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Foreign Direct Investment (FDI) in a country refers to an investment made by a foreign company with the aim of acquiring lasting or long-term interests in enterprises operating within that particular economy (Graham, 2005). For any country to develop, direct investment is vital, as it helps availing capital necessary for boosting production. Production of both goods and services is the key factor towards building a robust economy. However, lack of local capital is a major problem for many economies, especially for developing economies, the category in which Lebanon belongs. To shore up the available local capital, Lebanon has to attract FDIs to enhance productivity. FDI in any economy is useful in that it helps to avail capital necessary for exploiting local resources, creating jobs, shore up government revenue through taxes paid, avail new technology to the recipient economy, produce cheaper goods for the local market and bringing foreign currency through exports (Graham, 2005).
However, there is a need to create a conducive environment to attract FDI. This can be achieved by assuring investors in security of their investments, political stability, good local infrastructure, friendly investment laws and policies, good return of investment and friendly tax regimes. Stringent rules on profits’ repatriation, high tax regimes, protectionist barriers against FDI, insecurity, political turmoil and high cost of doing business may hinder investments in Lebanon by foreign investors.
Lebanon is a country found in the Middle East, a region known for ruling family dictatorships and lack of openness to the outside world. However, apart from being one of the few democracies in the region, Lebanon is also one of the few countries that have embraced a free-market economy. Unfortunately, the country has not been able to weather security challenges facing many other countries in the region. To start with, the country underwent a devastating civil war from 1976 to 1990 that destroyed much of the infrastructure, led to capital and human resource flight, and slowed down investments’ inflow. After stabilizing for some time, the country found itself in another war with Israel, southern neighbor that destroyed much of the newly built infrastructure and displaced many people from their homes in 2006. Soon after, a political deadlock on the composition of the government following the general elections led to demonstrations that nearly shut all the economic activities in the country.
These challenges worsened by corruption in the government departments, unnecessary bureaucracies, high taxes, nepotism and political uncertainties; factors that have pushed 35.2% of the population of 4.2 million to live below the poverty line. Despite these, the country has shown resilience in economic growth, having registered an impressive 9% and 7% growth in 2009 and 2010 respectively (Farquhar, 2009). However, destructive wars, political upheavals and poverty levels mentioned above are discouraging foreign investments and therefore lead to slow economic growth.
The 2006 war in Lebanon was a contradiction of sorts. Unlike the conventional warfare that pits two nations against each other, this was a war between Israel and Hezbollah, an un-official Lebanese militia operating along Israel borders. In its pursuit of the militia deep into Lebanon territory, Israeli made the entire country become a war zone. Lebanon’s infrastructure was heavily damaged in the process of war, while close to a million people were uprooted from their homes. Nearly 1200 civilians were killed and over 4000 injured during the conflict.
Fortunately, the world acted swiftly and the war came to an end in about one month period. This reduced damage and death toll considerably in comparison to the aftermath of the World War II, which lasted close to five years. Lebanon was, therefore, able to recover faster from the effects of this war in comparison to European countries after the Second World War. Been in a state of war for more than 15 years, Lebanon must have learnt lessons of survival that came handy after this short conflict. The Israeli army attacked vital civilian infrastructure inside Lebanon that led to an opinion backlash that helped reduce the intensity of attacks, therefore saving Lebanon from more destruction; unlike Europe where the aim was to destroy as much infrastructure on the enemy side as possible. In comparison to Europe, the damage inflicted to Lebanon was of a much lower scale. Lastly, Hezbollah changed from a militia to a political party that got involved in mainstream politics soon after that war, a process that helped to speed-up reconstruction of the infrastructure, unlike in Europe where those responsible for causing the war were sought after and killed or jailed, lowering the spirit of rebuilding economies.
Trade between Israel and Lebanon has mostly been complex and controversial. There have been accusations that among the reasons why Israeli had curved out a 10 km security zone in south Lebanon a need to control trade between the two countries emerged (Shahak, 1996). Israel apparently did not want its goods to be controlled while entering Lebanon and, therefore, they curved out the security zone to tilt trade in its favor. However, after the July 2006 war, with Israel having withdrawn from the security zone, the embargo slapped by Lebanese government on imports from Israel have reduced trade between the two countries considerably. This led to un-availability of Israeli goods in Lebanon. The effect of this would be scarcity of those goods in Lebanon, increased prices, loss of income by importers, lost government revenues from taxes and loss of jobs.