This chapter examines the contribution of FDI to trade, global value chains (GVCs) integration, productivity and innovation. It analyses productivity differences between foreign and domestic firms at national and sectoral levels, and the extent of value chain linkages between foreign MNEs and Tunisian firms, an important channel of productivity spillovers. It also assesses the role of foreign firms in innovation and the local capacity of domestic firms, particularly small and medium-sized enterprises (SMEs), to benefit from the diffusion of knowledge and technology brought by FDI.
FDI Qualities Review of Tunisia
Boosting Productivity and Creating Better Jobs
2. FDI impact on productivity and innovation
Abstract
2.1. Summary
Tunisia’s small open economy has benefitted from trade and investment openness and integration in global value chains (GVCs). The economy is diversified, with a large contribution of services to value added and a labour-intensive manufacturing sector. Manufacturing exports, particularly of machinery, electronics, textiles and clothing goods, have been an important driver of growth, but most economic activity is in low value-added activities and, in turn, labour productivity is modest by international standards and has even declined since 2011. Reallocation of capital to more productive sectors, including services, or higher value-added segments of the supply chains has been limited by structural challenges hindering investment and business dynamism, while global and domestic turbulences have weakened business confidence.
Private investment, especially foreign direct investment (FDI), could further contribute to economy-wide productivity growth and innovation in Tunisia. Foreign firms are more productive than their Tunisian peers in most sectors, including chemicals, finance, and mining – all large recipients of FDI. At the national level, however, foreign firms were 43% less productive than Tunisian firms in 2022. The few sectors where foreign firms are less productive accounted for 45% of foreign firms’ revenues and are dominated by automotive and electric-electronics manufacturers operating in the offshore regime – the electric-electronics sector attracted the bulk of FDI in the past decade. Foreign exporters in the two sectors mostly assemble imported components and re-export them with little transformation and interaction with Tunisian suppliers, limiting productivity gains and knowledge spillovers from FDI. Overall, foreign firms purchase 30% of their inputs on the Tunisian market, which is lower than in other southern Mediterranean countries.
The productivity performance of foreign relative to Tunisian firms in services is higher than in manufacturing but has deteriorated over the past years. Foreign firms are more productive than Tunisian firms in all services sectors, except in ICT. The ICT sector attracted the largest amount of services FDI between 2013 and 2022, after financial activities, and has the highest number of foreign firms in services (12% of all foreign firms). Foreign firms’ revenues in ICT have dropped sharply since 2019, however, while employment has increased, leading to a strong decline in productivity. Overall, the labour productivity of foreign firms in Tunisia decreased by 17% between 2010 and 2022, underpinned by their stalling productivity levels in manufacturing and decline in services’ ICT. Policies in place, including incentives provided to export manufacturers by the offshore regime and foreign ownership restrictions in services, may have influenced the motives and composition of FDI and its mixed impact on productivity. Misreporting by firms of their revenues, labour informality and the partial reliability of existing data may also affect these results.
Beyond supporting productivity enhancements in many sectors of the economy, FDI in Tunisia also contributes to advancing 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, yet they 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 into R&D activities 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 mechanical and electronical 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 biotechnology, medical devices or engines and turbines, do not attract much FDI in Tunisia.
Policy directions
Align 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 further promotion efforts to attract FDI in the digital economy and high-productivity 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 knowledge spillovers, and could be more cost-effective than attracting new investors motivated by incentives of the offshore regime.
Improve efforts to promote local supplier network to strengthen linkages between foreign and Tunisian firms, particularly between foreign offshore and domestic onshore companies to reduce reliance on imports of intermediate goods and services. This requires reducing administrative barriers and improving co-ordination across the investment, innovation and SME development policy and related institutions, including FIPA Tunisia, APII, and TIA.
Continue efforts reducing the dichotomy between the offshore and onshore regimes to expand investors’ motives beyond low value-added, export-processing, investments to more productive segments of the value chain. 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 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 following the National Strategy for Improving the Business Climate. 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.
Establish robust monitoring and evaluation mechanisms to effectively assess the impact of FDI on productivity, innovation, and GVC integration. This requires availability and access to firm-level statistics, building on the Répertoire National des Enterprises (RNE), providing information on foreign ownership, value-added, export, and R&D spending. This will necessitate improving institutional coordination between the INS, FIPA Tunisia, and the INS.
2.2. Productivity trends and challenges in Tunisia
Private investment in Tunisia and past economic policies have contributed to the development of a well-diversified, export-oriented economy with strong manufacturing and services sectors and an important agricultural activity. Trade intensity – the share of exports and imports in GDP – reached 111% in 2022, twice as high as the OECD average. Despite a sustained pace of reforms and a diversified economy that is well integrated in international trade, private investment has dropped and productivity has stalled since 2011 (Zribi, Dhaoui and Faydi, 2016[1]). Competition and private investment are hindered by a number of long-standing barriers such as an overprotective regulatory environment, bureaucratic burdens, corruption, and difficulties to access credit (ITCEQ, 2023[2]; OECD, 2022[3]). Moreover, the repeated government changes since 2011 have brought political uncertainty that undermined business confidence.
2.2.1. Tunisia’s labour productivity growth has stalled in the past decade
In 2022, investment accounted for 16% of GDP, well below comparators, declining from 25% in 2000. Economic growth slowed after 2011 and real GDP per worker – a measure of labour productivity – was around 40% of the OECD average in 2022 (Figure 2.1, panel A). The economy continues to exhibit a level of labour productivity that is comparable to or higher than that of other emerging economies, such as Colombia, Morocco, and Thailand. Labour productivity increased steadily at an average growth rate of 2.2% between 1991 and 2010 but has since fallen below 1%. Declining productivity growth is not specific to Tunisia, yet the pace of slowdown has left the economy behind peer countries and is inhibiting strong and inclusive growth that raises human capital, generates better incomes and helps Tunisia meet the SDGs (Figure 2.1, panel B).
Figure 2.1. Productivity trends and cross-country comparison
Source: World Bank Development Indicators (World Bank, 2024[4]), https://databank.worldbank.org/source/world-development-indicators.
Stalling labour productivity in Tunisia is driven by a limited productivity growth within sectors but also a slow reallocation of resources – capital and labour – to more productive sectors due to barriers to firm entry and exit, hindering business dynamism and discouraging the creation of better jobs (Amara, Zidi and Jeddi, 2022[5]; OECD, 2022[3]). Real labour productivity – measured as value added per worker – has been stagnant or even declined across sectors in the past decade. Finance and mining are the most productive sectors, which is expected as both are capital-intensive, but labour productivity of the mining sector halved between 2011 and 2020 due to disruptions in phosphates production, and growth has been almost flat for the financial sector (Figure 2.2). Labour productivity in manufacturing corresponds to around 60% of that in services, reflecting specialisation in low value-added manufacturing. Productivity in important manufacturing sectors, such as textiles and leather and mechanicals and electronics, is declining since 2011. The textiles and clothing sector used to be Tunisia’s primary export industry but has faced increasing international competition in recent years, particularly from Southeast Asian countries (Ministère de l’Industrie, des Mines et de l’Énergie, 2022[6]). The productivity of the mechanical and electronics sector has declined in the past decade, falling below the national average. Resource reallocation to high-productivity sectors such as ICT is limited.
Larger and younger firms are more productive in Tunisia (Amara, Zidi and Jeddi, 2022[5]). However, business dynamism and new firm entry has been low, and an overwhelming majority of firms are micro or small enterprises, thus limiting their contribution to overall productivity growth. The significant state involvement in the economy also hinders productivity. Many sectors are dominated by large state-owned enterprises (SOEs) or private firms that enjoy monopoly power and market protection, limiting the entrance of new, younger firms. The SOE share in turnover of the largest 100 firms in Tunisia exceeds 50%, against an OECD average of 13%, and their sales amount to almost 10% of GDP (OECD, 2022[3]).
Figure 2.2. The evolution of labour productivity in Tunisia
Note: Labour productivity is measured as value added per worker.
Source: OECD calculations based on (INS, 2023[7]), https://ins.tn/statistiques/75.
2.2.2. Most of the economic activity is concentrated in low-value added sectors
The dominance of sectors with low value-added activities in Tunisia contributes to limited labour productivity growth. Within the manufacturing sector, mechanics and electronics, food and beverages, and textiles and leather form the basis of Tunisian industry, representing 71% of all value added in the manufacturing sector in 2022 (Figure 2.3, panel A). This contribution is closely linked to the export structure of Tunisian goods, which have been an important driver of economic growth, as almost half of all manufacturing production is export-oriented (Ministère de l’Industrie, des Mines et de l’Énergie, 2022[6]). The mechanics and electronics sector represented 42% of exported goods in 2022 and is now the principal driver of Tunisia’s exports, consisting mainly of electrical wires and cables produced for the European automobile industry. The other two main manufacturing sectors, the textile and leather sector and the agri-food industry, contributed to 19% and 12% of all goods exports respectively. Many exported goods are simply assembled in Tunisia, from imported intermediate parts, thus limiting the value added in these sectors (World Bank, 2014[8]). Although, over recent years, mid- and high-tech manufacturing exports within the mechanical and electrical sector have increased.
Among services, the retail and repair sector, public administration, and education were key contributors to value added, followed by transport, health and social services, and financial services (Figure 2.3, panel B). The high share of trade and repair sectors in total value-added results from the large number of companies operating in these sectors rather than their value creating potential. These sectors account for 42% of all private sector firms in Tunisia but are dominated by micro enterprises with limited growth and investment potential as well as high levels of informal employment, all of which hamper productivity growth (Dhaoui, 2022[9]). Overall, the significant growth in services is mostly due to the expansion of public administration, and less to the dynamism of high value-added tertiary activities (OECD, 2022[3]).
Figure 2.3. Economic structure of Tunisia and comparable countries
Share of value added by sector, 2022 (%)
Source: OECD based on (INS, 2023[7]), https://ins.tn/statistiques/75.
2.3. The contribution of FDI to labour productivity
Foreign investment can help unlock potential productivity gains in Tunisia and boost economic growth. Foreign firms are typically more efficient, technology- and skills-intensive than average in host countries, and thus direct contributors to productivity growth. Their operations can also indirectly boost productivity among domestic firms (OECD, 2022[10]; OECD, 2023[11]). Domestic firms that supply foreign entrants see productivity gains through their improved access to knowledge, technology and finance. Other firms benefit from imitating more productive peers or by hiring workers that have gained new skills through their work with foreign firms. Benefits do not materialise automatically, however, and policies and institutional factors play an important role in enabling FDI spillovers. Realising this potential in Tunisia depends in large part on the establishment of linkages between foreign multinationals and domestic SMEs. The type, motives, and sector of the investment, as well as the size, structure and technological advantages of the investing firm all affect the extent to which Tunisia benefits from productivity spillovers.
2.3.1. Foreign investment in more productive sectors is significant
A significant share of FDI in Tunisia is in the relatively more productive sectors, with a gradual shift towards more technology- and skill-intensive sectors (Dhaoui, 2022[9]). The most productive financial sector was the second highest in terms of FDI inflows. Moreover, one fourth of FDI over 2013-2022 flowed to the four most productive sectors, excluding energy: finance; tourism and real estate; chemicals; and food and beverages (Figure 2.4, panel A). The largest share of FDI went to the mechanical and electrical sector, which also includes the metal industry. This broad sector had a limited contribution to overall productivity growth, but this may mask productivity differences within different sub-sectors. Some relatively productive sectors, such as food and beverages, have stricter restrictions on foreign ownership, potentially limiting the contribution of FDI in these sectors.
While a significant share of FDI goes to more productive industries, there is evidence of an inverse relationship between labour productivity and the number of FDI projects in Tunisia. Sectors that are more productive had a smaller share in total FDI projects during 2013-2022 and vice versa. A significant number of FDI projects is therefore concentrated in low value-added activities with modest levels of labour productivity. For example, the textile and leather sector accounted for around 5% of FDI inflows but almost 20% of all FDI projects (Figure 2.4, panel B). There is therefore a lot of FDI activity happening in this sector but since it is less capital-intense in nature, it contributed little to overall productivity levels. On the other hand, the financial, tourism and real estate sectors accounted together for around 10% of total FDI but just 2% of FDI projects, confirming the very capital-intensive nature of FDI in these sectors.
Figure 2.4. The relationship between FDI and labour productivity across sectors
Aggregate for 2013-2022
Note: The size of the bubble represents the share of a sector in total value added. FDI share by sector excludes the energy sector. The period of analysis is limited by data availability.
Source: OECD calculations based on (FIPA, 2023[12]) and (INS, 2023[7]).
2.3.2. Foreign firms are more productive than Tunisian firms in most sectors but not in those where they are largely present
Despite a significant share of FDI in productive sectors of the economy, there is scope to further improve the contribution of foreign firms to labour productivity through their direct operations. Tunisia’s National Business Registry, the RNE, shows that foreign firms were 43% less productive than Tunisian firms in 2022, a significant drop from 2010 when both had similar productivity levels (Figure 2.5) (Box 2.1 provides more details on the data and its limitations). Overall, between 2010 and 2022, foreign firms’ labour productivity decreased by 17% while that of Tunisian firms increased by 30%. The manufacturing sector, due to its greater size, is largely responsible for the negative labour productivity premium of foreign firms.
Figure 2.5. Foreign firms’ total labour productivity performance has been weak and declining
Foreign labour productivity premium (a value higher than zero indicates a better performance of foreign firms)
Note: Labour productivity is measured as revenues per employee. Real values were obtained by deflating by the consumer price index. The figure excludes agriculture, construction and the trade sectors where informal employment is prevalent.
Source: OECD calculations based on (INS, 2023[13]), the Répertoire National des Entreprises (RNE) sample.
Box 2.1. The National Business Registry – Répertoire National des Entreprises
Overview of the registry
The National Business Registry, Répertoire National des Entreprises (RNE), managed by the National Statistics Office of Tunisia (INS), provides an exhaustive list of private sector companies in Tunisia. The database is based on compiled files from the tax authorities (Direction Générale des Impôts - DGI) for company information and the national social security fund (Caisse Nationale de Securité Sociale - CNSS) for information on employment. Summary statistics on firms and employment evolution are published annually by the INS and include information broken down by sector, firm size, location, regime of operation (offshore/onshore), and ownership (Tunisian/Foreign). Information on firms’ exports, imports, revenues and payroll is not available for all firms and not published in annual reports.
The sample used in this report
The INS has provided the OECD a sample of aggregated data that includes only companies that provided information on employment, revenues and payroll in order to ensure a consistency of coverage of labour productivity and wage variables (Chapter 3). Despite a reduced number of firms relative to the original RNE database, the sample provides a good coverage as it accounts for at least 80% of employment and 70% of firms with at least one employee (see details in Annex A). Strong labour informality in agriculture, construction and retail and wholesale trade may alter aggregate measures of labour productivity. In the agriculture sector, over 80% of workers are employed informally while the share in construction and the trade sectors is around 70% and 65% respectively (INS, 2020[14]). It is likely that employment numbers in these sectors are highly underestimated. Therefore, these sectors were excluded from calculations of total labour productivity and wages of foreign and Tunisian firms.
Caveats of the analysis
Selection bias: As the data on turnover and wage bill is not compulsory for firms to report, there might be a selection bias as to which firms are included in the RNE sample.
Informal employment: In Tunisia, informality is widespread across the economy, estimated at 45% of total economy in 2019. Employment data is therefore likely to be underestimated.
The definition of foreign firm: There is no harmonised definition of foreign firms in the RNE. Firms can be defined as foreign as long as there is foreign participation in the ownership of the company.
Use of revenues for labour productivity measurement: The use of revenues in labour productivity measurement is less reliable than using value added since revenues do not account for the cost of inputs used by the firm in production. Nevertheless, revenues have been commonly used to calculate productivity in the absence of value added measures.
Source: INS, Répertoire National des Entreprises.
Stalling labour productivity levels in manufacturing, combined with a strong decline in services sectors have underpinned the relatively low and deteriorating productivity performance of foreign firms in Tunisia (Figure 2.6, Panels A and B). Productivity differences between foreign and Tunisian firms are higher in manufacturing than services, but in manufacturing the gap has been constant over the past decade, whereas it increased in services in the past years. The disparity between foreign and Tunisian firms’ productivity levels partly reflects the labour-intensive nature of FDI – foreign firms have a significantly higher share in total employment than in revenues compared with Tunisian firms (Table 2.1).
Figure 2.6. Foreign firms’ labour productivity performance in manufacturing and services
Note: Labour productivity is measured as revenues per employee. Real values were obtained by deflating by the consumer price index.
Source: OECD calculations based on (INS, 2023[13]), the Répertoire National des Entreprises (RNE) sample.
Table 2.1. Foreign firms have a higher share in total employment than in revenues
2010-2022 average
Source: OECD calculations based on (INS, 2023[13]), the Répertoire National des Entreprises (RNE) sample.
Despite the negative foreign productivity premium at the national level, foreign firms are more productive than their Tunisian peers within most sectors, including important sectors such as chemicals, finance, mining, scientific and technical activities, and textiles (Figure 2.7, panel B). The few sectors where foreign firms are less productive account for 45% of foreign firms’ revenues, however, and are dominated by automotive and electric-electronics manufacturers, which, combined, represent almost one third of all the foreign firms’ revenues, as well as ICT services providers (Box 2.2). The discrepancy between foreign productivity premia at the national and sectoral levels is similar to findings for offshore firms, where productivity premia existed at sectoral but not at the national level (Dhaoui, 2019[15]).
Figure 2.7. Foreign firms are more productive than their Tunisian peers in most sectors
Source: OECD calculations based on (INS, 2023[13]), the Répertoire National des Entreprises (RNE) sample.
The fact that foreign firms have lower productivity in some sectors is consistent with the fact that they specialise in lower value added activities. These firms operate mainly under the offshore regime and import a large share of their inputs, which are then assembled and re-exported (Joumard, Dhaoui and Morgavi, 2018[16]). While previous studies have identified a positive link between being an offshore enterprise and productivity performance in Tunisia, the opposite holds in the case of two-way offshoring i.e. when firms export and import at the same time (Baghdadi, Kheder and Arouri, 2019[17]). Instead, these firms might be motivated to shift offshore to decrease the fixed costs associated with exporting and are likely to exit the market once privileges are removed. Similar results were also observed for example in China, where exporting firms that specialised in processing and benefitted from tariff exempted imported goods were less productive than non-processing exporters and non-exporters (Dai, Maitra and Yu, 2016[18]).
The low foreign labour productivity premium may also be the result of data limitations. In a few sectors, trends between employment and revenues growth are not consistent. In the ICT sector – the main services sector for foreign firms in terms of revenues, total revenues dropped sharply in 2019, while employment increased, resulting in a strong reduction in labour productivity. It is possible that some firms underreport revenues and overreport wages. A recent study on Tunisia has found that almost one in ten companies do not submit a tax declaration in spite of reporting workers to the social security administration, and 15% of those who do report taxes report anomalously low sales (Rijkers, Arouri and Baghdadi, 2017[19]). Similarly, tax evasion in Tunisia has been linked with firms’ reporting higher labour costs (see Chapter 3) (Baghdadi, Kheder and Arouri, 2019[17]). The underreporting of revenues may be more widespread in the absence of financial controls and audits in companies. Financial audits are less common in Tunisia than in other countries, with only 25% of firms reporting that they had their financial statements reviewed by external auditors, in contrast to 59% in MENA economies and 46% in OECD countries (World Bank, 2024[20]).
Box 2.2. Labour productivity developments in key sectors of the Tunisian economy
Four sectors, representing around half of the total revenues of foreign firms, have shaped labour productivity developments of foreign firms between 2010 and 2022: i) mechanical-electrical-electronics manufacturing, ii) automotives and other transport equipment, iii) textiles and clothing and iv) ICT services. Except in textiles and clothing, labour productivity of foreign firms in these sectors was lower than that of Tunisian peers (Figure 2.8). In the mechanical and electronics sector, foreign labour productivity decreased significantly, and was 40% less than the productivity of Tunisian firms in 2022. In the automotive sector, the productivity of foreign firms slightly increased but less than the productivity of Tunisian firms. In textiles and clothing, foreign firms’ productivity is higher than Tunisian peers but the gap narrowed following improvements among Tunisian firms. Total labour productivity of foreign firms in the ICT sector declined considerably and, since 2018, became lower than Tunisian ICT firms’ productivity – In 2019, Tunisian firms in the ICT sector reported a six-fold increase in revenues while employment only doubled. Annex Figure 2.B.1 includes labour productivity development of foreign and Tunisian firms in additional sectors.
Figure 2.8. Foreign and Tunisian firms’ labour productivity developments in selected sectors
Real revenues per employee, by ownership
Note: Labour productivity is measured as revenues per employee. Real values were obtained by deflating by the consumer price index.
Source: OECD calculations based on (INS, 2023[13]), the Répertoire National des Entreprises (RNE) sample.
2.3.3. Tunisia’s FDI contribution to productivity is lower than in other emerging economies
Internationally comparable data, based on firm-reported surveys (World Bank Enterprise Survey – WBES), shed additional light on the performance of foreign firms in Tunisia compared to peer countries. Foreign investment contributes positively to productivity growth in Tunisia, but less than in other MENA economies. The WBES data, whose sectoral coverage differs from the RNE, shows that labour productivity of foreign firms was on average 50% higher than that of domestic firms (Figure 2.9). The survey-based data might be less sensitive to underreporting than official tax administration data as they are not linked to potential tax advantages. Moreover, it measures labour productivity in terms of value added per worker and thus accounts for the actual value creation of a firm rather than what it sells. The average foreign productivity premium is still nevertheless slightly lower than the average in OECD countries and significantly lower than in other MENA economies such as Morocco, Jordan, and Egypt.
Figure 2.9. Productivity premium of foreign firms in Tunisia and comparator countries
Foreign firms are more productive if index >0, 2020 or latest year available
Note: Labour productivity is defined as the ratio of value added to employment.
Source: OECD calculations based on (World Bank, 2024[20]), World Bank Enterprise Surveys, https://www.enterprisesurveys.org/en/data.
2.4. The contribution of FDI to R&D and innovation
2.4.1. R&D investment and innovation outcomes in Tunisia can be improved …
As foreign firms are often larger and have more resources to engage in research and development (R&D) activities, they can contribute positively to the Tunisian economy through innovation diffusion. Technological advancements, which increase the efficiency of production or lead to product innovation, enable companies to gain a competitive edge on the market. A company can invest in R&D activities, innovate or adopt an already existing technology on the market. The more firms in Tunisia spend on R&D and innovate, the stronger will be the overall level of market competition. Moreover, technological developments at economy-wide level are important drivers of productivity growth (OECD, 2015[21]).
Investment in R&D activities in Tunisia has been low compared to the OECD average (Figure 2.10, panel A). Despite improvements since the early 2000s, 0.7% of GDP was spent on R&D in 2019 which was roughly only one fourth of the 2.7% of GDP spent in OECD countries on average. The number had been above the MENA average throughout the early 2000s but, in recent years, this spending has been on par with the MENA average, following increased R&D expenditure in other MENA countries in the past few years and lack of additional spending in Tunisia. With a high share of graduates in science, technology, engineering, and mathematics (STEM), and a booming electronics sector, Tunisia has a strong potential to attract FDI in support of innovation driven by human capital. Innovation outcomes are still relatively weak compared to peer countries, however. Tunisia applied for 15 patents per million of population in 2017-2020, versus an OECD average of 275 patents per capita. The OECD average is driven upwards by a few very innovation-driven countries such as South Korea, Japan and the United States; however, Tunisia also fared considerably worse than comparable OECD countries such as Portugal, Latvia, or Slovakia (Figure 2.10, panel B). Tunisia performs better than MENA economies where the amount of patent applications was lower.
Figure 2.10. R&D expenditure and patents applications are low
Note: In panel B, each country's data includes patent applications for which the first-named applicant is a country resident. The MENA average includes Tunisia. Egypt, Algeria, Morocco, and Jordan.
Source: World Bank Development Indicators (World Bank, 2024[4]), https://databank.worldbank.org/source/world-development-indicators.
… but foreign firms perform better than domestic ones
The presence of foreign firms in Tunisia can contribute to the overall investment and intensity of research activities in the economy. In most countries, foreign firms are more likely to invest in R&D than domestic firms (Figure 2.11, panel A). This is because they are on average larger and have a better access to finance and skilled workers and are often closer to the productivity frontier. In Tunisia, most of the research takes place in public academic institutions with little collaboration and know-how transfers to the private sector (Ministère de l’Industrie, des Mines et de l’Énergie, 2022[6]). The government has placed innovation at the centre of its industrial strategy. Yet, despite a number of existing R&D incentives set up by the government, their uptake by firms has been fairly limited. Consequently, 20% of the surveyed foreign firms in Tunisia invested in R&D as opposed to only 6% of domestic ones (Figure 2.11, panel A). One of the main constraints to increased innovation investment, reported by companies, is the lack of financial resources and difficulties accessing credit (ITCEQ, 2023[2]).
Box 2.3. Chile’s High-technology Investment Promotion Programme
In the early 2000s, the Chilean Economic Development Agency (CORFO) implemented the High-Technology Investment Promotion Programme to attract high-tech investments that could diversify the productive base and position the country as an export platform of technological services in the Latin America region (Agosin, 2009[22]). The programme included financial incentives, coupled with technical assistance and information provision, for adopting advanced technologies, implementing employee training programmes, and completing pre‑feasibility studies; promotional campaigns and targeted investment generation activities in major tech hubs around the world; and network development initiatives to transfer international best practices from American and European markets to Chile.
The programme’s design was based on the experience of other countries, in particular Ireland and Costa Rica, whose investment promotion approach involved the targeting of incentives to specific sectors, emphasis on the technological content of promoted investments, and the use of direct subsidies rather than tax exemptions. In Chile, the prioritisation of high-technology sectors was done in line with the strategic objectives identified by the National Innovation Council for Competitiveness, an inter-institutional body responsible for co‑ordinating and advising the government on innovation, science and technology policy (Agosin, 2009[22]). Efforts focused on attracting firms that could contribute to the development of the clusters identified by the Council as having the greatest potential for economic growth such as ICTs, biotechnologies and new materials.
Although the programme’s budget and number of staff were small by international standards, CORFO managed to leverage the expertise of various government actors and international stakeholders. A team of government agencies was created to facilitate investment promotion activities, bringing together the National Commission for Science and Technology, Fundación Chile, a non-profit foundation that supported new technological applications in a number of industries, and Chile’s IPA, the Foreign Investment Committee (Nelson, 2007[23]). To ensure alignment of the programme with industry priorities, CORFO also created a transnational strategic network consisting of a business school in the United States, sectoral experts associated with successful IPAs, US-based consulting firms specialising in business services, software development and ICTs, US business associations and foreign investors established in Chile. All played an important role in the effective development of the programme.
In 2001‑03, 219 companies had received technical assistance, including information and advice for the evaluation of investment opportunities and conditions in Chile. Overall, for each US dollar of public financial support provided to foreign investors, the programme had yielded USD 10 of materialised investments (Agosin, 2009[22]). Thanks to the programme, in 2007, there were 60 international technology service centres operating in the country and leading companies in the ICT, business services, and software development sectors had been established in Chile.
Source: OECD based on Agosin (2009[22]) and Nelson (2007[23]).
As a result of increased investment, foreign firms are more likely to innovate in Tunisia. The level of innovation still lags behind many OECD countries but is similar to that observed in MENA economies. Among the firms surveyed in Tunisia, 17% of foreign firms introduced a new product or service versus 11% of domestic firms (Figure 2.11, panel B). Similar outcomes are observed regarding firms that introduced a process innovation. While in Tunisia, the number is still relatively low even for foreign firms, 10% introduced a process innovation, twice as many as domestic firms (Figure 2.11, panel C). Innovation is also correlated with trade openness as firms that export are more likely to innovate than those that sell just to the domestic market, with the mechanical and electrical sector driving innovation (Ministère de l’Industrie, des Mines et de l’Énergie, 2022[6]).
Figure 2.11. Innovation outcomes of foreign firms in Tunisia and comparator countries
2020 or latest year available
Source: OECD calculations based on (World Bank, 2024[20]), World Bank Enterprise Surveys, https://www.enterprisesurveys.org/en/data.
The fact that innovation outcomes of foreign firms in Tunisia are weak compared to other countries is related to the fact that most of them operate in relatively less capital-intensive manufacturing industries. Nevertheless, as they perform better than domestic firms on average, there is a potential for innovation diffusion to the local economy, as long as domestic firms have the absorptive capacities to adapt to new technologies or processes. Further efforts could help attract more technology-intensive FDI in Tunisia. In Chile, the government implemented the High-Technology Investment Promotion Programme to attract high-tech FDI that could diversify Chile’s productive base and position the country as an export platform of technological services in Latin America (Box 2.3).
The prevalence of R&D activities in Tunisia is dependent on the sectors where firms operate as some sectors are more technology-intense than others by nature. It also depends on their position in value chains as the higher the firm is positioned in the value chain, the more important the role of innovation. Only a handful of sectors in Tunisia have greenfield FDI directed specifically at R&D, in contrast to a larger number of sectors in comparator regions (Figure 2.12, panel A). Yet, R&D investments are significant in the software and IT services sector, where the amount of FDI into R&D amounted to 55% of all the FDI in that sector over 2003-22. At the same time, the software & IT services sector is a small contributor to overall FDI and half of the R&D FDI came from a single project, therefore it does not necessarily define a trend in the sector. In the automotive sector, 14% of all FDI went towards R&D activities, and less significant amounts were present in the communications, business services, and textiles sectors. At the same time, the sectors that are relatively R&D intensive, like biotechnology, medical devices or engines and turbines, do not attract much FDI in general in Tunisia.
The share of FDI directed at R&D activities is higher than most MENA economies but falls behind some peer OECD countries like Portugal, Costa Rica or Lithuania (Figure 2.12, panel B). There is scope to diversify further the activities within sectors and attract more FDI aimed at R&D activities within the manufacturing sectors, such as in the automotive or the mechanical and electronics sectors. In the Slovak Republic, where foreign firms tend to concentrate in low value-added activities, the government has put in place reforms aiming at improving the collaboration on R&D and technology-based projects in key sectors, with the objective to diversify the economy beyond low value-added manufacturing (Box 2.3).
Figure 2.12. Greenfield FDI in R&D across sectors in Tunisia
Note: Greenfield FDI corresponds to announced capital expenditure (CAPEX) and is partly based on estimates.
Source: OECD calculations based on Financial Times (2024[24]), https://www.fdimarkets.com/.
Box 2.4. FDI and economic diversification policies delivered by the Slovak IPA
The Slovak Republic shows a high level of economic specialisation. Most of its value added and employment, are concentrated in a few sectors, mainly in the automotive industry, and a number of low‑tech sectors, such as wholesale and retail trade, real estate activities and construction. Although the automotive industry alone is responsible for 20% of total manufacturing value added, foreign affiliates operating in the automotive industry are involved in low value‑added activities (fabrication and assembly of imported car components). Their investment generates, therefore, scarce local technology diffusion, which hampers the sector’s and the overall economy’s potential to upgrade to more knowledge‑intensive activities.
Recent policy reforms in the Slovak Republic have focused on diversifying the economy beyond low value‑added manufacturing and strengthening its innovation potential. The Regional Investment Aid Scheme is the main instrument used by the Slovak government to support investments that help the economy move away from low value‑added manufacturing and towards more knowledge‑intensive and high-tech sectors. The scheme provides aid in the form of grants for tangible and intangible fixed assets, corporate income tax relief, wage subsidies for newly created jobs and discounts in the renting or selling of real estate. The sectoral scope of the Regional Investment Aid Scheme illustrates the government’s strategic choice to support FDI-intensive sectors to move higher up the value chain and engage in technologically sophisticated activities with more local content in their products. To benefit from the aid, investment projects should fall under one of the defined investment categories, namely industrial production, technological centres and business services centres, each one of which is linked to priority sectors (e.g. chemicals, electronics, automotive, business services etc.) and relevant smart industry technologies (e.g. robotics, artificial intelligence, big data, cloud, etc.).
In recent years, investment facilitation and aftercare services have also focused on encouraging foreign and domestic firms to collaborate on the implementation of R&D and technology-based projects. The Slovak IPA, SARIO, has established an Innovation Services Platform, which connects some of its most technologically advanced foreign clients with innovative Slovak firms to undertake R&D. In addition to policy efforts aimed at increasing the knowledge intensity of FDI (see section on productivity-enhancing FDI), similar initiatives have been recently introduced to help the Slovak SMEs diversify their activities towards high-tech sectors. In 2019, SARIO started providing diversification services to the Slovak SMEs that want to expand their operations into the space, aviation, smart mobility and medical technologies industries. The support includes business-consulting services, seminars, matchmaking events and workshops for B2B collaboration.
Source: OECD (2022[25]).
2.5. The contribution of FDI to Tunisia’s integration into global value chains
Participation in GVCs allows countries to integrate into global trade, expand their presence on international markets, diversify exports and enhance domestic competition, all of which can bring positive spillovers for productivity growth and innovation. In addition, it can enhance the internationalisation of local SMEs, which are typically too small to expand beyond neighbouring countries, through establishing links with large foreign companies. The transfer of technologies and human capital can contribute to productivity spillovers on domestic firms, as long as they have the absorptive capacity to benefit from these linkages.
2.5.1. Most foreign firms in Tunisia are fully exporting companies with weak domestic linkages
Tunisia has become well-integrated into GVCs, following a period of trade liberalisation in the 1990s and accession to the World Trade Organisation in 1994. The government has pursued an export-led model of growth based on investment incentives, resulting in increasing flows of FDI (World Bank, 2014[8]). Trade openness has had generally positive outcomes for economic growth, increased competition and contributed to productivity improvements. The manufacturing sector has been the principal driver of exports, sustained by the mechanical and electrical as well as textiles and clothing sector. Exports are well diversified in terms of products but concentrated geographically with almost 60% of all exports going to France, Germany, and Italy, making Tunisia vulnerable to the economic situation in partner countries.
Tunisia’s integration in GVCs has been partly driven by the offshore regime i.e. companies that are fully exporting and enjoying special privileges such as duty exemptions and tax privileges or advantageous access to ports. Offshore companies are not well integrated with onshore companies, limiting the spillovers from FDI (Joumard, Dhaoui and Morgavi, 2018[16]). On average, 45% of firms in the manufacturing sector which employ at least ten people are fully exporting firms (APII, 2024[26]). This number is as high as 80% in the textile and clothing sector and at around 70% in the sectors of leather and shoes, and electric and electronic manufacturing. There is also a strong link between FDI and export activity as many of the offshore firms are foreign firms. This is especially true for bigger foreign manufacturing firms, with at least 10 employees and 100% of foreign capital, where offshore firms make up 94% of all foreign firms (Table 2.2). In the two manufacturing sectors where most of these foreign firms operate i.e. the textiles and leather sector, and electric and electronic sector, 98% and 99% of companies respectively are fully exporting. In all the manufacturing sectors except the construction materials sector, offshore firms make up at least 80% of foreign companies thus limiting their interaction with the domestic market.
Table 2.2. The share of offshore companies among foreign manufacturing firms
Share and number of offshore firms among foreign and Tunisian firms, by sector
Note: Refers to firms with 100% of foreign or 100% Tunisian ownership. Included are only companies with at least 10 employees.
Source: Agence de Promotion de l’Industrie et de l'Innovation, (APII, 2024[26]), http://www.tunisieindustrie.nat.tn/fr/tissu.asp.
Tunisia’s strong export performance and FDI attraction have helped it became well integrated into GVCs, mainly through imports of intermediate products (OECD, 2021[27]). The two main OECD GVC indicators, forward and backward participation, indicate the position of a country along the global supply chains. Forward participation shows the extent to which the value added generated in one country is integrated in another country’s exports and is typically high in countries specialising in the R&D or design stages of production (OECD, 2021[27]). With a share of 16%, Tunisia’s integration is lower than that of the OECD average and most of its peer countries (Figure 2.13, panel A) and reflects that the contribution of Tunisian exports in GVCs is relatively low. Despite improvements in sophistication levels of exports, only 7% of manufactured exports are of the high-technology type i.e. with high R&D intensity, in contrast with 17% on average in the OECD countries (World Bank, 2024[28]). On the other hand, Tunisia’s integration through backward participation, at 35%, is higher than many comparable countries (Figure 2.13, panel B). Backward participation reflects the share of foreign value added in gross exports and suggests that many intermediate inputs for production in Tunisia are sourced from abroad, assembled and then further re-exported. This is particularly the case for exports in the mechanics and electronics, as well as textiles and leather sectors (Joumard, Dhaoui and Morgavi, 2018[16]).
Figure 2.13. Integration into GVCs across countries
Note: 1. Domestic value added in foreign exports as a share of gross exports. 2. Foreign value added share of gross exports.
Source: OECD Trade in Value Added (TiVA) 2022 Database (OECD, 2022[29]), https://stats.oecd.org/.
2.5.2. There are positive spillovers to be gained from strengthening FDI-SME linkages
Participation in GVCs can help foster linkages between foreign and Tunisian firms. The presence of foreign firms generally encourages competition and incentivises domestic firms to innovate, with positive direct consequences on productivity. However, Tunisian firms – mostly SMEs or micro enterprises – are often financially constrained and lack skilled staff, and hence might not have adequate resources to innovate. They can nevertheless benefit from positive knowledge spillovers from FDI through labour mobility between their workers and those of foreign firms, business linkages with foreign suppliers or buyers, or through technology transfers. Establishing links between foreign and local firms allows domestic firms to participate in GVCs as foreign firms are often export-oriented multinationals serving international markets. However, the extent to which linkages between foreign and domestic firms form and positive spillovers occur would be determined by the Tunisian firms’ product quality, absorptive capacities, as well as the sector it operates in. The most productive foreign firms are more demanding in terms of the quality of the product they are sourcing and local suppliers need to be able to respond to such needs (OECD, 2023[11]).
Foreign firms have limited supply linkages with Tunisian firms, partly because they mostly operate under the offshore regime, and hence benefit from tax exemptions on imported inputs while facing administrative barriers to source from Tunisian onshore firms. On average, foreign firms in Tunisia source 30% of their inputs from domestic firms, which is the lowest share among MENA economies (Figure 2.14). This reflects to some extent the large share of foreign companies in the offshore sector and the difficulties to establish links with domestic companies. Different regulations which exist between the offshore and onshore regime and the associated transaction costs, as well as low competitiveness of domestically supplied products, encourage imports of intermediates from abroad (Joumard, Dhaoui and Morgavi, 2018[16]). As a result, 46% of imported intermediates in Tunisia are re-exported.
Domestic firms purchase two-thirds of their inputs from local firms, reflecting a duality in the supply chains between domestic and foreign firms. Technology spillovers from foreign to domestic firms are also limited, with only 8% of Tunisian firms using technology licensed from a foreign company, in contrast to 23% of foreign firms (Figure 2.15). Linkages between foreign and domestic firms are still limited but there is a potential for domestic companies to benefit further from the presence of foreign firms. The provision of technological inputs by foreign to domestic firms can be an important source of productivity growth in emerging economies (Newman et al., 2015[30]). There is scope for policymakers to address the challenges that domestic companies face to access foreign technology as well as promote better integration between domestic and foreign firms in order to fully benefit from the potential of the FDI-SME linkages. Example of such enabling policies include facilitating contact with the domestic suppliers, upgrading their capabilities, or financial support, such as was done in some European countries (see Box 2.5).
Figure 2.14. Sourcing from domestic firms
% of inputs sourced domestically, 2020 or latest available
Source: OECD calculations based on World Bank Enterprise Survey, (World Bank, 2020[31]), https://www.enterprisesurveys.org/en/data.
Figure 2.15. Sourcing technology from foreign company
% of firms using technology licensed from a foreign company, 2020 or latest available
Source: OECD calculations based on World Bank Enterprise Survey, (World Bank, 2020[31]), https://www.enterprisesurveys.org/en/data.
Box 2.5. Promoting value chain linkages and strategic partnerships in selected EU countries
Matchmaking services, online platforms and events to link FDI and SMEs
Most IPAs, including Tunisia’s FIPA, provide matchmaking services to reduce the information barriers that prevent foreign investors from identifying local suppliers or customers. In the Slovak Republic, SARIO supports several matchmaking programmes targeting foreign firms and their affiliates, including the flagship Business Link events and Slovak Matchmaking Fairs, implemented under the auspices of the Ministry of the Economy (OECD, 2022[25]). The use of online tools and platforms is common in this area. In Bulgaria, the national SME promotion agency BSMEPA runs an online platform to advertise requests of foreign companies looking for partners in the domestic industry (e.g. local suppliers, local exporters, potential business partners). The Hungarian Investment Promotion Agency (HIPA) maintains a database of domestic firms to help large companies identify suppliers that meet their requirements and could integrate their value chain.
Many EU governments organise or actively support the participation of domestic SMEs in knowledge exchange and information events, which can provide matching opportunities with foreign partners. The Spanish agency Red.es, in collaboration with ICEX Spain Export and Investment, organises national stands in international events to support the internationalisation of domestic firms operating in the digital economy. In Bulgaria, the BSMEPA runs a dedicated project to support domestic SMEs’ participation in business fairs, exhibitions and conferences within the country and abroad, with a view to enhancing their export activities, facilitating the establishment of direct contacts and commercial linkages with foreign partners, and fostering their integration in European and international markets.
Assistance for upgrading the capabilities of domestic suppliers
Common instruments to develop value chain linkages are supplier development programmes – such as Portugal’s flagship Supplier Club or the Slovak Republic’ Supply Chain Development Programme – and other business consulting and skills upgrading schemes that seek to align the capabilities of domestic suppliers with the requirements of foreign investors. Some schemes specifically target SMEs or start-ups. In Sweden, the Leap Accelerator programme helps technology start‑ups develop tailored go‑to-market plans and build strategies for internationalisation via diverse training, consulting and peer-learning services (e.g. online collaborative workshops for groups of companies, individual coaching sessions, data-driven analysis tailored to the company's needs).
Financial support for enabling SME integration into GVCs or collaborative R&D
SMEs internationalisation through trade can facilitate market expansion and upgrading and help strengthen the domestic supplier base. The Dutch Trade and Investment Fund (DTIF), set up by the Ministry of Foreign Affairs and administered by Invest International, provides loans, guarantees and export financing to domestic firms wishing to import, export or establish affiliates abroad. In Finland, Finnverra’s Internationalisation Loans support the costs of establishing and operating SME subsidiaries abroad.
Financial support is also given for collaborative R&D and innovation activities involving foreign partners. Many of these schemes specifically target SMEs or reward their involvement with higher grant or loan rates The German Central Innovation Programme for SMEs (ZIM) includes two sub-schemes (ZIM cooperation projects and ZIM cooperation networks) that support with grants joint R&D&I projects by consortia of SMEs and research institutions. Since 2018, co‑operative projects involving foreign partners are also eligible for funding.
Source: (OECD, 2021[32])
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Annex 2.A. Comparison of the RNE sample with the original registry
The table below compares the number of firms and employees by sector in the original RNE database and the sample provided by INS to the OECD. Included are only firms with at least one employee.
Annex Table 2.A.1. Comparison of the RNE sample with the original registry by sector
2021
Note: Included are only firms with at least one employee.
Source: (INS, 2023[13]), Répertoire National des Entreprises.
Annex 2.B. Labour productivity developments of foreign and Tunisian firms across sectors
Annex Figure 2.B.1. Foreign and Tunisian firms’ labour productivity developments in selected sectors
Real revenues per employee, by ownership
Note: Labour productivity is measured as revenues per employee. Real values were obtained by deflating by the consumer price index. The sectors were selected based on the relative importance in terms of foreign firms’ revenues (in addition to sectors shown in figure 2.8).
Source: OECD calculations based on (INS, 2023[13]), the Répertoire National des Entreprises (RNE) sample.