A New Approach for Jordan to Attract FDI

Introduction

Jordan has emerged as a pillar of stability in the region, successfully navigating economic and political shocks over the past two decades. This resilience and ongoing modernization now position Jordan to attract significant foreign direct investment (FDI), especially through collaboration with the Gulf Cooperation Council (GCC). Indeed, as GCC countries advance their transformation agendas, business barriers are diminishing. Moreover, Jordan's political modernization agenda, which aims to increase partisan representation in parliament in the upcoming elections is paving the way for mutually beneficial economic growth and investment opportunities, led by the private sector.

Developments in Jordan

Despite mixed results from past economic plans, Jordan is optimistic about its Economic Modernization Vision (EMV) 2033, designed to revive the economy through 366 initiatives spread across 35 sub-sectors. This plan aims to create 1 million jobs, achieve a 5.6% annual growth rate, double female labor force participation, and increase per capita income by 3% annually from 2023 to 2033. Approximately 72% of the JD 41 billion required will come from private investments. To attract these funds, Jordan has introduced new laws –such as the Public-Private Partnership Law and Investment Environment Law– ensuring equal treatment for non-Jordanian investors and expanding sectors eligible for incentives, including quotas extendable up to 40% for foreign workers in specialized roles.

Nevertheless, despite extensive government efforts, only the private sector will drive these initiatives. The GoJ has repeatedly struggled to negotiate successfully with other governments to promote new economic projects and attract FDI. For instance, the US$ 3 billion Saudi-Jordanian Investment Fund (SJIF) and its National Railway Project, struggle to achieve substantial government-to-government collaboration. Furthermore, the long-awaited government sponsored National Conveyor project has faced years of continued delays and so far failed to materialize due to lack of interest from major regional government-backed developers.

Saudi investments in Jordan exemplify the potential of private sector collaboration. With approximately $14 billion invested across 900 projects in sectors such as transportation, infrastructure, energy, finance, commerce, and tourism, the economic ties between the two countries are strengthening. Significant opportunities in Saudi Arabia, driven by the economic renaissance in cities like Riyadh and ambitious projects like NEOM. Key Saudi investments include a $185 million stake in Jordanian Capital Bank Group and $24 million in the online business OpenSooq, demonstrating the growing economic synergy between the two nations.

Strategic Advantages and Challenges

Jordan benefits from well-developed infrastructure and a government that supports sector growth through tax incentives, grants, and subsidies. For instance, Jordan's Investment Law offers tax exemptions on profits for up to 10 years for projects in certain sectors.

Moreover, Jordan ranks above average among upper middle-income countries in government effectiveness, rule of law, regulatory quality, and control of corruption. It ranked fourth in the Arab world on the 2023 Corruption Perceptions Index by Transparency International. The Heritage Foundation’s Index of Economic Freedom ranks Jordan as the third freest economy in the Middle East and North Africa. Additionally, Jordan is the 4th most peaceful country in the region according to the Global Peace Index 2023, and it boasts the most stable banking sector in the MENA region.

Furthermore, the political modernization agenda in Jordan signals a shift towards a new era with increased partisan representation in parliament. In the upcoming parliamentary elections, 41 of the 138 seats will be selected by party list. This change is expected to introduce new leadership and perspectives into Jordan's political landscape. However, for this political transformation to be effective, it must be accompanied by further corresponding economic reforms to ensure stability and mutual reinforcement of political and economic progress.

Lastly, Jordan's strategic location between Europe, Africa, and the Middle East makes it an ideal gateway for companies seeking expansion, also allowing exports to bypass the risky maritime routes of Bab al-Mandeb and the Strait of Hormuz. Moreover, through its Free Trade Agreements, Jordan has access to 51 markets of approximately 1.5 billion people. This includes major regions and countries such as the United States, Canada, Singapore, Turkey, the member countries of the Greater Arab Free Trade Area (GAFTA), and the European Free Trade Association (EFTA).

Despite significant efforts, Jordan has struggled to attract FDI. Over the past two decades, FDI has shown a downward trend, and GDP growth has been modest, averaging around 2-2.5%. To achieve growth rates above 3%, as envisioned, boosting FDI is essential. As Jordan undergoes political and economic reforms, the country should focus on complementing and integrating with, rather than competing with, the economic aspirations of the GCC countries.

Regional Economic Transformations

The economic transformation agendas in GCC countries have reshaped the regional landscape, opening opportunities for Jordan to attract foreign direct investment (FDI). With Saudi Arabia's VAT increase to 15%, Jordan can capitalize by offering a competitive tax regime and targeted investment incentives, such as tax holidays, reduced corporate tax rates, and industry-specific exemptions in manufacturing and high-tech sectors.

Energy costs in the region are rising due to subsidy reductions and diversification efforts. Global supply chain disruptions and new VAT regulations have significantly increased transportation costs, primarily driven by logistical difficulties from Houthi attacks on ships off the Yemeni coast. This has caused a 39% drop in ships transiting the Suez Canal and a 45% decrease in freight tonnage, forcing shipping companies to reroute or halt operations in the Red Sea. Jordan's exports to Europe and the US bypass Bab-el-Mandeb, while exports to the GCC are transported by land.

Labor market reforms in GCC countries, like the Saudization policy, mandate greater employment of citizens, leading to higher wages and increased operational complexities. In contrast, Jordan's more flexible labor market policies and young, educated workforce offer a viable alternative for companies looking to optimize labor costs and maintain operational efficiency.

These rising costs in neighboring countries further enhance Jordan's attractiveness as an investment destination. While energy costs remain a challenge in Jordan, the country has made significant strides in renewable energy, with over 29% of its energy mix coming from renewable sources, compared to 3.2% for Saudi Arabia.? This has significantly reduced operational costs for businesses and enhanced Jordan’s appeal to investors. By leveraging these advantages, Jordan can position itself as a prime destination for FDI, complementing rather than competing with the economic ambitions of the GCC.

Strategic Economic Initiative for FDI driven M&A through Consulting

The proposal aims to establish an economic initiative that leverages consulting expertise to identify and analyze Jordanian business sectors with high potential for mergers and acquisition with industries in GCC, namely Saudi Arabia, UAE, Kuwait and Qatar. The initiative may be structured around a strategy with a framework of four main phases:

I. Comprehensive Analysis:

1. Sector Identification: in depth market research is conducted to identify high-potential sectors in Jordan, such as manufacturing, agritech, pharmaceuticals amongst others that show high prospects. The study would offer insights valuable to prospective GCC investors, including market trends, growth forecasts and alignment with GCC countries’ economic goals and aspirations.
2. Industry Mapping: the produced data analytics, coupled with the consulting expertise, would then be used to map said identified Jordanian industries against the needs and growth strategies of each of the GCC countries’ industries, further aligning identified industries in a multi-dimensional matrix showing compatibility, growth potential and value creation.
3. Stakeholder Engagement: Engaging with local business leaders, equity funds, investment banks,? industry experts and economic development agencies in Jordan to extract insights and propose recommendations from key stakeholders to be used in refining the analysis,

II. Prioritization

1. Criteria Development: this part of the prioritization phase will develop and produce a tailored criteria for sector and industry prioritization based on growth potential, alignment with GCC economic goals and strategic importance.
2. Sector Ranking: Accordingly and as a result of applying the said criteria, a list of sectors ranked based on their attractiveness for FDI and appetite for M&A will be produced along with actionable insights from the analysis phase.

III. Target List Development:

1. Company selection: in this activity, Jordanian companies within the prioritized sectors based on growth prospects, innovation and investment readiness will be identified and evaluated to produce a list of 100 high-potential Jordanian companies.
2. Due Diligence: a preliminary due diligence will be carried out on selected companies to assess financial health, operational efficiency and strategic fit, to produce due diligence reports for shortlisted companies.
3. Company Profiling: at this stage, detailed profiles for targeted companies are developed, highlighting their strengths, market position and investment potential.

IV. Matchmaking exercise:

1. Investor Outreach: Consulting teams will initiate engagement with GCC investors through targeted outreach, leveraging consulting networks, producing a list of interested investors and partners.
2. Roadshow Organization: Consulting partners would facilitate and organize matchmaking events, including conferences, workshops and one-on-one meetings to connect Jordanian companies with GCC investors.
3. Negotiation Support: Consulting teams on the project will provide the needed support in facilitating negotiations and deal structuring, including managing engagement and communications between Jordanian companies and prospective GCC investors.
4. Post-Matchmaking Follow-up: This will include follow-up with both Jordanian companies and GCC investors to ensure successful partnerships and address any arising issues.

Utilizing the expertise of the consulting industry in GCC is crucial for effectively navigating the investment landscape. The consulting industry in Saudi Arabia, which grew by 12% in 2023, has developed robust capabilities and deep insights into the regional economic environment. By engaging these consulting firms, Jordan can benefit from their knowledge of market trends, regulatory processes, and strategic entry points. This expertise is essential for identifying investment opportunities, streamlining regulatory processes, and creating attractive investment packages.

This strategic initiative will not only bolster Jordan’s economic growth but also complement the economic aspirations of GCC countries. It will create new opportunities for regional collaboration and development, enhancing economic ties and fostering mutual prosperity in the region.

Case Study: Area for Cooperation

Jordan's manufacturing sector plays a crucial role in the economy, contributing over 17% of GDP and providing employment to more than 600,000 people. The Ministry of Investment has unveiled its "Investment Promotion Strategy" for 2023-2026, highlighting priority areas such as high value-added industries, information and communication technology, healthcare, tourism, real estate, mining, chemicals, agriculture, and logistics.

Jordan's pharmaceutical sector, established in 1962, excels in producing high value-added products and services that meet international standards. With advanced production, testing, and development infrastructure, Jordan outpaces regional competitors. Over 20 successful companies are engaged in medical research, with many leading pharmaceutical and life science firms thriving in international markets. The well-designed regulatory process reduces investment risk, with robust legal protections for intellectual property rights, essential for the sector. Recent automation enhancements in the drug approval process have further streamlined operations. Jordan offers cost advantages with customs exemptions and a favorable tax regime, including a 5% income tax on profits for companies in development zones and significant tax benefits in the Aqaba Special Economic Zone. The growth potential of Jordan’s pharmaceutical sector is substantial, driven by rising global demand, particularly in the MENA region, expected to reach USD 50-60 billion by 2025. There is strong potential for licensing and joint venture partnerships between Jordanian and multinational pharmaceutical companies to produce export products for EU and regional markets.

Conclusion

In conclusion, aligning with GCC economic aspirations is vital for Jordan's sustained growth and development. Proactive regional economic integration and investment pursuits by Jordanian policymakers and businesses will unlock the full potential of this strategic initiative, which will likely flourish with the upcoming parliamentary elections. Strengthened economic ties and complementarities between Jordanian and GCC industries will foster mutual growth and innovation, propelling the region towards shared prosperity.