This chapter provides an overview of Tunisia’ current state of sustainable development challenges and analyses trends in inward FDI across sectors. It describes how foreign investment contributes to Tunisia’s sustainable development objectives and provides a summary of Chapters 2 and 3 on the impact of FDI on productivity, innovation, job quality and skills development.
FDI Qualities Review of Tunisia
Boosting Productivity and Creating Better Jobs
1. Overview
Abstract
1.1. Foreign investment is a major source of financing that has recently stalled
Tunisia’s small open economy has strongly benefitted from trade and investment openness and integration in global value chains (GVCs). Major business climate reforms, including in recent years, and the creation of the offshore regime in 1972 led Tunisia to attract large amounts of foreign direct investment (FDI). Inflows of FDI reached their peak in 2006 at USD 3.2 billion, representing more than 9% of the GDP at the time. The FDI stock-to-GDP ratio of 85% is high compared to other emerging economies – but FDI inflows have been trending downwards (Figure 1.1). Economic drawbacks caused by the Global Financial Crisis and political disruptions in the past decade considerably impacted FDI inflows into the country, which have been generally decreasing since 2012 despite showing some signs of recovery in 2017 and 2018. External shocks resulting from the COVID-19 pandemic in 2020 brought about an additional contraction of FDI inflows. In 2022, FDI flows represented 1.5% of GDP, which is low relative to the 2.3% in the MENA region and to previous years, but higher than the 0.9% recorded in 2021 during the COVID-19 crisis.
Figure 1.1. The contribution of FDI to the Tunisian economy is important but has recently stalled
Source: (IMF, 2024[1]), IMF Balance of Payments Database; and (World Bank, 2024[2]), World Bank Developments Indicators.
Stalling FDI in Tunisia, together with sluggish economic growth, can set back progress towards the Sustainable Developments Goals (SDGs). Foreign investment helps reduce Tunisia’s large external financing needs while foreign firms are likely to create many good jobs and boost productivity and innovation (OECD, 2022[3]). FDI can also help achieve Vision 2035, aiming at making Tunisia a knowledge-based economy with human capital as a source of innovation. Instability, with frequent changes in government affecting policy coherence and implementation, and uncertainty on priority reforms has slowed economic growth (Figure 1.2). This adversely affect business dynamism and contributes to the emigration of skilled youth. Recent geopolitical instability led to rising energy prices and persistent external imbalances (OECD, 2022[4]). GDP grew by less than 1% in 2023, compared to 2.6% in 2022, adversely affected by inflationary pressures, weighing on consumption and investment, and a decline in agricultural production. The Central Bank of Tunisia estimates GDP growth at 2.1% in 2024, considerably lower than the estimated growth of 3.9% in emerging economies on average (Central Bank of Tunisia, 2024[5]).
Figure 1.2. Economic growth in Tunisia has catch-up potential with other emerging economies
Source: (World Bank, 2024[2]), World Bank Developments Indicators; and (OECD, 2024[6]) OECD Economic Outlook database.
Despite ongoing challenges, Tunisia offers a variety of economic opportunities, including an educated workforce, a favourable geographical location, and free-trade agreements with the EU and Africa. The economy is diversified, with a large and increasing contribution of services to value added, a labour-intensive manufacturing sector, and an important agricultural sector relative to OECD countries (Figure 1.3). Trade intensity – the share of exports and imports in GDP – reached 111% in 2022, twice as high as the OECD average. Exports, particularly of machinery, electronics, textiles and clothing, have been important drivers of growth and job creation. Labour productivity, however, is modest by international standards and has even declined since 2011. Reallocation of capital to more productive sectors or segments of the value chains has been limited due to structural challenges, including significant state involvement in the economy, and weakened business confidence, hindering business dynamism (OECD, 2022[4]). Overall, gross fixed capital formation declined over the past decade and represented only 16% of GDP in 2022, compared to 26% in 2010, but has slightly increased since 2021.
Figure 1.3. Economic structure of Tunisia and comparator countries
Share of value-added by sector, in percent
Source: OECD based on (World Bank, 2024[2]), World Bank Developments Indicators.
Tunisia has undertaken comprehensive business climate reforms over the past years to unlock private investment, including foreign investment. The 2016 investment law, adopted after extensive consultations with public and private stakeholders, further liberalised investment and introduced new incentives, including wage and training subsidies. Tunisia has since then continuously pursued legislative reforms to strengthen investor rights and create a more investor-friendly environment (OECD, 2021[7]). Little progress has been made since 2016 on streamlining restrictions on foreign ownership, however. The 2018 application decree of the investment law lists 243 authorisation and licensing regimes – authorisation is required to invest in 49 sectors if foreign ownership exceeds 50%. In sectors such as wholesale trade a blanket prohibition on FDI applies (OECD, 2021[7]; OECD, 2022[4]). Lowering barriers to foreign ownership in Tunisia’s services sector such as business services, ICT, and transport and logistics could help unleash economy-wide productivity gains, including in export-oriented manufacturing activities relying on competitive and quality ICT infrastructure and services inputs, and confronted to increased fierce global competition (see Box 1.1).
Reforms also revamped the institutional framework for investment policy, although it is now composed of several bodies with partly overlapping mandates. The Foreign Investment Promotion Agency, FIPA, is responsible for the promotion and facilitation of foreign investment, similar to most investment promotion agencies (IPA) of OECD countries. With the ongoing geo-economic fragmentation, the agency focuses on providing competitive conditions to foreign investors considering nearshoring their operations to serve the large European market. FIPA operates under the umbrella of the Ministry of Economy and has several offices in Europe. The Tunisia Investment Authority (TIA) regulates investment activities and leads policy reforms in this area. It also provides tax incentives for large projects. The Agency for industrial and Innovation Promotion (APII) is responsible for promoting the industrial sector and innovation. It is the only investment body with subnational offices (OECD, 2019[8]). The presence of multiple agencies involved in investment issues generates considerable coordination needs to ensure policy coherence and delivery.
Tunisia is considering further reforms to enhance its investment framework: it has launched, in the context of its 2023-2025 National Reform Programme, a “National Strategy for the Improvement of the Business Climate”, accompanied by a nationwide public e-consultation (OECD, forthcoming[9]). Ongoing reforms include a draft foreign exchange bill to ease international business dealings that was passed in March 2024 by the cabinet and is open for parliamentary review and ratification – foreigners face restrictions in making bank transfers abroad unless they are an offshore entity. By assessing the impact of FDI on productivity, innovation, quality job creation and skills development, this review provides additional policy directions for reforms than can help strengthen the contribution of FDI to sustainable development.
Box 1.1. FDI liberalisation in services can help unleash economy-wide productivity gains
Tunisia’s trade and investment liberalisation efforts in the 1990s led to important FDI inflows (Figure 1.4, Panel A). However, regulatory restrictions on foreign ownership continue to be significantly higher than in OECD countries. Authorisation is required to invest in 49 sectors if foreign ownership exceeds 50% (Figure 1.4, Panel B). Restrictions on FDI also apply in several sectors, as set out by sector-specific and commercial legislations, among others, rather than consolidated in a negative list. They include foreign equity limits to acquisition and/or greenfield investments in agriculture, transport, telecommunications, financial services, wholesale and retail distribution, and media (Figure 1.4, Panel C). In tourism, foreign travel agencies may operate only indirectly through partnerships with Tunisian travel agencies (OECD, 2023[10]). FDI restrictions in services and infrastructure can hold back economy-wide productivity gains, including in manufacturing activities relying on competitive and quality services.
Figure 1.4. Regulatory restrictions on foreign ownership in Tunisia
FDI Regulatory Restrictiveness Index (FDIRRI), 2021
Source: OECD FDI Regulatory Restrictiveness Index (OECD, 2021[11]) https://www.oecd.org/investment/fdiindex.htm.
1.2. The contribution of FDI to sustainable development in Tunisia: main findings
1.2.1. Diversifying the sectors and sources of FDI can help improve economic resilience
The energy and manufacturing industries attract most foreign investments in Tunisia, although their importance has declined. In 2021, the energy sector attracted 29% of total FDI according to the latest available data from the Central Bank of Tunisia. Excluding the energy sector, and based on FIPA statistics, manufacturing has attracted the most FDI over the past decade (Figure 1.5). Manufacturing FDI more than doubled between 2013 and 2022 and about 75% of FDI in 2022 went to manufacturing, with the remaining directed at services, and less than 1% to agriculture. Within manufacturing, the electrics-electronics sector is the largest recipient, followed by chemicals, rubber, plastic and machinery and metals. The textile sector attracted only 3.5% of FDI. Services FDI has been concentrated in finance (38%), telecommunications (25%), and tourism and real estate (24%). The sectoral distribution of FDI in Tunisia is driven by many policy and non-policy factors, including privileges granted by the offshore regime to export companies and sectoral restrictions on foreign ownership in services sectors (OECD, 2021[7]).
Figure 1.5. Manufacturing is by large the first recipient of FDI followed by finance and ICT
Share of sector in total non-energy FDI
Note: FIPA publishes FDI statistics by sector, except for the energy sector, that are coherent with FDI statistics of the CBT. FIPA’s statistics has a higher level of disaggregation by sector than FDI statistics of the CBT, but the CBT includes the energy sector (OECD, 2020[12]),
Source: OECD calculations based on Foreign Investment Promotion Agency (FIPA, 2023[13]).
Investors from the EU and the Gulf Cooperation Council (GCC) dominate the foreign investment landscape in Tunisia. Jointly, they held 84% of total non-energy FDI over 2013-2022. The two groups do not invest in the same sectors, with implications for the impact of the respective investments on various sustainable development outcomes (Figure 1.6). Investors from the EU (66%) – principally from France, Italy, Germany and Spain – own most export-processing manufacturing projects. In 2020, the EU share in total imports was 48% – most non-food EU products are exempt from import duties because of Tunisia’s Association Agreement with the EU. On the other hand, two thirds of Tunisia’s exports go to the EU (Eurostat, 2022[14]). GCC companies (mostly from Qatar and the UAE) primarily invest in finance, ICT, and real estate sectors, which are less export-oriented and geared towards the Tunisian market. Diversifying the sources of FDI would allow Tunisia to increase economic resilience to external shocks and global trade fluctuations.
Figure 1.6. EU investors are the largest in Tunisia but mostly invest in manufacturing
Total non-energy FDI over 2013-2022
Note: Data excludes the energy sector.
Source: OECD calculations based on Foreign Investment Promotion Agency (FIPA, 2023[13]).
1.2.2. Many foreign firms are large export-processing offshore manufacturers
Stalling FDI in Tunisia can set back progress towards the SDGs, as foreign firms are significantly larger than Tunisian firms and, in turn, are likely to create many jobs, pay higher wages, be more productive and better integrated in GVCs. Benefits may not materialise automatically, however, and policies and institutional factors play an important role in enabling FDI direct and spillovers impacts. Realising this potential depends in large part on the type, motives, and sectors of foreign investment, as well as on the size, structure and technological advantages of the investing firm. The establishment of business linkages between foreign and Tunisian firms strongly depends on the capabilities of the latter (OECD, 2022[3]).
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 according to the Répertoire National des Entreprises. 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 (Figure 1.8, Panel A). While large foreign firms – in terms of employment – are mostly textile, mechanical, electronics or automotive equipment manufacturers, many foreign firms are services providers, principally of scientific, technical, business or ICT activities (Figure 1.7, Panel B).
Half of the foreign firms are micro businesses, possibly diaspora investors purchasing land for agriculture, building a house, or starting a small business (Delahaye and Tejada, 2018[15]). The benefits of diaspora FDI may not be sizeable but are geographically more widespread. The Tunisian diaspora tends to invest in their region of origin – often rural or remote areas, in contrast with foreigners that choose major coastal urban hubs (UNDP, 2016[16]). Overall, the metropolitan area of Tunis – the Grand Tunis – hosted 67% of foreign firms and attracted more than half of non-energy FDI between 2013 and 2022 (Figure 1.7, Panel C).
The contribution of FDI to sustainable development is inherently linked to Tunisia’s offshore regime, created in 1972. This regime grants exporting firms duty exemptions, tax incentives and preferential access to ports. Combined with major liberalisation reforms in the 1990s, Tunisia’s model of economic growth, based on the offshore regime, led to increased FDI in low value-added exports and integration in GVCs. In 2021, foreign offshore firms, in majority export-processing manufacturers, represented 79% of all foreign firms, in stark contrast with Tunisian offshore firms that accounted for only 2% of Tunisian firms (Figure 1.7, Panel D). This share is close to 100% in the textiles and electric-electronic and household appliance industries. Tunisia’s offshore regime, and related import-export activity, is dominated by EU investors.
Figure 1.7. Key characteristics of foreign firms in Tunisia
Note: 1. As a share of companies with at least 1 employee.
Source: OECD based on (INS, 2023[17]), Répertoire National des Entreprises.
Geared towards low value added, low cost production, the offshore regime model has shown its limitations, including its inability to create enough jobs for the highly educated youth entering the labour market (Box 1.2). The economy became characterised by large, low value-added, exports in the offshore sector and a protected domestic sector (OECD, 2012[18]). Furthermore, foreign offshore manufacturers are poorly integrated in the local economy – in 2021, they sourced only 30% of their inputs from domestic firms, which is the lowest rate among MENA economies, limiting market opportunities and knowledge spillovers to SMEs (Joumard, Dhaoui and Morgavi, 2018[19]). Furthermore, offshore firms can sell a significant share of their goods on the domestic market, creating unfair competition with onshore firms. The authorities have taken steps to reduce dependency on the offshore regime to attract FDI and improve its impact on local development. Competitiveness in the onshore sector has improved with the liberalisation of key services, although further progress in this area would boost the attractiveness of the onshore regime to investment.
Box 1.2. Historical developments in Tunisia’s offshore regime
At the beginning of the 1970s, Tunisia made a shift in its economic development policy and sought to involve foreign partners in its investment efforts. An offshore regime to encourage FDI was established, to attract low-cost production using unskilled labour. Exports of these offshore enterprises rose swiftly and the textile and clothing sector quickly overtook the oil industry. The share of fuel products in total goods export fell from 54% in 1981 to 16% in 1988. Electrical component exports also rose steadily.
With the promulgation of the Investment Incentives Code in 1993, strengthening the offshore regime, firms engaged wholly in export were eligible for numerous financial and tax advantages, including a total tax exemption for profits derived from export during the first 10 years. As in other countries such as Malaysia, which pursued a similar dual approach to development, the economy came to be characterised by rapidly growing exports and a protected domestic sector. Production for export was done primarily in enclaves and local value-added consisted essentially of low-cost and unskilled labour.
This approach may have been appropriate in the 1970s, given the country’s education level and the preferences granted by Europe, but it began to show its limitations already in the 2000s, with the emergence of a new, educated and skilled generation of workers in the labour market. Offshore companies created many jobs, yet not enough to absorb an active population that rose considerably and included many university graduates entering the labour market for the first time. Furthermore, there was little effect on real wages and the system did not induce many indirect jobs by comparison with other forms of FDI that favour business linkages with local SMEs. Lastly, the favourable treatment accorded to the offshore sector came at the expense of the “onshore” sector (ILO, 2011[20])
The authorities have gradually been taking measures to overcome this dualism. Local and onshore firms have benefited from tariff reductions on imported components and cuts in corporate taxes. At the same time, offshore firms were gradually authorised to sell part their output on the local market (50% since 2011). Corporate income tax rates of the two regimes converged with the Budget law for 2021, although other tax privileges remain (OECD, 2022[4]). Competitiveness in the onshore sector has been improved with the liberalisation of key services such as banking and ICT. Further progress in this direction, making the services sector more open to competition and to foreign investors would boost the competitiveness of the onshore sector and help eliminate the distinction between these two sides of the economy, to the benefit of both.
Source: (OECD, 2012[18]), OECD Investment Policy Reviews: Tunisia 2012, OECD Investment Policy Reviews, OECD Publishing, Paris, https://doi.org/10.1787/9789264179172-en.
1.2.3. The contribution of FDI to employment is high but favours 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. The large contribution of FDI to labour market outcomes is crucial for an economy confronted with high unemployment rates – 16% in 2023, particularly among youth, women, the educated workforce and workers in hinterland regions. As in other MENA countries, stalling business dynamism, combined with skills imbalances and labour market rigidities, has limited adequate employment opportunities for an increasingly educated Tunisian labour force (OECD, 2022[4]; ILO, 2023[21]).
Most job opportunities are in lower-skilled occupations, created by large foreign manufacturers exporting automotive components, textile and clothing, and mechanical and electronics products (Figure 1.8, Panel A). While the textiles and clothing industry is the largest private employer, both by foreign and Tunisian firms, it is the automotive equipment industry that counts the largest share of foreign firms employing the bulk of workers within the sector (Figure 1.8, Panel B). 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. Demand for these higher-skilled jobs is stronger in the capital. Despite attracting half of FDI, jobs created by foreign firms in the metropolitan area of Tunis – the Grand Tunis – represented 28% of all FDI jobs, compared to 34% for the coastal Northeast region, where projects require less skilled workers but are more labour-intensive.
Figure 1.8. Foreign firms employ many workers in manufacturing, ICT and business services
Source: OECD based on (INS, 2023[17]), Répertoire Nationale des Entreprises.
The job creation intensity of FDI in Tunisia is one the highest in the MENA region and significantly higher than the OECD average. It has also increased in the past decade, partly driven by a shift in FDI to job-creating assembling activities of the electronic components sector. Even if most of the jobs created are in manufacturing activities, job creation from greenfield FDI in services and in renewables has expanded in the past decade (Box 1.3) – EU greenfield investors created 66% of jobs in renewables. Business services, R&D, sales and marketing, which are activities that may better fit the educated young job seekers, contributed to 12% of new jobs created by greenfield FDI during 2013-23, twice more than in 2003-12. Total FDI – both greenfield and mergers and acquisitions – from the EU created 77% of all FDI jobs over 2012-2022, owing to labour-intensive manufacturing projects relative to GCC investors (Figure 1.9).
Figure 1.9. EU investors accounted for 77% of all jobs created by FDI between 2013 and 2022
Source: OECD based on Foreign Investment Promotion Agency (FIPA, 2023[13]).
Foreign firms in Tunisia operate in a labour market with large skills imbalances – a misalignment between the demand and supply of skills, partly stemming from a high number of graduates, including many women, and low job creation for the highly skilled. Foreign firms have little impact on reducing this imbalance since their labour demand is geared towards low-skilled workers. Furthermore, they face severe skills mismatches, even more than Tunisian firms, as workers hired do not necessarily have adequate skills (Figure 1.10, Panel A). Hired workers are likely to be highly educated Tunisians constrained to accept jobs not corresponding to their qualifications, with adverse impacts on productivity. Foreign firms provide more on-the-job training than Tunisian firms, however, which reflects multinationals’ constant need to adapt to competitive international pressure through upskilling (Figure 1.10, Panel B). 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 (Figure 1.10, Panel C).
Figure 1.10. The contribution of foreign firms to skills development and gender equality in Tunisia
Source: OECD calculations based on (World Bank, 2024[22]), World Bank Enterprise Surveys (Tunisia: 2020), https://www.enterprisesurveys.org/en/data.
Box 1.3. Foreign investment in Tunisia’s renewables sector can support a just green transition
Tunisia has abundant solar, wind and biomass resources. The government raised its renewable energy target from 30% to 35% by 2030 compared to the trend scenario in 2022. It also pledged to reduce its carbon intensity (emissions relative to gross domestic product) by 45% by 2030 compared to its 2010 level. There is no hydrogen strategy, but the government is working on establishing a new legal framework to promote the production and use of green hydrogen and its derivatives in the local market. Many solar equipment suppliers operate in Tunisia’s solar market. Most of these entities can only manufacture and distribute equipment for small and medium solar projects. For large-scale solar projects, equipment tends to be imported (OECD, forthcoming[9]).
Foreign investment can play a fundamental role in supporting a just green transition in Tunisia. Globally, the share of renewable energy in total energy FDI expanded rapidly, reaching 84% in 2021. The shift of FDI in the energy sector away from fossil fuels and into renewables has consequences on job creation. Estimates show that, since 2019, jobs created from FDI in renewables even surpassed jobs from fossil fuel investments. In Tunisia, greenfield FDI in renewables strongly increased between 2003 and 2022 (Figure 1.11). Relatedly, jobs created from FDI in renewables represented 18% of all jobs created by FDI in the energy sector between 2013 and 2022 against only 4% between 2003 and 2012. EU greenfield investors created 66% of jobs in renewables over 2013-22.
Figure 1.11. Jobs created from greenfield FDI in renewables in Tunisia, 2003-2022
Note: Greenfield FDI corresponds to announced capital expenditure (CAPEX). Number of jobs and CAPEX are partly based on estimates.
Source: OECD calculations based on (Financial Times, 2024[23]) fDi Markets Database, https://www.fdimarkets.com.
In addition to supporting a just green transition, FDI can contribute to a decreasing carbon footprint thanks to the better overall environmental performance of foreign firms, particularly energy performance. Foreign firms in Tunisia perform better than domestic firms in terms of energy efficiency, measured as the amount of value added produced per unit input of energy. Furthermore, foreign firms are also more likely to use energy from their own renewable sources, monitor CO2 emissions across their supply chain or implement measures to reduce waste, thus being leaders of the green transition (OECD, 2023[24]).
1.2.4. The contribution of FDI to productivity and wages is limited but varies by sector
Foreign investment in Tunisia is gradually shifting to more technology- and skill-intensive sectors but could further support economy-wide 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, depending on whether sectors with large informality are included or not (Figure 1.12, Panel A and B). 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 – productivity performance is often a catalyst for better wages (Figure 1.12, Panel C). The discrepancy in foreign firms’ performance at the national and sectoral level is driven by a few sectors where foreign firms are largely present but are less productive than their Tunisian peers. Foreign firms’ productivity and wage performances, relative to Tunisian firms, were higher in services than in manufacturing, but for productivity this performance has deteriorated in the past years.
Figure 1.12. Foreign firms are more productive and pay higher wages in most sectors
Foreign firms are more performant than Tunisian firms if the value is higher than zero
Note: Labour productivity is measured as revenues per employee. Panel B: the trade sector includes wholesale trade, trade and vehicle repair and retail trade, where levels of informal employment are high.
Source: OECD based on (INS, 2023[17]), the Répertoire Nationale des Entreprises sample.
The few sectors where foreign firms are less productive than their Tunisian peers accounted for nearly half of foreign firms’ total revenues. They include primarily automotive equipment and electric-electronics offshore exporter and ICT firms. Foreign offshore exporters mostly assemble imported components and re-export them with little value-added, limiting productivity gains and knowledge spillovers. The ICT sector attracted the largest amount of services FDI over the past decade, after financial activities, and has the highest share of foreign firms in services (Figure 1.8, Panel B). But revenues of foreign ICT firms dropped sharply in 2019, while employment increased, leading to a decline in productivity. On the other hand, they paid higher wages than Tunisian firms. The textiles industry is one of the few large sectors where foreigners performed better, suggesting that their activities go beyond only processing or assembling.
The combination of incentives provided to offshore exporters and the limited attractiveness of the onshore sector, where FDI restrictions are high in productive sectors such as business and professional services, is partly behind the mixed impact of FDI on productivity and wages. From a policy perspective, it is less the foreign ownership of MNEs in Tunisia that drive their weak performance but rather that they operate in the offshore regime. The discrepancy between foreign productivity premia at the national and sectoral levels corroborates findings for offshore firms showing that productivity premia existed at the sectoral but not at the national level (Dhaoui, 2019[25]). Other findings show that offshore firms that are engaged in both exporting and importing underperform their onshore counterparts as they generally engage in processing and pure assembly activities (Baghdadi, Kheder and Arouri, 2019[26]). Finally, considering the significantly lower contribution of foreign firms to total revenues compared with employment (11% versus 20%), it is possible that exporters partly report revenues or profits made by selling their goods or services in foreign markets.
1.2.5. FDI supports Tunisia’s ambitions of becoming a knowledge-based economy
Beyond supporting productivity enhancements in many sectors of the economy, FDI in Tunisia also supports innovation. Despite low levels of investment in R&D, technology diffusion from foreign firms contributes to improved innovation outcomes. Foreign firms are more R&D intensive than their Tunisian counterparts – 20% of foreign firms invested in R&D as opposed to 6% of Tunisian firms in 2021. Foreign firms are also more likely to introduce a product or process innovation but tend to be less innovative than in other comparator countries, partly as a result of their specialisation in less capital-intensive activities. The share of greenfield FDI going to R&D is smaller than in peer economies such as Portugal, Costa Rica or Lithuania. Little FDI goes directly to R&D activities, except in the ICT and the automotive sectors, which may help these sectors upgrade their production and export higher value-added goods and services and, in turn, improve their productivity. Sectors that are more R&D intensive, like pharmaceuticals, biotechnology, or medical devices do not attract much FDI (OECD, forthcoming[27])
1.3. Reforms can support FDI that boosts productivity and quality job creation: key policy directions
Enabling FDI that boosts productivity and creates quality jobs in Tunisia hinges upon a complex mix of policy measures that involve both a favourable investment policy environment and targeted policy reforms. An in-depth policy assessment for Tunisia is outside the scope of this review, but it could build on it to provide concrete reform suggestions and prioritise policy and institutional reforms to maximise the benefits of FDI on productivity and create more jobs. The OECD FDI Qualities Recommendation and related policy toolkit and principles could support such an assessment (Box 1.4).
Box 1.4. The OECD Recommendation on FDI Qualities for Sustainable Development
The Recommendation on FDI Qualities is structured around the following key high-level policy principles/directions, drawn from the FDI Qualities Policy Toolkit:
1. Governance: Provide coherent strategic direction on fostering investment in support of sustainable development, and foster policy continuity and effective implementation of such policies.
2. Domestic policy and legal frameworks: Take steps to ensure that domestic policy and legal frameworks support positive impacts of investment on sustainable development.
3. Financial and technical support: Prioritise sustainable development objectives when providing financial and technical support to stimulate investment.
4. Information and facilitation services: Facilitate and promote investment for sustainable development opportunities by addressing information failures and administrative barriers.
5. Development cooperation: Strengthen the role of development cooperation for mobilising FDI and enhancing its positive impact in developing countries.
The FDI Qualities Policy Toolkit is also structured along these policy principles/directions and provides detailed guidance to governments on enhancing the impacts of FDI in four areas of the SDGs, including productivity and innovation; job quality and skills; gender equality; and decarbonisation.
The Recommendation builds on other standards developed by the OECD in the area of international investment, including the Declaration on International Investment and Multinational Enterprises to which Tunisia adhered in 2012.
Based on this assessment of FDI impact on sustainable development, policy directions include:
Improve policy coherence by aligning investment policy and promotion goals with Tunisia Vision 2035 and national plans aiming at making Tunisia a knowledge-based economy with human capital as a source of innovation. This implies a balanced approach towards job creation in investment policy that continues to target labour-intensive sectors, including outside of the Grand Tunis Area, while stepping up efforts to attract FDI in the digital economy and high-productivity, high-wage, services such as ICT, business services, and scientific activities. In manufacturing, supporting expansions in higher value-added activities of the automotive and electronics sectors can boost export sophistication, productivity, and skills spillovers, and could be more cost-effective than attracting new investors motivated by incentives of the offshore regime.
Continue efforts to reduce the dichotomy between the offshore and onshore regimes to expand investors’ motives beyond low value-added, low-wage, export-processing investments to more productive segments of the value chain and services onshore sectors that can match the large supply of highly educated job seekers. This includes reducing tax and regulatory differences, beyond corporate income tax, between the two regimes and stepping-up efforts to promote FDI outside of the offshore regime while improving the onshore regime’s attractiveness, including by removing barriers such as the requirement for foreign investors to partner with Tunisian firms.
Strengthen pro-competition reforms to unleash economy-wide productivity gains and support a more dynamic private sector that creates more and better jobs. Consider reassessing regulatory restrictions to foreign investment, notably horizontal restrictions and those in service sectors, such as business services, ICT, and transport, and, where relevant, streamline or remove them. Services restrictions can hold back economy-wide productivity gains, including in manufacturing activities relying on competitive and quality services. Foreign investment in services has also the potential to create jobs for both the low and highly-skilled Tunisian job seekers.
Establish robust monitoring and evaluation mechanisms to effectively assess the impact of FDI on productivity, innovation, and labour market outcomes. This requires firm-level data, building on the Répertoire National des Enterprises (RNE), providing information on foreign ownership, value-added, export, spendings on R&D and training, employment by gender, and labour costs. This necessitates improving coordination between the INS, FIPA, and APII. Consider involving FIPA and other relevant agencies in skill needs and anticipation exercises to design skills development programmes that target the needs of foreign firms.
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