2. FDI trends and sustainable development impact

Georgia has leveraged its open economy, business-friendly environment, and strategic location to attract sizable inflows of foreign direct investment (FDI). Sweeping liberalisation reforms helped FDI stocks grow 400% just five years after the 2003 Rose Revolution. Since this initial wave of reforms, successive governments have continued to advance measures to improve the business and investment environment, with positive returns. Georgia was one of the few countries in Eastern Europe and the Caucasus to quickly recover from contractions in FDI following the 2008 global financial crisis. Since then, investment in large-scale energy transport infrastructure helped bring record amounts of FDI to the country in 2017. FDI inflows as a percentage of GDP have also been strong relative to regional peers. A free trade agreement (DCFTA) with the EU could help attract new investors from Europe, while a 2018 trade accord with China may help fortify the country’s position as a link between Asia and Europe.

While these indicators are positive, the majority of FDI in the past ten years has gone to non-tradable sectors, including transport infrastructure, construction, and banking. These sectors have contributed to economic growth, but have not sufficiently advanced job creation, particularly in rural areas, or productivity. With the exception of recent growth in FDI in renewable energy and tourism, FDI in export-oriented sectors, including manufacturing and agriculture, has remained flat and far below potential. Overall, aside from a few large-scale investments, primarily in energy infrastructure, FDI inflows have not grown substantially in the past decade, and equity investments have been declining in recent years.

The coronavirus (COVID-19) health crisis, government measures to contain the pandemic, and the resulting economic upheaval will have a significant negative effect on FDI across the globe in the near- to medium-term. Global FDI inflows are projected to decline by at least 30% in 2020, not recovering until the end of 2021 in the most optimistic scenario. Reinvested earnings, which have become an increasingly important component of FDI inflows in Georgia, are likely to drop considerably as company revenues decline, while mergers and acquisitions (M&A) and greenfield investments are in many cases being put on hold. Sectors most affected by the crisis include many that are important to Georgia’s economy, including tourism, wholesale retail and trade, and energy (OECD, 2020[1]).

Recovering and expanding FDI inflows will be key to respond to the economic challenges precipitated by the pandemic. Georgia relies heavily on FDI to finance its current account deficit, which could double to 11% of GDP in 2020 (IMF, 2020[2]). But FDI can provide additional advantages beyond its direct contribution to the capital stock (Box 2.1). Under the right conditions, international investment can raise productivity, support integration in global value chains (GVCs), create decent jobs, contribute to the development of human capital, diffuse cleaner technologies, and bring gender-inclusive work practices. OECD analysis suggests that foreign firms in Georgia pay higher wages, have greater employment growth, and have more trained employees than domestic firms. Foreign firms are also more energy efficient and innovative.

Recognising the positive role international investment can play in economic development, the government has actively sought to attract FDI to encourage new technology and knowledge spillovers, boost and diversify exports, and create jobs. This chapter reviews recent FDI trends in Georgia, including sectoral composition and origin, and investigates how FDI contributes to key sustainable development priorities.

Georgia’s transformation to a liberal market economy was accompanied by a sharp rise in foreign investment (Figure 2.1). FDI inflows increased more than five-fold between 2003 and 2007. Continued efforts by successive governments to improve the business environment and reduce barriers to investment helped the country recover FDI inflows relatively quickly after the 2008 global financial crisis. Georgia is one of the few countries in Eastern Europe and Central Asia to have quickly recovered FDI inflows after 2008. The 2012-17 period saw substantial infrastructure investments, including the South Caucasus gas pipeline, and growth in FDI in the financial sector, energy, and, to a lesser extent, tourism.

FDI has also become increasingly important to the economy. FDI stocks doubled from 55% of GDP in 2007 to over 100% in 2018, a substantially higher ratio than all of the other Eastern Partner (EaP) countries and the EU average (Figure 2.2).1 Georgia has also attracted a growing share of total inward FDI stocks going to the six EaP countries, at 14% in 2018, compared to half this 20 years prior. Belarus, Azerbaijan and Ukraine hold larger shares of the region’s FDI stock, however, and regional peers with larger populations, economies, or reserves of natural resources attract greater inflows in absolute value. However, relative to GDP, FDI inflows in Georgia have been strong compared to inflows in regional peers (Figure 2.2). FDI in Georgia is highly concentrated geographically; 75% of FDI since 2009 has gone to Tbilisi, and 10% to the Adjara region (home to Georgia’s second largest city Batumi). Together these regions account for approximately 60% of GDP and 41% of the population (2019) (Geostat, 2020[5]).

Despite some spikes of large-scale investments, yearly FDI inflows have not substantially increased over the past decade, and have declined slightly since 2017. Regarding components of FDI, equity investments, including greenfield projects and mergers and acquisitions, have been declining in recent years, both in absolute value and as a share of total FDI (Figure 2.3). Greenfield investments are often sought by countries to advance the growth of a sector, as they involve new projects or expansions, as opposed to changes in ownership or mergers of existing activities. Georgia has attracted nearly 40% fewer greenfield FDI projects, worth 45% less in total capital expenditure, in the past eight years compared to the previous eight years (2004-2011) (fDi Markets, 2020[6]). Though it should be noted that high rates of investment after 2004 were partly driven by privatisations and initial investor interest following major liberalisation reforms.

The near-term forecast suggests further contractions in investment. The COVID-19 pandemic and resulting global supply disruptions, demand contractions, and the pessimistic outlook of economic actors is likely to have a significant effect on FDI inflows in the coming year at least. The OECD projects that under the most optimistic scenario global FDI flows will fall by more than 30% in 2020 compared to 2019 (OECD, 2020[7]). In Georgia, the IMF forecasted at the end of April that FDI inflows could decline by 19% in 2020, but assessments are subject to high levels of uncertainty (IMF, 2020[2]). FDI inflows in the first quarter of 2020 were around half of the investment flows received in the first quarter of the previous two years, though initial figures for the second quarter show some improvement (Geostat, 2020[5]). The current crisis may affect Georgia (and indeed many other countries) more severely than the 2008 financial crisis, given the country’s greater integration in the global economy, and higher exposure to macroeconomic fluctuations in major trading partners, including the EU, Turkey and Russia (OECD, 2020[8]).

Georgia appears to attract investors primarily from Europe and its neighbouring countries (Figure 2.4). European countries, including UK, Netherlands, Cyprus2, Luxembourg and Czech Republic, accounted for half of Georgia’s inward FDI stock in 2018. However, firms based elsewhere may route investments through affiliates in these countries for tax or other purposes, inflating the amount of investment from Europe. Georgia’s bordering countries, primarily Azerbaijan and Turkey, and to a lesser extent Russia and Armenia, have also been substantial sources of investment. Georgia has also attracted FDI from the Middle East (primarily the UAE), Asia (China) and North America (US), though all three regions represent small shares of the country’s total inward FDI stock.

Announced greenfield investments over 2003 to 2019 similarly originate primarily from Europe (39%) and bordering countries (21%), followed by the Middle East and North African (16%) and Asia-Pacific (13%) regions (fDi Markets, 2020[6]). In terms of capital expenditure, Germany, the Czech Republic, Egypt, Azerbaijan and Russia have been the largest sources of greenfield FDI since 2003.

Georgia attracts FDI in a somewhat diversified portfolio of sectors. The majority of FDI inflows since 2007 has gone to services – primarily finance, real estate, trade, and tourism – followed by transport and energy (Figure 2.5, left panel). Infrastructure projects and financial services have seen the greatest FDI growth over the past decade. FDI in tourism has also been rising in recent years, but is below peak investments received in 2007 and 2008, when the industry benefited from privatisation of state-owned land. With the exception of renewable energy, FDI in other export-oriented sectors, including manufacturing and agriculture, has remained relatively flat (Figure 2.6).

Manufacturing, including consumer electronics, building materials, automotive components, and textiles, received a higher share of greenfield FDI, accounting for close to a quarter of total announced greenfield inflows since 2007 (Figure 2.5). The majority of greenfield FDI, similar to overall FDI flows, has gone to financial services, energy (hydropower, coal, oil & gas), and transport & warehousing. Many of these investments have been important contributors to economic growth. FDI in infrastructure, including gas pipelines, logistics services, ports and other transport systems, are essential to advance Georgia’s aims to serve as a regional logistics hub. Quality infrastructure is a crucial input to growth and connectivity, and despite some important improvements, according to one survey around one in five firms report that transport is a major constraint to doing business (World Bank, 2020[9]).

In terms of volume, the vast majority of greenfield projects have been in services, primarily in the financial sector. Since 2003, there have been nearly as many individual projects in financial services as in agribusiness, energy, manufacturing, real estate, and construction combined. Georgia has attracted relatively little FDI in export-oriented sectors, which have the potential to advance productivity through integration in the global market. Agribusiness (food and beverages) has received just 3% of announced greenfield FDI since 2007 (fDi Markets, 2020[6]). Favourable growing conditions, abundant water resources, and low labour and material costs present clear opportunities for investment in agriculture and agribusiness. But limitations in the quality and quantity of inputs remain hurdles for investors seeking to export in agriculture and other export-oriented sectors (Box 2.2).

Foreign direct investment can play a crucial role in advancing the Sustainable Development Goals (SDGs) in Georgia. It can enhance growth and innovation, create quality jobs, develop human capital, raise living standards, and improve environmental sustainability. By linking domestic firms to multinational enterprises (MNEs), FDI serves as a conduit to access international markets and integrate in global value chains (GVCs). The impact of FDI can be both direct and indirect. Direct impacts stem from foreign firms’ operations in the host country, whereas indirect impacts (or spillovers) arise from foreign firms’ interactions with domestic firms (OECD, 2019[3]).

Realising the positive contribution of FDI to sustainable development is not, however, a given. Maximising benefits and minimising potential risks associated with FDI may not be a primary concern for profit-seeking investors and may not receive sufficient attention by policymakers seeking to attract investment. Private sector incentives and both home and host country policies require careful consideration as they play a critical role in realising the potential of FDI to advance sustainable development (OECD, 2019[3]). This section draws on the OECD FDI Qualities Indicators (Box 2.3) to examine the relationship between FDI and five sustainable development outcomes in Georgia: employment and job quality, productivity and innovation, skills, gender equality, and carbon footprint.

The FDI Qualities indicators reveal that foreign manufacturing firms perform better than domestic manufacturers in Georgia in a few areas (Figure 2.7). The association between FDI and development outcomes varies substantially across regions and countries; local contexts, including economic structure, domestic policies and FDI characteristics, all affect the role FDI can play in advancing sustainable development. In Georgia, FDI is positively associated with some labour market and environmental outcomes, but the relationship between FDI and productivity, innovation and gender equality is less clear.

Foreign manufacturing firms in Georgia have higher employment growth rates (Panel B) than domestic manufacturers. This is not the case for the average foreign firm in EaP countries, Central Asia, the Southern Mediterranean or Southeast Europe. While the results in Georgia are a positive indication of the role FDI can play in advancing job creation, they may also reflect the low dynamism of domestic manufacturers.

The extent to which FDI creates jobs varies depending on the labour intensity of the industries that attract FDI. FDI in capital-intensive sectors (including energy) generate fewer jobs per dollar invested than those in industries that are more labour-intensive (such as manufacturing or some services). Consistent with this, in Georgia nearly 40% of all jobs created by greenfield FDI since 2003 have been in manufacturing industries, including consumer electronics and textiles .Service sectors have been the second largest job creator, led by financial services (primarily retail banking), tourism, communications, and business services. Conversely, energy investments have created relatively few jobs since 2003. It is notable that per dollar invested, agribusiness has created nearly as many jobs as manufacturing.

While job creation is crucial, job quality is also important to advance inclusive development. In Georgia, foreign manufacturers pay higher wages than domestic firms (Panel E). It is notable that FDI in Georgia tends to be concentrated in sectors with low average wages, suggesting that FDI could help upgrade wages in these sectors, by putting pressure on domestic firms that compete for similar workers. There is also a positive relationship between FDI and on-the-job training in Georgia (Panel G), which is not observed in many other regions, although it could also suggest a lack of skilled workers in Georgia. Training is an important avenue by which companies can contribute to skills development.

The relationship between FDI and other labour market outcomes in Georgia is less clear. Foreign and domestic manufacturers hire similar shares of skilled workers (Panel F), and foreign firms do not necessarily offer greater job security than domestic peers (Panel H). In contrast, the average foreign firm in Eastern Partner countries and Southeast Europe tends to provide longer-term contracts, thereby perhaps contributing to better working conditions.

Foreign manufacturing firms are not necessarily more productive than domestic manufacturing firms overall in Georgia (Panel A), although this might simply reflect the fact that FDI tends to be concentrated in low-productivity sectors. This ambiguous relationship is similar in other regions where FDI tends to go to low-wage, low-skill and low-productivity sectors, with the exception of Central Asia. FDI does, however, contribute to product innovation in Georgia (Panel J), though less so the other dimensions of innovation examined (R&D, Panel K, and use of foreign technology, Panel L). This contrasts with the average Eastern Partner and Southern Mediterranean country, where there is a strong relationship between FDI and multiple measures of innovations.

The one area where FDI has a clear negative relationship in Georgia is gender equality. Foreign manufacturing firms employ lower shares of female workers (Panel C) and are less frequently owned by women than domestic firms. In many countries FDI does not appear to advance gender equality, which may be due to overall gender imbalances in manufacturing sectors that receive high levels of FDI, including, in Georgia, consumer electronics, building and automotive materials.

Finally, there is a clear positive relationship between FDI and environmental outcomes in Georgia. Foreign manufacturing firms are more energy efficient than their peers (Panel I), which is not the case in Central Asia, Southeast Europe or most of the Eastern Partner countries. Foreign firms can bring new production techniques, reducing emissions by diffusing cleaner or energy-saving technologies.

It is important to bear in mind that the FDI Qualities indicators come with some limitations. Most important, the indicators do not isolate causal effects, or the direction of causality. This means that the indicators are agnostic about whether FDI causes an outcome or vice versa, or whether correlations are driven by third factors. The indicators represent correlations and require contextualisation and additional information for interpretation, but provide some direction on what mechanisms are at play for a given outcome (OECD, 2019[3]).


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[6] fDi Markets (2020), Crossborder greenfield investment database, FT.

[5] Geostat (2020), National Statistics, National Statistics Office of Georgia, Tbilisi, https://www.geostat.ge/en/modules/categories/22/national-accounts.

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[2] IMF (2020), Georgia: Sixth Review Under the Extended Arrangement and Requests for a Waiver of Nonobservance of Performance Criterion, Modification of Performance Criteria, and Augmentation of Access-Press Release; Staff Report; and Statement by the Executive Director for Georgia, IMF, Washington DC, https://www.imf.org/en/Publications/CR/Issues/2020/05/05/Georgia-Sixth-Review-Under-the-Extended-Arrangement-and-Requests-for-a-Waiver-of-49394 (accessed on 12 June 2020).

[8] OECD (2020), COVID-19 crisis response in Eastern Partner countries: OECD Policy Responses to Coronavirus (COVID-19), OECD, http://www.oecd.org/coronavirus/policy-responses/covid-19-crisis-response-in-eu-eastern-partner-countries-7759afa3/ (accessed on 4 July 2020).

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[4] OECD (2020), Investment Perspectives in Eastern Partner Countries, http://www.oecd.org/investment/Investment-perspectives-in-Eastern-Partner-countries.pdf.

[7] OECD (2020), “OECD Investment Policy Responses to COVID-19”, OECD Tackling coronavirus, contributing to a global effort, https://read.oecd-ilibrary.org/view/?ref=129_129922-gkr56na1v7&title=OECD-Investment-Policy-Responses-to-COVID-19 (accessed on 28 May 2020).

[3] OECD (2019), FDI Qualities Indicators: Measuring the sustainable development impacts of investmnet, OECD, Paris, http://www.oecd.org/fr/investissement/fdi-qualities-indicators.htm.

[10] USAID (2014), Competitiveness of Georgian Agriculture: Investment Case Studies, Hipp Georgia, USAID Economic Prosperity Initiative, Tbilisi, https://land-links.org/wp-content/uploads/2018/04/USAID_Land_Tenure_EPI_Competitiveness_Georgian_Agriculture_Investment_Case_Studies_HIPP_Georgia.pdf (accessed on 25 June 2020).

[9] World Bank (2020), Economy Profile of Georgia: Doing Business 2020, World Bank Group, Washington DC, https://www.doingbusiness.org/content/dam/doingBusiness/country/g/georgia/GEO.pdf (accessed on 1 July 2020).


← 1. The six Eastern Partner countries are: Armenia, Azerbaijan, Belarus, Georgia, the Republic of Moldova and Ukraine.

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