The Lost Decade Essay Example | Topics and Well Written Essays - 2000 words

The Lost Decade - Essay Example As a result, there was trade surplus and increased liquidity for banks thus making credit easily available and cheap. There was also increase in asset prices such as; real estates, stocks and land. Banks used excess liquidity to lend loans backed by real estates or land as collateral and when eventually the ministry of finance raised interest rates in 1989, the asset bubble burst resulting in the collapse of the financial markets and economic growth stagnation. There are several factors which can be attributed to the recession. Some scholars like Ito believe that the situation could have been avoided if only the government had taken measures urgently. The Bank of Japan (BOJ) and ministry of finance(MOF) and Japanese banks took a long time to acknowledge the existence of the problem hence took long to respond and this led to worsening of the problem (Saxonhouse & Stern, 2004). Increased speculation is also viewed as a contributing factor to the lost decade. Due to high prices of land, stock and real estate, banks thought that the prices would continue to rise thus instead of reinvesting the excess liquidity, they loaned it with real estate as a collateral without foreseeing any risks. As prices continued to increase, the companies continued to acquire more loans backed by assets and invested in stocks and securities and the banks offered loans without considering creditworthiness of the loanee. By the time the bubble bust, most banks had little or capital reserves (Callen & Ostry, 2003). Callen and Ostry (2003) observe that the economic slowdown was a result of massive savings due to demographics of aging population. This resulted in over reliance on traditional bank loans as opposed to issue of stocks and bonds in the capital market to acquire additional financing. The relationship of banks and corporations led to lowering of lending standards leading to increased risks. The shareholders of commercial banks were mutual life insurance companies which were manage d by representatives selected by the management hence there was no regulations to operate efficiently. The banks therefore were lending money without a profit maximization motive thus increased lending risks. The MOF had also undergone deregulation hence was not providing the banks with regulatory rents hence they turned to small and micro enterprises and gave the loans against real estate collateral at low interest rates (Syed et al. 2009). The government institutions were getting annual subsidies and hence were not keen on making profits hence lack of control in lending activities. The government response policy in 1997 of increasing consumption tax is the reason for continued crisis which had already began to ease (Syed et al. 2009). The government underestimated the depth of the crisis and began strategies to reduce budget deficits by increasing consumption tax. This resulted in increased consumption of durable goods by consumers as they speculated the increase leading to inflat ion (Nanto, 2009). The community banking model of Japan also prolonged the crisis since the banks were reluctant to write-off non-performing loans and instead opted to continue lending to defaulters. The increase in interest rates in 1989 by the MOF led to the bursting of the bubble. The impact was felt not only by the banking system and other financial

The World of Management Research Paper Example | Topics and Well Written Essays - 1750 words

The World of Management - Research Paper Example At present, the demand of the management professionals are increasing gradually as an efficient manager is able to fulfill the objective of the company and increase the profit. In the globalized economy, when the economies of different country are connected to one another, the demand of a certified professional from an international organization is high. The professionals, who are certified from a professional organization, are able to handle the issues that arise in an organization in a proper manner. The areas of management include human resources, accounting, marketing, operations etc. Every department has some specific works to manage the company well overall. The managers of the operations department need to manage the resources available for them, for instance, labor and raw materials, and increase the profit of the company. The human resources mangers are responsible to manage the employees and make sure that they are motivated enough to do the job. Marketing managers have to make sure that the company is providing goods and services as per the customer requirement and the accounts department managers have to make sure that there is nothing false in the revelation of the financial information, which are used by the stakeholders of the company. The researcher has selected the area of business administration identify the history, job prospects and needed professional licenses in the field. Historical Overview of Business Administration Business administration means to manage the sources available to an organization effectively and optimally use the sources so that the organization can fulfill the objectives. During the 18th century, a Scottish philosopher Adam Smith has argued that in order to efficiently manage an organization, it needs to have specialized labor resources. He has also stated that some changes in the process can improve the productivity of the organization. If the specialized employees can be used in related places, they will get motivated , as well as the company would be benefited. During the 19th century, the classical economists provided the theoretical background about the processes of allocation of the resources, pricing and the production issues. In the 20th century, the organizations started to understand the importance of administration of business. They felt that an efficient leader could manage the subordinates very well. They can take out the best from the employees by motivating them. The universities have started the business schools where they provide the degree Master of Business Administration, also there were many personalities like Peter Drucker, who provided the theories of management. In this century, various processes invented by the researchers which can improve the efficiencies of the processes and increase the profit of the organizations like six sigma process, reengineering, various software development. During the period, business administration was divided into six different branches, namel y management information systems, marketing management, strategic management, financial management, operations management and human resource management. During the current 21st century, the administration process became more effective; for

Barbara Kruger's strategic role in post-modern art resurfaces Dissertation

Barbara Kruger's strategic role in post-modern art resurfaces - Dissertation Example The study "Barbara Kruger's strategic role in post-modern art resurfaces " discovers the influence of Barbara Kruger on modern art. Kruger proved to be a powerful force in having challenged the long established conventions, typecasts and traditional practices of society. Through her works she established a strong link between the popular photographs of the 1940s and 1950s by including the public spaces that people are exposed to in their everyday lives. By conceptualizing the conflict and tension latent within theses spaces, Kruger is able to strike an alarming irony through unmasking the violence that disturbs space. The main force for these works revolves around the notion that power, and thus violence, is what propels the splitting of the external to create the internal; space. Kruger argues that space is not an area of freedom but a ‘closed interior’. By shedding light on the external and excluded items submerged underneath what we see in an internal space, Kruger ex poses these never before seen grounds to the public. I believe that Barbara Kruger is most definitely an artist that is worthy of attention; she has inspired a new sphere of, but not confined to, graphic design. Her work is a prime example of ‘Spatial practive’, whereby, she completes a space by exposing it in its entirety, not only its internal elements. This dissertation will tackle in depth the significance of ‘spatial practice’ and ‘site specificity’, and how exactly Barbara Kruger utilizes this in her work to challenge society. It will also discuss the societal impact and influences her pieces have produced. Kruger is often misunderstood, and it not always conceived as narrated in the brief description above. Her role, her purpose and her intention are often contested; some critics comment that she is merely a political agitator. Kruger’s stance in the artistic, political and social worlds will be thoroughly examined. Despite critiq ue, this dissertation will focus on bringing forward the argument that Kruger employs site specificity as a tool for accusation, uncovering conflict ,but not for mass commercialization or for creating acts of violence. Another element that I would focus upon is a critic, David Deitcher who questions that Barbara Kruger is not easily categorized because of her self-constructed identity. ‘Her work has both a place and a strategic role within contemporary artistic discourse’ (Goldstein, A, 2000, p.25). This will be an argument that the dissertation would bring forward how Barbara Kruger’s figure of speech and her presentable artworks effects her ‘strategic role’ and how it brings her practice into external sites and not within a space. At last but not least, this dissertation would analyze the genre feminism in Kruger’s work and how it affected the women by observing her piece of work and what reality brings forward to them. Throughout these chap ters, artworks by Barbara Kruger would be analyzed in depth and how her works have influenced and affected the society and as well how these artworks can resurface the hidden truth of the political society. This will also relate to Jean Baudrillard theories in the context that Barbara Kruger can connect her work to. â€Å"Simulation is no longer that of a territory, a referential being or a substance. It is the generation by models of a real without origin or reality; a hyperreal† (Baudrillad, 2008, p.342). Chapter 1: Site Specificity This chapter delves into the site specificity in Barbara Kruger’s works. Site specificity is defined as ‘artworks take location into account in large scale work’, and the reason for examining this topic is because Kruger has considered the space in her works in attempting to establish relationships

The Lost Decade Essay Example | Topics and Well Written Essays - 2000 words

The Lost Decade - Essay Example As a result, there was trade surplus and increased liquidity for banks thus making credit easily available and cheap. There was also increase in asset prices such as; real estates, stocks and land. Banks used excess liquidity to lend loans backed by real estates or land as collateral and when eventually the ministry of finance raised interest rates in 1989, the asset bubble burst resulting in the collapse of the financial markets and economic growth stagnation. There are several factors which can be attributed to the recession. Some scholars like Ito believe that the situation could have been avoided if only the government had taken measures urgently. The Bank of Japan (BOJ) and ministry of finance(MOF) and Japanese banks took a long time to acknowledge the existence of the problem hence took long to respond and this led to worsening of the problem (Saxonhouse & Stern, 2004). Increased speculation is also viewed as a contributing factor to the lost decade. Due to high prices of land, stock and real estate, banks thought that the prices would continue to rise thus instead of reinvesting the excess liquidity, they loaned it with real estate as a collateral without foreseeing any risks. As prices continued to increase, the companies continued to acquire more loans backed by assets and invested in stocks and securities and the banks offered loans without considering creditworthiness of the loanee. By the time the bubble bust, most banks had little or capital reserves (Callen & Ostry, 2003). Callen and Ostry (2003) observe that the economic slowdown was a result of massive savings due to demographics of aging population. This resulted in over reliance on traditional bank loans as opposed to issue of stocks and bonds in the capital market to acquire additional financing. The relationship of banks and corporations led to lowering of lending standards leading to increased risks. The shareholders of commercial banks were mutual life insurance companies which were manage d by representatives selected by the management hence there was no regulations to operate efficiently. The banks therefore were lending money without a profit maximization motive thus increased lending risks. The MOF had also undergone deregulation hence was not providing the banks with regulatory rents hence they turned to small and micro enterprises and gave the loans against real estate collateral at low interest rates (Syed et al. 2009). The government institutions were getting annual subsidies and hence were not keen on making profits hence lack of control in lending activities. The government response policy in 1997 of increasing consumption tax is the reason for continued crisis which had already began to ease (Syed et al. 2009). The government underestimated the depth of the crisis and began strategies to reduce budget deficits by increasing consumption tax. This resulted in increased consumption of durable goods by consumers as they speculated the increase leading to inflat ion (Nanto, 2009). The community banking model of Japan also prolonged the crisis since the banks were reluctant to write-off non-performing loans and instead opted to continue lending to defaulters. The increase in interest rates in 1989 by the MOF led to the bursting of the bubble. The impact was felt not only by the banking system and other financial

Barbara Kruger's strategic role in post-modern art resurfaces Dissertation

Barbara Kruger's strategic role in post-modern art resurfaces - Dissertation Example The study "Barbara Kruger's strategic role in post-modern art resurfaces " discovers the influence of Barbara Kruger on modern art. Kruger proved to be a powerful force in having challenged the long established conventions, typecasts and traditional practices of society. Through her works she established a strong link between the popular photographs of the 1940s and 1950s by including the public spaces that people are exposed to in their everyday lives. By conceptualizing the conflict and tension latent within theses spaces, Kruger is able to strike an alarming irony through unmasking the violence that disturbs space. The main force for these works revolves around the notion that power, and thus violence, is what propels the splitting of the external to create the internal; space. Kruger argues that space is not an area of freedom but a ‘closed interior’. By shedding light on the external and excluded items submerged underneath what we see in an internal space, Kruger ex poses these never before seen grounds to the public. I believe that Barbara Kruger is most definitely an artist that is worthy of attention; she has inspired a new sphere of, but not confined to, graphic design. Her work is a prime example of ‘Spatial practive’, whereby, she completes a space by exposing it in its entirety, not only its internal elements. This dissertation will tackle in depth the significance of ‘spatial practice’ and ‘site specificity’, and how exactly Barbara Kruger utilizes this in her work to challenge society. It will also discuss the societal impact and influences her pieces have produced. Kruger is often misunderstood, and it not always conceived as narrated in the brief description above. Her role, her purpose and her intention are often contested; some critics comment that she is merely a political agitator. Kruger’s stance in the artistic, political and social worlds will be thoroughly examined. Despite critiq ue, this dissertation will focus on bringing forward the argument that Kruger employs site specificity as a tool for accusation, uncovering conflict ,but not for mass commercialization or for creating acts of violence. Another element that I would focus upon is a critic, David Deitcher who questions that Barbara Kruger is not easily categorized because of her self-constructed identity. ‘Her work has both a place and a strategic role within contemporary artistic discourse’ (Goldstein, A, 2000, p.25). This will be an argument that the dissertation would bring forward how Barbara Kruger’s figure of speech and her presentable artworks effects her ‘strategic role’ and how it brings her practice into external sites and not within a space. At last but not least, this dissertation would analyze the genre feminism in Kruger’s work and how it affected the women by observing her piece of work and what reality brings forward to them. Throughout these chap ters, artworks by Barbara Kruger would be analyzed in depth and how her works have influenced and affected the society and as well how these artworks can resurface the hidden truth of the political society. This will also relate to Jean Baudrillard theories in the context that Barbara Kruger can connect her work to. â€Å"Simulation is no longer that of a territory, a referential being or a substance. It is the generation by models of a real without origin or reality; a hyperreal† (Baudrillad, 2008, p.342). Chapter 1: Site Specificity This chapter delves into the site specificity in Barbara Kruger’s works. Site specificity is defined as ‘artworks take location into account in large scale work’, and the reason for examining this topic is because Kruger has considered the space in her works in attempting to establish relationships

Grant Proposal Essay Example for Free

Grant Proposal Essay Program planning is a process that shows the needs of a community and the reason and purpose for the programs an organization wants to set up to address that need. Through program planning; goals, objectives, activities, and evaluations are set up to provide the framework for the grant proposal to be written. A well written grant proposal will show the reader that the organization writing the proposal truly understands the problems within a specific community and it will convince the reader that they want to provide the financial help that will be necessary for the organization to solve the problem. Once a problem within a community has been discovered, an organization figures out how to confront that problem and writes a grant proposal to explain that problem and how it plans to help solve that problem, by proving that they understand the situation. The grant proposal starts with the premise, which explains the understanding the organization has about the problem and shows the belief they have that they will be able to provide the help necessary to solve the problem. The conclusion portion of the grant proposal explains the ways that the organization plans to address the problem through the programs and services they will provide to the community. Finally, the grant proposal will provide a detailed explanation of what they plan the outcomes of their programs to be. The organization has to prove that their programs will truly be an asset to the community using their grant proposal by making sure that each part of the proposal will compliment the other through a descriptive and flowing argument and by making sure that each part of the grant proposal compliments the other.

Development of the Caspian Oil and Gas Sector

Development of the Caspian Oil and Gas Sector Caspian Oil Gas Role of FDI in Economic Development of Azerbaijan, Kazakhstan and Turkmenistan Abstract This paper underlines the foreign direct investment strategy formulation process in the three energy-rich countries of the Caspian Region: Azerbaijan, Kazakhstan and Turkmenistan. The study comparatively analysis the investment climate in three selected countries and more specifically it examines the foreign direct investment in oil and gas industry and its role in economic development of each country. The research examines the investment climate in Azerbaijan, Kazakhstan and Turkmenistan and factors influencing the foreign investor’s decision-making in oil and gas sector. The first part of this paper overviews the Caspian region and its oil and gas reserves. More specifically this part summarises the role of foreign direct investment in oil and gas industry and how it promotes economic development of Caspian basin countries, namely Azerbaijan, Kazakhstan and Turkmenistan. The second part presents the theoretical framework of foreign direct investment. This part also reviews the previous empirical findings on types, determinants and motives of foreign direct investment. The part 3 comparatively analysis foreign direct investment performance in selected countries and factors which may influence the ability of a country to attract foreign investment. This part also overviews the investment climates in Azerbaijan, Kazakhstan and Turkmenistan. Part 4 concludes. Key Words: FDI, Caspian Sea region, Oil and Gas, Azerbaijan, Kazakhstan, Turkmenistan. 1 Introduction The Overview of the Caspian Sea Region It is wide recognized that foreign direct investment (FDI) can play an important role in the development process of many countries and it is much required. Economies in transition, such as those in Central Asia and the Caucasus, are no exception as they realize the important role of FDI in strengthening their transition process. While some of them have sizable deposits of oil, gas and minerals which are major attractions to foreign investors, others, being less endowed, have more difficulty to attract FDI to their fledgling industrial and service sectors. But in even those countries which are well endowed with natural resources, there is a thrust to diversify their economies away from over-dependence on those resources and to develop viable value-added manufacturing industries and services. FDI can play a major catalytic role in this process. Just a decade years ago the areas on each side of the Caspian Sea – Central Asia to its east side and the Transcaucasia to its west were largely unknown. These regions were provinces of the Soviet Empire important to the outside world neither politically nor economically. Now its is well known that the Caspian Sea is largest land-locked body of water on Earth, bordered by Azerbaijan, Russia, Kazakhstan, Turkmenistan and Iran – the Caspian basin countries (see Map 1). Amongst the five countries only Iran is a member of the Organization of Petroleum Exporting Countries. Kazakhstan, Azerbaijan and Turkmenistan became independent after collapse of Soviet Union in 1991. Once a centre of global commerce, the Caspian Sea region has languished in obscurity ever since the rise of the sailing ship rendered the Silk Road obsolete a half millennium ago (Olcott, 1998). After discovery of oil and gas resources in the Caspian offshore and shore areas, this region became very important oil and gas sector in global context. Moreover, owing to energy security and geopolitical reasons, the Caspian region became very attractive for the West. Azerbaijan became one of the world’s first oil sectors after crude oil production started in Baku in the middle of 19th century. The oil production in Central Asia started in the beginning of the 20th century. Azerbaijan recorded about 70% of Soviet oil production by end of 1940. The former Soviet Union controlled almost all natural resources in Soviet Republics. At the time of their independence, Soviet republics were quasi-states (Olcott, 1998). Each republic has its own president and prime minister, local and national legislatures. The political and economic liberalisation of the Soviet Union in the mid-1980s attracted foreign investors and oil and gas companies interested in exploration and production prospects. The collapse of the Soviet Union gave further opportunities for the liberalisation of investment regulations. By the late 1990s the Caspian region was comparatively politically stable region, and a number of countries significantly improved investment regimes to their oil and gas sectors. Historically, energy industry in Azerbaijan, Russia, Kazakhstan, Turkmenistan and Uzbekistan is very important sector for the economy growth of these countries. However, poor management of natural resources and poor investment climate in these countries lead to disparities emergent between the countries in socio-economic terms. Nowadays, it is well recognized that foreign investment plays a vital role in the development of the oil and gas sector for such countries as Azerbaijan, Kazakhstan and Turkmenistan and significantly stimulates social and economic development of each of these countries. 1.2 Research Questions The presence of potentially vast oil and gas reserves is a part of the foreign investment attraction into the Caspian Sea region. On the other hand, it is important to note that while the quantity of proven reserves undoubtedly plays a significant role in estimating a region’s production and export potential, the other decisive factors for attraction foreign direct investment into this region are undeveloped market, cheap labour and cheap inputs and weak competition. This paper focuses on foreign direct investment strategy formulation process in the three energy-rich countries of the Caspian Region: Azerbaijan, Kazakhstan and Turkmenistan; and on what foreign direct investment strategy in each country are based. The study comparatively analysis the investment climate in three selected countries and more specifically it examines the foreign direct investment in oil and gas industry and performance by each country. The significant number of researches in regard to foreign direct investment mostly explains the investment strategy in the developed countries, when limited study has done on investment in less-developed countries or emerging countries. The selected countries Azerbaijan, Kazakhstan and Turkmenistan are transition countries and to a certain extent new participants in the competition to attract foreign investment. These countries can offer many potential advantages to foreign investor, especially in oil and gas sector of business. The research examines the investment climate in Azerbaijan, Kazakhstan and Turkmenistan and factors influencing the foreign investor’s decision-making in oil and gas sector. There is no much research which explores the determinants of investment in Azerbaijan, Kazakhstan and Turkmenistan, the stereotypes and perceptions that foreign investors have about these countries and what could be done to increase the foreign direct investment flow into these countries. This paper surveys these parts by investigating the multinational oil companies operating in Azerbaijan, Kazakhstan and Turkmenistan. The data from different energy agencies were gathered for comparative analysis of oil and gas data as well as foreign direct investment in different countries. This would not only let one to have a picture of various state strategies related to foreign investment, but could also provide the valuable outlook of the most advantageous approach for transition countries in doing business with foreign investors. 1.3 The Legal Status of Caspian Sea A large share of oil and gas reserves in Central Asia and Caucasus are thought to lie under he Caspian Sea. The question of the ownership of those resources, including the right to license and tax their development, is being argued by the Caspian littoral countries. The legal debate over the Caspian Sea can be tracked back to the 1921 Treaty to Moscow, reaffirmed in 1935, which declared that the inland Caspian Sea belonged to Russia (Kemp, 2000). Later Russia sent a note to the United Nations dated from 5th October 1994, where Russian Ministry of Foreign Affairs stated that the Caspian Sea should not be subject to the provisions of international maritime law (International Energy Agency, 1998). The importance of the application of international law is that a â€Å"sea† under the 1982 Law of the Sea Convention would be subject to separation into national zones for the development of its mineral resources. Russia stated that until all five of the Caspian littoral states (Azerbaijan, Russia, Kazakhstan, Turkmenistan, and Iran) came to a common decision on some other arrangement, the legal status of the Caspian Sea was subject only to the provisions of the more general (Treaty of Friendship between Iran and the USSR of 26 February 1921 and Treaty between Iran and the USSR on Trade and Maritime Navigation of 26 March 1940). Nevertheless, the ongoing legal uncertainty does not seem considerably decreased foreign investment in the Caspian Sea region. Advantageous geological prospects, with potential of a major oil and gas resource base, show significant motivations for companies to invest in this important producing region, preferably from the beginning of its development. 1.4 Current Production and Proven Reserves in Caspian Region Caspian oil presents a lot of opportunities for world oil markets and for the region itself (Energy Charter Secretariat, 2008): The appearance of new production sources would expand world oil supplies. Major quantities of Caspian oil would ease the pressure on the Persian Gulf production capacity and provide an additional hedge against oil supply disruptions Profits from oil exports could stimulate economic growth and improve the standard of living in the Caspian energy-rich counties. The availability of Caspian energy supplies in world markets will likewise improve the prospects for economic growth and political stability in the Caspian basin countries. Nowadays the Caspian Sea region is important, but not major supplier of crude oil to world markets, based upon estimates by British Petroleum (BP) and the Energy Information Administration (EIA). In 2005 the Caspian region produced 2.1 million barrels per day, or 2 per cent of total world production (see Table 1). Kazakhstan’s production rapidly increased since the late 1990s, accounted for 67 per cent and Azerbaijan for 22 per cent of regional crude oil production in 2005. The Caspian Sea region’s comparative contribution to world natural gas supplies is larger than that for oil. Gas production of 3.0 trillion cubic feet per year in 2005 was 3 percent of world production (Energy Information Administration, 2006). Turkmenistan is the largest producer; with production of 2.0 trillion cubic feet per year, it accounts for almost two-thirds of the region’s gas production. (see Figure 1). Unlike oil, the region’s proven reserves of natural gas are a higher proportion of the world total than is its natural gas production. The estimate of proven reserves of natural gas in the Caspian Sea region for the end of 2006 published by Energy Information Administration is 232 trillion cubic feet per year, which represents 4 per cent of the world total (see Table 2). Table 1Oil Production in the Caspian Sea Region 1. Proven reserves are defined by the EIA 2. Possible reserves 3. Other estimates (EIA/IEO 2006) 3.45 million barrels per day, (World Oil, 10 March 2004) 3 million ^Only Caspian area oil and gas production Source: Energy Information Administration (EIA): Caspian Sea Region: Survey of Key Oil and Gas Statistics and Forecasts, July 2006. Table 2Gas Production in the Caspian Sea Region ^Only Caspian area gas production Source: Energy Information Administration (EIA): Caspian Sea Region: Survey of Key Oil and Gas Statistics and Forecasts, July 2006. Figure 1 Gas Production in Caspian Sea region (1992-2004) Source: Energy Information Administration (EIA): Caspian Sea Region: Survey of Key Oil and Gas Statistics and Forecasts, July 2006. 1.5 Role of Oil and Gas in the Economic Development of Caspian Region The development of oil and gas resources in the Caspian region is mostly important for the development of economies in the Central Asian and Transcaucasia. In 1995 the energy sector’s share of gross domestic product (GDP) was an estimated 14.6 percent in Azerbaijan, 10.1 percent in Kazakhstan, 10.2 percent in Turkmenistan (International Energy Agency, 1998). Foreign investment attracted to the oil and gas sector in Caspian region could offer significant profits for the region’s governments and stimulate investment in other economic sectors. The attract foreign investment the host Governments should take discreet measures to ensure the development of an sufficient legal and administrative infrastructure, including institution building and personnel training, to handle the inflow of oil related revenues and to help ensure the countries’ efficient and equitable development. International Monetary Fund (2003) expressed concerns that unless regional governments introduce further administrative reforms, they risk being overwhelmed by new oil wealth. Particularly, corruption is a peril. Economic development motivated by foreign investment in the oil and gas industry helps to guarantee the financial independence of the Central Asian and Transcaucasian states. The transition to the market economy and the economic dislocations originated by collapse of Soviet Union left Azerbaijan, Kazakhstan and Turkmenistan without adequate funds to develop oil and gas resources. Governments of these countries are looking for private investment (mainly from foreign companies) that would play significant role in the development of oil and gas industry. Besides financial capital, a foreign investor brings a modern technology to local industry, including environmentally sound production techniques and modern management approaches. The Caspian Sea region countries are competing with each other for foreign investment. Oil and gas companies have a wide choice of where to make investment. The foreign investor considers the opportunities that offer the best financial returns. However, the investment climate is vital for company’s decision on where to invest. As a result, Kazakhstan and Azerbaijan took considerable steps in creating attractive investment climates. Kazakhstan concentrated on building a body of law applicable to all projects, while Azerbaijan focused primarily on modified production sharing agreements (International Monetary Fund, 2003). By the beginning of 1998, cumulative foreign direct investment in the oil and gas sectors of Central Asia and Transcaucasia had reached an estimated 3 billion of American dollars, nearly one third of which was placed in 1997. Future investment commitments in the region from contracts already signed total over 40 billion of America dollars (International Energy Agency, 1998). So far most foreign investment has been in Kazakhstan and Azerbaijan. Gas-endowed Turkmenistan started to attract foreign investment later than the others due to Government dictatorship and poor investment climate. Caspian oil development has gained a great deal of political and commercial momentum since the first foreign companies came there at the end of 1980s (Ruseckas, 2000). Since then the most important external factor influencing Caspian oil development is the price of oil. Principally if oil prices remain at present high level it is possible the more optimistic projects will be started. The Caspian Sea region could possibly produce approximately 4 million barrels per day by 2010. In any case, the Caspian Sea states require a stable legal regime to develop, produce, transport and market its natural resources. 1.5.1 Summary data on Azerbaijan Owing to extensive oil reserves, Azerbaijan is a major oil producer since the middle of the last century. Between 1990 and 1995 Azerbaijan’s gross domestic product dropped 58 percent (International Energy Agency, 1998). Oil production fell by only 25 percent mainly because of continuing oil product exports to neighbouring countries and an increasing use of heavy fuel oil in domestic power stations to alternative for imported gas. Due to the tightening of monetary and budgetary policies, the fiscal deficit dropped from 11.4 percent of gross domestic product in 1995 to less than 2 percent in 1996. In 2006 Azerbaijans real gross domestic product grew by 31 percent when the oil production in this region significantly increased. Azerbaijans anticipate for sustained economic growth is in its managing of large oil and natural gas resources in the Caspian Sea region, through effective management of the resulting revenue stream, and non-oil sector diversification (Energy Information Administration, 2006). During the beginning of transition most Azerbaijan onshore oil fields were in decline and required momentous new investment to develop large-scale offshore projects and to reconstruct existing fields. Since independence Azerbaijan signed several agreements with foreign oil companies. While maintaining full state ownership over energy companies, Azerbaijan was quick to invite foreign investors to assume a direct role in the development of its hydrocarbon reserves (Thompson, 2004). In 1992 most of the Azerbaijan oil sector assets were merged in two state oil companies – Azerineft and Azneftkimiya. The new merger was called the State Oil Company of the Azerbaijan Republic or SOCAR. While Government organizations handle production and exploration agreements with foreign companies, SOCAR is body to all international companies developing new oil and gas projects in Azerbaijan. After the first commercial oil flows through the Baku-Tbilisi-Ceyhan pipeline during summer 2006 and the increasing oil production from the Azeri-Chirag-Guneshli project, oil revenues are expected to contribute to a doubling of Azerbaijan’s gross domestic product by 2008 (Thompson, 2004). Energy Information Administration (2007) reports that though the oil sector represented around 10 percent of Azerbaijan’s gross domestic product in 2005, it is already projected to double to almost 20 percent of gross domestic product in 2007 (see Table 3). To manage the revenues, former President of Azerbaijan Heydar Aliyev formed a State Oil Fund in 1999, which is designed to use money obtained from oil-related foreign investment for poverty reduction, education and raising rural living standards. As of the end of 2006, the State Oil Fund reported assets of almost 2 billion US dollars, but the fund’s assets are expected to increase to 36 billion US dollars by 2010 (Energy Information Administration, 2006). Table 3Azerbaijan: Economy and Energy (in millions US dollars) 2003 2004 2005 2006 2007 2010 Oil Production (thousand barrels per day) 320 319 441 648 860 1,300 Oil Exports (thousand barrels per day) 215 204 314 521 721 N/A Foreign Direct Investment 3,285 3,556 1,680 -219 -4,750 476 FDI in Oil Sector 3,246 3,461 1,459 -573 -5,198 366 Oil Sector Revenue 886 946 1,337 2,921 5,272 19,417 As share of total rev (%) 42% 38% 39% 51% 59% N/A As share of total GDP (%) N/A N/A 9.8% 15% 19.7% 43.3% Oil Fund Assets 816 972 1,394 1,936 3,093 36,387 Source: Energy Information Administration: Short Term Energy Outlook, 2007; International Monetary Fund (IMF), Article IV Consultation, Staff Report, No 07/191, June 2007 1.5.2 Summary Data on Kazakhstan As it was the case in most other former Soviet Union countries, Kazakhstan’s first attempts at economic reform were effectively taken in response to Russias one-sided price reforms in 1992. After Kazak oil production had suddenly declined for two years in the end of 1993, inflation had out of control. The efforts to create an economic union with Russia and other former Soviet Union countries didn’t meet expectations of the Kazakh Government. Looking at the dynamic Asian economies as a model, the Kazakh Government turned to market style policies. However, the government increased hard budget constraints and restrictive monetary policies due to attempts to solve non-payment problem through state financing. The remained net debts after netting out inter-industry arrears were financed from Government budget and the central bank. In 1993 International Monetary Fund (IMF) granted Kazakhstan a one-year standby package. To maintain IMF collaboration and to stop the decline in gross domestic product, the Kazakh government implemented a second stabilisation program in 1995. But this time hard budget constraints and monetary policy were strengthened by excluding of government financing of net positions in inter-enterprise debts and retreating government guarantees for loans granted by foreign and domestic banks. In the middle of 1996, the International Monetary Fund approved an Extended Fund Facility (EFF) of 446 million US dollars for three years (IMF, 2003). According to International Monetary Fund (2003) the decision was made in light of a wide-ranging three-year reform programme submitted by the government, as well as the positive longer term prospects for production and exports of energy and non-ferrous metals. In 1996, Kazakhstan experienced its first positive economic growth since 1989. 1.5.3 Summary Data on Turkmenistan Preceding the collapse of the Soviet Union approximately 8 percent Turkmenistan’s gross domestic product was generated by gas exports to the rest of the USSR mostly to Belarus, Ukraine and the Caucasus. Another 5 percent of gross domestic product was earned from cotton exports. Gas and cotton exports continue to be used to cover the import of considerable amounts of grain and capital equipment from other former Soviet Republics. While estimates for the fall of gross domestic product between 1990 and 1995 vary depending on how adjustments to official gross domestic product are made, International Monetary Fund and European Bank of Reconstruction and Development agree on about -35 percent (IMF, 2003). This is much less than the 58 percent drop in Turkmen gas production. The rest of the economy is basically agricultural. The cotton industry has been less affected by the downfall of the Soviet Union. The government gradually liberalised some prices beginning in 1992. A presidential decree of 1995 removed price controls on all products except for about 50 items, including energy. The government introduced the manat as the national currency in 1993. In 1995 it unified the previously separate official and commercial exchange rates, which subsequently became determined by inter-bank auctions for foreign exchange. Between 1992 and 1995 the government compensated for the shortfall in revenue from taxes on gas production and exports by cutting expenditures and replacing subsidies to the economy with additional allocations of credit at largely negative interest rates. Controlled prices were adjusted repeatedly but declined in real terms for natural gas and for oil products through 1994. The share of gas related revenues in the central budget declined from 60 percent in 1992 to under 20 percent in 1995, which lowered the share of total budgetary revenue in GDP from 40 percent to 10 percent during this period. Due to drastic expenditure cuts in government wages and investment, including maintenance, the central budget deficit remained fairly stable over this period. It also helped that new excise taxes were introduced in 1995 on petrol (55 percent) and diesel (60 percent). This resulted in some recovery of government capital spending. The easy money policy was changed slowly in 1995 and 1996. During this time foreign exchange surrender requirements of state-owned enterprises to the Foreign Exchange Reserve Fund (FERF) were increased to 50 percent for gas and oil exports, and the money allocated directly to the central budget. Prior to that, this fund had been used to award credits to the economy, contributing to monetary expansion. In 1995 and 1996, bank credit allocation was reduced, real interest rates rose (due to credit auctions with deregulated interest rates), and reserve requirements for banks were increased. However, the pursuit of these policies was not smooth, in part due to the limited political autonomy of the Central Bank. Nevertheless, inflation decelerated by 50 percent towards the end of 1995 and is estimated to have been 445 percent in 1996, and 21 percent in 1997. Despite plummeting gas exports in recent years, Turkmenistan’s current account was slightly positive in 1994 and 1995, as long as arrears owed to the country are not taken into account. If such arrears are counted the 1995 balance swings from an estimated surplus of 54 million US Dollars to a deficit of 289 million US Dollars. The situation has probably continued to deteriorate due to weak gas exports. 2 Theoretical Frameworks 2.1 Overview of Foreign Direct Investment Theories There is variety of empirical studies on theoretical models explaining foreign direct investment (FDI) and its determinants. The various approaches from different disciplines such as economics, international business, organisation and management explain numerous characteristics of this phenomenon. The following dissimilar methods, explaining foreign direct investment as the location decision of multinational enterprises are mostly acknowledged in empirical literature on FDI: Ownership advantages as determinants of foreign direct investment (including monopolistic advantage and internalisation theory) based on imperfect competition models and the view that multinational enterprises (MNEs) are firms with market power (Hymer, 1960; Buckley and Casson, 1979; Kindleberger, 1969; Caves, 1971 for ownership advantages) Determinants according to the Neoclassical Trade Theory and the Heckscher-Ohlin model, where capital moves across countries due to differences in capital returns (for example Markusen et al, 1995,pp. 98-128; Aliber, 1970); Determinants of foreign direct investment in Dunning’s ownership-location-internalization (OLI) framework, which brought together traditional trade economics, ownership advantages and internalisation theory (Dunning, 1977; 1979); Determinants of foreign direct investment according to the horizontal FDI model or Proximity- Concentration Hypothesis (Krugman, 1983; Markusen, 1984; Ethier, 1986; Horstmann and Markusen, 1992; Brainard, 1993); Determinants of foreign direct investment according to the vertical FDI model, Factor-Proportions Hypothesis or the theory Development of the Caspian Oil and Gas Sector Development of the Caspian Oil and Gas Sector Caspian Oil Gas Role of FDI in Economic Development of Azerbaijan, Kazakhstan and Turkmenistan Abstract This paper underlines the foreign direct investment strategy formulation process in the three energy-rich countries of the Caspian Region: Azerbaijan, Kazakhstan and Turkmenistan. The study comparatively analysis the investment climate in three selected countries and more specifically it examines the foreign direct investment in oil and gas industry and its role in economic development of each country. The research examines the investment climate in Azerbaijan, Kazakhstan and Turkmenistan and factors influencing the foreign investor’s decision-making in oil and gas sector. The first part of this paper overviews the Caspian region and its oil and gas reserves. More specifically this part summarises the role of foreign direct investment in oil and gas industry and how it promotes economic development of Caspian basin countries, namely Azerbaijan, Kazakhstan and Turkmenistan. The second part presents the theoretical framework of foreign direct investment. This part also reviews the previous empirical findings on types, determinants and motives of foreign direct investment. The part 3 comparatively analysis foreign direct investment performance in selected countries and factors which may influence the ability of a country to attract foreign investment. This part also overviews the investment climates in Azerbaijan, Kazakhstan and Turkmenistan. Part 4 concludes. Key Words: FDI, Caspian Sea region, Oil and Gas, Azerbaijan, Kazakhstan, Turkmenistan. 1 Introduction The Overview of the Caspian Sea Region It is wide recognized that foreign direct investment (FDI) can play an important role in the development process of many countries and it is much required. Economies in transition, such as those in Central Asia and the Caucasus, are no exception as they realize the important role of FDI in strengthening their transition process. While some of them have sizable deposits of oil, gas and minerals which are major attractions to foreign investors, others, being less endowed, have more difficulty to attract FDI to their fledgling industrial and service sectors. But in even those countries which are well endowed with natural resources, there is a thrust to diversify their economies away from over-dependence on those resources and to develop viable value-added manufacturing industries and services. FDI can play a major catalytic role in this process. Just a decade years ago the areas on each side of the Caspian Sea – Central Asia to its east side and the Transcaucasia to its west were largely unknown. These regions were provinces of the Soviet Empire important to the outside world neither politically nor economically. Now its is well known that the Caspian Sea is largest land-locked body of water on Earth, bordered by Azerbaijan, Russia, Kazakhstan, Turkmenistan and Iran – the Caspian basin countries (see Map 1). Amongst the five countries only Iran is a member of the Organization of Petroleum Exporting Countries. Kazakhstan, Azerbaijan and Turkmenistan became independent after collapse of Soviet Union in 1991. Once a centre of global commerce, the Caspian Sea region has languished in obscurity ever since the rise of the sailing ship rendered the Silk Road obsolete a half millennium ago (Olcott, 1998). After discovery of oil and gas resources in the Caspian offshore and shore areas, this region became very important oil and gas sector in global context. Moreover, owing to energy security and geopolitical reasons, the Caspian region became very attractive for the West. Azerbaijan became one of the world’s first oil sectors after crude oil production started in Baku in the middle of 19th century. The oil production in Central Asia started in the beginning of the 20th century. Azerbaijan recorded about 70% of Soviet oil production by end of 1940. The former Soviet Union controlled almost all natural resources in Soviet Republics. At the time of their independence, Soviet republics were quasi-states (Olcott, 1998). Each republic has its own president and prime minister, local and national legislatures. The political and economic liberalisation of the Soviet Union in the mid-1980s attracted foreign investors and oil and gas companies interested in exploration and production prospects. The collapse of the Soviet Union gave further opportunities for the liberalisation of investment regulations. By the late 1990s the Caspian region was comparatively politically stable region, and a number of countries significantly improved investment regimes to their oil and gas sectors. Historically, energy industry in Azerbaijan, Russia, Kazakhstan, Turkmenistan and Uzbekistan is very important sector for the economy growth of these countries. However, poor management of natural resources and poor investment climate in these countries lead to disparities emergent between the countries in socio-economic terms. Nowadays, it is well recognized that foreign investment plays a vital role in the development of the oil and gas sector for such countries as Azerbaijan, Kazakhstan and Turkmenistan and significantly stimulates social and economic development of each of these countries. 1.2 Research Questions The presence of potentially vast oil and gas reserves is a part of the foreign investment attraction into the Caspian Sea region. On the other hand, it is important to note that while the quantity of proven reserves undoubtedly plays a significant role in estimating a region’s production and export potential, the other decisive factors for attraction foreign direct investment into this region are undeveloped market, cheap labour and cheap inputs and weak competition. This paper focuses on foreign direct investment strategy formulation process in the three energy-rich countries of the Caspian Region: Azerbaijan, Kazakhstan and Turkmenistan; and on what foreign direct investment strategy in each country are based. The study comparatively analysis the investment climate in three selected countries and more specifically it examines the foreign direct investment in oil and gas industry and performance by each country. The significant number of researches in regard to foreign direct investment mostly explains the investment strategy in the developed countries, when limited study has done on investment in less-developed countries or emerging countries. The selected countries Azerbaijan, Kazakhstan and Turkmenistan are transition countries and to a certain extent new participants in the competition to attract foreign investment. These countries can offer many potential advantages to foreign investor, especially in oil and gas sector of business. The research examines the investment climate in Azerbaijan, Kazakhstan and Turkmenistan and factors influencing the foreign investor’s decision-making in oil and gas sector. There is no much research which explores the determinants of investment in Azerbaijan, Kazakhstan and Turkmenistan, the stereotypes and perceptions that foreign investors have about these countries and what could be done to increase the foreign direct investment flow into these countries. This paper surveys these parts by investigating the multinational oil companies operating in Azerbaijan, Kazakhstan and Turkmenistan. The data from different energy agencies were gathered for comparative analysis of oil and gas data as well as foreign direct investment in different countries. This would not only let one to have a picture of various state strategies related to foreign investment, but could also provide the valuable outlook of the most advantageous approach for transition countries in doing business with foreign investors. 1.3 The Legal Status of Caspian Sea A large share of oil and gas reserves in Central Asia and Caucasus are thought to lie under he Caspian Sea. The question of the ownership of those resources, including the right to license and tax their development, is being argued by the Caspian littoral countries. The legal debate over the Caspian Sea can be tracked back to the 1921 Treaty to Moscow, reaffirmed in 1935, which declared that the inland Caspian Sea belonged to Russia (Kemp, 2000). Later Russia sent a note to the United Nations dated from 5th October 1994, where Russian Ministry of Foreign Affairs stated that the Caspian Sea should not be subject to the provisions of international maritime law (International Energy Agency, 1998). The importance of the application of international law is that a â€Å"sea† under the 1982 Law of the Sea Convention would be subject to separation into national zones for the development of its mineral resources. Russia stated that until all five of the Caspian littoral states (Azerbaijan, Russia, Kazakhstan, Turkmenistan, and Iran) came to a common decision on some other arrangement, the legal status of the Caspian Sea was subject only to the provisions of the more general (Treaty of Friendship between Iran and the USSR of 26 February 1921 and Treaty between Iran and the USSR on Trade and Maritime Navigation of 26 March 1940). Nevertheless, the ongoing legal uncertainty does not seem considerably decreased foreign investment in the Caspian Sea region. Advantageous geological prospects, with potential of a major oil and gas resource base, show significant motivations for companies to invest in this important producing region, preferably from the beginning of its development. 1.4 Current Production and Proven Reserves in Caspian Region Caspian oil presents a lot of opportunities for world oil markets and for the region itself (Energy Charter Secretariat, 2008): The appearance of new production sources would expand world oil supplies. Major quantities of Caspian oil would ease the pressure on the Persian Gulf production capacity and provide an additional hedge against oil supply disruptions Profits from oil exports could stimulate economic growth and improve the standard of living in the Caspian energy-rich counties. The availability of Caspian energy supplies in world markets will likewise improve the prospects for economic growth and political stability in the Caspian basin countries. Nowadays the Caspian Sea region is important, but not major supplier of crude oil to world markets, based upon estimates by British Petroleum (BP) and the Energy Information Administration (EIA). In 2005 the Caspian region produced 2.1 million barrels per day, or 2 per cent of total world production (see Table 1). Kazakhstan’s production rapidly increased since the late 1990s, accounted for 67 per cent and Azerbaijan for 22 per cent of regional crude oil production in 2005. The Caspian Sea region’s comparative contribution to world natural gas supplies is larger than that for oil. Gas production of 3.0 trillion cubic feet per year in 2005 was 3 percent of world production (Energy Information Administration, 2006). Turkmenistan is the largest producer; with production of 2.0 trillion cubic feet per year, it accounts for almost two-thirds of the region’s gas production. (see Figure 1). Unlike oil, the region’s proven reserves of natural gas are a higher proportion of the world total than is its natural gas production. The estimate of proven reserves of natural gas in the Caspian Sea region for the end of 2006 published by Energy Information Administration is 232 trillion cubic feet per year, which represents 4 per cent of the world total (see Table 2). Table 1Oil Production in the Caspian Sea Region 1. Proven reserves are defined by the EIA 2. Possible reserves 3. Other estimates (EIA/IEO 2006) 3.45 million barrels per day, (World Oil, 10 March 2004) 3 million ^Only Caspian area oil and gas production Source: Energy Information Administration (EIA): Caspian Sea Region: Survey of Key Oil and Gas Statistics and Forecasts, July 2006. Table 2Gas Production in the Caspian Sea Region ^Only Caspian area gas production Source: Energy Information Administration (EIA): Caspian Sea Region: Survey of Key Oil and Gas Statistics and Forecasts, July 2006. Figure 1 Gas Production in Caspian Sea region (1992-2004) Source: Energy Information Administration (EIA): Caspian Sea Region: Survey of Key Oil and Gas Statistics and Forecasts, July 2006. 1.5 Role of Oil and Gas in the Economic Development of Caspian Region The development of oil and gas resources in the Caspian region is mostly important for the development of economies in the Central Asian and Transcaucasia. In 1995 the energy sector’s share of gross domestic product (GDP) was an estimated 14.6 percent in Azerbaijan, 10.1 percent in Kazakhstan, 10.2 percent in Turkmenistan (International Energy Agency, 1998). Foreign investment attracted to the oil and gas sector in Caspian region could offer significant profits for the region’s governments and stimulate investment in other economic sectors. The attract foreign investment the host Governments should take discreet measures to ensure the development of an sufficient legal and administrative infrastructure, including institution building and personnel training, to handle the inflow of oil related revenues and to help ensure the countries’ efficient and equitable development. International Monetary Fund (2003) expressed concerns that unless regional governments introduce further administrative reforms, they risk being overwhelmed by new oil wealth. Particularly, corruption is a peril. Economic development motivated by foreign investment in the oil and gas industry helps to guarantee the financial independence of the Central Asian and Transcaucasian states. The transition to the market economy and the economic dislocations originated by collapse of Soviet Union left Azerbaijan, Kazakhstan and Turkmenistan without adequate funds to develop oil and gas resources. Governments of these countries are looking for private investment (mainly from foreign companies) that would play significant role in the development of oil and gas industry. Besides financial capital, a foreign investor brings a modern technology to local industry, including environmentally sound production techniques and modern management approaches. The Caspian Sea region countries are competing with each other for foreign investment. Oil and gas companies have a wide choice of where to make investment. The foreign investor considers the opportunities that offer the best financial returns. However, the investment climate is vital for company’s decision on where to invest. As a result, Kazakhstan and Azerbaijan took considerable steps in creating attractive investment climates. Kazakhstan concentrated on building a body of law applicable to all projects, while Azerbaijan focused primarily on modified production sharing agreements (International Monetary Fund, 2003). By the beginning of 1998, cumulative foreign direct investment in the oil and gas sectors of Central Asia and Transcaucasia had reached an estimated 3 billion of American dollars, nearly one third of which was placed in 1997. Future investment commitments in the region from contracts already signed total over 40 billion of America dollars (International Energy Agency, 1998). So far most foreign investment has been in Kazakhstan and Azerbaijan. Gas-endowed Turkmenistan started to attract foreign investment later than the others due to Government dictatorship and poor investment climate. Caspian oil development has gained a great deal of political and commercial momentum since the first foreign companies came there at the end of 1980s (Ruseckas, 2000). Since then the most important external factor influencing Caspian oil development is the price of oil. Principally if oil prices remain at present high level it is possible the more optimistic projects will be started. The Caspian Sea region could possibly produce approximately 4 million barrels per day by 2010. In any case, the Caspian Sea states require a stable legal regime to develop, produce, transport and market its natural resources. 1.5.1 Summary data on Azerbaijan Owing to extensive oil reserves, Azerbaijan is a major oil producer since the middle of the last century. Between 1990 and 1995 Azerbaijan’s gross domestic product dropped 58 percent (International Energy Agency, 1998). Oil production fell by only 25 percent mainly because of continuing oil product exports to neighbouring countries and an increasing use of heavy fuel oil in domestic power stations to alternative for imported gas. Due to the tightening of monetary and budgetary policies, the fiscal deficit dropped from 11.4 percent of gross domestic product in 1995 to less than 2 percent in 1996. In 2006 Azerbaijans real gross domestic product grew by 31 percent when the oil production in this region significantly increased. Azerbaijans anticipate for sustained economic growth is in its managing of large oil and natural gas resources in the Caspian Sea region, through effective management of the resulting revenue stream, and non-oil sector diversification (Energy Information Administration, 2006). During the beginning of transition most Azerbaijan onshore oil fields were in decline and required momentous new investment to develop large-scale offshore projects and to reconstruct existing fields. Since independence Azerbaijan signed several agreements with foreign oil companies. While maintaining full state ownership over energy companies, Azerbaijan was quick to invite foreign investors to assume a direct role in the development of its hydrocarbon reserves (Thompson, 2004). In 1992 most of the Azerbaijan oil sector assets were merged in two state oil companies – Azerineft and Azneftkimiya. The new merger was called the State Oil Company of the Azerbaijan Republic or SOCAR. While Government organizations handle production and exploration agreements with foreign companies, SOCAR is body to all international companies developing new oil and gas projects in Azerbaijan. After the first commercial oil flows through the Baku-Tbilisi-Ceyhan pipeline during summer 2006 and the increasing oil production from the Azeri-Chirag-Guneshli project, oil revenues are expected to contribute to a doubling of Azerbaijan’s gross domestic product by 2008 (Thompson, 2004). Energy Information Administration (2007) reports that though the oil sector represented around 10 percent of Azerbaijan’s gross domestic product in 2005, it is already projected to double to almost 20 percent of gross domestic product in 2007 (see Table 3). To manage the revenues, former President of Azerbaijan Heydar Aliyev formed a State Oil Fund in 1999, which is designed to use money obtained from oil-related foreign investment for poverty reduction, education and raising rural living standards. As of the end of 2006, the State Oil Fund reported assets of almost 2 billion US dollars, but the fund’s assets are expected to increase to 36 billion US dollars by 2010 (Energy Information Administration, 2006). Table 3Azerbaijan: Economy and Energy (in millions US dollars) 2003 2004 2005 2006 2007 2010 Oil Production (thousand barrels per day) 320 319 441 648 860 1,300 Oil Exports (thousand barrels per day) 215 204 314 521 721 N/A Foreign Direct Investment 3,285 3,556 1,680 -219 -4,750 476 FDI in Oil Sector 3,246 3,461 1,459 -573 -5,198 366 Oil Sector Revenue 886 946 1,337 2,921 5,272 19,417 As share of total rev (%) 42% 38% 39% 51% 59% N/A As share of total GDP (%) N/A N/A 9.8% 15% 19.7% 43.3% Oil Fund Assets 816 972 1,394 1,936 3,093 36,387 Source: Energy Information Administration: Short Term Energy Outlook, 2007; International Monetary Fund (IMF), Article IV Consultation, Staff Report, No 07/191, June 2007 1.5.2 Summary Data on Kazakhstan As it was the case in most other former Soviet Union countries, Kazakhstan’s first attempts at economic reform were effectively taken in response to Russias one-sided price reforms in 1992. After Kazak oil production had suddenly declined for two years in the end of 1993, inflation had out of control. The efforts to create an economic union with Russia and other former Soviet Union countries didn’t meet expectations of the Kazakh Government. Looking at the dynamic Asian economies as a model, the Kazakh Government turned to market style policies. However, the government increased hard budget constraints and restrictive monetary policies due to attempts to solve non-payment problem through state financing. The remained net debts after netting out inter-industry arrears were financed from Government budget and the central bank. In 1993 International Monetary Fund (IMF) granted Kazakhstan a one-year standby package. To maintain IMF collaboration and to stop the decline in gross domestic product, the Kazakh government implemented a second stabilisation program in 1995. But this time hard budget constraints and monetary policy were strengthened by excluding of government financing of net positions in inter-enterprise debts and retreating government guarantees for loans granted by foreign and domestic banks. In the middle of 1996, the International Monetary Fund approved an Extended Fund Facility (EFF) of 446 million US dollars for three years (IMF, 2003). According to International Monetary Fund (2003) the decision was made in light of a wide-ranging three-year reform programme submitted by the government, as well as the positive longer term prospects for production and exports of energy and non-ferrous metals. In 1996, Kazakhstan experienced its first positive economic growth since 1989. 1.5.3 Summary Data on Turkmenistan Preceding the collapse of the Soviet Union approximately 8 percent Turkmenistan’s gross domestic product was generated by gas exports to the rest of the USSR mostly to Belarus, Ukraine and the Caucasus. Another 5 percent of gross domestic product was earned from cotton exports. Gas and cotton exports continue to be used to cover the import of considerable amounts of grain and capital equipment from other former Soviet Republics. While estimates for the fall of gross domestic product between 1990 and 1995 vary depending on how adjustments to official gross domestic product are made, International Monetary Fund and European Bank of Reconstruction and Development agree on about -35 percent (IMF, 2003). This is much less than the 58 percent drop in Turkmen gas production. The rest of the economy is basically agricultural. The cotton industry has been less affected by the downfall of the Soviet Union. The government gradually liberalised some prices beginning in 1992. A presidential decree of 1995 removed price controls on all products except for about 50 items, including energy. The government introduced the manat as the national currency in 1993. In 1995 it unified the previously separate official and commercial exchange rates, which subsequently became determined by inter-bank auctions for foreign exchange. Between 1992 and 1995 the government compensated for the shortfall in revenue from taxes on gas production and exports by cutting expenditures and replacing subsidies to the economy with additional allocations of credit at largely negative interest rates. Controlled prices were adjusted repeatedly but declined in real terms for natural gas and for oil products through 1994. The share of gas related revenues in the central budget declined from 60 percent in 1992 to under 20 percent in 1995, which lowered the share of total budgetary revenue in GDP from 40 percent to 10 percent during this period. Due to drastic expenditure cuts in government wages and investment, including maintenance, the central budget deficit remained fairly stable over this period. It also helped that new excise taxes were introduced in 1995 on petrol (55 percent) and diesel (60 percent). This resulted in some recovery of government capital spending. The easy money policy was changed slowly in 1995 and 1996. During this time foreign exchange surrender requirements of state-owned enterprises to the Foreign Exchange Reserve Fund (FERF) were increased to 50 percent for gas and oil exports, and the money allocated directly to the central budget. Prior to that, this fund had been used to award credits to the economy, contributing to monetary expansion. In 1995 and 1996, bank credit allocation was reduced, real interest rates rose (due to credit auctions with deregulated interest rates), and reserve requirements for banks were increased. However, the pursuit of these policies was not smooth, in part due to the limited political autonomy of the Central Bank. Nevertheless, inflation decelerated by 50 percent towards the end of 1995 and is estimated to have been 445 percent in 1996, and 21 percent in 1997. Despite plummeting gas exports in recent years, Turkmenistan’s current account was slightly positive in 1994 and 1995, as long as arrears owed to the country are not taken into account. If such arrears are counted the 1995 balance swings from an estimated surplus of 54 million US Dollars to a deficit of 289 million US Dollars. The situation has probably continued to deteriorate due to weak gas exports. 2 Theoretical Frameworks 2.1 Overview of Foreign Direct Investment Theories There is variety of empirical studies on theoretical models explaining foreign direct investment (FDI) and its determinants. The various approaches from different disciplines such as economics, international business, organisation and management explain numerous characteristics of this phenomenon. The following dissimilar methods, explaining foreign direct investment as the location decision of multinational enterprises are mostly acknowledged in empirical literature on FDI: Ownership advantages as determinants of foreign direct investment (including monopolistic advantage and internalisation theory) based on imperfect competition models and the view that multinational enterprises (MNEs) are firms with market power (Hymer, 1960; Buckley and Casson, 1979; Kindleberger, 1969; Caves, 1971 for ownership advantages) Determinants according to the Neoclassical Trade Theory and the Heckscher-Ohlin model, where capital moves across countries due to differences in capital returns (for example Markusen et al, 1995,pp. 98-128; Aliber, 1970); Determinants of foreign direct investment in Dunning’s ownership-location-internalization (OLI) framework, which brought together traditional trade economics, ownership advantages and internalisation theory (Dunning, 1977; 1979); Determinants of foreign direct investment according to the horizontal FDI model or Proximity- Concentration Hypothesis (Krugman, 1983; Markusen, 1984; Ethier, 1986; Horstmann and Markusen, 1992; Brainard, 1993); Determinants of foreign direct investment according to the vertical FDI model, Factor-Proportions Hypothesis or the theory