FDI Qualities Review of Egypt

Abstract

This report examines how foreign direct investment (FDI) contributes to productivity, innovation, job quality and skills development in Egypt. While foreign investment serves as a vital source of financing for Egypt, sustaining and deepening the current reform efforts is essential to ensure more equitably distributed benefits across society and to foster the growth of a knowledge-based economy. This report evaluates the country’s policy and regulatory environment shaping technology transfer from foreign multinational enterprises (MNEs) to small and medium-sized enterprises (SMEs). It offers policy recommendations to promote and attract FDI with significant spillover potential, enhance the ability of Egyptian SMEs to absorb new knowledge, and strengthen Egypt’s integration in global value chains.

Egypt has made significant strides towards achieving a resilient and sustainable economy. In recent years, the Government has launched a broad agenda of structural and institutional reforms aimed at improving the investment climate, enhancing the quality and impact of foreign direct investment (FDI), and stimulating economic growth. These efforts include strengthening the legal and regulatory framework for investment, expanding the role of the private sector, and promoting policy stability in fiscal and monetary areas. To support investor confidence, Egypt introduced measures to streamline licensing procedures and improve investor services through modernised digital platforms. Egypt continues to be a major and attractive destination for investors. Since 2011, FDI inflows have grown in absolute terms and as a percentage of GDP, despite a downturn in 2019-2021 due to the COVID-19 pandemic. However, labour productivity growth has been moderate relative to other emerging economies and strong imbalances in the labour market persist. Unemployment is high among youth and women and, while nominal wages and the minimum wage have increased, real wages remain low.

FDI boosts productivity and employment, but its contribution to innovation, inclusion, and integration in global value chains could be enhanced

FDI has the potential to help Egypt address pressing challenges and become a resilient and sustainable economy. About three-fifths of the FDI inflows received in 2023-2024 and about four-fifths of the greenfield FDI received in 2013-2023 went to construction and resource-based sectors (energy, coal, oil and gas). These are capital-intensive sectors with high levels of productivity but limited prospects for innovation and knowledge diffusion. A small share of FDI is dedicated to R&D and innovation activities, just 0.2% of all inflows in 2013-2023, and only 5.5% of foreign firms reported spending on R&D. At the same time, the renewable energy sector continues to attract investment, confirming Egypt's role as a leading global destination in this sector. In addition, innovative sectors such as software and information and communication technology (ICT), have attracted a growing share of greenfield FDI.

Foreign firms contribute significantly to labour productivity. They are on average 1.5 times more productive than domestic firms. Linkages between foreign and Egyptian firms are also significant as foreign firms tend to source around 63% of their inputs domestically. Wide productivity gaps, however, call into question the ability of domestic firms to take full advantage of these linkages, for example through knowledge and technology spillovers. There is untapped potential for FDI to increase Egypt’s integration in global value chains (GVCs). Persistent barriers to FDI and trade in services underlie limited participation in GVCs. Foreign firms are more than twice as likely to export as domestic firms but, despite their export orientation, the sectoral composition of FDI does not favour indirect exporting by SMEs and generate only limited spillovers through market linkages.

Between 2013 and 2023, 275 598 jobs were directly created by greenfield projects, a sharp increase from the 165 390 created in the previous decade. Many jobs were in manufacturing, although the relative importance of this sector for job creation has declined over the past decade. Other sectors have emerged as drivers of job creation, such as renewable energy and ICT. Despite the large number of jobs created the intensity of FDI job creation, i.e. the number of jobs created per billion of greenfield FDI invested, is lower in Egypt than in other peer countries: in 2003-2023, Egypt's job creation intensity was 1 100 jobs, below the OECD and MENA averages of 2 100 and 1 600 jobs, respectively. Additionally, FDI flew to sectors with less job creation intensity, such as renewables and digital sectors. While FDI is contributing to Egypt's digital and green transition, it is likely to create fewer jobs in the future. The quality of jobs created by foreign firms does not appear to be different from those created by Egyptian firms. Foreign and domestic firms pay similar wages and employ skilled labour at a similar rate, perhaps because foreign firms are prevalent in low-skill or low-innovation-intensity sectors, yet they are more likely to provide training to their workers. Finally, foreign firms are not more gender inclusive than domestic firms, given the low proportions of women at all levels (employees, managers, and owners) found in both domestic and foreign firms.

Further reforms can help fully realise the potential of FDI through SME-FDI linkages and positive spillovers: Key policy directions

Egypt has advanced important and wide-ranging reforms over the past years to improve the policy and institutional framework for investment: a Ministry of Investment and Foreign Trade was created in 2024, bringing under the same roof trade and investment policy, functions previously managed by the former Ministry of Foreign Trade and Industry – now split into the Ministry of Industry and the Ministry of Investment and Foreign Trade – and the General Authority for Investment and Free Zones (GAFI). The 2025 National Economic Development Narrative frames investment as a pillar of Egypt’s development strategy. Implementing ongoing reforms and initiating additional ones will help attract FDI with improved impact on the domestic economy. Strengthening intellectual property rights (IPR) and ensuring their enforcement would increase investor confidence and encourage R&D activities. Continued governance and transparency reforms have helped improve perceptions related to corruption and strengthen Egypt’s attractiveness as a reliable investment destination. Though sustained efforts remain key to further address corruption-related concerns.

Effective investment promotion in Egypt requires a well-defined strategy that integrates the roles of the GAFI and other entities focused on FDI, SME growth, and innovation. Monitoring and evaluation, particularly of fiscal and incentive programmes, are critical to ensure they are properly designed to achieve desired policy objectives. Key challenges lie in institutional co-ordination and alignment of government efforts to attract investment in sectors with better growth prospects, such as higher value-added manufacturing sectors. Egypt has already established a green hydrogen strategy that aims to mobilise low-carbon FDI, providing a solid foundation for further development of this sector. Building on this, attracting investments through public-private partnerships and targeted incentives should be combined with tailored support for small businesses to help them succeed in this high-potential but high-risk sector.

Strengthening SME capacities requires better institutional co-ordination and policy reforms in entrepreneurship and competition. While recent reforms have provided more support and flexibility to SMEs, key issues remain. Recent reforms to simplify administrative procedures, including those implemented under the Industrial Permits Act of 2017 and the introduction of an electronic platform for business registration by GAFI, could be further developed by limiting the number of procedures required and introducing centralised and streamlined processes for business registration and license applications. Reducing unnecessary regulatory interventions and promoting transparent public-private dialogue will help create more effective policies and reduce business costs.

Connection between domestic and foreign firms to promote productivity spillovers could be strengthened. While the creation of Free and Special Economic Zones (SEZs) has attracted investment, it has also created isolated enclaves with limited linkages to the local economy. Supplier development programmes and matchmaking services can reduce search costs for international firms sourcing inputs from local producers. Public-private dialogue should help identify barriers to forming stronger linkages. National initiatives such as MSMEDA’s digital SME platform and IMC’s sector-specific supplier development programmes are strengthening local firm capacity and competitiveness. These efforts are key in enhancing SME–FDI linkages, supporting absorptive capacity, and advancing sustainable integration into global value chains (GVCs). In addition, greater attention is needed to enforce social and environmental regulations in economic zones. A national strategy to leverage FDI to support SMEs and broader development goals could focus efforts across government ministries. Better data collection on FDI and its impact on the economy, including linkages between domestic and foreign firms, would help improve policy effectiveness.

Policy recommendations

• Streamline institutional roles and improve co-ordination among government agencies involved in investment promotion and SME development. This would improve transparency and reduce overlaps in mandates. Consider streamlining institutional roles and establishing interinstitutional networks and working groups to address co-ordination gaps in the promotion and facilitation of knowledge-intensive investment.
• Finalise and effectively implement Egypt’s National Foreign Direct Investment Strategy (2025–2030), currently being developed by GAFI in collaboration with the World Bank Group. The strategy should serve as a key pillar of Egypt’s investment reform agenda and be aligned with Egypt Vision 2030 and the 2025 National Economic Development Narrative. The strategy should outline clear policy priorities, target sectors, governance arrangements, and a comprehensive M&E framework based on international good practices. A well-articulated strategy and M&E framework will support policy alignment, enhance co-ordination across institutions, and ensure productivity and innovation spillovers.
• Strengthen GAFI’s capacity to target and prioritise investments with high innovation and technology transfer potential. GAFI should build on the sector prioritisation framework developed under the National FDI Strategy (2025-2030). Building on the comprehensive investment targeting and prioritisation framework can further equip GAFI with the tools needed to prioritise investments in high-value-added and innovation-driven sectors, such as ICT, advanced manufacturing, and green technologies. Targeted investments should focus on fostering high-tech solutions and increasing economic complexity. Develop sustainability and innovation scoring mechanisms to guide investment targeting and regularly review sectoral priorities based on global and domestic economic developments. GAFI should also consider developing dedicated units to facilitate green and high-tech investments and promote collaboration between foreign and local firms.
• Strengthen supplier linkages by creating a comprehensive database and enhancing matchmaking services in collaboration with government entities involved in SME development. GAFI should consider collaborating with local chambers of commerce, private sector stakeholders, MSMEDA and IMC to develop a comprehensive, online database of local suppliers in priority sectors. This platform would provide foreign investors with detailed profiles of Egyptian SMEs and enable virtual matchmaking to reduce transaction costs. This would enhance local integration of foreign investors, increasing productivity spillovers and supporting SME development.
• Integrate MNE-SME linkage programmes into business support services offered in zones. Clarify land governance procedures and streamline institutional responsibilities to improve investor access and facilitate integration of zones into local economies. Under the Inter-ministerial Group on Entrepreneurship led by MPEDIC, GAFI could consider enhancing business development services within zones by introducing dedicated matchmaking initiatives and supplier databases to connect MNEs with local SMEs in co-ordination with IDA, MSMEDA, and IMC. Complementary measures, such as technical support, workforce training, and incentives for local sourcing, should be prioritised to foster value-added linkages and maximise spillover benefits.
• Improve SME access to supplier development services and ensure they meet the product and service quality standards required by foreign MNEs. Extend MSMEDA’s online platform to provide a comprehensive mapping of business support services offered by the government, private sector, NGOs, and development partners. Consider connecting MSMEDA’s enhanced portal with GAFI’s electronic platform, as well as the Hub for Advisory, Finance and Investment (HAFIZ platform), to create a more cohesive and integrated digital ecosystem for SMEs and entrepreneurs.
• Support and further expand supply chain and cluster development programmes implemented by IMC towards knowledge-intensive activities and industries with weak supplier capacities. Several government agencies (e.g. EDA, IMC, MSMEDA) provide export development services that promote international exposure and networking of SMEs abroad, but they fall short of developing robust supplier capacities—such as product quality standards, certification, and accreditation—that would enable them to join the supplier networks of foreign investors domestically. Policy emphasis could be placed on developing comprehensive action plans for the development of industrial clusters and business networks and leveraging existing programmes implemented by IMC, EDA and MSMEDA.
• Ensure that innovation policies include priorities and specific measures fostering R&D collaborations with foreign MNEs in knowledge-intensive sectors. Collaborative initiatives currently implemented by ITIDA and TIEC could be further supported and leveraged to enhance the involvement of SMEs and startups in R&D partnerships, facilitate technology transfer, and expand matchmaking efforts. Emphasis could also be placed on supporting high-technology and knowledge-intensive activities through public-private partnerships connecting universities and R&D centres.