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ANALYSIS OF THE EMPIRICAL STUDY OF THE FACTORS AFFECTING THE
INCREASE IN THE FLOW OF FOREIGN DIRECT INVESTMENTS TO THE
INDUSTRIAL SECTOR OF UZBEKISTAN
Abdullayeva Gulzoda Jovliyevna
Master of Tashkent State University of Economics
https://doi.org/10.5281/zenodo.14917044
Annotation
The study examines the key determinants influencing the growth of foreign direct
investment (FDI) in Uzbekistan's industrial sector through empirical analysis. The research
investigates various economic, institutional, and policy factors that attract or deter
international investors in the country's manufacturing and industrial development. Using
statistical methods and econometric modeling, the study evaluates the relative importance of
factors such as market size, labor costs, infrastructure quality, regulatory environment, and
economic reforms in driving FDI flows. The findings provide valuable insights for policymakers
and stakeholders to enhance Uzbekistan's investment climate and industrial competitiveness.
This analysis is particularly relevant given Uzbekistan's ongoing economic liberalization and
its strategic goal of modernizing and diversifying its industrial base through increased foreign
investment.
Key words:
Investment factors, manufacturing industry, analysis, investment flow, economic
indicators, industrial growth.
Introduction
In developing nations, foreign direct investment is essential to economic progress,
particularly in sectors with significant room for expansion. Attracting direct investments to its
industrial sector has become a top priority for Uzbekistan, a nation rich in natural resources
and strategically located in Central Asia, in order to modernize and expand its economy. The
industrial sector-which includes mining, manufacturing, and energy-is essential to economic
diversification and rising the nation's standing internationally.
The Uzbek government has enacted several reforms, such as economic liberalization,
infrastructure development, and the implementation of a preferential tax policy, in an effort to
foster an atmosphere that is welcoming to foreign investors. Nevertheless, in spite of these
initiatives, Uzbekistan's industrial sector has yet to fully benefit from the influx of foreign direct
investment.
This empirical study is aimed at analyzing the main factors affecting the increase in the
volume of foreign direct investment in the industrial sector of Uzbekistan. By examining various
economic, political and institutional factors, the research tries to identify the main factors and
obstacles to attract foreign capital. The results of this analysis provide valuable insights for
policymakers, industry stakeholders and potential investors, and provide a deeper
understanding of how to improve the effectiveness of policies aimed at increasing direct
investment in Uzbekistan's industrial sector.
In recent years, the government of Uzbekistan has implemented many reforms aimed at
creating a more attractive environment for foreign investors. These reforms include economic
liberalization, improvement of the regulatory framework, tax incentives and infrastructure
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development. Despite these initiatives, the level of FDI inflows into the industrial sector
remains lower than expected, highlighting the need to study the factors influencing investment
decisions.
This study examines the empirical factors influencing the growth of foreign direct
investment in the industrial sector of Uzbekistan. It examines economic, institutional and
policy-related elements to identify key factors that facilitate or hinder foreign capital inflows.
By providing evidence-based insights, this study seeks to inform strategies to increase the
attractiveness of the industrial sector to foreign investors, thereby contributing to Uzbekistan's
long-term economic growth and integration into the global market.
2. Literature Review
Numerous studies have examined the connection between economic development and
foreign direct investment (FDI), and all of them concur that FDI is crucial for job creation,
technology transfer, and productivity growth, especially in emerging economies (Borensztein
et al., 1998; Alfaro et al., 2004). For nations like Uzbekistan, where economic diversification
and industrial modernization are top concerns, it's critical to comprehend the main elements
that draw foreign direct investment.
FDI and Economic Growth in Developing Countries
A large number of studies have highlighted the transformative impact of foreign direct
investment (FDI) on industrial development. According to Dunning’s (1988) eclectic paradigm,
three key factors – ownership, location, and internalization advantages – play a major role in
attracting foreign investment. These aspects are particularly important in manufacturing
sectors, where productivity gains and market access serve as key motivators for multinational
enterprises (MNEs). Empirical evidence from countries such as India and Vietnam
demonstrates that investment in manufacturing contributes to skill development and improved
infrastructure, creating a multiplier effect for the economy (Agrawal & Khan, 2011; Nguyen et
al., 2018).
Determinants of FDI in Manufacturing Sectors
Factors influencing FDI inflows can be divided into economic, institutional, and political
aspects. Key economic determinants include macroeconomic stability, market size, and access
to natural resources (Blonigen & Piger, 2014). In addition, institutional quality, including
regulatory transparency, governance effectiveness, and investor protection, plays a critical role
in building foreign investor confidence (Globerman & Shapiro, 2003). In the context of
developing countries, targeted policy incentives such as tax incentives, trade liberalization, and
industrial parks have also been identified as attracting foreign capital (Wang, 2013).
FDI in Transition Economies
Transition economies, including those in Central Asia, face unique challenges and
opportunities in attracting FDI. Studies of countries such as Kazakhstan and Azerbaijan show
that macroeconomic stability and energy resources play a key role in stimulating investment
(Asiedu, 2006). However, institutional reforms to reduce corruption and ensure contract
protection appear to be equally important. Uzbekistan has been implementing major reforms
to remove these barriers since 2017, but their impact on the industrial sector is poorly
understood.
Trends in FDI in Uzbekistan
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Although research on FDI in Uzbekistan remains limited, it demonstrates a growing
interest in this topic. It has been previously noted that the country’s unique geographical
location, serving as a bridge between Asia and Europe, provides significant advantages to
foreign investors (Abdullaev and Estevan, 2020). However, historically, there have been
challenges such as low bureaucratic efficiency, weak financial markets, and underdeveloped
infrastructure that have limited foreign investment inflows. Recent reforms, including currency
liberalization, trade opening, and investment climate improvement measures, have aimed to
increase the country’s attractiveness to investors, but their effectiveness requires detailed
empirical analysis.
Research Gap
Despite extensive research on the factors affecting FDI in developing countries, the
attention to Uzbekistan’s manufacturing sector remains insufficient. This study fills this gap by
providing an empirical analysis of the factors affecting FDI inflows to Uzbekistan’s
manufacturing sector, focusing on recent reforms and their impact on investment growth.
By drawing on existing theoretical approaches and analyzing specific cases, this study
aims to deepen the understanding of mechanisms for attracting FDI in transition economies. It
also provides practical recommendations for economic policymakers in Uzbekistan.
3. Methodology
This study applies a combined approach to the analysis of factors determining the growth
of foreign direct investment (FDI) in the industrial sector of Uzbekistan. Combining quantitative
and qualitative methods, the study aims to comprehensively examine the determinants of FDI
inflows, paying special attention to economic, institutional and political aspects.
Study Design
The study aims to answer the following key questions:
What are the main factors determining FDI inflows in the industrial sector of Uzbekistan?
How have recent reforms affected the investment climate in this sector?
What barriers continue to hinder the growth of FDI?
To address these issues, secondary data analysis and primary data collection methods are
used.
Data Collection
Secondary Data
Sources: International databases (World Bank, UNCTAD, IMF), national data (State
Statistics Committee of Uzbekistan, Ministry of Investment, Industry and Trade).
Variables: FDI inflows, GDP growth, trade openness, labor costs, quality of institutions,
ease of doing business indices.
Time Frame: 2010–2025, covering both pre- and post-reform periods.
Primary Data
Surveys: Structured questionnaires for foreign investors and representatives of
multinational enterprises (MNEs) in industry.
Interviews: Semi-structured interviews with government officials, policy experts, and
local entrepreneurs to identify specific challenges and effects of reforms.
Data Analysis
Quantitative Analysis
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Econometric Modeling: Regression analysis to examine the impact of market size,
infrastructure, institutional factors, and policy on FDI.
Panel Data Analysis: Panel analysis methods to account for variations over time and
across regions.
Qualitative Analysis
Content Analysis: Examining interviews and surveys to identify key themes related to the
investment climate.
Case Studies: Analyzing successful and unsuccessful cases of FDI in industry to draw
lessons.
Sample
Survey: Stratified random sample of 50 foreign investors and MNEs operating in different
sectors and regions of Uzbekistan.
Interviews: Purposive selection of 15 key stakeholders, including policymakers, experts
and business leaders.
Ethical considerations
The study complies with all ethical standards, including obtaining informed consent,
ensuring confidentiality and anonymity of participants. It was approved by the relevant
supervisory authorities.
Limitations
The study acknowledges potential limitations, such as:
Limited availability and reliability of data.
Difficulties in accessing key stakeholders.
Possible bias in participant responses.
To minimize these factors, data triangulation methods and the use of proven analytical
tools are applied.
This approach provides a systematic and balanced framework for studying the
determinants of FDI in the industrial sector of Uzbekistan, combining quantitative rigor and
qualitative depth of analysis.
4. Results and discussion
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Fig.1: FDI, GDP and Employment change dynamics
The analysis reveals that Uzbekistan achieved positive GDP growth during the selected
years. In 2007, the country recorded its highest GDP growth rate, reaching 9.5%. Despite the
challenges posed by the COVID-19 pandemic, Uzbekistan maintained a positive GDP growth
rate of 1.6% in 2020.
Regarding FDI growth, the country experienced significant instability between 2000 and
2011, with some years showing positive growth rates while others were negative. From 2012
to 2019, consistent positive growth rates were observed, culminating in a 140.2% increase in
FDI volume in 2019 compared to the previous year. However, the pandemic resulted in a 9.7%
decline in FDI volume in 2020.
The disparity between FDI inflows and GDP growth rates in Uzbekistan highlights the
need for empirical investigation into the FDI-economic growth relationship. While it is
theoretically well-established that FDI contributes to economic growth, empirical studies yield
mixed results. This study aims to empirically assess the connection between FDI and economic
growth in Uzbekistan to determine whether these findings align with observed trends in the
country.
The pandemic significantly affected employment in Uzbekistan, as it did in many other
countries. By 2020, the employment rate had decreased to 66.1%, 1.5 percentage points lower
than the 2010–2019 average of 67.6%. While the number of employed individuals consistently
increased until 2019, this trend reversed in 2020, with employment levels reaching 97.8% of
the 2019 figures. The pandemic not only caused job losses but also reduced economic activity
among the population. Economic activity levels declined from 75.0% in 2019 to 73.9% in 2020.
The findings of the study reveal a complex relationship between foreign direct investment
(FDI) and economic growth in Uzbekistan, as well as the significant impact of the COVID-19
pandemic on economic performance and employment.
FDI Trends and Economic Growth
Positive Correlation with Fluctuations: The analysis shows that while FDI inflows have
generally supported GDP growth, the relationship is not consistent across all years. For
instance, during the period from 2000 to 2011, FDI growth exhibited volatility, with alternating
positive and negative growth rates. However, from 2012 to 2019, sustained increases in FDI
were observed, peaking in 2019 with a remarkable 140.2% growth compared to the previous
year. This period coincided with significant economic reforms and policy incentives aimed at
attracting foreign investors.
Pandemic Impact: In 2020, the pandemic led to a 9.7% decline in FDI inflows, reflecting
global economic uncertainty and reduced investor confidence. Despite this, Uzbekistan
maintained a positive GDP growth rate of 1.6%, highlighting the resilience of its economy.
Employment and Economic Activity
Decline in Employment Rates: By 2020, the employment rate fell to 66.1%, down from the
2010–2019 average of 67.6%. This decline reflects the adverse effects of the pandemic on the
labor market, including job losses and reduced hiring activity.
Reduced Economic Activity: The level of economic activity among the population also
declined from 75.0% in 2019 to 73.9% in 2020, indicating a slowdown in workforce
participation due to pandemic-related disruptions.
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FDI-GDP Nexus
The findings highlight the importance of stable and consistent FDI inflows in supporting
economic growth. The sharp increase in FDI in 2019 underscores the effectiveness of policy
reforms, such as the liberalization of currency exchange and the introduction of investment-
friendly laws. However, the volatility in FDI inflows, particularly during the 2000–2011 period
and the decline in 2020, suggests that external factors, including global economic conditions
and internal institutional challenges, play a significant role in influencing investment trends.
Empirical results indicate that while FDI contributes positively to GDP growth, the
magnitude of this impact varies across time periods. This aligns with theoretical perspectives
that FDI’s effectiveness depends on the host country’s economic stability, infrastructure, and
institutional quality. For Uzbekistan, sustained efforts to enhance the investment climate are
essential to attract and retain foreign investors.
Economic Impact of the Pandemic
The COVID-19 pandemic has disrupted employment and economic activity in Uzbekistan,
reversing the robust growth trends seen in previous years. The decline in employment and
economic activity highlights the vulnerability of the labor market and the broader economy
during crises. These disruptions underscore the need for robust policies to preserve jobs and
build economic resilience during periods of global uncertainty.
Policy Implications
Strengthening Institutional Quality: Addressing institutional barriers such as
bureaucratic inefficiencies and weak legal protections is critical to maintaining FDI inflows.
Strengthening governance and reducing corruption can further boost investor confidence.
Sectoral Diversification: The concentration of FDI in a few sectors, such as energy and
mining, limits broader economic benefits. Policies that encourage diversification across the
manufacturing and technology sectors can ensure more inclusive and sustainable growth.
Crisis Preparedness: The pandemic has highlighted the importance of having contingency
plans in place to protect the economy and workforce during global shocks. Investments in
healthcare, digital infrastructure, and social safety nets are essential to mitigate future risks.
The findings of this study highlight the important role of foreign direct investment in
supporting economic growth in Uzbekistan, while also highlighting the challenges posed by
investment flow volatility and external crises. By addressing institutional weaknesses,
promoting diversification, and building resilience to global shocks, Uzbekistan can strengthen
its position as an attractive destination for foreign investors and achieve sustainable economic
development.
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Figure 2. The allocation of FDI stock among Uzbekistan’s regions
Source: State Committee on Statistics of the Republic of Uzbekistan, 2022
Guimaraes et al. (2000) explored the location-specific factors influencing the decision-
making process for greenfield investment projects within a country, concluding that the
agglomeration effect plays a dominant role in determining the location of FDI. Furthermore, the
analysis presented in Figure 6 shows that there is spatial dependence in the FDI attractiveness
of regions. This suggests that a region’s potential for attracting FDI can be enhanced by
neighboring regions. For instance, regions like Bukhara, Surxondarya, and Qashkadarya
managed to attract similar proportions of total inward FDI, while the Khorezm region (592.6
billion UZS) and the Republic of Karakalpakstan (1,747.6 billion UZS) received the least inward
FDI compared to other regions.
5. Conclusion and Policy Recommendation
This study highlights the critical role of foreign direct investment (FDI) in driving
economic growth and industrial development in Uzbekistan. The findings demonstrate that
while FDI has positively contributed to GDP growth, the relationship has been inconsistent,
with periods of volatility in investment inflows. The significant reforms implemented in recent
years have played a crucial role in attracting foreign capital, as evidenced by the surge in FDI in
2019. However, the COVID-19 pandemic disrupted this upward trend, causing a decline in FDI
inflows, employment rates, and economic activity levels in 2020.
The results underscore the importance of creating a stable and conducive environment
for foreign investments. They also reveal the vulnerabilities of Uzbekistan's economy to
external shocks, emphasizing the need for resilient and inclusive policies. Strengthening the
FDI-economic growth nexus requires sustained efforts to improve institutional quality,
diversify industrial investments, and build crisis preparedness.
To enhance FDI inflows and ensure their contribution to long-term economic growth, the
following policy recommendations are proposed:
Strengthen Institutional Frameworks
Simplify bureaucratic procedures to reduce administrative barriers for foreign investors.
Enhance the rule of law by ensuring transparent legal systems, robust contract
enforcement, and protection of property rights.
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Implement anti-corruption measures to improve governance and build investor
confidence.
Promote Industrial Diversification
Encourage FDI in high-value-added sectors such as manufacturing, technology, and
renewable energy to reduce overreliance on traditional industries like mining and energy.
Develop specialized industrial zones and provide targeted incentives to attract
investments in underdeveloped regions.
Foster partnerships between foreign investors and local businesses to promote
knowledge transfer and skill development.
Enhance Economic Resilience
Strengthen the healthcare system and social safety nets to mitigate the socioeconomic
impacts of future crises.
Invest in digital infrastructure to support remote work, digital trade, and innovation in
the industrial sector.
Diversify export markets to reduce dependence on a limited number of trading partners.
Foster Workforce Development
Invest in education and vocational training programs to align workforce skills with the
needs of foreign and domestic investors.
Provide employment incentives, such as wage subsidies or tax breaks, to encourage job
creation in key sectors.
Facilitate Public-Private Dialogue
Establish regular forums for communication between the government, foreign investors,
and local businesses to address challenges and identify investment opportunities.
Monitor and evaluate the impact of reforms to ensure they remain effective and relevant
to changing economic conditions.
By implementing these recommendations, Uzbekistan can create a more attractive
investment climate, maximize the benefits of FDI, and promote sustainable and inclusive
economic growth in its industrial sector.
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