EUROPEAN UNIVERSITY OF CYPRUS

Course : BUS 201A International BusinessTitle : Foreign Direct Investment in KazakhstanAcad. Year : Fall Semester 2015Instructor’s name : Sourouklis ChristakisStudent’s name : Giannoulis IoannisSubmission date : 17/12/2015

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ABSTRACT

During the course BUS201A International Business for the Fall

Semester 2015, one of the key requirements of the lesson is to conduct an

assignment with the title: Foreign Direct Investment in a developing or

developed country. My own assignment has the title: Foreign Direct

Investment in Kazakhstan. This particular assignment includes a theoretical

background about FDIs in general and then a case study. For the needs of this

research, I collected information from various websites. I tried to examine the

subject thoroughly, by examining it from many different aspects.

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TABLE OF CONTENTS

I. Acknowledgement...................................................................................4II. Introduction............................................................................................5III. Research Objectives...............................................................................6IV. Literature Review..................................................................................7V. Foreign Direct Investment......................................................................9 1. Definition.........................................................................................9 2. Importance of FDI...........................................................................10 3. Advantages of FDIs..........................................................................11 4. Disadvantages of FDIs.....................................................................13 5. Types..............................................................................................14VI. Case study: FDI in Kazakhstan .............................................................16 1. Kazkhstan: General information.....................................................16 2. Political system...............................................................................18 3. Legal system...................................................................................19 4. Foreign Relations ............................................................................21 5. Economy........................................................................................22 6. Business opportunities in Kazakhstan..............................................24VII. Conclusion.........................................................................................26VIII. References........................................................................................27IX. Appendices..........................................................................................28

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ACKNOWLEDGEMENT

It is a genuine pleasure to express my deep sense of thanks and gratitude

to my parents, who fund my studies and offer me an invaluable support. My

parents and the rest of my family and friends really encourage proceeding and

overcoming any problem I may encounter.

Furthermore, I owe a deep sense of gratitude to my professor Dr

Sourouklis Christakis for his interest and support he provides to me in order to

complete this assignment.

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INTRODUCTION

First and foremost, this assignment with the title “Foreign Direct

Investment in Kazakhstan is conducted for the purpose of the course of the

course “International Business”. It is divided into two separated parts.

The first part is related to the theoretical background of the Foreign Direct

Investments in general. More specifically, this encompasses a definition of FDI,

the importance of FDI, some advantages and disadvantages and some types.

The second part is about a case study. Given that I am a CEO in an enterprise I

decided in accordance with the Board of Directors that we should make a

foreign Direct Investment in a developing country, Kazakhstan. From this reason,

the subject is approached from many aspects. It is analyzed the geographical

position of the country, its political environment, the legal system, the foreign

relations of the state, its economy and last but not least the business

opportunities that may exist, according to financial forecasts.

To conclude, this assignment is prepared according to the structure and

the guidelines of professor Dr. Sourouklis and I would be very glad if it could

meet the expectations of the readers.

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RESEARCH OBJECTIVES

This assignment includes two separate parts. The first part is associated

with the theoretical background about the Foreign Direct Investment. As for this

part, the objectives are:

To learn what is FDI

To learn to distinguish this kind of investment from other kinds

To understand the importance of FDIs for the countries, by listing

also the advantages and the disadvantages

To familiarize with the term, since it is mandatory for the case study

The second part of this assignment is the case study. Assuming I am a CEO

in a local company, I decide to make a FDI in a developing country and more

specifically Kazakhstan. The objectives of this part are:

To try to customize FDI principles in a country, thus obtaining an

overall picture about this kind of investment

To study a country , try to examine its profile through many

aspects, learn its policies about FDI and detect its peculiarities

To try to understand the way a CEO in reality should approach a

relevant issue

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LITERATURE REVIEW

It is known worldwide that foreign direct investments are an important

form of investment and that many articles have been written on this subject.

Since the topic of this assignment is relevant, I would like to present briefly a

really interesting article from Prakash Loungani and Assaf Razin for the

magazine of IMF. The title of the article is “How Beneficial is Foreign Direct

Investment in Developing Countries?”

First of all, the columnists emphasize on the resilience of FDIs in contrast with

other kinds of investments e.g. Portfolio investment or loan flows in the

economic crisis situations. This make the host countries, especially the

developing ones to show more interest on FDIs and according to statistics it is

observed that through years an increase to FDI and portfolio investment in

comparison with loans.

It is true that private capital inflows have many considerable advantages such

as the development of best practices due to the integrated capital market,

the limitation of governments to implement bad policies since the capitals

present high mobility etc. Therefore, in this article, it is described the special

advantages that derive from the FDI, such as the transfer of technology from

investor’s country to the host one, the increased tax revenues for host

countries etc. Besides, it is noted the the predominance of foreign direct

investments in comparison with other kinds of investments, taking also into

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consideration empirical evidence from a survey from Bosworth and Collins.

To explain further, FDI constitute an investment that is based on the host

country, in contrast with international debt flows that can “leave” at the

first sign of trouble in the host country.

However, there are many risks that must be taken into consideration.

It is observed that more FDIs exist in riskier countries, namely with weaker

credit ratings, where the quality of institutions is low. This is an important risk

for developing countries, given that these countries have no organization,

some fire sales can be made and the foreign investors obtain more

management and control on the domestic firms, whereas they will have

gathered excessive information about the production possibilities of the host

country. This phenomenon is observed more in crisis situations, according.

The communists conclude that FDI have many benefits for developing

countries, as long as the appropriate measures have been taken in order to

secure the integrity and the sovereignty of the host country.

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FOREIGN DIRECT INVESTMENT

DEFINITION

Here is a really good and analytical definition of this business term:

“A foreign direct investment (FDI) is an investment made by a company

or entity based in one country, into a company or entity based in another

country. Foreign direct investments differ substantially from indirect

investments such as portfolio flows, wherein overseas institutions invest

in equities listed on a nation's stock exchange. Entities making direct

investments typically have a significant degree of influence and control over

the company into which the investment is made. Open economies with skilled

workforces and good growth prospects tend to attract larger amounts of

foreign direct investment than closed, highly regulated economies.”

Therefore, the key elements of a FDI, as it is obvious from this definition,

are: It is about the acquisition of assets or property in a country other than

the home country of company or of the investor. Also, this kind of investment

differs from others such as portfolio investment, it provides power to the

investor and it favors more the most developed countries.

Needless to say, the methods of making a FDI are various e.g. by setting up

a subsidiary or associate company in the foreign country

IMPORTANCE OF FDI

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First and Foremost, foreign direct investments are really important

source of revenues for the host countries. More specifically, an increase in FDI

can be related to the economic development of these countries because of

the influx of capital and the increased tax revenues. Most of the times, host

countries channel these revenues into infrastructure e.g. the construction of

roads, schools, hospitals or other projects very considerable for the society

e.g. the funding of R&D programs, thus improving the life quality standards of

the citizens.

Furthermore, from an economical aspect, these funds from FDIs will

reinforce the financial system of the host countries, since they provide

liquidity to the real economy and “the chain of money” will begin. The banks

will give more loans to the companies and this will benefit the job market, by

creating new jobs and hence reducing unemployment and poverty at some

extent. All these aforementioned situations will offer in a long term

prosperity and social justice to the society. Last but not least, it is easy to

understand that the importance and the benefits from FDIs are tenfold in

developing countries where the quality of life of people is quite low in

contrast to the developed ones.

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ADVANTAGES OF FDIs

It is really important to list some of the main advantages of FDIs in order to

understand better this kind of investment. More specifically:

Economic Development Stimulation

Foreign direct investment can spur the target country’s economic

development, creating a more conducive environment for you as the investor

and benefits for the local industry.

Easy International Trade

Countries usually have their own import tariff policies; fact that explains why

trading with it is quite difficult. Also, there are industries that usually require

their presence in the international markets to ensure their sales and goals will

be completely met. With FDI, all these will be made easier.

Employment and Economic Growth

Foreign direct investment can reinforce the job market of the host country, as

investors build new companies and therefore new jobs can be created. This

leads in long term to an increase in income and more buying power to the

people and hence economic growth, prosperity and social justice.

Development of Human Capital Resources

One big advantage brought about by FDI is the development of human capital

resources, which is also often understated as it is not immediately apparent.

Human capital is related to the competence and knowledge of those able to

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perform labor, more known to us as the workforce. The attributes gained by

training and sharing experience would increase the education and overall

human capital of a country. Its resource is not a tangible asset that is owned

by companies, but instead something that is on loan. Bearing this in mind, a

country with FDI can benefit considerably by developing its human resources

while maintaining ownership

Tax Incentives

Many states, in order to attract investors (companies or individuals) to make

FDIs in their countries, implement some tax incentives. The most common

incentives are: low corporate tax, tax holidays, preferential tariffs, special

economic zones etc.

Resource Transfer

Foreign direct investment will allow resource transfer and other exchanges of

knowledge, where various countries are given access to new technologies and

skills. The advantage for the host countries is enormous, especially for the

developing countries.

Reduced Disparity Between Revenues and Costs

Foreign direct investment can reduce the disparity between revenues and

costs. With such, countries will be able to make sure that production costs

will be the same and can be sold easily.

DISADVANTAGES OF FDIs

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On the contrary, there are some disadvantages regarding FDIs that should

also be examined.

Hindrance to Domestic Investment

Given that investor focuses its resources elsewhere other than his own home

country, foreign direct investment can sometimes hinder domestic

investment.

Risk from Political Changes

Because in some countries political changes are rapid and these changes are

likely to affect considerably many aspects of the country e.g. taxation, It is

highly important to examine thoroughly the political environment before

make a FDI. It is also recommended to hire a professional analyst to conduct

the appropriate analyses e.g. PESTEL DG Analysis, in order to minimize the

risk. One major risk is the probability of expropriation or even confiscation.

Negative Influence on Exchange Rates

Foreign direct investments can occasionally affect exchange rates to the

advantage of one country and the detriment of another.

Economic Non-Viability

Considering that foreign direct investments may be capital-intensive from

the point of view of the investor, it can sometimes be very risky or

economically non-viable. Thus, in this case the advice of an expertised person

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is mandatory to assure you for the investment. A really important indicator in

investments is the ROI (return on investment)

Negative Impact on the Country’s Investment

The rules that govern foreign exchange rates and direct investments might

negatively have an impact on the investing country. Investment may be

banned in some foreign markets, which means that it is impossible to pursue

an inviting opportunity.

Modern-Day Economic Colonialism

It must be mentioned that many third-world countries, or at least those with

history of colonialism, worry that foreign direct investment would result in some

kind of modern day economic colonialism, which exposes host countries and

leave them vulnerable to foreign companies’ exploitations.

TYPES

The following types are the main types of FDI, which an investor should bear

in mind and choose one of these:

Horizontal FDI . It is observed when a firm duplicates its home country-

based activities at the same value level in a host country through FDI.

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Platform FDI . This type of Foreign direct investment arises when this kind of

investment made from a source country into a destination country for the

purpose of exporting to a third country.

Vertical FDI takes place when a firm through FDI moves upstream or

downstream in different value chains i.e., when firms perform value-adding

activities stage by stage in a vertical fashion in a host country.

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CASE STUDY: FOREIGN DIRECT INVESTMENT IN KAZAKHSTAN

PROLOGUE OF THE CASE STYDY:

This is the second part of this assignment. It is about the case study,

where I suppose to be a Chef Executive Officer of a local company, which

plans to expand its operations abroad. The board of Directors decided to

make Foreign Direct Investment in Kazakhstan, a developing country. On the

following pages, it is analyzed thoroughly, from many different aspects this

country, thus explaining the reasons why it is selected for this purpose.

KAZAKHSTAN: GENERAL INFORMATION

At first, Kazakhstan, officially the Republic of Kazakhstan, is a country

in Central Asia, with a minor part west of the Ural River and thus in Europe

The climate of the country is continental. The average temperature in Astana

in winter is around -18°C, in summer: 20°C, whereas the average

temperature in Almaty in winter: -8°C,in summer: 22°C. It is about the

world's largest landlocked country by land area and the ninth largest country

in the world. Its territory of 2,724,900 square kilometers (1,052,100 sq mi) is

larger than all of Western Europe. In 2006, Kazakhstan had become the

dominant nation of Central Asia economically, generating 60% of the region's

GDP, primarily through its oil/gas industry. The country has vast mineral

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resources. The currency of Kazakhstan is Tenge.

Furthermore, Kazakhstan has borders with (clockwise from the north Russia,

China, Kyrgyzstan, Uzbekistan, and Turkmenistan, and also adjoins a large

part of the Caspian Sea. Kazakhstan is the 61st most populous country in the

world. Given its large land area, its population density is among the lowest, at

less than 6 people per square kilometer (15 people per sq. mi.). The capital

is Astana, where it was moved in 1997 from Almaty

Kazakhstan is populated by 131 ethnicities, including Kazakhs (who make

up 63 percent of the population), Russians, Uzbeks,

Ukrainians, Germans, Tatars, and Uyghurs. Islam is the religion of about 70%

of the population, with Christianity practiced by 26%; Kazakhstan officially

allows freedom of religion but religious leaders who oppose the government

are suppressed. The Kazakh language is the state language, and Russian has

equal official status for all levels of administrative and institutional purposes,

related to the long history of Russian dominance in the region.

Last but not least the territory of Kazakhstan has historically been

inhabited by nomadic tribes. This changed in the 13th century, when Genghis

Khan occupied the country as part of the Mongolian Empire. Following

internal struggles among the conquerors, power eventually reverted to

the nomads. By the 16th century, the Kazakh emerged as a distinct group,

divided into three jüz (ancestor branches occupying specific territories).

The Russians began advancing into the Kazakh steppe in the 18th century

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and, by the mid-19th century, they nominally ruled all of Kazakhstan as part

of the Russian Empire. Following the 1917 Russian Revolution and

subsequent civil war, the territory of Kazakhstan was reorganized several

times. In 1936 it was made the Kazakh Soviet Socialist Republic, considered an

integral part of the Soviet Union.

POLITICAL SYSTEM

First and Foremost, It must be mentioned that Kazakhstan was the last of

the Soviet republics to declare independence following the dissolution of the

Soviet Union in 1991. More specifically, Kazakhstan declared

its sovereignty as a republic within the Union of Soviet Socialist Republics in

October 1990. Following the August 1991 aborted coup attempt in Moscow

and the subsequent dissolution of the Soviet Union, Kazakhstan declared

independence on 16 December 1991.

Nowadays, Kazakhstan is perceived as a unitary republic. Its first and, to date

(2015), only President is Nursultan Nazarbayev. The President

may veto legislation that has been passed by the Parliament and is also

the commander in chief of the armed forces. The Prime Minister chairs the

Cabinet of Ministers and serves as Kazakhstan's head of government. There

are three deputy prime ministers and sixteen ministers in the Cabinet.

Kazakhstan has a bicameral Parliament composed of the Majilis (the lower

house) and Senate (the upper house). Single-mandate districts popularly elect

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107 seats in the Majilis; there also are ten members elected by party-list vote.

The Senate has 47 members. Two senators are selected by each of the

elected assemblies (Maslikhats) of Kazakhstan's sixteen

principal administrative divisions (fourteen regions plus the cities of Astana

and Almaty). The President appoints the remaining seven

senators. Majilis deputies and the government both have the right of

legislative initiative, though the government proposes most legislation

considered by the Parliament.

LEGAL SYSTEM

The legal system of the Republic of Kazakhstan, along with legal

systems of Italy, France, Germany, Austria and other countries, belongs to

the Roman-German (continental) legal system.

As opposed to the Anglo-Saxon legal system (England, the USA), where

judicial precedents are the main legal sources, Roman-German legal

system has a single hierarchically structured system of enacted law

sources.

Written constitution (fundamental law) plays the essential role

among the law sources in the Roman-German legal system, and has the

supreme legal force. In accordance with the article 4 of the Constitution of

Kazakhstan, the Law in the Republic is made of the norms of the

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Constitution, laws which conform to the Constitution, other normative

legal acts, international treaties and other obligations of the Republic of

Kazakhstan, as well as normative resolutions of the Constitutional Council

and the Supreme Court of the Republic of Kazakhstan.

In the legal system of this country as it happens to many others as well

international treaties ratified by Kazakhstan have priority over its laws

and are applied directly, unless international treaty specifies its application

requires issuance of a law. Thus, recognized principles and provisions of

international law are an element of the legal framework of the Republic

of Kazakhstan, to which all legal subjects may appeal. The basics of the civil

relations can be found in the article 6 of the Constitution of the

Republic of Kazakhstan. According to this article, in the Republic of

Kazakhstan the state property and private property are equally recognized

and protected.

What is really remarkable and it explains the legal stability of this state is the

fact that there are many provisions to the country’s legislation for the foreign

investors. For instance, in the law of Republic Kazakhstan from January, 8th,

2003 No373-II on Investments, it is described thoroughly the rights of

investors etc. Besides, according to statistics as of May 2014, Kazakhstan

attracted $190 billion in gross foreign investments since its independence in

1991 and it leads the CIS countries in terms of FDI attracted per capita.

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FOREIGN RELATIONS

Kazakhstan is a member in many international organizations such as

the United Nations, Organization for Security and Cooperation in

Europe, Euro-Atlantic Partnership Council and the Organisation of Islamic

Cooperation (OIC). It is an active participant in the North Atlantic Treaty

Organisation Partnership for Peace program Kazakhstan is also a member of

the Commonwealth of Independent States, the Economic Cooperation

Organization and the Shanghai Cooperation Organization. Indeed the nations

of Kazakhstan, Russia, Belarus, Kyrgyzstan and Tajikistan established

the Eurasian Economic Community in 2000, to revive earlier efforts to

harmonize trade tariffs and to create a free trade zone under a customs

union. On 1 December 2007, it was announced that Kazakhstan had been

chosen to chair theOrganization for Security and Co-operation in Europe for

the year 2010. Kazakhstan was elected a member of the UN Human Rights

Council for the first time on 12 November 2012.

Last but not least, Kazakhstan has really good relations with USA, a really

significant country, given that on 11 April 2010, Presidents Nazarbayev

and Obama met at the Nuclear Security Summit in Washington, D.C., and

discussed strengthening the strategic partnership between the United States

and Kazakhstan. They pledged to intensify bilateral cooperation to promote

nuclear safety and non-proliferation, regional stability in Central Asia,

economic prosperity, and universal values.

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ECONOMY

Kazakhstan has the largest and strongest performing economy in Central

Asia. Supported by rising oil output and prices, Kazakhstan’s economy grew at

an average of 8% per year until 2013, before suffering a slowdown in 2014

and 2015 Kazakhstan was the first former Soviet Republic to repay all of its

debt to the International Monetary Fund, 7 years ahead of schedule.

Buoyed by high world crude oil prices, GDP growth figures were

between 8.9% and 13.5% from 2000 to 2007 before decreasing to 1–3% in

2008 and 2009, and then rising again from 2010. Other major exports of

Kazakhstan include wheat, textiles, and livestock. Kazakhstan is a leading

exporter of uranium.

Kazakhstan’s economy grew by 4.6% in 2014. The country experienced a

slowdown in economic growth from 2014 sparked by falling oil prices and the

effects of the Ukrainian crisis The country devalued its currency by 19% in

February 2014. Another 22% devaluation occurred in August 2015.

Kazakhstan’s fiscal situation is stable. The government has continued to

follow a conservative fiscal policy by controlling budget spending and

accumulating oil revenue savings in its Oil Fund – Samruk-Kazyna. The global

financial crisis forced Kazakhstan to increase its public borrowing to support

the economy. Public debt increased to 13.4 per cent in 2013 from 8.7 per cent

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in 2008. Between 2012 and 2013, the government achieved an overall fiscal

surplus of 4.5 per cent.

Since 2002, Kazakhstan has sought to manage strong inflows of foreign

currency without sparking inflation. Inflation has not been under strict

control, however, registering 6.6% in 2002, 6.8% in 2003, and 6.4% in 2004.

In March 2002, the U.S. Department of Commerce granted

Kazakhstan market economy status under U.S. trade law. This change in

status recognized substantive market economy reforms in the areas of

currency convertibility, wage rate determination, openness to foreign

investment, and government control over the means of production and

allocation of resources.

Needless to say, in 2015, the World Economic Forum compiled its Global

Competitiveness Ranking ranking Kazakhstan 50th out of 144 countries.]The

ranking considers multiple macroeconomic and financial factors, such as

market size, GDP, tax rates, infrastructure development, etc. In 2012, the

World Economic Forum listed corruption as the biggest problem in doing

business in the country, while the World Bank listed Kazakhstan as a

corruption hotspot, on a par with Angola, Bolivia, Kenya, Libya and Pakistan,

Kazakhstan secured 2nd position in the Central and South Asia regional

ranking of the 2015 Global Innovation Index (GII) released by World

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Intellectual Property Organization (WIPO) together with Cornell University

and INSEAD France.

BUSINESS OPORTUNITIES IN KAZAKHSTAN

First of all, it must be mentioned that FDI constitute a really

considerable issue for the Kazakhstan’s government. It is well known that its

president and the state as a whole do decisive moves ( for instance favorable

legislation, advertisements in big European channels like Euronews etc) in

order to attract foreign investors , thus creating a favorable environment for

investments. Moreover, it is worth highlighting that US Department considers

that Kazakhstan have the best investment climate in the region. What is

remarkable, according to latest report from World Bank for Kazakhstan, is

that this country is characterized as an attractive enough destination from

European companies for investments. This could be interpreted as a good

example of best practices, encouraging us for the profile of the country.

However, the forecasts for the economy of Kazakhstan are quite worrying.

Examining the macroeconomic environment in the country, the the forthcoming

reduces in oil prices due to the oversupply; field where the country does many

exports and the devaluation of the national currency, Tenge are reasons that

causing concern. Needless to say, the main export markets of oil are Europe and

China, where there are observed financial problems according to the report of

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World Bank. More specifically due to the Greek crisis the growth in Europe is

estimated to reach a modest 1.9 percent in 2015 and 2016, whereas Chinese

growth is expected to slide from 6.8 percent in 2015 to 6.3 percent in 2016.

To conclude, it cannot be neglected that the next two, mainly years might

exist economical unstability, but it highly believed that Kazakhstan has the

experience to overcome these issues, as it did in the global economical recession

the year 2008.

Conclusion:

All things considered, it is widely acceptable that foreign investments

constitute one of the prime ways for big profit for a company. Foreign

investments also give the investor the opportunity to obtain considerable

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power and control in the host country.

However, the big worry in FDI is the selection of the host country. It is highly

important to examine the profile of the country from many aspects, as to

learn about it and then minimize the risk and thus secure the investment

in this particular case, the Board of Directors and I decided to make a FDI, in

behalf of the local company we represent, to Kazakhstan.

Kazakhstan is a developing country which welcomes the investments

especially from the European states and also provides a secure environment

for the investment. Even though there are some economical issues in the

country due to global instability with the oil prices, I personally support this

option, considering the benefits for our company e.g. the low taxes.

More specifically, the company could begin to invest an amount of €20.000 at

the beginning to the enterprise with the best efficiency according to the

statistics and then the Board of Directors will determine the next moves.

REFERENCES

Wikipedia,2015

https://en.wikipedia.org/wiki/Economy_of_Kazakhstan#References

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Invest in Kazakhstan Legislation(2003,2014)

http://invest.gov.kz/uploads/files/2015/12/03/law-of-the-republic-of-

kazakhstan-on-investments.pdf

Economist, Intellengent Unit, 2015

http://country.eiu.com/2015/kazakhstan

Word Bank Group report, 2015

http://www-wds.worldbank.org/2015/

external/default/WDSContentServer/WDSP/IB/2015/12/07/090224b083c36a

17/2_0/Rendered/PDF/Kazakhstan000a0c0update00Fall020150.pdf

Loungani, P., Razin, A.( 2001) How Beneficial Is Foreign Direct Investment

for Developing Countries?, Finance & development-magazine of IMF,

Volume 28, Number 2 ,Available from

http://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.ht

m( Accessed 14 December2015

Investopedia(2015)

http://www.investopedia.com/ 2015 /terms/f/fdi.asp

APPENDICES

Power structure of Kazakhstan

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