The Covid-19 pandemic has disrupted the globalised economy, exposing the limitations of the highly interdependent international production networks. Consequently, decision-makers in politics and the private sector are re-evaluating their current and future international activities and strategies, which is already reflected in an estimated 30% decline in global FDI flows in 2020.

This negative trend will hit economies in the Middle East and Africa (MEA) region hard, particularly the poorest nations that depend on FDI to overcome poverty and hunger, also caused by the pandemic. Policy makers and FDI professionals must urgently adapt to the ‘new normal’ in FDI to succeed in an environment of fierce competition with even fewer resources. 

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Refining inclusivity

Focusing on ‘inclusive FDI’, which would primarily benefit underdeveloped sectors, could be an effective strategy for host countries. However, in the post-Covid-19 era, the term ‘inclusive FDI’ has to be redefined to include the sectors most badly affected by the pandemic, such as travel and tourism, food and beverage, retail and small and medium-sized enterprises (SMEs) in general.

Each country has to identify the heaviest-hit areas of their economies – and those of strategic importance to their sustainable development – to be able to concentrate their efforts on attracting suitable foreign investors accordingly. Unfortunately, policy-makers revealed their inability to identify the impacted sectors and introducing adequate measures for their aid during the pandemic. The measures introduced were, in many cases, inadequate or the process of benefiting from them were too bureaucratic or simply impossible.

Many African countries introduced tax cuts, which were not effective, or measures that addressed only registered companies after a complicated know-your-customer process. Many SMEs and micro entrepreneurs did not qualify for financial aid as they were not even registered as companies. 

Patchy help

The Gulf Cooperation Council countries implemented a major part of the financial measures through banks, which have been neglecting the needs of SMEs and entrepreneurs throughout the past decade. Government funds mostly benefited those who already were using financial instruments, and neglected those who were struggling from strict banking policies even before the pandemic.

Since 2012, I have been addressing the fact that SMEs are more sustainable and inclusive foreign direct investors. However, in both the 2007-08 financial crisis and the current Covid-19 one, foreign-owned SMEs are excluded from governmental support. This time, however, the consequences for the MEA region could be devastating as the future of international business structures and FDI flows is more uncertain than ever.

Economies that depend on expats for their demographic development and economic prosperity will face great challenges in particular, as the replacement of skilled expats and foreign entrepreneurs leaving their countries will cost them much more in the future. But so far, no country is addressing this strategic issue with the necessary urgency.

Mazdak Rafaty is managing partner of Ludwar International Consultancy and SME adviser to the joint Emirati-German Chamber of Commerce. E-mail: m.rafaty@lic-consulting.com

This article first appeared in the August - September edition of fDi Magazine. View a digital edition of the magazine here.