NATURAL RESOURCES IN RELATION OF FOREIGN DIRECT INVESTMENT AN EMPIRICAL STUDY ON LIBYAN ECONOMY

Prepared by the researcher  : Dr. Salem Ahmed Abdullah – College of Graduate Studies – Al-Zaytoonah University of Libya

Democratic Arab Center

Journal of Afro-Asian Studies : Ninth Issue – May 2021

A Periodical International Journal published by the “Democratic Arab Center” Germany – Berlin. The journal deals with the field of Afro-Asian strategic, political and economic studies

Abstract

The availability of natural resources both in terms of quantity and quality is a prerequisite for the success of any investment programme. The paper aims to examine whether or not natural resources in Libya is appropriate to attract foreign companies, particularly in the non-hydrocarbon sectors.

 Paper method used is based on qualitative research through two methods of data collection. A survey which was conducted by using a questionnaire with representatives of the foreign and joint companies. A structured interview technique was also used to gauge the opinions of the senior Libyan officials in improving the investment climate.

 The study reveals that despite the numerous obstacles and shortcomings associated with natural resources in Libyan economy, it is relatively favourable for attracting FDI to the non-oil sectors. It also shows the majority of foreign companies depend on local natural resources in the production process. However, it discovered that the scarcity of natural resources constitutes a major problem for manufacturing companies.

The paper recommends themes that Government should use to improve Libyan investment climate which has been launched by Privatization and Investment Board (PIB), such as building investment map and to encourage partnerships between foreign and local investors by facilitating the procedures for joint projects.

JEL Classification: O13, N5, Q28, F21, M16.

1. Introduction

Libya occupies a significant geographical location as it lies in the centre of the North African region. It covers a vast area extending from the middle part of the Mediterranean coast in North Africa to the northern highlands of central Africa. From an historical perspective this distinctive location has made Libya the confluence that links Arab-Islamic cultures with African culture. Moreover, Libya has played a major role in the economic and political developments that have taken place in this part of the world since the early civilisations.

Location of Libya, as a natural resource, gains international importance due to: (i) Libya extends for almost 1990 km (1237 miles) along the southern Mediterranean coast separated from Europe by the Mediterranean Sea; the region has witnessed the flourishing of a number of ancient civilisations. (ii) The territory extends to between 1900 and 2000 km into the African continent and has been linked to Sudan and West Africa by a number of caravan routes. These routes played a major role in transport and trade activities between the Mediterranean region and Sub-Saharan Africa. (iii) Libya has played a major role in linking the eastern region of the Arab world to the Arab Maghreb region based on a common cultural, religious and historical legacy (Shernanna, F& Elfergani, S, 2007).

Furthermore Libya has numerous resources of oil and gas besides other natural resources such as the vast arable land, water resources, the climate, animal and marine resources not to mention its tourism potentials and the various mineral resources.

2. Research Problem Statement

Despite the huge natural resources available in Libya, the productive sectors are under-performing by failing to use these resources effectively curtailing output and income. In 2019 the agricultural, the animal resources and maritime sectors contributed only 0.16% to GNP, while the per capita income of agricultural products was equivalent to only US$683m. Despite the long Mediterranean coastal strip and the huge fishery resources production is poor: output was 2.0 metric tonnes in 2019 compared to 1900.0 metric tonnes in Egypt and 1494.7 metric tonnes in Morocco (AMF, 2020:130).

A number of factors curtail output in the agricultural, fishing and animal resource sectors: low rainfall; rapidly moving sand dunes; migration from rural to urban areas; inadequate grazing land; overgrazing of land; a lack of modern techniques in agriculture and fishing; and a lack of trained and skilled labour. Labour is these sectors was around 2.3% of the total labour force in 2018 (AMF, 2020:303)

In the manufacturing sector the situation is even worse, with poor productivity a central feature. In 2019, this sector contributed 2.1% to the GNP compared with 61.9% for oil and gas industries, while the added value for the manufacturing industry was estimated at US$0.908bn and US$26.294bn for the extractive industry ((AMF, 2020: 321). The poor performance of this sector can be attributed to a number of factors. The most important of which is the privatisation programme. In 2003 production was suspended in a number of companies pending changing the ownership to the private sector, which has had negative effects on the productivity in these companies.

Moreover, despite the promising resources in the tourism sector, its performance is still weak, with total revenues of around US$164.0m, contributed 0.24% to the GNP in 2010 (World Bank Group, 2016:43). Many researchers and experts explain the poor productivity of the tourism industry by referring to the inadequate infrastructure including hotels and the telecommunication facilities, and the mismanagement of licensing procedures in the absence of the qualified cadre in of the sector (Shernanna, F& Elfergani, S, 2007:145).

Foreign investment, particularly FDI, is not a new phenomenon in Libya. The first law in relation to FDI came into force in Libya on 30 January 1958. This was followed by Law No. 37 of 1968, which was amended by Law No. 5 of 1997 with regard to the encouragement of the foreign capital, and which came to force on 29 May 1997, sometime before the enforcement of its executive regulations. A further limited amendment was implemented by Law No. 7 of 2003, which made it possible for local business using capital in Libyan Dinars (LD) to participate in joint ventures with the foreign companies. This law is mainly concerned at encouraging foreign capital, particularly in relation to projects which benefit from the introduction of new technology, training of local staff, diversification of income, the development of local products to meet international standards or otherwise contributing to local development (Article One of Law No. 7). Moreover, the idea of attracting the FDI into the Libyan economy is not new as it started as early as the 1950s. Thereafter FDI played a major role in the discovery of the huge oil and gas reserves which has contributed to increasing the foreign earnings for the state. These earnings have made it possible for the state to push ahead with its programmes of social and economic development across the economy for almost half a century.

However, despite the aforementioned advantages FDI in areas other than the hydrocarbon sector has rarely been attracted to Libya. Furthermore, FDI has made little contribution towards increasing the rate of capital accumulation in the Libyan economy. FDI has not exceeded 1.99% of total investment in the 1980s and 2000s. In other words that ratio would indicate that only US$199 would become available for every US$10,000 of the total investment required for economic development in Libya. But as yet most of the FDI in Libya has been directed towards the oil and gas sector (Abdulla, 2013: 76).

The Privatization and Investment Board (PIB) was established at the end of 1998 at a time when the business environment was particularly weak. A result, FDI inflows in its early years were slow. However, with the positive political developments in the Libyan-Western relationships since the suspension of UN sanctions in 1999 and the government’s policy to improve the business environment FDI flows into the non-oil sector started from mid-2003.

The key research question in this context are:

• To what extent can foreign and joint companies rely on local resources to boost the production process?
• Do foreign and joint companies or the public sector have any problems using local raw materials to increase productivity?

3. Aim and Objectives

The paper aims to examine whether or not natural resources in Libya is appropriate to attract foreign companies, particularly in the non-hydrocarbon sectors, the research objectives include the following: First: a description of the main Libyan natural resources in order to establish main components of the Libyan economy and these components‘ potential to attract FDI to the non-hydrocarbon sectors. Second: investigate whether or not the natural resources in Libya is appropriate for FDI through the perceptions of the representatives of foreign companies, particularly in the non-hydrocarbon sectors. Third: highlighting the obstacles and shortcomings associated with natural resources in Libyan economy. Fourth: providing some recommendations which can be helpful in improving the Libyan business environment.

4. Literature Review

The various theories in relation to FDI and economic development discussed previously focused on the pivotal role of the rapid accumulation of capital and other elements (Rosenstein-Rodan, 1943; Lewis, 1954; Rostow, 1960; Leibenstein, 1957; Nurkse, 1943; Bruton, 2001). However, despite the achievement of modern economic growth, these theories have been criticised as they focus on capital investment in cash or in kind.

The importance of natural resources as a major element for attracting FDI has been established by a number of studies. In other words, the availability of natural resources in the required quality and standard constitutes an important factor for attracting FDI and promoting economic development. Buchley et al (2007) emphasise that most of Chinese foreign investment targets natural resources. Dunning (1979) on argues that companies usually target natural resources which are available in huge quantities abroad while maintaining production in their home countries. This argument is corroborated by Anwar (2008) who states that most multinational companies in the fledgling markets are state-owned, seeking natural resources to meet the increasing local demand for these resources which are cost prohibitive in the mother state. South Korea is a case in point where the government encourages local companies to intensify the search for natural resources abroad in order to secure cheap and sustainable inputs for the Korean economy (Han & Brewer, 1987). Likewise Chinese government-owned multinational companies look for foreign natural resources in order to provide the local economy with cheap inputs.

On the other hand, considering the importance of FDI on natural resource development and economic development, this study attempted to establish the opinions of the foreign and the joint companies’ representatives in relation to Libyan natural resources, and if they are satisfied with these resources.

5. Methodology

The paper methods used in this study are based on qualitative research techniques, and consist of two modes of data collection. The first was a questionnaire through which primary data from the representatives of the foreign and joint companies were assembled with the objective of establishing their attitudes towards Libyan business environment. The field research for this study was undertaken at 94 foreign and joint companies registered with the PIB and operating in Libya. To ensure that the four relevant aspects—category, status, economic sector, and location—were covered 50% of the research population was taken as a sample.

After selecting the stud sample target by using a stratified random sampling technique, it was discovered that a number of companies had more than one authorisation. As a result the total number of authorised companies was 83, each of which was sent a questionnaire by post. 72 questionnaires were returned, of which 68 were completed and four were rejected as incomplete. Thus, the questionnaire return rate was 81.9% with 0.818 according to Cronbach’s Alpha scale.

By using SPSS version 26 system, analytical descriptive and statistical analysis was conducted using frequency, chi-square of goodness of fit and cross-tabulation tools by using economic sector as an independent variable.

The second method of data collection was structured interviews, which were conducted with the senior Libyan officials. The phrase senior officials refer to government officials who hold key supervisory positions at different levels of responsibility from the head of departments up to minister of Libyan economy. Consequently the interview population included 14 individuals, three of whom were from Libyan Ministry of Economy (two were Heads of Department and one was Minister of Libyan economy), and the remaining eleven were from the PIB. By selecting 50% and using a convenience sample technique the research sample was reduced to seven senior officials, one from Libyan Ministry of Economy, and six from the PIB. Due to the small size of the sample, the data was analysed manually through an interpretative technique.

In terms of members of the sample, there were seven Libyan senior officials, one of whom was Minister of Libyan Economy. Of the six based at the PIB, five were heads of departments and one an assistant secretary of the PIB.

6. Results and Discussion

Generally speaking the results of the survey revealed the majority of foreign companies (61.8%) depend on local natural resources in the production process. 38.2% of respondents stated that their companies do not rely on local natural resources.it also shows that 41.2% of the total number of representatives experienced no problems using local natural resources. The findings also indicate that 58.8% of all participants encountered some problems regarding the use of local natural resources. In order of importance these were: 36.8% highlight limited materials in the local market; 11.8% refer to the high cost of natural resources; 5.9% refer to poor quality; and 4.4% refer to other problems such as registering a plot of land to establish their projects.

Chi-square of goodness of fit was employed to determine whether or not the observed frequencies are different from what we would expect to find. In relation to perceptions on local natural resources, it is assumed that:

The null hypothesis is: there are approximately equal numbers of cases in each group, and the alternate hypothesis is: there are not equal numbers of cases in each group.

Table 1: Appendix 1 Chi- Square of Goodness of Fit for Natural Resources Variables

a  0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 34.0.

b  0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 13.6.

As can be seen from table 1, the chi-square value for availability of natural resources is 3.765 on one degree of freedom, and 42.147 for difficulties in relation to natural resources on four degrees of freedom. On the other hand, the P value is 0.052 for availability of natural resources, and 0.000 for the last factor. Since, the observed P value is less than alpha (alpha = 0.05), the results were considered statistically significant. However, in order to give further meaning to the findings cross-tabulation is utilised.

Table 2: Cross Tabulation of Company Sector and Dependency on Local Natural Resources

Table 2 shows how the economic sector of the international companies related to their use of the available natural resources through the perceptions of the participants. It could be noted that the manufacturing sector has the strongest dependency with 89.2%, while 33.3% of agriculture sector is dependant and 28.6 % of the service sector.

Table 3: Cross Tabulation of Company Sector and Difficulties in relation to Natural Resources

  None  % Services  % Agriculture  % %

Table 3 shows the relationship between the each of the three sectors and the type of difficulties that face companies in relation to natural resources. From the appendix, it is apparent that the scarcity of natural resources constitutes a major problem for manufacturing companies in the opinion of 62.2% of the respondents from these companies. The quality of natural resources comes second in the opinion of 10.8% manufacturing respondents, while 2.7% complain about the high cost of the materials.

As far as the service sector is concerned the main problem (21.4%) is the high price of local materials. The inadequacy of material and other marketing problems such as delays from suppliers and lack of communication between suppliers and clients comes in second place (7.1%). In the agricultural sector, one third of the respondents complain from the high prices of the materials, while another third complain about delays made by the suppliers of these materials. Further details can be found in the appendix.

It can also be concluded from the findings that the service sector is faces less difficulties in relation to natural resources than the other sectors as 64.3% of the service sector respondents do not refer to any significant problems compared to 33.3% and 24.3% in the agriculture and manufacturing sectors respectively.

The key research question in this context is: to what extent can foreign and joint companies rely on local resources to boost the production process?

The survey revealed that 61.8% of respondents admitted that the production process in their company depended local natural resources. In this regard the results show that industrial companies were the most dependent with 89.2% followed by 33.3% of agriculture companies and 28.6% of service companies

The GPC strategy regarding investment is not properly formalised, but it policies tend to be associated with encouraging investors to take advantage of local raw materials. One senior Libyan official stated that:

In fact a written investment strategy with distinct features is missing. However, the intention to attract FDI is always present, particularly in the areas of construction materials and the health service given the inadequacy of these services in the Libyan market. The GPC is also encouraging partnerships in industries such as the cement industry (Alahrash, 2019).

Another senior official added:

The law of foreign investment has provided tax and fee exemptions for a specific period of time to foreign projects associated with food security, with regional development, that use advanced technology and which contribute to the development of local products. Moreover, the general tendency is to encourage partnerships between foreign and local investors by facilitating the procedures for joint projects (Guthoor, 2019).

Furthermore, senior Libyan officials confirmed that one of the main setbacks of the economic development programme was its failure to invest in local resources in order to create an alternative to oil revenues and which would increase production and improve services. They also confirmed the vital role of FDI in achieving a balanced and sustainable economic development in the country. In this context, one of the participants in the interviews stated that “failure to use the available local resources in an ideal manner is the most significant setback of the development programme in Libya” (Alsharoon, 2019), while another respondent argued that “the FDI in the Libyan market particularly in food industry and the construction material sector are making a good contribution to the economy by allocating natural resources to increase production and self-sufficiency.” (Alahrash, 2019).

However, senior Libyan officials are of the opinion that FDI in Libya tends to provide extra savings to be invested in the productive sector as the total foreign capital for investment is estimated at LD5.7bn. Although this capital is not large it still can play a positive role in comparison to the public sector whose resources are already stretched by funding other investment projects. Foreign capital also raises the quality of investment; as one of the senior officials stated “as far as foreign investment is concerned the agricultural projects provide a successful example, as the use of modern technology has eventually increased the productivity per hectare of wheat crop.” (Alahrash, 2019).

The key research question is: do foreign and joint companies or the public sector have any problems using local raw materials to increase productivity?

The results show that 58.8% of representatives of foreign and joint companies stated they had problems using the local natural resources. Specifically, 70.0% of participants consider the resources to be inadequate, while 20.0% stated they are prohibitively expensive, and 10.0% argue they are of a low quality. The results also show that companies in the manufacturing sector suffer the most from the scarcity of materials.

The interviews revealed that senior Libyan officials are well aware of the problems associated with the quality of raw materials as these materials are transferred from the quarries to the production sites in Tripoli, Al-Jfara and Benghazi counties under unhygienic conditions. Moreover, the scarcity of these materials coupled with the disorganised marketing process has led to increasing prices.

Senior Libyan officials emphasised that raw materials in Libya are mismanaged, and that the locations of the materials should be incorporated in an investment map in order for potential investment projects to be located close to source of the raw materials in rural areas. This would make the processing for final consumption of the materials easier. As one senior Libyan official put it “the raw materials are important for increasing production and income.” (Al-Aroush, 2019). Another interviewee argued that:

Before coming to that stage raw materials reserves need to be estimated and plan drawn up to the effect of achieving sustainability and regional development particularly in rural areas where these materials are in abundance (Alsharoon, 2019).

The investment map has two closely related aspects. The first involves the estimation and location of raw materials by conducting exploration and research studies. The second involves establishing the most suitable methods for securing the sustainability of these materials.

Senior Libyan officials seem to be unhappy with the GPC’s performance in relation to the above mentioned aspects associated with raw materials. As one interviewee maintained:

The general administration in Libya still needs to devise an effective scheme by coordinating between the relevant governments bodies with regard to planning the available economic resources by defining the market requirements of these materials and by organising these markets for fair competition (Guthoor, 2019).

Another participant argued that mismanagement of raw materials in Libya has been due to:

‘The failure of some of the municipalities, to provide the LIB with schemes focusing on the industrial sector. In fact most of the municipalities have no such scheme, which makes it difficult to allocate sites for FDI despite the recent establishment of the General Authority for Industrial States (Al-Aroush, 2019).

Another participant attributed the lack of cooperation between the LIB and most of the counties in relation the investment map to the fact that a number of decision-makers in these counties have poor economic knowledge.

7. Conclusion

The paper examines whether or not natural resources in Libya is appropriate to attract foreign companies, particularly in the non-hydrocarbon sectors. By qualitative techniques of data collection and analysis, this study has correlated the representatives’ attitude with the Libyan senior officials’ views about the research questions, and attempted to find out if natural resources in Libya are appropriate for attracting FDI, particularly to the non-oil sectors.

The paper reveals that despite the numerous obstacles and shortcomings associated with natural resources in Libya, it is relatively favourable for attracting FDI to the non-oil sectors. This success can also be partially ascribed to the fact that the Libyan market can be described as pristine with a variety of economic resources particularly in the area tourism that can be exploited. This is in addition to its excellent geographic location and the associated advantages with regard to trade and transport. Moreover, the country is characterised by its access to high quality fisheries which provide opportunities for investment in the food industry. Furthermore, the non-oil mineral resources provide opportunities for investment in the manufacturing sector especially in the area of the construction materials industry and construction itself.

The study reveals that despite the numerous obstacles and shortcomings associated with natural resources in Libyan economy, it is relatively favourable for attracting FDI to the non-oil sectors. It also shows the majority of foreign companies depend on local natural resources in the production process. Furthermore, it discovered that the scarcity of natural resources constitutes a major problem for manufacturing companies. It also reveals that service sector is faces less difficulties in relation to natural resources than the other sectors.

the paper recommends themes that Government should use to improve Libyan investment climate has been launched by PIB, such as building investment map and to encourage partnerships between foreign and local investors by facilitating the procedures for joint projects.

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