FDI in the Algerian telecommunication sector: an analysis of motivations, constraints and effects

The Algerian government pursues liberalisation and economic reforms to boost growth and diversify the economy from dependence on oil. It solicits foreign investment in infrastructure in sectors including telecommunications, roads, power and water supply. Still, the oil sector remains the main driver of GDP growth, leaving the Algerian economy exposed to fluctuations in the world oil market. This research assesses the attempt to develop one of these sectors, telecommunications, by encouraging foreign direct investment. This is a technologically advanced sector with the potential to increase productivity across the economy On the basis of an extensive literature review, I develop a model to assess the effects of FDI on the telecom sector. This model starts with the classical position that government policy is a key determinant of the extent and nature of FDI inflows, principally through incentives, specific regulations, specific benefits and subsidies, or general policies such as liberalisation, but also through second-round effects on the competitive structure of the market. The model differs from classical accounts of FDI in the attention it gives to rents and rent capture, which I argue strongly mediate the effects of FDI, particularly in developing economies where markets tend to be inefficient, and in sectors such as telecommunications arising from the natural monopolies present. I apply this model to data collected from official sources and from multiple case studies from the Algerian telecommunications sector, involving 90 field interviews. The results suggest that the country has strongly benefited from the increase of FDI in the telecommunications sector, where this has been accompanied by new technology, finance, know-how and resources. Key reasons for this are government intervention on the market through liberalisation, specific regulation and specific benefits increasing the competitive rivalry and the rent capture via lobbying. The spillovers from FDI are also influenced by the mode of entry and management style, which is associated with country risk analysis. These benefits may be available for other sectors where the same conditions can be put in place