(MENAFN- Arab Times) Economic diversification is a cornerstone of Gulf economies, as they seek to reduce their reliance on oil revenue as the dominant source of funding for growth. Attracting foreign investment has played a key part in this diversification, and will continue to do so.
While Foreign Direct Investment (FDI) obviously serves to diversify the funding sources of the Gulf, the benefits are beyond purely fiscal in nature. The region's desire for foreign investment is not motivated solely by having access to a broader capital pool, although this is obviously an advantage. International investment adds to an economy's productive capacity, and imports not just capital but also technology, production skills and improved management. A diversity of quality investors can make a tangible difference to the companies in which they invest or partner with, bringing international standards of corporate governance, expertise and technology. It provides an opportunity for GCC companies to develop their local talent through these standards, making them more competitive on the global stage. Indeed, the most recent edition of the Global Competitiveness Index emphasized innovation and skills as key drivers of economic growth.
Vital
Many state-owned investment companies in the region recognize this, focusing on an international partnership model to further socioeconomic development. This is especially prevalent in capital and technology-intensive industries, such as aerospace, energy and industry. Leveraging industry-best capabilities from leading private companies leads to knowledge and technology transfer, which is vital for increasing the competitiveness of the Gulf region.
Rational investors will invest where they see the greatest potential for risk-adjusted returns and many of the key requirements for foreign investment are directly linked to understanding a market's risk. These include transparency and accountability, sound corporate governance, Rule of Law and lack of corruption. Despite the sheer volume of available public information- although, like most things in life, the focus needs to be on quality, not quantity -there are still misconceptions about investing in the Middle East.
Matthew Hurn, Chairman of the Association of Corporate Treasurers Middle East, recognizes that a lack of transparency € or perceived lack of transparency - is a hurdle for FDI in the region. "Capital will flow to those companies that can demonstrate a sound business model, transparency and corporate governance," Hurn comments. "FDI therefore essentially acts as a barometer for companies that have international standards in these areas."
Ralph Waldo Emerson, the American essayist and poet, once said, 'Fear always springs from ignorance,' and closed markets only serve to heighten misunderstandings. There is often misinterpretation about what you do not understand, thus a clear way for the Gulf States to educate potential investors- or at least allay their fears about a lack of transparency - is by continuing to open up their markets.
As Zachary Cefaratti, Risk Officer at Dalma Capital, a Dubai-based asset manager, commented on the opening of the Saudi stock market, "Like the floodgates of a dam, once markets are opened, it becomes much easier to open them further than to close them back up."
It is a virtuous cycle; foreign investment not only increases returns through knowledge transfer and increased productive capacity, but it can also serve to lower the risk premium through increased understanding. Moreover, foreign investment both requires and encourages stronger government-to-government relationships through regulatory clarity, a sound business climate, and political and economic stability.
Global capital flows reveal a lot about international markets, from both a financial and ethical perspective. Institutional investors do not simply put their money in markets where they believe they can generate the greatest alpha; there must also be security of investment and transparency of valuations. Foreign investment in Gulf regions therefore validates the integrity of these markets and is crucial for increasing one's competitiveness on the global arena.
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