already in place the government also make grants to these industry in form of tax holidays, favorable custom tariffs plus there is a wide ready market for textile products in East-Europe region and Russia, close links that exist between neighboring cotton producers like Turkmenistan, Uzbekistan, Tajikistan make the sector highly capable of big returns.
The telecommunication sector has being liberalized to attract more foreign investors enhanced by the growing number of information technology an internet penetration which has resulted to a sharp demand for broadband ISP services. The power generation sector will attract FDI due to high electricity consumption attributed to increased income/quality of life, infrastructure and hydrocarbon projects, recent reports show that a total of twenty two billion US dollars worth of investment are expected by the year 2015 plus the government has set aside thirteen billion US dollars that are to be channeled in the expansion program of power generation capacity a further nine billion US dollars will be invested in distribution and national grid.
The other potential area that the Kazakhstan government focuses on distributing FDI to is the Metallurgy sector which produces huge amount of world-class base, precious minerals and metals, the sector has well developed infrastructure that are already in place and the closeness to biggest consumers of metallurgical products makes it worthwhile to channel FDI to.
According to National Bank of Kazakhstan, the country is ranked at the 20th position in terms of its oil reserve, 13th position in terms of natural gas reserve and 24th in the world in natural gas production.
Kazakhstan should take the advantage of its strategic location which put it at a better place to become the centre of business in central Asia with ready markets form Russia and China. To gain competitive advantage over other country Kazakhstan should focus on creating conducive business environment together with political stability and increase the incentive granted their local companies that want to participate in direct investment abroad. All this will be attainable if there will be zero tolerance to corruption cases, improving of the education standards and the logistical infrastructure.
Political institution should be strengthen by instituting professional training for government officials, engaging the local government in the developments of clusters, design a process to ensure that the political environment is transparent in its deal and consistent, institute professional civil service with transparent rules and performance based promotion.
Zero tolerance to corruption will be achieved if the government institution eliminate the long tendering procedure that are involved with tenders, put in place comprehensive strategy to fight against corruption in national and local government, the other way to eliminate corruption is to ensure maximum punishment for those officials who engage in corrupt deals plus salary increment to government staff.
The other recommendation that will see increase in FDI is removal of labor quota on expatriates; promote the transfer of skills as show of commitment to the growth of FDI, promoting the entrance of foreign banks in to the local banking industry, establishing transparent small and medium enterprises lending institutions, reduce the complexity in regulatory procedures that are involved in the licensing and registration process and the involvement of existing multinational companies in setting up private sector IFCs. Privatization of government owned industries and establishing a competition oversight authority that will make the country more attractive for foreign direct investments.