FOREIGN DIRECT INVESTMENT
Since starting the political and economic reform process in 1990, Mongolia has proclaimed an open door towards the outside world and offers a favorable climate for foreign investors. The country has extensive and largely untapped natural resources, competitive local operating costs (labor costs, energy and premises), high literacy rate, and a relatively stable political and economic environment.
Creating the conditions to attract FDI and to strengthen the private sector have been important components in national development plans and have underpinned policy and structural reform since independence. Despite its location and distance from export markets, investment in the Mongolian economy has been relatively dynamic. This dynamism has been aided in part by rich natural resources and in part by the pro-active policies pursued by the Mongolian government.
The majority of sectors of the Mongolian economy are open to foreign investors, including banking, financing and privatization, infrastructure (road, transportation; tourism; ICT; construction), mining and oil, and food and agro-industry. The government actively encourages all forms of foreign investment, including joint ventures, wholly foreign-owned firms and co-production arrangements. There are no performance requirements as a condition for investment as the Government of Mongolia complies with trade-related investment measures (TRIMS) that specifically prohibit such requirements, for example export performance or local content requirements.
Recent FDI Flows
As of the end of 2005, since 1990, around 4,800 foreign invested companies (including the oil sector) have been registered from 88 countries with the total direct investment of 1.4 billion USD of which around 50 percent accounts for the minerals sector. 80 percent of total FDI was undertaken between the years 2000-2005, and among them investors from the People’s Republic of China, Canada, South Korea, Japan, British Virgin Islands, USA and Russian Federation are in leading position by the amount of investment and the number of registered companies. The leading sectors in terms of FDI are mining, trade and catering, light industry, banking, construction, and raw material processing.
FDI for 1999-2005 was concentrated in mining and oil followed by trade and catering service, light industry, banking and financial services and engineering construction and production of building materials. According to FIFTA, the majority of investment was in the mining sector, accounting for 47, 7% of all accumulated FDI. The strong presence of the mining sector in FDI can be explained in part by the high capital-intensity of mining industry. Canada, China, USA, Bulgaria and Russia are main investors in this sector.
FDI in the mining and minerals sector now represents about half of total FDI, while trade and catering compromises 15.4 percent, light industry 6 percent, banking and financial services 5.3 percent, construction 3.9 percent, and processing of animal originated raw materials 3.8 percent.
In 2005 FDI in the geological prospecting, oil exploration and mining sector amounted to US$191 million, compared to US$60 million in 2001. Following active FDI in this sector many new business activities were created in Mongolia.
The construction sector is on the rise, primarily due to the implementation of The Land Ownership Law of Mongolia, which allows for private ownership of land. The Program on 40 thousand houses has also had a positive impact on the construction sector.
FDI in the banking and financial services sector increased to above 5 percent of total FDI in 2005. The highest FDI flow – US$ 19.7 million – occurred in 2001. Since then banking has been an important sector for FDI because of the privatization of The Trade and Development Bank and the Agricultural Bank of Mongolia, and further liberalization in the banking system.
In the 2000-2005 period, FDI flows into the tourism sector increased to US$5.6 million. Today, FDI in the tourism sector comprises around 1.1 percent of total FDI and 10 percent of the country’s GDP.
There has, however, been declining FDI in the textile and garment sector due to expiration of the WTO multilateral fiber agreement, and China becoming a member of WTO.
Ninety five percent of total FDI occurred in the capital city of Ulaanbaatar, with only 5 percent / about 72.6 million USD/ in the provinces. Amongst the provinces 7.5 percent of FDI occurred in the Western region, 34.6 percent in the Khangai region, 41.1 percent in the Central region and 16.7 percent in the Eastern region. FDI is, therefore, concentrated- not unexpectedly- in those locations typified by more infrastructures.
The Government of Mongolia has approved a list of priority sectors for investment. In accordance with the list, the technological equipment and machinery brought into Mongolia by foreign investors as a part of share capital of foreign-invested companies are granted customs duty and VAT exemptions. And this is the list of the Priority sectors for foreign investment of Mongolia.
Entry filed under: Foreign Direct Investment.