Malta might be one of the smallest countries in Europe but it is no small player when it comes to attracting FDI. In the past four years, while most other EU economies have suffered at the hands of the eurozone crisis, Malta has attracted a slew of new investments, particularly in its financial services, business services, software and IT, and communications sectors.

A flexible workforce and Malta's location – with easy access to other markets in the EU as well as north Africa and the Middle East – are often cited as advantages to investing in the country. But the country owes the recent growth in FDI to its entry to the EU in 2004, and the eurozone in 2008. Now the country benefits from all of the advantages of these memberships while also offering relatively low set-up costs when compared with other EU economies.

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Ambitious target

The influx of FDI into Malta's financial services sector is helping the country move closer to its aim of becoming an international financial centre. Achieving IFC status is an ambitious target, especially given the current state of the global economy, but one that Malta is making steady progress towards. According to the 2011 Competitiveness Index compiled by the World Economic Forum, Malta ranked 15th out of 142 countries for financial market development and 12th for the soundness of its banks.

The first step towards achieving credibility as an IFC depended on establishing sufficient regulation to govern the country's financial sector. “If Malta is just a tax haven it is not very sustainable," says Josef Bonnici, governor of the Central Bank of Malta. "That is why the country took measures to build a well-regulated financial sector."

Malta has 60 double taxation treaties, which are agreements between two countries designed to protect a country's taxing rights and prevent attempts to avoid or evade liability. On top of this, the Malta Financial Services Authority (MFSA), a public entity that regulates the industry, has signed 39 memorandums of understanding with similar bodies in other countries.

“A successful financial centre has to be well integrated with the international system that is in place already. And Malta was, so that made this sector viable for development,” says Mr Bonnici. This development is already taking place, with the financial sector contributing an estimated 0.5% per year to Malta's economy and directly employing 10,000 people, according to the MFSA.

Cultural mix

Since Malta joined the EU in 2004, it has also enjoyed significant growth in its maritime sector. In 2011, the Maltese Register of Shipping recorded 16.1% year-on-year growth in the number of registrations, making it the number one destination for ship registration in Europe and the seventh largest in the world. As well as a growing number of private vessels, Malta also has more than 40 passenger liners.

With a burgeoning maritime sector and rapidly evolving financial sector, the Maltese economy might be compared to that of Cyprus. In fact, similarities between the two Mediterranean island nations go beyond their economies, since both countries are located between Europe and the Middle East and north Africa (MENA) region. While in the case of Cyprus this position has resulted in conflict and a splitting of the country, Malta has a less tumultuous history, and is now considered to be a place where the two different cultures peacefully co-exist.

“Malta is a mix, its language is a mix, even its looks are a mix, and that is its big selling point,” says Arnold Cassola, an international secretary of the Maltese Green Party.

Undoubtedly, Malta's cultural mix pays off in economic terms. “When businesspeople from north Africa or the Middle East consider entering the EU market and are looking for partners, Malta is the natural choice,” says Brian Camilleri, analyst at investment promotion agency Malta Enterprise.

Give and take relationship

The relationship between Malta and MENA works both ways, and Maltese investors are increasingly targeting opportunities in the region. While growth in the EU is still largely thwarted by the eurozone crisis, the International Monetary Fund forecasts that MENA economies will grow by 3.6% in 2013, making this a much more attractive investment destination. 

“While 2012 saw a decline in growth in north Africa due to decreased foreign investment and tourism revenue, as well as the European financial crisis, a higher growth rate is predicted for 2013, presenting a number of opportunities for Maltese companies,” says Mr Camilleri. 

Business software developer ISL is one Maltese company that has decided to take advantage of the close links between Malta and the MENA region. “ISL first expanded into Egypt, then other countries in north Africa. We are in the process of opening a new office in Algeria. The company finds these markets more approachable than in Europe,” says Joe Aquilina, ISL’s business development director. He adds that the attraction of these markets is less to do with the is lower saturation levels as it is with the fact that ISL has gained expertise in doing business in these countries over the years.

“A lot depends on personal relations, and ISL has been building those for years," says Mr Aquilina. "And when we are establishing [new relationships], the fact that [the Maltese] language and Arabic are similar definitely helps.”  

Going by the book

The relationship between Malta and MENA is having a positive effect on the banking industry too. Malta is starting to establish itself as a centre for sharia-compliant transactions, utilising its growing expertise in the financial sector and close connections with MENA. In the past three years, the country has hosted a number of Islamic finance forums and in 2010 the MFSA published guidelines for sharia-compliant transactions.

Despite all this growth, however, one area in which Malta still struggles is in improving the country's overall business climate. In the World Bank's Doing Business 2013 report, Malta is ranked 102nd out of 185 economies, the same position that it held in the 2012 report. The reason for this low ranking is the difficulty of starting a new business in the country and of obtaining construction permits.

Malta does score highly in other areas, however, including protecting investors, paying taxes and trading across borders. These are all areas that have been specifically targeted by the government and the MFSA in recent years, and in which new rules and regulations have been established.