DOI:  10.36172/EKONOMISTI.2020.XVI.04.Kalandia

Abstract

Despite an existing global challenges, Georgia is trying to become a regional investment hub in the Caucasus. Government is developing strategies that will focus on increasing the flow of foreign direct investment.

Article reviews global competitiveness index, published by The World Economic Forum (WEF). The report serves two main purposes: to help governments easily identify the factors hindering economic growth, and to help the business sector make decisions about future investment.

Article analyzes the challenges Georgia faces nowadays according to report and proposes recommendations for improving the country’s weak points. 

Keywords: Foreign Direct Investments, Global Competitiveness, Economic Growth, Innovation Capacity. 

In the scientific literature, competitiveness is considered to be one of the determining factors in the inflow of foreign direct investment, as it is associated with high standards of living, reduced costs, improved quality standards, improved business processes, overall efficiency, and so on. Studies on the correlation between competitiveness and foreign direct investment inflows are scarce in the literature, mainly due to the lack of universally accepted definitions of competitiveness (Christie, Mosneanu, and Glodi, 2008). 

Competitiveness can be determined at both firm and country level. Competitiveness at the firm, or micro level, is relatively clear and implies the ability of firms to compete, increase scale, and be profitable in the marketplace.

Explaining the concept of competition at the national level gives us the following opinion - the country's trade balance - its ability to sell more overseas than it buys measures the country's competitiveness.

Determining the competitiveness of countries is much more difficult than determining the competitiveness of firms because countries simply cannot go out of business as companies.

Country’s competitiveness is also determined by the ability to maintain a level of income stability and includes one of the most important indicators - the rate of return on investment, which explains the potential for economic growth.

According to the Organization for Economic Co-operation and Development (OECD), competitiveness is defined as the ability of a country to produce goods and services in line with international market standards and at the same time increase the real income of the society in the long run.

The World Economic Forum (WEF) annually publishes report analyzing the competitiveness and business environment of countries around the world. The report serves two main purposes: to help governments easily identify the factors that hinder economic growth, and help the business sector make decisions about future investment.

According to the report of the World Economic Forum, the most difficult challenge for Georgia in terms of increasing competitiveness is to strengthen institutions, improve the level of education and increase the efficiency of the labor market.

Given Georgia's position in the Global Competitiveness Index, it is clear that education and qualifications are the weakest points. Lack of education and qualifications hinder the development of other areas that constantly require highly qualified staff and innovation. 

In the modern economy, innovation is seen as a driving force for competitiveness, as innovation reduces product costs and prices, creates a new wave of demand in the market, attracts foreign currency, has a positive effect on the image of companies due to the new product.

Noteworthy is the fact that innovation is primarily associated with high risk. That is why it is necessary for companies to focus on innovation-based national production. The innovative system should be in line with the socio-economic factors existing in the country. 

Companies created with foreign investment are serious players in the market, and for the most part they are distinguished by high production activity. Also noteworthy is the share of Georgian-foreign companies in total exports, which account for half of the total exports, indicating that Georgian exports are largely at the expense of foreign investment.

Whether the difference in the quality of technology between local and foreign companies is high, local companies are slowly losing their share of the domestic market due to the significantly lower quality of their products, and foreign companies are taking the vacant place. In this way, foreign direct investment increases domestic competition. However, this effect is positive for the host country if the technological difference between domestic and foreign companies is very high and the competition pushes both participants to lower prices and raise quality.

Local firms can improve their manufacturing methods by observing the technologies of multinational corporations, and local firms created by competing foreign direct investment are also pushing local firms to improve their processes and technologies.

Therefore, the inflow of foreign direct investment leads to the development of local industries, and may develop so strongly that it will reduce the ratio of multinational organizations and the absolute position in the industry.

Also worth considering is the type of investment, namely multinational corporations that enter countries and only aim to take advantage of cheap labor and their plans do not include technology transfer or retraining of employees, are less profitable for host countries.

Direct foreign investment can bring new products to market, new processes and practices that can boost the host country’s supply of ideas, which in turn contributes to innovation. Multinational companies can help improve the productivity of local firms. Despite the additional competition caused by the influence of new firms into the market due to foreign direct investment, which can hurt local industries, competition in one sector can be beneficial to other sectors .Local firms in turn assist multinational firms in purchasing raw materials and intermediate goods that can use higher quality and lower priced intermediate goods in their own manufacturing process.

Also worth considering is the type of investment, namely multinational corporations that enter countries and only aim to take advantage of cheap labor and their plans do not include technology transfer or retraining of employees, less profitable for host countries. 

Despite the global challenges, Georgia is trying to become a regional investment hub in the Caucasus. The Ministry of Economy and Sustainable Development has developed a strategy and action plan for attracting investment in 2020-2021. The strategy is focused on increasing the inflow of foreign direct investment. The volume of investments in Georgia from year to year depends more on the start and end dates of various large-scale projects.

Over the last seven years, the average level of foreign direct investment has increased by 35% compared to the same period last year; Compared to other countries in the region, the share of FDI in GDP is 3 times higher in Georgia; The volume of reinvestment has also increased. The share of reinvestment in foreign direct investment ranges from 34.1% to 62%, which shows the confidence of foreign investors in the country.

The strategy for attracting investment in 2020-2021 has been prepared according to the IFC methodology and international specialists have also participated in its preparation. The strategy states that Georgia is ready to invest in more high-tech, knowledge-based and scientific-research activities. 

Conclusion 

Countries aimed at increasing competitiveness or productivity should make efforts to improve the various dimensions of structural change and at the same time allocating resources to attract the FDI. In the case of Georgia, it is better to focus on improving the education system of countries so that there are more workers with higher education in the market. At the same time, more resources should be allocated for research and development, which can improve the technological readiness and progress of countries.

Finances should be allocated to improve the qualifications of experienced and skilled personnel, it can be vocational education, trainings, seminars, etc. Government efforts should be directed towards the creation of a continuous education system.

It’s obvious that investors will always avoid investing in high-risk ventures. That is why the country needs to develop certain types of incentive programs, which will be a kind of prevention in case of business failure. Otherwise it is hard to find an investor who will invest in a risky project, especially in a startup.

In terms of investment promotion, the government should try to increase the size of the market - through fiscal levers it should ensure the initiation of new businesses and productions in the country, and for this it should eliminate the problem of access to capital. 

References:

1. Investment Attraction Strategy and Action Plan 2020-2021, Ministry of Economy and Sustainable Development of Georgia, “Produce in Georgia”www.investingeorgia.org  
2. Kavtaradze M., Georgia's position in the Global Competitiveness Index 2018- Analysis and Recommendations. Association of Young Financiers and Businessmen – AFBA.
3. TonkovaE, Petrov D., Hristova S., Investment in high technologies and its role for enhancing the competitiveness of the national economy, New Challenges of Economic and business development 2019, Riga, University of Latvia.
4. Schwab K, World Economic Forum, The Global Competitiveness Report 2019, www.weforum.org/gcr
5. Stankov B., Damnjanović J. Roganović M.,  Pillars of competitiveness as fdi determinants in host countries: A review of the panel data empirical studies, school of business 2/2018, 98-116.