Foreign direct investment (FDI) in Armenia

FDI in Figures

According to UNCTAD’s World Investment Report 2024, FDI inflows to Armenia stood at USD 443 million in 2023, down by 55.6% compared to the previous year but still well above the 2019-21 average. At the end of the same period, the total stock of FDI was estimated at USD 7.5 billion. The volume of net FDI inflows relative to GDP and Gross Fixed Capital Formation (GFCF) has fluctuated significantly over the last decade. During the COVID-19 pandemic in 2020, FDI inflows were very low, but by 2022, they reached record highs, equivalent to over 25% of GFCF, highlighting the increasing importance of FDI to Armenia's economy. In recent years, Armenia has benefitted from the rapid growth of global FDI in high-tech services and manufacturing. From 2020-2023, over 52% of greenfield FDI projects were in software and IT, compared to 22% from 2014-2019.

Armenia ranks first among CIS countries in terms of FDI appeal, according to the World Bank. The Government has introduced conditions and laws favourable to foreign investment, and, because of its economic dynamism, the country has earned the nickname 'The Caucasian Tiger'. These measures include free economic zones for high-tech industries that provide companies with preferential treatment on corporate profit tax, VAT, property tax, and customs duties (UNCTAD). Armenia has strong human capital and a well-educated workforce. It does not impose restrictions on foreign control and rights to private ownership and establishment (except for the media and commercial aviation sectors), and business registration procedures are fast. FDI is also promoted through the EU-Armenia Comprehensive and Enhanced Partnership Agreement. Following the conflict in Ukraine, some multinationals with operations in Russia have moved their offices to Armenia, while an influx of Russian émigrés to the country has brought in a new qualified workforce. However, the country remains strongly dependent on the economic health of the Russian and EU economies for FDI, it has a small domestic market and corruption is still widespread. In general, Armenia's competitive landscape is showing signs of enhancement, although numerous businesses have highlighted the need for comprehensive reforms encompassing judicial, tax, customs, health, education, military, and law enforcement institutions to consolidate these advancements. Armenia ranks 63rd among the 133 economies on the Global Innovation Index 2024 and 57th out of 184 countries on the latest Index of Economic Freedom.

What to consider if you invest in Armenia

Strong Points

The attractiveness of the country is linked to its sustained economic growth over the last ten years and a series of reforms. We can also mention the following elements:

• Political stability
• Its geographical position, allowing access to the former Soviet republics
• Good integration into the world economic order: regional (a member state of the European Union and Eurasian Economic Union) and intercontinental
• A skilled and relatively inexpensive labour force
• A developing economy with sectors requiring foreign investment (such as telecommunications)
• Controlled inflation at a low level
• A desire to normalise relations with Turkey, suggesting a possible opening of the border
• A safe and advanced financial and banking sector
• Significant mineral resources (molybdenum, copper, gold)

Weak Points

The main obstacles to Armenia's economic development are:

• A small domestic market
• High transport costs (all goods must transit through Georgia because of the embargo imposed by Turkey and Azerbaijan)
• High risk of nepotism and interferences at the State authority level
• Strong dependence on the economic situation in Germany and Russia
• High public debt slowing down necessary investments, particularly in infrastructure
• Risk related to natural disasters (earthquakes)
• The poverty of the population is also a negative factor, especially in times of crisis, because the social climate and domestic consumption can be undermined.
• High external debt (USD 11.9 billion in 2019 - World Bank, latest data available)

Government Measures to Motivate or Restrict FDI

The Armenian government is conscious of the need to create a more inviting business environment and has made targeted efforts to encourage foreign investment, required for the development of the economy. The law on the reduction of poverty and corruption, as well as other reforms specifically linked to the business environment, have come into force. In particular, we can name:

• Equal treatment for foreigners
• No limitation on foreign ownership
• Freedom to repatriate profits
• Limited state intervention and deregulation

The high-tech and information and communication technologies sectors have attracted foreign investment in recent years. Many international companies have established offices in Armenia to recruit qualified human resources and experts in these disciplines. Finally, in 2015, the government created the Development Foundation of Armenia to encourage foreign investment, promote tourism and develop exports, and which has been functioning under the new name Doing Business Armenia.