Stalling FDI in Tunisia can set back progress towards the Sustainable Developments Goals (SDGs), as foreign firms are likely to create many jobs, pay higher wages, be more productive and better integrated in GVCs. Of all private firms in Tunisia, 3.5% were foreign owned in 2022. These foreign firms generated 11% of revenues and employed 21% of formal private sector workers. Nearly one foreign firm out of four employs at least 50 workers, against 2% of Tunisian firms, and 6.5% have more than 200 employees. While large foreign firms are mostly textile, mechanical, electronics or automotive equipment manufacturers, smaller foreign firms are services providers, principally of scientific, technical, business or ICT activities. Half of the foreign firms are micro businesses, possibly Tunisian diaspora investors purchasing land for agriculture, building a house, or starting a small business in their region of origin – often rural areas, in contrast with foreigners that choose coastal urban hubs. The metropolitan area of Tunis hosted 67% of foreign firms and attracted more than half of non-energy FDI between 2013 and 2022.

The large contribution of FDI to sustainable development is inherently linked to Tunisia’s offshore regime, created in 1972. Combined with major liberalisation reforms in the 1990s, Tunisia’s offshore regime exports led to increased FDI and strong integration in GVCs. In 2021, foreign offshore firms, in majority European export-processing manufacturers, represented 79% of all foreign firms, a share close to 100% in the textiles and electric-electronic and household appliance industries. The offshore regime model has shown its limitations, however, with a dual economy characterised by large, low value-added, exports in an offshore sector that is unable to create jobs for the highly educated youth and a protected domestic sector. Furthermore, foreign offshore manufacturers are poorly integrated in the local economy – in 2021, they sourced only 30% of their inputs from domestic firms, limiting knowledge spillovers to Tunisian SMEs.

The contribution of FDI to job creation is large and one of the highest in the MENA region but is limited to low-skilled jobs. An abundant, young and skilled workforce had made Tunisia an attractive investment destination. In 2021, one out of five private sector employees worked in a foreign firm – 34% in manufacturing and 10% in services, among which 95% in foreign offshore firms; the number of workers in foreign firms has also doubled since 2005. Most job opportunities are in lower-skilled occupations, however, created by large foreign manufacturers exporters. Jobs created by foreign firms in services were less important but required more high-skilled workers, particularly in ICT, business, scientific and technical services – in all these sectors, foreign firms accounted for 24% to 44% of employment. Even if most of the jobs created are in manufacturing activities, job creation from FDI in services and in renewables has expanded in the past decade. Foreign firms provide more on-the-job training than Tunisian firms, which reflects multinationals’ continual need to adapt to competitive international pressure through upskilling. The impact of FDI on gender outcomes is mixed. Most workers in foreign firms are women, and in proportions higher than in Tunisian firms, but these women are often in low-paid jobs in textiles or in the tourism sector.

Foreign investment is gradually shifting to more technology- and skill-intensive sectors but could further support productivity growth and improved living standards. At the national level, labour productivity of foreign firms decreased by 17% between 2010 and 2022, and, in 2022, foreign firms were between 40% to 50% less productive than Tunisian firms. They also paid only marginally higher wages. At the sectoral level, however, foreign firms were more productive and paid higher wages than their Tunisian peers in most sectors. The discrepancy in performance at the national and sectoral level is driven by a few sectors where foreign firms are less productive than their Tunisian peers. These sectors accounted for nearly half of foreign firms’ total revenues and include primarily automotive equipment and electric-electronics offshore exporter assembling imported components and re-exporting them with little value-added, limiting productivity and knowledge spillovers. The combination of incentives to offshore exporters and the limited attractiveness of the onshore sector is partly behind the mixed impact of FDI on productivity and wages.

Tunisia has undertaken comprehensive business climate reforms over the past years to unlock private investment, including FDI, with the objectives of reducing the large financing gap, creating more and better jobs, and boosting aggregate productivity. The 2016 investment law, adopted after extensive consultations with public and private stakeholders, further liberalised investment, and other legislative reforms strengthened investor rights, created a more investor-friendly environment and narrowed the policy gap between foreign and domestic firms. A new foreign exchange bill – to be ratified by the Parliament – should ease international business dealings. The authorities have also taken steps to reduce dependency on the offshore regime to attract FDI and improve its impact on local development. Further reforms are needed to improve the contribution of FDI to productivity, innovation, and better job creation for the highly educated youth. Based on an assessment of FDI impact on sustainable development, policy directions include:

• Improving policy coherence by aligning investment policy and promotion with Tunisia Vision 2035 and national plans aiming at making Tunisia a knowledge-based economy with human capital as a source of innovation. Institutional coordination is essential to achieve this goal.

• Continuing efforts to reduce the dichotomy between the offshore and onshore regimes to expand investors’ motives beyond low value-added, low-wage, export-processing activities to more productive segments of the value chain and services sectors that create jobs for the highly educated job seekers.

• Strengthening pro-competition reforms, including reducing barriers to foreign investment in relevant services sectors such as business services and ICT, to unleash economy-wide productivity gains and support a more dynamic private sector that creates more and better jobs.

• Establishing robust monitoring and evaluation mechanisms to assess the impact of FDI on productivity, innovation, and labour market outcomes and anticipate foreign firms’ skills needs.