An Empirical Analysis of Foreign Direct Investment in Libya: Locational Determinants and Local Backward Linkages

The role of foreign direct investment (FDI) has been increasingly important as a mean of transferring technology and innovation from developed countries to developing ones. It has made a significant contribution to development and economic growth in host countries by allocating resources from wealthy countries to be transferred to those experiencing scarcity, allowing host countries to invest in activities beyond their domestic saving capabilities. Understanding the relationships of foreign investment with domestic suppliers, and what determines investment location choices, can help dictate the consequences of implementing passive, as opposed to active, FDI policies by host country governments, as well as providing the tools for FDI agencies to formulate their strategies. The main focus of this research is to determine the factors that most encourage and discourage FDI in Libya, to identify the different requirements of each type of FDI by applying different characteristics, like nationality, industry type, and ownership, and to examine the relationship between the foreign companies and the domestic suppliers. To capture these relationships in sufficient depth, the host countries’ locational determinants were analysed, these influenced the choice of FDI. These locational determinants, such as economic and investment policy, market conditions, facility and utility, financial and legal and institutions were developed based on an extensive review of the relevant theoretical and empirical literature.
Primary data were collected by means of a survey questionnaire from 74 foreign-owned and joint venture companies and 20 face-to-face interviews with senior managers of these companies, and Libyan government senior officials, in order to gain a more in-depth understanding of their responses and to investigate the difficulties and challenges facing government bodies tasked to improve the Libyan business environment. Principal Component Analysis (PCA) with Varimax rotation was used for unidimensionality conditions. Multivariate analysis of variance (MANOVA), chi-square and cross-tabulation tools, then, were applied as statistic tools, while a thematic technique was employed to conduct an interpretative analysis of the interviews. The research found that in the sample, six out of eleven determinant factors were considered as encouraging incentives (economic situation, market conditions, natural resources, tax exemptions, skilled labour and semi-skilled labour), these are needed for FDI in Libya, in line with the literature. The remaining five factors (government regulation, domestic infrastructure, and research development as well as financial, legal and judiciary systems), were found to be discouraging factors. When applying moderators to the model, the result reported that factors encouraging/discouraging FDI were different in all groups. Results also showed that there are many challenges facing Libyan policy-makers aiming to reform the business environment in order to make it more attractive for FDI. In general, foreign companies have developed limited backward linkages with domestic suppliers which need to be improved and made more competitive in order to be of real benefit to local companies. The policy implication of this finding is that for Libya to be a more attractive market for future FDI, urgent and decisive reforms are needed in the issues which inhibited FDI inflows, and the incentives provided should be restricted to and designed for targeted specific FDI only, in order to gain desirable benefits and promote the spillover.