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Economics World, ISSN 2328-7144 May 2014, Vol. 2, No. 5, 325-332
DAVID
PUBLISHING
Competitive Advantage of Libyan Business Environment Salem Abdulla Azzaytuna University, Tripoli, Libya
The economic development needs of developing countries require capital accumulation, which is no longer an easy task, even for industrialized countries. Although borrowing remains an important alternative, it has proved to be an expensive method in the long run. Consequently, to attract foreign direct investment (FDI), developing countries have been liberalizing their economies, which is expected to contribute to job creation and income generation. Libya declared its intention to liberalize its economy and to integrate into the global economy in order to achieve comprehensive development. This study investigates and explores the condition of the Libyan business environment in relation to foreign and joint companies, particularly in the non-oil sectors. This paper aims to investigate whether or not the Libyan business environment is appropriate to attract foreign companies, particularly in the non-hydrocarbon sectors. The method used in this paper is based on creating Porter model of competitive advantage of in relation to attract FDI. The paper reveals clearly that apart from substantial oil reserves, Libya is rich in other resources. Despite these positive advantages, there are numerous obstacles and shortcomings associated with the Libyan business environment. It discovered that the general structure and policies in relation to the Libyan business environment still require considerable attention to bring about the political and administrative stability, as well as the stability of laws and regulations. Furthermore, intensive media campaigns need to be launched with all the necessary legal and political guarantees for attracting FDI into the country. Keywords: competitive advantage, North African region, economic development, Libyan business environment, foreign direct investment (FDI)
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 civilizations (Shernanna & Abdulla, 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. The Libya, as the case with other developing countries, suffers numerous financial and economic problems such as a dependency on the oil and gas sector as the main source of the national income. In addition, the
Salem Abdulla, Ph.D. in government and International Affairs, lecturer in Finance at Azzaytuna University, Tripoli, Libya. Correspondence concerning this article should be addressed to Salem Abdulla, P. O. Box: 81589, Tripoli, Libya. E-mail:
[email protected].
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limited capacity of its local market given its relatively small population acts as a constraint on economic growth. However, the huge potential of the hydrocarbon sector and the high levels of financial flows were generated from these resources that can provide a reliable source of capital, and the need to develop the country’s infrastructure should make Libya a target for FDI. Such investment is promising for the simple reason that the use of the associated modern technology provides the ideal investment for the local natural resources. 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 (Retrieved from http://www.npc.gov.ly/doc/dec_and_leg/astetmar.pdf). 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 have 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 (Laws and Regulations Related to Investment, 2008). 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 1990s. 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). The Libyan Investment Board (LIB) was established at the end of 1998 at a time when the business environment was particularly weak. As 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 (Abdulla, 2004).
Method The method used in this paper is based on qualitative research. The primary data was collected through a survey conducted by using a questionnaire with representatives of the foreign and joint companies in order to discover their opinions in relation to the Libyan business environment. A structured interview technique was also used to gauge the opinions of the senior Libyan officials, whose jobs were related to FDI operations, with the objective of establishing the most important challenges facing the public administration in order to improve the business environment. After summarizing the findings of both methods and categorizing them as variables, the paper used these variables in creating Porter model of competitive advantage of Libyan business environment in relation to attracting FDI.
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Results and Discussion By using data explained in Appendix 1, competitive advantage model of Libyan business environment was created. Figure 1 shows Porter’s model in relation to competitiveness and the business environment (Porter, 1990). In terms of demand conditions, the Libyan economy has a strong financial position with high rates of economic growth especially in recent years. It also provides an easy access to African, Asian, and Europe markets. However, the economy is highly dependent on the oil sector which is subject to external variables such as production and prices. This dependence on oil is unreliable given the poor performance of the non-oil sector (Porter & Virgin, 2006). In the area of related and support industry, the Libyan business environment is characterized by the private SMEs and the smooth flow of capital into the country. However, a number of problems exist in relation to the organization of the markets of raw materials, which curtail the supply of these materials leading to price increases. Another weakness is the poor organization of labor markets and the consequent difficulties of importing foreign labor and the scarcity of skilled local labor. In terms of factor conditions characterized, human resource competencies, social stability and young and cheap labor are the main positive characteristics of the factor conditions. In terms of natural resources, Libya has a unique geographic location and a diversity of climatic conditions. In addition, apart from substantial oil reserves, Libya is rich in other resources such as minerals, fisheries, arable land, and animal resources. Despite these positive advantages, the physical infrastructure in Libya is weak apart from the transport and telecommunication sector which are relatively strong. Libya also lags behind in the area of information technology and research including inadequate business information. Context for Firm Strategy and Rivalry
Factor (Input) Conditions
The efficiency, quality, and specialization of input available to firm
A local context and rules that encourage investment and productivity A context of open and vigorous local competition, specially among locally based rivals
Related and supporting Industries
Demand Conditions
The presence of sophisticated and demanding local customers
* Access to capable, locally based suppliers and firms in related fields * Presence of clusters instead of isolated industries
1. Competitiveness of the for business environment. Source:Figure The General planning Council Libya,2006
Source: The General Planning Council for Libya in 2006.
In relation to firm strategy, structure, and rivalry, the policies aimed at encouraging FDI are the most important factors. Furthermore, in the past decade, policy-makers have made great efforts to improve bilateral relations with all countries particularly with the Western and African countries. However, despite these efforts, the general structure and policies in relation to the Libyan business environment still require considerable
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attention to bring about the political and administrative stability, as well as the stability of laws and regulations. Furthermore, intensive media campaigns need to be launched with all the necessary legal and political guarantees for attracting FDI into the country. Factor Conditions in the Libyan Business Environment Factor conditions are the situation in a region regarding the efficiency, quality, and specialization of inputs available to companies. These factors can be grouped into human, natural resources and infrastructure. It is important to note that each nation or region has its own particular set of factor conditions; hence, each country will develop those industries for which the particular set of factor conditions is optimal. Table 1 shows the most important factor conditions in the Libyan business environment. Table 1 Factor Conditions in the Libyan Business Environment Existing Situation (i) Human Development Factors + A high performance in human development + A young person’s country (PAID, 2006) + Well developed in social justice and the contribution of women + A high level of social stability (ii) Geographical Factors + An attractive location + The climate is relatively diverse (iii) Economy Related Factors (-) Relatively poor agriculture resources + A wealth of high quality fish + Relative wealth of non-oil mineral resources + Wealth of archaeological resources and nature tourism (iv) Infrastructural Factors (-) Weakness in the financial system but steps have been taken to reform it + Transport and telecommunication services are improving (-) Poor tourism sector infrastructure (-) Weakness in infrastructure of industrial zones (-) Weakness in the electricity network (-) Poor quality of public water (-) Poor quality of waste disposal services (-) Postage and delivery service is based on P. O. boxes without using street names and GPS does not exist (-) Average quality of land transport with organizational problems for using roads (-) Weakness in airports’ capacities and facilities (-) Weakness in ports’ capacities and facilities (-) The capacity of the MMRP is still limited and intangible (-) A reasonable development in mobile service (-) A very limited water supply in areas which are suitable for agriculture (-) Delays in the implementation of the railway project (v) Information Technology and R&D Related Factors (-) Poor infrastructure in the area of information exchange (-) Lack of business information
Demand Conditions in the Libyan Business Environment Demand conditions influence the shaping of particular factor conditions, which impact the pace and direction of innovation and product development. According to Porter (1990) demand conditions are determined by three major characteristics: high customer expectations for products, local customer needs, and unusual local demand in specialized segments that can be served globally. Table 2 summarizes the most important demand conditions in the Libyan business environment.
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Table 2 Demand Conditions in the Libyan Business Environment Existing Situation + A strong financial position + Strong GDP growth in recent years (-) Highly dependent on the oil and gas sector (-) Weak performance in the agricultural sector: 3.5% of GDP in 2007 (-) Weak performance in the industrial sector: 5.0% of GDP in 2007 + Easy market access to African and Arab countries
In terms of demand conditions, the Libyan economy has a strong financial position with high rates of economic growth especially in recent years. It also provides an easy access to African and Arab markets. However, the economy is highly dependent on the oil sector which is subject to external variables such as production and prices. This dependence on oil is unreliable given the poor performance of the non-oil sectors. Related and Support Industries in the Libyan Business Environment According to the Porter Model, related and support industries help make local industry more competitive as firms can enjoy more cost effective and innovative inputs. This effect is strengthened when the suppliers themselves are strong global competitors. Table 3 shows the most important related and support industries in the Libyan business environment. Table 3 Related and Support Industries in the Libyan Business Environment Existing situation + Economic activities are based on private SMEs (-) Unorganized natural resources’ market provides limited supply and high prices + Ease of importing capital and accounting procedures (-) Difficulties in exporting funds and the auditing system (-) Unorganized labor market
In the area of related and support industry, the Libyan business environment is characterized by the private SMEs and the smooth flow of capital into the country. However, a number of problems exist in relation to the organization of the markets of raw materials, which curtails the supply of these materials leading to price increases. Another weakness is the poor organization of labor markets and the consequent difficulties of importing foreign labor and the scarcity of skilled local labor. Firm Strategy, Structure, and Rivalry in the Libyan Business Environment Firm strategy, structure, and rivalry include the local context and rules that encourage FDI in a context of open and vigorous local competition. Table 4 displays the most important firm strategy, structure, and rivalry in the Libyan business environment. Table 4 Firm Strategy, Structure, and Rivalry in the Libyan Business Environment Existing Situation (i) Country General Specific Infrastructural Issues (-) There is no constitution (-) Institutional and legislation instability is deteriorating (-) Instability in the administrative system (-) Multiplicity of laws and regulations (-) Idea of tribalism still exists
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Table 4 continued Existing Situation + Crime rate and entry and exit visas are at acceptable levels (ii) Business Related Infrastructural Issues + Tax exemptions and transfer of profit are at acceptable levels (-) Bureaucracy is the most significant obstacle but it is becoming complicated (-) There is no investment map (-) Problems of some land ownership (-) OSS is not activated (iii) FDI related Structural Issues (-) There is a strategy to attract FDI but it is not formalized + Encouraging FDI from 1998 with the establishment of the LIB (-) Weakness in promotional campaigns (-) Guarantees provided are not sufficient + In 2003 returned to international community + Stock market launched in 2006 (-) Limited FDI projects licensed, only 128 companies in the period 2003-2008 + Encouraging the local private sector from 1986 (-) Lack of experience in dealing with multinational companies (-)30 projects worth LD11.3bn (UK£6.0bn) were cancelled during the period 2003-2008
Conclusions The paper examines whether or not the Libyan business environment is appropriate to attract foreign companies, particularly in the non-hydrocarbon sectors. From Porter model of competitive advantage of Libyan business environment, it is clear that despite the numerous obstacles and shortcomings associated with the Libyan business environment, Libya has many positive characteristics. Despite these positive advantages, there are numerous obstacles and shortcomings associated with the Libyan business environment, such as physical infrastructure in Libya which is weak apart from the transport and telecommunication sector, highly dependent on the oil sector, poor organization of raw materials and labor markets, lagging behind in the area of information technology. The general structure and policies in relation to the Libyan business environment still require considerable attention to bring about the political and administrative stability, as well as the stability of laws and regulations. Furthermore, intensive media campaigns need to be launched with all the necessary legal and political guarantees for attracting FDI into the country.
References Abdulla, S. (2004). Globalization and developed countries: Case of FDI (in Arabic). Tripoli: The National Bureau of Research and Development. Abdulla, S. (2013). Toward a strategy to activate inter-investment for Arab development (in Arabic). Tripoli: Libyan Cultural Ministry. Economy Minister’s Decision to Issue Executive Regulation of the Law No. 37 in 1968 (in Arabic). (2008). Retrieved from http://www.npc.gov.ly/doc/dec_and_leg/astetmar.pdf Laws and Regulations Related to Investment in Libya (in Arabic). (2008). Retrieved from http://www.npc.gov.ly/doc/dec_and_leg/astetmar.pdf PAID. (2006). Preliminary results of the general census of population in 2006 (in Arabic). Tripoli: PAID. Porter, M. E. (1990). The competitive advantage of nations. New York: MacMillan Free Press. Porter, M., & Virgin, D. (2006). Assess the competitiveness of the Libyan economy. Tripoli: General Planning Council. Shernanna, F., & Abdulla, S. (2007). Major ingredient for investing in Libya (in Arabic). Tripoli: Academy of Graduate Studies.
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Appendix 1. A Summary of Research Database Indicator
Research Variable Human Resource Indicators Representatives have a positive attitude towards the quality of human resources ﹢ There are many difficulties in terms of dealing with the local labor market, the most important of which is ﹣ importing foreign labor to cover the scarcity of local skilled labor High performance in human development ﹢ Well developed in social justice and the contribution of women ﹢ A young person’s country ﹢ Unorganized labor market ﹣ Foreign investors are satisfied with the specifications of the human resources ﹢ Lack of experience in dealing with multinational companies ﹣ Natural Resource Indicators 61.8% of foreign investors use local natural resources ﹢ Limited material supplies and high prices ﹣ An attractive location ﹢ Arable land at rate of 3%, invested in agriculture is 1% ﹣ A very limited water supply in areas suitable for agriculture ﹣ A wealth of high quality fish ﹢ The capacity of the MMRP is still limited and intangible ﹣ Weak performance in the agricultural sector: 3.5% of GDP in 2007 ﹣ The climate is a relatively diverse ﹢ Indictors Research Variables Relatively wealth of non-oil mineral resources ﹢ Weak performance in the industrial sector: 5.0% of GDP in 2007 ﹣ Wealth of archaeological resources and nature tourism ﹢ Poor tourism sector infrastructure ﹣ Organizational and administrative problems in the tourism sector ﹣ Lack of coordination between the public bodies to provide the infrastructure required for establishing ﹣ industrial zones There is no clearly defined industrial strategy ﹣ Lack of exploration studies ﹣ Lack of coordination between the public bodies to build the investment map ﹣ Problems of land ownership along the coastal strip ﹣ Infrastructure Indicators Representatives of foreign and joint companies are not satisfied with financial, electricity, water and sewage, ﹣ and disposal and solid waste services Representatives of foreign and joint companies are satisfied with telecommunication and transport ﹢ infrastructure Densely populated counties suffer more than rural counties from the poor quality of infrastructure services ﹣ except in water and sewage, and telecommunication services The agriculture and industrial companies are the most affected by the poor quality of infrastructure ﹣ Indictors Research Variables Deterioration of infrastructure in the financial sector Water sewage, disposal and solid waste services are deteriorating ﹣ Transports and telecommunication services are developing ﹢ Weakness in the banking system but steps to reform the system have been taken ﹣ Weakness in the capital and investment tools of insurance companies ﹣ Stock market launched in 2006 ﹢
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Appendix 1 continued Indicator Research Variable Weakness in electricity provision ﹣ Poor quality of public water ﹣ Poor quality of waste disposal services ﹣ Postage and delivery services are based on PO boxes without using street names and GPS does not exist ﹣ Reasonable development in mobile services ﹢ Average quality of land transport with organizational problems of using roads ﹣ Weakness in ports’ capacities and facilities ﹣ Weakness in airports’ capacities and facilities ﹣ Delays in the implementation of the railway project ﹣ Poor infrastructure in the area of information exchange: limited number of internet users and subscribers ﹣ Indictors Research Variables Political and Social Conditions Representatives of foreign and joint companies are not satisfied with institutional and legislation stability ﹣ Representatives of foreign and joint companies are satisfied with low crime rate and entry and exit visas ﹢ Institutional and legislation instability is deteriorating ﹣ Good relations with the most countries, especially in Africa and Europe ﹢ A high level of social stability ﹢ Instability in political institutions ﹣ Idea of tribalism still exists ﹣ Economic and Financial Concerns Representatives of foreign and joint companies are satisfied with importing capital and accounting procedures ﹢ Representatives of foreign and joint companies are not satisfied with exporting funds and the auditing system ﹣ Strong financial position ﹢ Strong GDP growth in recent years ﹢ High dependency on the oil and gas sector ﹣ Economic activities are based on private SMEs ﹢ Indictors Research Variables Administrative Conditions Representatives of foreign and joint companies are not satisfied with the application procedure ﹣ Bureaucracy is the most significant obstacle in the Libyan business environment ﹣ Foreign companies are more affected by bureaucracy than others ﹣ Bureaucracy is getting less complicated ﹢ Instability in the administrative system ﹣ OSS is not activated ﹣ Limited number of FDI projects licensed, only 128 companies during the period 2003-2008 ﹢ Weakness in the promotional campaigns ﹣ 30 projects worth LD11.3bn (about UK£6.0bn) were cancelled during the period 2003-2008 ﹣ Legal Conditions Representatives of foreign and joint companies are not satisfied with land ownership and nationalization ﹣ guarantees Representatives of foreign and joint companies are satisfied with tax exemptions and transfer of profits ﹢ There is no constitution ﹣ Policies Towards FDI Economic liberalization and encouraging the local private sector from 1986 ﹢ Establishment of the LIB, and from 2003 Libya has returned to the international community ﹢ There is a strategy to attract FDI but it is not formalized ﹢
