Barriers and Obstacles to FDI into Yemen

Abstract

This study sought to explore the barriers and obstacles to foreign direct investment in Yemen and make recommendations that can be adopted by Yemeni government officials to improve FDI inflows into the country. The research was administered using semi-structured interviews of managers of foreign firms operating in Yemen and government officials in the Department of Foreign Affairs and Trade. Analysis of the data was done using the thematic content analysis. Government officials from the Department of Foreign Affairs and Trade and managers of foreign companies operating in Saudi Arabia who took part in this study offered important insight regarding the state of the investment climate in Yemen including the barriers and obstacles to FDI in Yemen and recommendations to help improve the business environment and FDI inflows.

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The findings suggest that the Yemeni government has set up initiatives that aim to improve the business climate. The government has expressed its commitment to developing a favorable business environment by enhancing its trade openness, enacting relevant laws, and adopting incentives to increase the attractiveness of Yemen to foreign investment; however, a number of barriers and obstacles exist in the investment environment. The obstacles and barriers to FDI reported in this study include rampant corruption; dispute settlement problems; political violence; increased competition from government-owned companies; inaccurate and incomplete land records; weak intellectual property rights; and inadequate and non-transparent regulatory system.

A number of recommendations have been made, which include setting up a powerful and independent body to deal with corruption; encouraging private sector involvement in sectors perceived to be under government monopoly; initiating reforms in the commercial court system in order to ensure that they are reliable in settling commercial disputes, and policies intended to address the political violence in the country.

Chapter One: Introduction

Background of the Study

For the last 20 years, globalization has increased significantly and has played a crucial role in driving global trade, especially through foreign direct investment (Aguayo‐Tellez, 2011). The upsurge in capital flows into developing nations, mainly through FDI, is anticipated to make substantial contributions towards economic productivity and efficiency, and advance growth opportunities in receiver economies through possibilities such as building linkages with domestic businesses and spillovers through the transfer of technology (Gorg & Greenaway, 2002). This has resulted in countries putting a lot of emphasis on attracting FDI, which is grown to become a crucial globalization driver (Gorg & Greenaway, 2002).

During the past 10 years, FDI activity has doubled across the globe. In addition, many scholars and policymakers agree that FDI constitutes one of the core influencers of economic growth and development, particularly in developing countries owing to the fact that it does not result in debt obligations. In addition, FDI is considered a crucial variable in economic development and growth since it results in the establishment of a lasting production asset as well as a long-term commitment. Moreover, FDI has been established to help developing economies achieve sustainable economic development through new technologies, employment opportunities, improved working standards, and providing linkages between developed and developing economies (Borenztein, De Gregorio, & Lee, 1998; Schreyer & Koechlin, 2002).

FDI is increasingly playing a crucial role in the global economy; a fact that has been affirmed by various economists and scholars because of the decisive relationship that exists between FDI and economic development in developing and developed nations (United Nations Conference on Trade and Development, 2013). A world investment report published by the United Nations Conference on Trade and Development (UNCTAD) in 2013 revealed that global FDI transactions had reached $1.35 trillion in 2012. The report also projected that, by the end of 2014, global FDI will reach about $1.60 trillion and $1.8 trillion by the end of 2015.

FDI has been found to be an effective way of enhancing economic efficiency as well as encouraging economic growth in the long term. Several developing and developed countries have acknowledged the significance of attracting FDI and have adopted measures that aim to increase FDI inflows to their economies (Al-Shibami, 2011). A case in point is South Korea, which has been successful in terms of attracting FDI. Before 1997, South (Al-Shibami, 2011) Korea ranked as one of the worst nations in terms of FDI attraction; however, at present, it has become one of the most appealing destinations for global companies; this is evident by the fact that FDI inflows in South Korea during the period 1997-2012 was estimated to be $120.297 billion (Al-Shibami, 2011).

There is no doubt that developing countries, including Yemen, are in dire need of FDI. In the case of Yemen, the country is strategically located since it provides a link between Africa and Asia. In addition, Yemen is endowed with a number of natural resources including agricultural land, minerals, oil, fisheries, and gas among others. In addition, the availability of cheap labor and several government incentives such as free land and customs exemptions are some of the strengths of Yemen that have allowed it to attract FDI (Ang, 2008).

According to the World Bank (2014), the newfound peace in Yemen has the potential to attract investment opportunities that can result in profits for businesses willing to invest in the country. The World Bank (2014) further reports that investment opportunities in Yemen are gradually increasing because of economic reforms being initiated by the new democracy. Because the government of Yemen is willing to collaborate with foreign businesses and provide them with permission to access the market in their country, World Bank (2014) pointed out that the economic sectors in the country show great promise (Bitzenis, 2006).

Despite these incentives and the potential of Yemen in attracting FDI, the country still faces a myriad of economic problems. One of the most crucial problems in Yemen in needs to be urgently addressed is the slow growth of FDI flows into the country (Cheng, 2006). From the viewpoint of developing countries such as Yemen, their limited access to global markets and low saving rates hinders their investment capacity unless it is complemented by other sources of external finance like FDI (Cho, 2003; Maxwell, 2005). To this end, attracting FDI has been a suggested policy for developing nations including Yemen based on the idea that FDI results in positive externalities to the economy.

The ability of a country to attract and encourage FDI depends on the country’s investment climate, which is a crucial factor that investors consider when making a decision to invest in a specific country (Choe, 2003; De Mello, 1999). Relatively few studies have focused on exploring FDI inflows to specific countries in the Arab World; most of the studies that do exist tend to analyze regional FDI activity, which partially explains why the little emphasis has placed on countries such as Yemen (Chowdhury & Mavrotas, 2006).

The poor performance of Yemen in attracting FDI raises a number of issues including the factors responsible for low FDI activity in the country and options available to policymakers to boost FDI flows to the country. Addressing these issues requires exploring the obstacles and challenges of FDI in Yemen, which is the focus of the current study (Gorg & Greenaway, 2002). Past research relating to political and macroeconomic determinants of FDI in developing nations have not emphasized on explaining the poor state of FDI inflows into developing nations, especially in the Arab World. This research attempts to deal with this issue using Yemen as a case example.

Statement of the Problem

Despite the fact that the Arab World as a whole is currently experiencing significant growth in FDI inflows, significant differences exist between individual countries with respect to their capacity to attract FDI (Ali & Guo, 2005; Alrezaki, 2009). In this regard, FDI activity in Yemen is one of the lowest in the Arab World, and the reasons for this need have not been properly examined. In addition, the domestic economy of Yemen depends significantly on oil; oil accounts for about 75% and 85% of government and export revenue respectively (World Bank, 2014). Nevertheless, the oil reserves in Yemen are relatively small when compared to the large oil-producing neighboring nations like the Kingdom of Saudi Arabia. Agriculture is the second-largest economic sector, accounting for about 20% of the real Gross Domestic Product (GDP) and comprises of more than 50% of the nation's labor force (World Bank, 2014).

Because the economy has an inadequate industrial base and productive volume, the country depends considerably on foreign debt relief as well as imported goods in order to sustain an economy that is already struggling. The agricultural and oil sectors are not providing adequate jobs to deal with the problems associated with rising unemployment attributed to its rapid population growth (Eurostat, 2013). According to O'Sullivan & Sheffrin (2003), one of the ways that Yemen could achieve sustainable economic growth is by attracting FDI; however, FDI inflows in the country are the lowest when compared to other countries in the Arab World. To this end, there is the need to identify the factors contributing to Yemen’s dismal performance in order to develop policy measures that would increase FDI inflows into the country.

Purpose of the Study

The primary objective of this study is to explore the barriers and obstacles to foreign direct investment in Yemen and offer recommendations to the Yemeni government to improve FDI inflows into the country. The following are the specific objectives of this research.

  1. To determine the barriers and obstacles contributing low FDI inflows into Yemen.
  2. To make specific recommendations that can be used to address the identified obstacles and challenges.

Research Questions

  1. What factors are contributing to low FDI inflow in Yemen?
  2. What can policymakers do to attract and encourage FDI inflows in the country?

Significance of the Study

This research is of great importance because it will provide crucial insight into the barriers and obstacles to FDI in Yemen. Currently, Yemen is one of the poorest countries in the Arab World, and FDI provides an opportunity to help the country grow and develop its economy. As a result, the findings of this research will be helpful in making policy recommendations that can help Yemen boost FDI inflows in order to achieve economic growth and development.

Overview of Sources of Information and Methodology Used

This study makes use of both secondary and primary data sources; therefore, the methodology will comprise a two-step process beginning with secondary research (desk research) followed by primary research. The secondary research will address the empirical and theoretical literature relating to the problem of interest (obstacles and barriers to FDI into Yemen). Secondary data will be gathered from electronic databases such as reports by OECD, Eurostat, UN Centre on Trans-national Corporations (part of UNCTAD), and government websites. Academic journals and business reports also provide vital sources of data for analysis. A follow-up primary research will be conducted using semi-structured interviews with various stakeholders including government officials and investors in order to gather their perspectives regarding the factors hindering FDI inflows into the country.

Limitations and Delimitations of the Research

There are a number of limitations and delimitations associated with this research. The first limitation of the study is that the scope of the research only focuses on Yemen, which means that the findings and implications associated with this research cannot necessarily be applied to all other developing countries. Another limitation of this study is associated with the sample used in the primary research, which is comprised mainly of policy makers and investors. It was relatively difficult to find a large number of participants in these fields, which explains why a relatively small sample size was used for the primary research component of this research. This limitation is further compounded by time constraints. In addition, there are inherent limitations associated with self-reporting, which was a feature of the primary research used in this study because data were collected using semi-structured interviews.

The research is also limited in various ways including the scope of the study that focuses solely on exploring FDI in Yemen. This can be attributed to the fact that the researcher had interest only in dealing with the slow growth of FDI in Yemen rather than dealing with developing countries in general. Another limitation is that the research did not examine the trends in FDI in Yemen; instead, the emphasis was placed on factors contributing to slow FDI inflow growth in Yemen. In addition, the study used an exploratory approach in dealing with the area of research. Statistical models were not appropriate in addressing the research problem due to the fact that the researcher intended to have a comprehensive overview of factors hindering FDI inflows in Yemen.

This study did not focus on exploring the economic trends in FDI inflows in Yemen, or how they correlated with the factors in the investment environment; instead, the focus of this research is to provide an overview of factors contributing to the low FDI inflows in Yemen and how this problem can be solved to attract FDI and contribute to economic development in the country. This explains why the researcher opted to conduct secondary research first followed by the primary research that gathered the views of policy makers and foreign investors in Yemen.

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Beneficiaries of the Study

The benefits of this study are two-fold. First, the findings provide crucial insight for policy-makers in Yemen to devise measures that can be used to attract FDI in the country. Second, the findings of this study provide potential foreign investors with an understanding of the investment environment in Yemen that should be taken into consideration when making a decision to invest in the country.

Chapter Structure

This thesis is comprised of five chapters. The current chapter provides background information relating to the research problem as well as the study purpose, study significance, overview of data sources and methodologies used, study limitations and delimitations, and beneficiaries of the study. Chapter Two – literature review – provides a review of current literature relating to FDI trends in Yemen, determinants of FDI in developing countries, and challenges to FDI inflows in Yemen. Chapter three – methodology – provides a detailed description of the activities undertaken in order to meet the objectives of the study including the research approach adopted, the research philosophy, research methods, and data collection methods. Chapter Four – results and discussion – presents the findings of the research with respect to the objectives of the study. Chapter Five – conclusions – summarizes the key findings of the research, implications of the research, and offers recommendations for future research.

Chapter Two: Literature Review

This chapter reviews the literature relating to the state of FDI inflows into Yemen. In an attempt to set the direction for the study, the study reviews the literature on the determinants of FDI in developing countries in general, and specifically, Yemen.

Trends in FDI in Yemen

In literature, there are two forms of FDI flows, which include FDI outflows and FDI inflows. Apart from FDI inflows to West Asia coming from developed nations, FDI inflows from developing countries have also increased (Bailey, 2003). While some multinational corporations have had a presence in Yemen since oil reserves were discovered there during the 1980s, it is imperative to point out that Yemen (Bailey, 2003) has not been a substantial beneficiary of FDI from either developed or developing nations. In the past two decades, the government of Yemen has tried to adopt measures intended to increase FDI inflows in the country. Following the beginning of the privatization of most public sector services in the country during the mid-1990s, there has been a gradual increase in FDI inflows in Yemen.

In addition, FDI inflows have increased following the consciousness and concern exhibited by the government regarding the need for Yemen to grow its economy. This has resulted in the government putting in place initiatives such as open economic policies and incentives in order to enhance the country’s investment climate. Having a clear understanding of FDI in Yemen requires the need to review FDI inflows in the context of three time periods, including the period after the revolution and before unification (1962-1990); the period after unification and before the start of the civil war (1991-1994); and the period after the secession war (1995 onwards) (Basar & Tosunoglu, 2006).

FDI During the Period After the Revolution and Before Unification

The Yemen Arab Republic was not able to attract foreign investors because of the civil war witnessed in the country in the course of the 1960s. Nevertheless, in 1970, FDI inflows into the Yemen Arab Republic reached $12.6 million. By 1980, FDI inflows into the Yemen Arab Republic had grown to $33.9 million. However, in 1990, Yemen Arab Republic reported negative FDI inflows amounting to -$131 million; this negative surge in FDI inflows in the country was caused by the political conflicts and changes witnessed across the globe, especially in the Middle East (as evident by the Gulf War and the end of communism in Eastern Europe.

However, the key drivers of FDI into the Yemen Arab Republic during the early 1980s, despite the poor market in the country, was the discovery of natural gas and oil in the country, which provide the Yemeni government with an opportunity to adjust to the new global business environment by opening its market to multinational corporations. Figure 1 below shows the trends in FDI inflows in the Yemen Arab Republic and the People’s Democratic Republic of Yemen during the period 1962-1990 (Bitzenis & Szamosi, 2009).

The People's Democratic Republic of Yemen, on the other hand, adopted a communist system following the 1963 revolution, which meant that the country did not permit foreign investment inflows. Nevertheless, during the mid-1980s, the government of People's Democratic of Yemen adopted open economic policies in order to cope with adjacent nations such as Oman, Saudi Arabia, and the Yemen Arab Republic by permitting FDI inflows, which totaled $1 million in 1986, $8 million in 1987, and $5 million in 1988 (Bitzenis & Szamosi, 2009).

The Period During Unification and Before the Civil War

This period in Yemen history is usually considered to be the transitional period whereby, despite the fact that Yemen suffered from internal political conflict and economic shock attributed to the country’s position during the Second Gulf War, it reported considerable FDI inflows with FDI inflows amounting to $714 million in 1991, up from -$131 million in 1990; in 1992 reported FDI inflows amounting to $714 million; in 1993 reported FDI inflows amounting to $897 million; and in1994 reporting FDI amounting to $ 11 million. The significant drop in FDI inflows in 1994 can be attributed to the civil war that was taking place at that time. Figure 2 below shows the trends in FDI in Yemen from 1991-1994 (Bitzenis, 2006).

 

The Period After Secession War

This period was and is characterized by Yemen suffering from significant economic problems, which increased the difficulty of the country to fund crucial development projects that aim to improve the investment infrastructure in the country. In addition, the past political instability and high competition that the country faces with regard to providing opportunities to attract FDI when compared with other nations in the region have played a significant role in hindering Yemen's ability to be a significant beneficiary of FDI relative to other countries found in West Asia and the Arab World.

After the unification of the Yemen Arab Republic and the People Democratic Republic of Yemen in 1990, the freshly established government formed the General Investment Authority in 1992, followed by the establishment of the Yemen Free Zones Public Authority in 1993. (Dow & Ferencikova, 2010) These initiatives had the main objective of attracting more FDI inflows into the country. The UNCTAD reported that the FDI inflows into Yemen in 1998 reached -$226 million, a further dip from -$218 million recorded in 1995, which can be attributed to the secession war that took place in 1995. Figure 3 below shows the FDI inflows in Yemen during the period 1995-2011 (Blonigen, 2005).

From the trends in FDI inflows in Yemen above, it is evident that there was an insignificant improvement in the amount of FDI inflows into Yemen during the period from 1995-2009, from -$218 million to $129 million. This insignificant improvement can be attributed to separate fluctuations in the total FDI flows from 1995-2009, with the range of fluctuation being -$328 million at the minimum and $1.5 billion at the maximum (Hermes, 2003; Janicki & Wunnava, 2004). As a result, when compared to countries receiving significant FDI in the Gulf Region, the relatively low amount of FDI inflows into Yemen can be primarily linked to the political instability in the country, poor and insufficient infrastructure, and a domestic market that was underdeveloped; a combination of these factors resulted in the limited market opportunities in Yemen, which in turn, discouraged FDI to the advantage of other countries in the region.

Because of relatively low FDI inflows to the country, there is very little presence of multinational corporations in Yemen. Nevertheless, Arab companies have a considerable presence in Yemen, which is primarily due to geographical proximity. Currently, the major sources of FDI inflows into the countries in West Asia are developed nations; however, for Yemen, the main sources of FDI inflows are from Jordan, Iraq, United Arab Emirates, and Saudi Arabia. An inference from this dismal state of FDI inflows into Yemen is that country’s investment environment is incapable of attracting and retaining major foreign investors in the country.

This assertion has been affirmed by a study undertaken in 2001 that had the main objective of gauging the country’s inward FDI index, which refers to the attractiveness of a country for global investors. The study measured the inward FDI index during two distinct periods including 1988-19980 and 1998-2000, with Yemen included in the set of 137 nations during the second period. In this study, Yemeranked the last, having an inward FDI index of -0.8 (Breisinger, Diao, Collion, & Rondot, 2011; Johnson & Christensen, 2010).

FDI Distribution in Yemen

There is widespread agreement in the academic literature that profitability is the most crucial factor that multinational corporations consider when seeking to grow their operations globally (Borenztein, De Gregorio, & Lee, 1998). As a result, multinational corporations usually invest in sectors and in regions that are likely to produce the highest possible profits. In Yemen, ever since the government established the General Investment Authority and adopted an open economic strategy, special efforts have been exerted with the aim of improving the investment climate in the country, encourage local investment, and attract both foreign and Arab investors to the country. FDI inflows in Yemen are primarily concentrated in fishery, agricultural, tourism, service, and industrial sectors.

In addition, FDI outflows and inflows from and to the western region have substantially improved in the last 10 years. FDI inflows into the region had reached $71 billion in 2012, a 12% increase from the previous year; however, FDI inflows in Yemen for the same years were relatively small with respect to the FDI outflows originating from Western Asia. Therefore, despite the fact that the government has put in place measurements that seek to improve its investment climate and attract foreign investors, Yemen has yet to benefit from these measures by becoming a significant recipient of FDI inflows into Western Asia from either developed countries or outflows from countries in Western Asia (de Haan, 2014).

Until 2005, it was evident that Yemen had low, and sometimes negative FDI inflows in the country. FDI activities in the country are mainly concentrated in the gas and oil production and exploration and other related services; this followed the decision made by the government in Yemen to enter into production-sharing agreements with a number of large multinational corporations from Norway, South Korea, France, Canada, and the United States. At present, there is limited FDI activity in the non-oil sectors in Yemen. As a result, the Yemeni government has adopted a series of initiatives and reforms intended to improve the country’s investment climate and attract FDI, particularly in the non-oil sector (Zhao, 2003). Some of the reforms initiated by the Yemeni government include the 2002 investment law, which advocates for Yemeni and foreign investment to be treated equally. In 2007, the government enacted the anti-corruption legislation and formed a specialized government body that responsible for dealing with mismanagement and corruption.

In addition, in April 2007, the Ministry of Industry and Trade held an investment conference, which had the primary objective of promoting investment opportunities in various economic sectors within the country (Zainal, 2007; World Bank, 2014). At this conference, the Yemeni government affirmed its readiness to modernize and revise the laws that governed the activities of multinational corporations operating in the country and offered commitments to eliminate the various obstacles and challenges that had hindered the increase of FDI inflows into the country. In addition, the government communicated its readiness to provide potential foreign investors with land, provided that the projects commenced operations within a duration of six months. Investors from the Gulf Cooperation Council were the primary targets of the conference (Jordaan, 2005).

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Following the economic boom witnessed in the GCC countries and an improvement in the domestic investment environment, Yemen began witnessing an increase in FDI inflows in 2006 (Jordaan, 2005). After the negative FDI inflows witnessed in 2005, FDI inflows in 2006 reached $1.2 billion, which accounted for 5.7% of Yemen’s GDP. The upward increase in FDI inflows was also manifested in the increase in the number of investment projects in the non-oil sector. Despite the fact that FDI in the gas and oil industry still accounts for a significant portion of the FDI inflows in Yemen, FDI activities in the tourism, service, and the cement industries, particularly from investors in the Gulf region have also increased. On the other hand, FDI in fisheries and agriculture segment has been low. The prospects of attracting FDI inflows into the country in the medium term and ensuring the stability of FDI inflows in the longer term depends significantly on the government’s ability to effectively deal with the challenges and obstacles to foreign investment, which is the focus of this research project (Wickham & Woods, 2005).

Factors that Determine FDI Inflows

The ability of a country in encouraging and attracting FDI depends significantly on providing a favorable investment environment since it plays a pivotal role in influencing the decision made by investors on whether or not to make investments in a specific country resulting in a higher ratio of FDI inflows (Kamaly, 2002). As a result, the process of FDI inflows in a specific host country or FDI outflows from the country doing the investing depends significantly on the provision of the several factors in both countries, which raises a number of crucial questions related to how, when, where, where and what to invest (United Nations Conference on Trade and Development, 2013). Therefore, understanding the mechanism of FDI flows poses the need for countries to research and examine the factors that affect FDI inflows. Several theories in international capital movements, especially FDI, have attempted to model the foreign investment decision as well as the most crucial determinants of FDI.

One of the most outstanding models used for understanding FDI is the eclectic approach, which was developed by Dunning. The eclectic approach tries to provide an explanation for why corporations make the decision to engage in foreign investment and point out the various types of international production in the selection process of a country for foreign investment (Uma & Roger, 2010). Furthermore, the eclectic approach places emphasis on the competitive advantage sources that enable a company to compete in foreign markets as defined by the entry mode into a foreign market and the choice of location undertaken by a multinational corporation (Kamaly, 2002).

The eclectic approach also tries to examine the “how”, “where” and “why” aspects of FDI activity that ought to be satisfied prior to make the decision to undertake foreign investment projects with respect to the three advantages, which include ownership advantages of the multinational corporation; the location-specific advantages; and internationalization advantages (Tekin-Koru, 2009; Sturges & Hanrahan, 2004). The ownership advantages are specific to a certain company, which enable the company to be able to react directly to global competition and exploit investment opportunities that exist in foreign markets. These factors provide a company with competitive advantages that enable it to set up subsidiaries in foreign markets. Ownership advantages focus on the reasons for expansion into a foreign market and are related to factors such as product innovations, marketing techniques, organizational skills, brand names, and knowledge, all of which are intangible assets.

Ownership advantages also include tangible assets such as capital, manpower, and natural resources. Location-specific advantages refer to the advantages that are specific to a certain country, which determines the selection of production site (Sieghart, 2009). Location-specific advantages are concerned with the “where” aspect of foreign investment and take into consideration issues like the availability of skilled and low-cost labor, efficient transport and communication systems, levels of education, political and physical infrastructure, and the size of the market. The internationalization advantages are concerned with the “how” aspect of foreign investment, and deal with factors such as the organization of foreign production (through hierarchies – FDI, or through markets – licensing); and mode of foreign market entry among others (Sekkat & Veganzones‐Varoudakis, 2007).

According to eclectic approach, the three prerequisite conditions that a company ought to adhere to if it seeks to undertake foreign investment include having some forms of ownership advantages relative to other companies – these advantages should be attributed to the ownership of firm-specific assets that are intangible; being more beneficial to the company to utilize these advantages instead of leasing or selling them to other independent companies; and that using these advantages together with some factors in the foreign market should contribute to profitability for the firm (Sekkat & Veganzones‐Varoudakis, 2007; Schreyer & Koechlin, 2002).

It is imperative to note that FDI is primarily defined in terms of capital flaws attributed to the behavior of global corporations; as a result, the factors affecting the direction as well as the magnitude of FDI stem from the factors that influence the behavior of global companies. Multinational corporations often expand their operations to overseas markets for various reasons including, but not limited to, using firm-specific advantages, exploiting the economies of scale, or just for the reason that their rival companies are taking part in similar activities (Dunning, 2004).

Conversely, policy competition between governments is also on the increase through the modifying of the crucial variables in their economic policies including the regulatory regime policies, privatization, subsidies, tariff barriers, corporate taxes and labor market conditions, all of which have the objective of improving FDI activity in their respective economies. FDI activity in recent years has increased significantly because of a number of factors such as bilateral investment treaties, marketing networks, the dawn of globally integrated production, and technological advancements. At the present, many nations are actively involved in adopting measures that aim to attract FDI such as providing infrastructure improvements, market preferences, and subsidies and duty exemptions imposed on foreign companies (Ghoneim, 2006).

Understanding the factors that determine FDI inflows means needing to first have an understanding of the types of FDI. Bailey (2003) outlined the three types of FDI depending on the intention underpinning the investment from the viewpoint of the company making the investment, which includes market seeking FDI, resource seeking FDI, and efficiency-seeking FDI. Market seeking FDI sometimes referred to as horizontal FDI, has the main objective of serving both regional and local markets. Market seeking FDI is characterized by replicating production facilities in the foreign markets. Due to the fact that the main reason for market seeking FDI is to better serve the needs of both regional and local markets using local production, market growth and market size characteristics of the host country are crucial factors that are taken into consideration (Kok & Ersoy, 2009).

Challenges and obstacles that hinder access to the local markets such as transport costs and tariffs may encourage this form of FDI. Resource seeking FDI is characterized by corporations investing in foreign markets with the main objective of acquiring resources that are unavailable in their home countries; these resources can include low-cost labor, raw materials, and natural resources, among others. In the manufacturing industry, the factor-cost considerations are crucial for manufacturing corporations making direct investments in foreign markets (Jones, Fallon, & Golov, 2000).

Contrary to the market seeking FDI, resource seeking FDI entails the relocation of some components of the production chain to the host economy. The main driver of the resource-seeking FDI is the availability of cheap labor in the host economy. It is also expected that countries endowed with natural resources such as gas and oil are likely to attract FDI in that sector. Efficiency seeking FDI is characterized by a company seeking to benefit from the centralized management of geographically distributed activities through economies of scope and scale (Kobrin, 2005).

In the context of developing countries, various studies have been conducted to determine the factors that increase FDI inflows in these countries; these can be looked at in terms of either obstacle to FDI or the encouragers of FDI depending on the extent to which they make a foreign market attractive to investors. The following are some of the determinants of FDI, especially in developing countries that have been explored in literature.

Size of the Market

Gross Domestic Product (GDP) and GDP per capita are used for determining the size of the market and have been reported by most econometric studies to be the most robust factor determining FDI inflows, especially horizontal FDI – market seeking FDI. Nevertheless, the market size is not relevant for the case of vertical FDI – resource seeking FDI. Countries that have larger and growing markets characterized by high purchasing power are deemed attractive destinations for foreign investment; this is because larger and growing markets imply that firms investing in that market are likely to benefit from higher returns on capital and investment (Lall & Narula, 2004).

According to the market size hypothesis, a larger market is needed for firm resources to be used in an efficient manner and to allow the company to exploit the economies of scale; this is because as the market expands to a certain critical value, foreign investment will commence following the further expansion of the market. The market size hypothesis has been relatively popular, with the market size of the host country considered an explanatory factor included in almost all studies involving the FDI determinants. Econometric research studies that compare countries have pointed out a significant correlation between market size and FDI. The market size in these studies is often measured using GDP along with other market characteristics such as income levels and income growth rates.

A number of studies have revealed that the GDP growth rate is a significant factor predicting FDI inflows; however, GDP has not been found to be a significant predictor of FDI, which probably suggests that in countries with a small national income, increases are less likely to be relevant in affecting FDI decisions when compared to growth performance as a pointer of market potential. Nevertheless, not all economic studies related to market size have reached the same conclusions about the significance of this variable in predicting FDI Inflows.

For instance, a study by Lipsey (2002) utilized the inverse income per capita as a representation of the return on capital and reported an inverse relationship between FDI/GDO and GDP per capita. Nevertheless, other researchers like Jones, Fallon, & Golov (2000) reported a positive relationship between GDP per capita and FDI; these authors used their findings to argue that larger market size is likely to encourage and attract FDI into the country. In addition, Bailey (2003) reported that real GDP is significantly positively related to FDI inflows, and found out that the GDP growth rate has a small but positive effect on GDI inflows.

Openness

There is mixed empirical evidence regarding the impact of openness in attracting and encouraging FDI inflows. Openness is usually measured using the ration of imports and exports to GDP. The openness hypothesis maintains that since the majority of investment undertakings are on the tradable sector, the degree to which a country is open to international trade ought to be a crucial factor when making an investment decision. According to Lipsey (2002), the effect of openness on FDI inflows relies significantly on the type of FDI. For market seeking FDI, trade restrictions (which imply less openness), are likely to have a positive effect on FDI inflows (Nordal, 2001). This assertion stems from the tariff jumping hypothesis, which maintains that foreign corporations that seek to serve the needs of local markets are likely to set up subsidiaries in the host nation if they face difficulties in trying to export their products to the host market.

On the other hand, multinational enterprises engaged in resource seeking FDI are likely to make investments in a more open country because increased imperfections associated with trade protection often result in higher transaction costs related to exporting. A strong positive relationship between openness and FDI inflows has been observed in the manufacturing sector; however, the electronic sector has reported a weak negative relationship (Mina, 2007). Other researchers have indicated a strong positive and weak positive impact of trade openness on FDI inflows (Mansur, 2008; Sadik & Bolbol, 2001). Despite the fact that access to certain markets based on growth and size is crucial, factors in the domestic market are not relevant for the case of resource seeking FDI. Nevertheless, there is a widespread belief that trade openness plays a crucial role in attracting and encouraging FDI.

Productivity and Costs of Labor

In literature, wage has been considered an indicator of the cost of labor. In addition, wage remains the most controversial of all the possible FDI determinants. From a theoretical point of view, the significance of low-cost labor in encouraging and the necessity for attracting FDI has been agreed upon by those supporting the modernization hypothesis and the dependency hypothesis albeit with extremely dissimilar implications. Nevertheless, there is no agreement among the empirical studies that have explored the effect of wages in encouraging and attracting FDI inflows. The findings range from higher wages in the host country discouraging FDI inflows to insignificant impacts on FDI inflows.

According to Ang (2008), relative costs of labor are statistically significant in attracting FDI inflows, especially for the case of resource seeking FDIs and labor-intensive industries. However, in cases where there are labor costs, it is somewhat insignificant – when there are little variations in labor cost between countries – then the skills in the labor force is anticipated to have a significant effect on the decisions made regarding the location of the FDI (Ghoneim, 2006).

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Political Risk

The importance of political risk among other factors determining FDI inflows is somewhat unclear. Asiedu (2002) asserts that, in cases where the host nation possesses natural resources, there is no additional incentive that would be needed for FDI inflow; this is the case for the countries that are politically unstable such as Angola and Nigeria, whereby the high profitability in extractive sectors appears to cater for the political instability. Overall, provided the multinational corporation has some level of confidence in operating profitably in the absence of too much risk on its employees and capital, the company’s decision to invest is less likely to be swayed by the political risk in the host country (Bitzenis, 2003). For instance, large mining corporations have been known to disregard some of the political risks through considerable investments in infrastructure maintenance as well in security. In addition, these corporations are not subject to limitations associated with small domestic markets or risks associated with the exchange rate because they tend to sell their products on international markets basing prices on hard currencies (Bitzenis & Marangos, 2008).

Certain proxy factors such as the number of riots and strikes and resulting work days lost have been established to be significant in attracting FDI inflows by a number of studies; nevertheless, these quantitative estimates have been criticized on grounds that they only capture the quantitative components associated with political risk but disregard the qualitative attribute of political risk. It is evident that the empirical relationship between FDI inflows and political risk is still unclear. This is because some studies such as Hausmann and Fernandez-Arias (2000) and Jarpersen et al (2000) did not find any significant relationship between political uncertainty and FDI inflows, whereas Parletun (2008) reported an inverse relationship between FDI inflows and political uncertainties.

Political risk is usually measured using political violence and political violence. Political instability denotes the likelihood of regime change and was reported to be a significant predictor of FDI by Hausmann and Fernandez-Arias (2000). Political violence, which denotes the frequency of political instigated riots, violent riots, and political assassinations, was found to be insignificant in influencing FDI inflows by Hausmann and Fernandez-Arias (2000).

Infrastructure

Infrastructure entails telecommunication systems, railways, ports, and roads among others. Institutional development such as accounting and legal services also form part of a country’s infrastructure. According to Asiedu (2002), poor infrastructure serves both as an opportunity for and an obstacle to FDI. For many developing countries, poor infrastructure is usually mentioned as one of the many constraints to FDI inflows. Nevertheless, foreign investors have also cited poor infrastructure as a factor that attracts considerable FDI if governments in the host country allow significant participation by foreign corporations in developing the infrastructure (Lipsey, 2005).

According to Jordaan (2004), well developed and good quality infrastructure plays a crucial role in increasing the productivity potential of both foreign and local investments, which in turn helps in stimulating FDI inflows. Ancharaz (2003) reported that, in literature, the standard measure of infrastructure development is the number of telephones per 1000 people. Nevertheless, Asiedu (2002) argues that the measure is not accurate since it focuses on availability rather than the reliability of a particular infrastructure. In addition, this measure only focuses on fixed-line infrastructure and disregards mobile telephones (Lipsey, 2010).

Growth

The relationship between FDI inflows and growth is a controversial issue. According to Lipsey (2010), the growth hypothesis suggests that an economy that is rapidly growing offers somewhat better opportunities for investment when compared to economies that are either stagnant or are growing slowly. A statistically significant effect of economic growth on FDI has been reported in the literature (Borenztein, De Gregorio, & Lee, 1998; Gorg & Greenaway, 2002; Schreyer & Koechlin, 2002).

Nevertheless, some studies have reported a weak positive relationship between FDI inflows and economic development, especially for less developed countries (Choe, 2003; De Mello, 1999). On the contrary, a negative correlation between FDI inflows and economic growth was reported for the case of developed economies (De Mello, 1999). Johnson (2005) reported a positive impact of having a lagged growth for the case of non-sub-Saharan African states; however, sub-Saharan African states reported an insignificant effect of economic growth on FDI inflows.

Tax

Empirical literature regarding the relationship between FDI and tax incentives is inconclusive. Some empirical studies have established that corporate taxes in the host country are significantly negatively related to FDI inflows (Dees, 1998; Hanson, 2000). Other studies have found that the effect of corporate taxes on FDI inflows is insignificant (Gorg & Greenaway, 2002; Johnson, 2005).

The direction of the effects of the aforementioned determinants on FDI is likely to be different. For instance, a factor may have an effect on FDI inflows both negatively and positively. Examples of such factors including tax, exchange rate, trade balance, trade barriers, and cost of labor have been established to have both negative and positive impacts on FDI inflows. The following subsection attempts to review the literature relating to challenges and obstacles that Yemen and other GCC countries face with regard to encouraging and attracting foreign investment (Obwona, 2001).

Challenges for Yemen in Attracting FDI

Despite the fact that most of the Western Asia countries have reported considerable improvements in terms of their investment climate in the recent past coupled with a surge in FDI, there are numerous factors constraining FDI inflows in countries such as Yemen. There is no doubt that the significance of these variables differs between countries in Western Asia. Some of the challenges hampering FDI inflows in this region, including Yemen, include the slow adoption of privatization initiatives, the domination of government sectors, rampant corruption and bureaucracy, weak law enforcement, and high inflation rates (Dow & Ferencikova, 2010).

Domination of Government Sectors and Slow Adoption of Privatization Initiatives

Several Western Asian countries, including Yemen, are faced with the challenge of domination of the government sector. A number of countries have enacted new laws and set up privatization initiatives; nevertheless, the pace at which these initiatives are being implemented is very slow. In addition, some countries are faced with the additional challenge of resistance. For instance, in Yemen, there is a widespread perception that the privatization of government-owned companies is at the detriment of poor citizens, and only benefits foreigners and the rich. In other countries such as Kuwait, the oil sector, which contributes about 75% of the country’s GDP, is still under public management. In addition, the privatization bill was introduced in the Kuwait Parliament during 1992; however, this bill has yet to be approved (Mansur, 2008).

The case is the same for Syria, where the government sector is still dominant and there is little priority accorded to privatization as a reform measure. The Syrian government has developed initiatives that seek to reform the public sector by convert government corporations into private-public ownerships and separate ownership from management, with ownership being placed on the government. However, the implementation of this reform has been extremely slow. Essentially, in Western Asian countries including Yemen, there have been plans to privatize public sectors by each successive regime. Transportation, electricity, and telecommunications are some of the primary sectors that are supposed to come under privatization; nevertheless, strong opposition and resistance to these reforms have played a crucial role in delaying their implementation (Moniruzzaman, 2010).

Corruption and Bureaucracy

Yemen and other countries in Western Asian are faced with the challenges of corruption and bureaucracy (Hermes, 2003). Foreign investors are compelled to undergo several lengthy government procedures. Another burden that investors face relates to the lack of consistent interpretation of the law as well as instances of favoritism in the decisions made by government officials. The World Economic Forum ranks Bahrain, Syria, and Kuwait 56th, 72nd, and 78th respectively out of 117 nations when it comes to the practice of favoritism by officials representing the government, which is an indicator that the representatives of the governments are not offering equal and fair treatment for people seeking their services (Aguayo‐Tellez, 2011).

In regards to the burden associated with government regulations. Kuwait, Egypt, and Syria were ordered 73rd, 74th, and 86th correspondingly out of 127 nations by the World Economic Forum (Alrezaki, 2009). In addition, Yemen suffers from a similar problem characterized by high bureaucracy levels, with investors regularly reporting that government regulations in the country are a significant burden. Despite the fact that governments of Western Asian countries have undertaken serious measures to combat corruption, leading to some significant progress, corruption is still rampant in several business activities in Western Asia countries.

Weak Law Enforcement

There is no doubt that most countries in Western Asia have adopted economic reform initiatives with the main objective of enhancing their attractiveness to investors through the introduction of novel investment and tax legislation. Nevertheless, these countries are faced with the challenges of inconsistent and weak enforcement of these laws. As a matter of fact, nearly all Western Asia countries including Yemen have enacted laws that govern and regulate the activities of multinational corporations, but instances of misinterpretation of the law as well as slow and inconsistent enforcement of these laws hamper FDI inflows into these countries (Lipsey, 2002). For instance, in Kuwait, it is a common occurrence for foreign investors to report considerable delays and difficulties when seeking ownership approval regardless of the fact that full foreign ownership is permitted in some sectors by the Law decree No. 8 of 2001 (Alrezaki, 2009).

A similar problem is also evident in the case of Yemen, where investors have regularly mentioned the weak implementation of laws related to intellectual and physical property. In addition, investors in Yemen have reported other problems such as an ineffective property registration system and land ownership records. Despite the fact that Yemen has passed laws to protect intellectual rights, the country has yet to enforce this legislation, which is crucial in attracting FDI (Ali & Guo, 2005).

Inflation

The favorable macroeconomic environment in Western Asian has been negatively affected by the increasing inflation rates in the recent past, which have had a negative effect on local purchasing power as well as wages. The increases in consumer prices in countries in Western Asia are primarily driven by the increase in domestic demand, increases in food prices at the global level, and the weakening of the United States Dollar. In the GCC nations, the increasing oil revenues have been coupled with fast growth of credit availability to the private sector, which has played a crucial role in increasing liquidity as well as stimulating demand for credit (Moniruzzaman, 2010). The need for countries in Western Asia to lessen interest rates in accordance with the latest move by the United States Federal Reserve has played a significant role in increasing investment and consumption demand. The latest reports indicate that nearly all countries in Western Asia including Yemen have inflation rates that exceed 10%.

In addition, Yemen is projected to document the strongest increases in prices in the region in 2015 (O'Sullivan & Sheffrin, 2003). Despite the fact that there is inconsistent empirical evidence regarding the relationship between FDI inflows and inflation, it is probable that a further increase in price will have a negative impact on FDI inflows into the countries in the region. In Yemen, macroeconomic economic stability is crucial for the country to be able to improve its FDI attractiveness. Growing inflation is likely to have a negative effect on foreign investors’ confidence in the region. With the increase in economic uncertainty, both foreign and domestic companies are likely to be unwilling to undertake investment projects in the country. Export-oriented sectors are more likely to report a significant decline in foreign investment activities due to the fact that higher input costs will lessen the competitiveness of these firms in international markets (Ang, 2008).

Chapter Summary

This chapter reviewed literature relating to the state of FDI inflows into Yemen. From the studies, it is evident that Yemen has not reported steady growth of FDI inflows in the country as characterized by periods of both positive increases in FDI as well as negative dips of FDI inflows into the country. As a result, when compared to countries receiving significant FDI in the Gulf Region, the relatively low amount of FDI inflows in Yemen can be primarily linked to the political instability in the country, poor and insufficient infrastructure, and a domestic market that is underdeveloped. The combination of these factors results in the limited market opportunities in Yemen, which in turn, discourages FDI at the advantage of other countries in the region.

FDI activities in Yemen are still concentrated almost entirely on the oil sector, which means that the government should diversify by developing measures that would encourage and attract FDI in the non-oil sector. Despite the dismal performance of FDI inflows in the country, no comprehensive study has been conducted to determine the challenges and obstacles to FDI inflows to Yemen. Most econometric studies have focused on ascertaining the determinants of FDI in developing countries as a whole, with no specific emphasis on Yemen. Therefore, the following chapter describes the steps that were undertaken in gathering comprehensive qualitative information in order to address the research problem.

Chapter Three: Methodology

This chapter provides a detailed description of the activities undertaken to gather the required data in order to answer the research questions, which include the research approach, research philosophy, research methods, and procedures used to collect data.

Research Approach

The research approach constitutes one of the most important methodological aspects to be taken into account when conducting any form of study. The three perspectives that constitute the research approach include qualitative approach versus quantitative research approach; inductive research versus deductive research; and the theoretical approach, which are discussed in detail in the following subsections.

Qualitative Approach vs Quantitative Approach

The dissimilarity that exists between qualitative and quantitative research presents a crucial methodological issue. The selection of a specific approach depends on the appropriateness of the method when answering the study questions (Daymon & Holloway, 2002). Qualitative research approach places emphasis on the discovery of novel information. In addition, qualitative research emphasizes on the relationship between the topic under study and the researcher. On the other hand, the quantitative research approach is based on the measurement and analysis of causal relationships that are may exist between variables being investigated. The quantitative research approach is characterized by counting and measuring things whereas the qualitative research approach is typified by describing meanings, concepts, metaphors, symbols, and objects.

In addition, there are fundamental differences between quantitative and qualitative research approaches in terms of the degree of flexibility of the research design; the types of data gathered during the research process; the methods utilized in collecting data; the nature of the research questions; and the analytical approaches utilized (Daymon & Holloway, 2010). In this regard, the qualitative research approach is interpretive, with the main objective being to provide a comprehensive understanding of meanings that people associate with particular phenomena. Some of the features of a qualitative research approach that contribute to its distinctiveness include providing a detailed understanding of the context of the study; making use of interactive data collection methods; and exploring new issues and concepts.

In contrast, quantitative research approaches have the primary objective of assessing well-laid hypotheses about a phenomenon under investigation using methods that tend to be extremely structured and rigid. This is distinguished from qualitative research approaches in the sense that qualitative research seeks to explore phenomena using flexible instruments to collect data. In the present study, the most appropriate research approach to tackle the research problem and achieve the study objectives was the qualitative research because the use of the qualitative research played a pivotal role in facilitating a holistic investigation rather than limiting the study to a set of variables to be investigated.

In this research, the starting point was to identify the problem area to be studied, then coming up with the study aims and objective, devising the research questions, ascertaining the most appropriate research methodology, and gathering information that could help the author answer the research questions listed in the previous chapter. The analysis of data collected from multiple sources marked the last step of the research process (Fisher, 2007).

The selection of the qualitative research approach for this study was underpinned by the fact that the qualitative research approach involves the collection of qualitative data followed by the researcher analyzing and reflecting on the recurring theoretical themes in the data collected. Moreover, qualitative research is characterized by a critical textual analysis rather than making use of numbers and statistics to present the findings of research. In the current study, textual analysis is the most suitable approach to address the research problem rather than using numbers and statistics to elucidate the findings of the study. In this thesis, the use of quantitative research approaches was considered; however, they were considered to be inappropriate given the nature of the research investigation. This study is primarily exploratory and is not descriptive, which implies that a qualitative research approach was the best way to achieve the study's aims and objectives (Laurel & Lunenfeld, 2003).

Furthermore, it is imperative to note that the current research was after exploring opinions, views and facts associated with the study issue – barriers and obstacles to FDI in Yemen – and developing suggestions that can be used to resolve the problem facing Yemen in terms of FDI inflows into the country. As a result, the current research relied considerably on the use of a critical approach and a narrative style in presenting its findings, which further provides a justification for the use of a qualitative research approach. Dawson (2002) points out that exploratory research is used when the research problem at hand is neither clearly defined nor structured; therefore, exploratory research has the main goal of uncovering new information, which is consistent with the nature of the current research (Mitchell & Janina, 2009).

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Inductive Approach vs Deductive Approach

The deductive-inductive dichotomy presents another perspective for the research approach. The deductive research approach has been likened to evaluating a theoretical proposition, which commences with the researcher formulating either a hypothesis or theory and then developing a research strategy to test the theory/hypotheses. On the other hand, the inductive research approach has been likened to theory building or development, which commences first with collecting data in order to develop a theory.

In this research, an inductive research approach was utilized. According to Fisher (2007), the inductive research approach provides an opportunity for the researcher to clarify more on what is taking place. There is no doubt that the nature of the current research is consistent with the features of an inductive research approach. In this regard, the current research seeks to develop a logical conceptual model that can be used to understand the barriers and obstacles that contribute to low FDI inflows into Yemen. The research process in the current study started by collecting information from multiple sources such as peer-reviewed journal articles, book publications, concept papers, white papers, conference proceedings and other theses (both published and unpublished) in order to ascertain the factors contributing to the low FDI inflows into Yemen and solutions that aim to eliminate the factors contributing to low FDI inflows into the country.

Moreover, the inductive research approach is usually linked to qualitative research using multiple information sources. The researcher contemplated using a deductive research approach; however, this was ruled out because it was not suitable for the nature of the inquiry used in the current research. Specifically, the inquiry in the current research uses a “specific to general” format, which poses the need to use inductive reasoning in addressing the research problem at hand (Monette, Sullivan, & DeJong, 2005).

Theoretical Approach vs Research Philosophy.

An additional way to differentiate the research approach utilized by a study involves the use of epistemological and theoretical perspectives. In this regard, Fisher (2007) asserts that a researcher cannot make the assertion that the study is both constructionist and objectivist concurrently. According to Saunders, Lewis, and Thornhill (2007), it is vital for researchers to determine the manner in which they perceive the world under investigation in order for them to select the most suitable research philosophy to guide the research process. When choosing the research philosophy to guide the research process, three essential aspects have to be taken into consideration: methodology, epistemology, and ontology. The methodology refers to the techniques that the researcher uses to collect relevant data.

Epistemology is defined as the researcher’s perspective in regards to what makes up satisfactory knowledge. Ontology is defined as the researcher’s perspective on the nature of reality. In the current research, an interpretive world view was used because the researcher sought to perform a critical analysis of views of scholars, authors, policy makers, and investors while at the same time recognizing that their views are also influenced by their biases and experiences (Neuman, 2003). The nature of the research problem made it impossible to adopt an objective worldview because investment decisions are made by people, who are inherently biased. Therefore, in this study, it was imperative to acknowledge that the barriers and obstacles to FDI inflows into Yemen are merely perceptions rather than objective abstractions that can be analyzed and represented using statistics.

The underlying inference is that what might appear an obstacle or challenge to one investor might be an encouraging factor for another; therefore, when collecting and analyzing data, such biases in the opinions of people have to be taken into consideration, which justifies the use of an interpretivism research philosophy in the current research. In this regard, this study embarked on critically analyzing and comparing the views of various authors, investors, and policy makers in order to ascertain the most dominant viewpoints regarding the research problem under investigation.

In terms of epistemology, interpretivism research philosophy is characterized by an emphasis on the situational details. From an ontological viewpoint, the interpretivism research philosophy is based upon the premise that knowledge is a social construct. From a methodological perspective, interpretivism research philosophy is mainly qualitative and focuses on performing in-depth investigations rather than generalizations, in order to have a comprehensive understanding of the topic under study.

Interpretivism research philosophy is based on the presumption that reality is subject to social construction since reality is a constant process characterized by the interpretation and re-interpretation of intentional as well as meaningful behavior of individuals. Interpretivism research philosophy has as its main goal to provide an in-depth understanding of the meanings associated with worldly situations by using the worldview of people living in those worldly situations. Therefore, the researcher must interpret the happenings, try to understand the process through which individuals construct meanings, and then discover the meanings that people associate with specific events and actions (Monette, Sullivan, & DeJong, 2005).

Apart from constructionism, interpretivism research philosophy emphasizes the importance of determining the subjective meanings and realities that are likely to motivate peoples’ actions; this helps the researcher to understand peoples’ actions and make sense of these actions in a way that is helpful to other people. In light of this, in the current research, the data collection and analysis were based on the researcher’s viewpoints, which implies the possibility of improper interpretation of data.

Moreover, because of the fact that the current research depends considerably on the opinions and views of others (scholars, policy makers, and investors), there was the need for the researcher to recognize the differences in the opinions and viewpoints and place emphasis on the overriding themes associated with the area of study. The research process was based on the premise that a single viewpoint/reality is nonexistent; thus, the researcher sought to explore the different meanings related to the area of research (Saunders, Lewis, & Thornhill, 2007).

Interpretivism research philosophy, which places emphasis on social construction, is differentiated from positivism research philosophy, which presupposes that research can be performed in an objective manner. On the contrary, interpretivism research philosophy is based on the presumption that researchers are the ones who construct knowledge; therefore, the social construction of realities is possible. In addition, social realities depend on the individual holding reality. In this study, the researcher acknowledged the possibility of the topic under study being interpreted in multiple ways, suggesting the likelihood of several concurrent interpretations of the topic under study.

In order to comprehend the subjective nature of reality, interpretive research should make use of methods typified by placing stress on the use of words rather than numbers and statistics; the comprehensive narrative of the issue under study; and undertaking holistic research characterized by the researcher seeking to come up with a complete picture of the study topic. In addition, an interpretive research philosophy requires the use of a research design that is both flexible and adaptable, which means that the researcher has to adjust the study design in order to take care of newly unforeseen trends, themes and patterns in the research (Saunders, Lewis, & Thornhill, 2007).

In general, this study researchers used a qualitative-inductive research approach that adopted an interpretive worldview in interpreting the data collected. The reason underpinning the selection of the qualitative research approach is that the study sought to develop a conceptual understanding of the barriers and obstacles contributing to low FDI inflows into Yemen as well as the measures that can be initiated by the country to counter the identified barriers and obstacles.

Research Methods

The current study is mainly exploratory Saunders, Lewis & Thornhill (2007) pointed out that exploratory studies have the primary goal of investigating what is taking place, asking questions, looking for novel insights, and evaluating the topic under study from new viewpoints. It is important for exploratory studies to be adequately flexible in order to ensure that unforeseen changes in the direction of the study in the event new data emerges. Nevertheless, it is vital to note that the inherent flexibility related to exploratory research does not suggest that exploratory studies lack direction that guides the inquiry process. This research process was conducted using primary research.

Primary Research

Primary research was executed using semi-structured interviews with foreign investors in Yemen, especially managers working for multinational corporations operating in Yemen; and government officials, especially those working under the Department of Foreign Affairs and Trade. Semi-structured interviews denote a qualitative form of research inquiry that involves the researcher making use of predetermined open questions in soliciting responses from respondents and engaging in discussions with respondents regarding specific issues raised by the respondents. Structured interviews make use of rigid pre-determined questions; therefore, they were not appropriate given the exploratory nature of this study. On the other hand, semi-structured interviews include open-ended questions in order to cater to the emergence of any unforeseen themes associated with the study.

The rationale underpinning the use of semi-structured interviews to collect data from respondents is because semi-structured interviews have been found to be effective in providing detailed information, which can be attributed to the fact that they are sufficiently flexible while at the same time gives the researcher control over the study. In addition, semi-structured interviews provide the interviewer with an opportunity to seek clarification and follow up on responses that may be incomplete. Since the current study was primarily qualitative and exploratory, semi-structured interviews were the most suitable data collection instrument when compared to other tools such as questionnaires, which were ruled out because they are extremely structured, making them unhelpful in uncovering new information. The use of questionnaires would have led to the collection of limited qualitative data. In the context of this research, semi-structured interviews are known to have medium structure and high infidelity, which form the crucial requirements of exploratory research like the current research (Laurel & Lunenfeld, 2003).

An interview guide was devised in order to help direct the semi-structured interview. The interview guide used in this study to collect a lot of information including the views and opinions of respondents regarding the investment environment in Yemen, factors contributing to the low FDI inflows into Yemen, measures are taken by the government in encouraging FDI, the effectiveness of these measures, and their suggestions as regards the measures that can be adopted by the government to help improve FDI inflows into the country. A copy of the interview guide is attached in Appendix 1. In addition, the researcher followed up on issues that emerged from the discussions that were not outlined in the interview protocol.

Respondents who took part in the semi-structured interviews were recruited using purposive sampling, which is characterized by choosing respondents based on the purpose of the research as well as knowledge regarding the population. In the context of this study, respondents in the interview were selected because of their direct or indirect involvement in FDI in Yemen. In this regard, foreign investors and government officials working for the Department of Foreign Affairs and Trade are well versed on the issue of FDI and factors that encourage and discourage FDI in the country. Random sampling, a probability sampling approach, was considered for this study; however, the sample needed for this study was relatively difficult to reach, which compelled the researcher to purposively select respondents in order to ensure that those respondents were knowledgeable of the research problem (Daymon & Holloway, 2010).

Managers of multinational firms operating Yemen have firsthand experience on the investment climate in Yemen. Moreover, government officials in the Department of Foreign Affairs and Trade are in charge of formulating and implementing policies aimed at boosting FDI in Yemen. In terms of the sample size, the researcher interviewed 30 respondents (15 managers of foreign companies operating in Yemen and 15 government officials. There is no precise rule for determining the appropriate sample size in qualitative research; however, a saturation of data is a crucial aspect that must be taken into consideration.

To this end, the researcher opted to discontinue the semi-structured interviews after interviewing 30 respondents because no new information was forthcoming, which is an indication that data saturation had been achieved. Fisher (2007) recommended the use of at least 12 interviews in order to gather trustworthy data. Moreover, it is crucial for the researcher to make sure that respondents being interviews have vast knowledge of the subject area of interest in order to collect rich data. There is no doubt that this criteria were met and that trustworthy and rich data was collected from the semi-structured interviews.

It is important that the mode of the interview be taken into consideration. The various modes of interviews include face-to-face interviews, video-link interviews via Skype, and telephone interviews. In this study, respondents had the discretion to select their most preferred form of interview based on their convenience. It is evident that different forms of interviews are likely to produce different results; however, a comparison of interview scripts from the different types of interviews did not point out significant differences (Daymon & Holloway, 2010). Therefore, the researcher opted to make use of the different modes of interviews.

Through the consent of respondents, the interview discussions were recorded verbatim for transcription and further analysis. All respondents agreed to the tape recording of the interview sessions; as a result, there was no need for note-taking during the interview, which enabled the researcher to be fully engaged in the interview process with minimal distraction. Interviews lasted roughly between 30-60 minutes. There was no documented instance of the interview being discontinued at the request of the respondent. In all the interview sessions, all questions outlined in the interview protocol and follow up questions were exhausted. In addition, all interviews were stopped at a point when the researcher recognized that no new information was emerging from the discussions with respondents.

Data Analysis

Each respondent in this study had a unique identifier that was used in their interview transcripts. Analysis of the transcripts was based on the inductive approach, which does not involve the use of a predetermined theoretical framework to facilitate the analysis of the data. In this research, the collected data shaped the direction of the analysis because of the exploratory nature of the study. The particular inductive approach that was used to facilitate the analysis of the interview transcripts is thematic content analysis, which placed emphasis on identifying and interpreting dominant and recurring themes in the information collected followed by the analysis of patterns and relationships that are likely to exist between the themes that have been identified (Laurel & Lunenfeld, 2003).

The first in the data analysis was categorizing information through coding or indexing data. In this study, coding did not involve the use of numerical variables; instead, it entailed identifying themes and patterns in the interview scripts, which included phrases used by phrases and terminology used by respondents, incidents described by respondents, and any concept ideas highlighted by the respondents. Coding the data posed the need for a comprehensive reading of the transcribed text in order to determine the categories of barriers and obstacles emphasized by respondents as well as measures that the Yemeni government can adopt in order to encourage FDI inflows into the country. Abbreviated codes of words were used to code data together with a descriptive label for the categories. In addition, themes that acted as subcategories under the main theme were identified and also labeled.

The process of coding continued until the researcher was no longer able to identify any additional themes from the interview transcripts. In categorizing data, two approaches can be used, which include emergent and preset categories. Preset categories are characterized by using a predetermined list of categories followed by searching the transcribed data for the presence of these pre-determined themes. The current study is primarily explorative and does not make use of a predetermined framework, which means that preset categories were not a suitable approach to identify themes in the data. Therefore, emergent categories were used, which involved going through the interview transcripts in order to discover dominant themes (categories). These categories may or may not be preconceived by the researcher (Monette, Sullivan, & DeJong, 2005).

After coding of information contained in the interview transcripts, the next step involved identifying patterns and relationships that existed between and within the identified dominant categories/themes. This was achieved by first summarizing the information associated with the multiple themes and pointing out any differences and/or similarities in the response provided by participants regarding the category. Specifically, this entailed assembling all information related to a specific theme followed by exploring the core ideas that respondents have articulated with respect to that particular category and looking for similarities and differences in the manner in which respondents tackled the issue.

Ethics

A number of ethical issues were taken into consideration during the research process. First, the study guaranteed the confidentiality and privacy of respondents who took part in the research. In this research, this study refrained from collecting any personal information that could identify a respondent. When disseminating the results, respondents are reported using a unique identifier, which helps guarantee their anonymity. Second, after recruiting participants, informed consent was emailed to them together with the purpose of the research. In addition, the informed consent informed the participants of how they participate in the research would be helpful in facilitating the achievement of the goals and objectives of the study. Informed consent also informed respondents how their information would be used. The recording of the interviews was done only after the respondents provided verbal consent that permitted the researcher to record the interview sessions (Daymon & Holloway, 2010).

Chapter Summary

This chapter provided a detailed description of the methodology adopted for this research including the research approach, research methods, data analysis, and ethical considerations. In terms of the research approach, this study used a qualitative-inductive research approach that adopted an interpretive worldview in interpreting the data collected. The reason underpinning the selection of the qualitative research approach is that the study sought to come with a conceptual understanding of the barriers and obstacles contributing to low FDI inflows into Yemen and the measures that can be initiated by the country to counter the identified barriers and obstacles.

With respect to the research methods, this research is mainly exploratory, executed using primary research. The primary research was administered using semi-structured interviews of managers of foreign firms operating in Yemen and government officials in the Department of Foreign Affairs and Trade. Analysis of data was done using the thematic content analysis. The following chapter presents the results of the primary research obtained from the semi-structured interview.

Chapter Four: Results and Discussion

The findings from the semi-structured interviews with respect to the research questions are presented in this chapter. This chapter comprises of various sections including participant characteristics, and common themes emerging from the interviews in terms of the research question.

Thematic Analysis

Data analysis commenced after the conversion of interview data into transcribed texts. Reading and re-reading helped in data reduction, which was crucial in highlighting emerging themes. The open coding procedure was utilized to identify emerging themes from the interview data obtained from government officials and managers of multinational companies operating in Yemen. The areas of emphasis while analyzing the data focused on the nature of the investment climate, the challenges and obstacles to FDI, and measures that could be taken to improve FDI inflows, both from the perspective of government officials and the managers of multinational companies operating in Yemen. The following subsections describe the emerging and recurring themes from the interview as expressed by the two groups of participants. Quotes from participants are provided in order to emphasize the themes found in the data.

Interview Findings from Government Officials

This subsection focuses on the findings from the interviews conducted with government officials representing the Department of Foreign Affairs and Trade. Their views regarding the current state of Yemeni investment climate, barriers, and obstacles to FDI and measures that can be taken to improve FDI inflows are presented in the following subsections.

Perceptions of Yemeni Investment Climate

A common theme emerging from the interview conducted with government officials working for the Department of Foreign Affairs and Trade is the acknowledgment that the investment climate has improved significantly in the recent past. A majority of the representatives of the Department of Foreign Affairs and Trade agreed that Yemen is gradually developing into a more open and free market. As one of the respondents stated:

The Parliament of Yemen ratified the country’s accession to the World Trade Organization in April 2014, which I believe will play a crucial role in creating a more open and freer market for both domestic and foreign investors.

Essentially, government officials from the Department of Foreign Affairs and Trade expressed optimism in the government’s eagerness to attract FDI. A number of participants cited the fact that the Investment Law in Yemen does not differentiate foreign investors from local investors. In addition, the General Investment Authority is also commonly cited by government officials when expressing the commitment of the government in increasing its openness to and reducing restrictions upon FDI. Consistent with this view on the openness of the Yemeni investment climate, one participant noted:

The General Investment Authority has the primary task of publicizing and promoting investment opportunities in Yemen as well as coordinating government support for investors. At present, the General Investment Authority is streamlining and simplifying its processes used in the registration of investments. As a result, investors can access any information they need from the GIA such as the application form together with the application instructions, an investment guide that summarizes the activities undertaken by GIA, and a draft of the investment law used in Yemen.

Besides expressing the commitment of the government in improving its openness to and lessening of the restrictions upon FDI, a number of government officials working for the Department of Foreign Affairs and Trade described the Yemeni investment climate in terms of transfer and conversion policies. In emphasizing the optimistic investment environment in Yemen, one respondent stated, “the majority of major currencies of the world, particularly the United States Dollar, are available readily and are traded freely and the prevailing market rates.” Another respondent said, “a number of interventions by the Central Bank have helped in creating a steady exchange rate with the United States Dollar since 2010.” Parallel with the views of others relating to transfer policies, one participant stated:

Yemen allows foreign companies operating in the country to freely transfer their profits to other countries. Investors are allowed to bring in capital from outside Yemen for investment and are at the same time allowed to re-export their capital investment. Nevertheless, international cash transfers exceeding $10,000 are subject to approval by the Yemeni Central Bank.

There were diverse comments provided by participants regarding their perceptions on the investment climate in Yemen, but repeatedly the government officials working for the Department of Foreign Affairs and Trade expressed the commitment of the Yemeni government in improving its trade openness, reducing restrictions imposed on foreign investment, and favorable transfer and conversion policies. Overall, it is evident that government officials perceive the investment climate in Yemen to favorable, or at least, it is improving and becoming more favorable.

Challenges and Obstacles to FDI Inflows

Despite the fact that government officials representing the Department of Foreign Affairs and Trade were optimistic about the improvements in the investment climate in Yemen, they also acknowledged a number of challenges and obstacles hindering FDI inflows into the country. The most commonly cited challenge mentioned by nearly all participants relates to the issue of security threat stemming from political violence. The majority of the participants noted that armed clashes and protests between anti-regime and pro-regime forces have played a crucial role in keeping foreign investors away. An example is the 2011 violent uprising that pitted those supporting and those opposed to the 33 years of government by President Ali Abdullah Salih, which resulted in the deaths of at least 1,000 Yemenis and thousands of additional injuries. Participants provided examples of shootings and killings of high-ranking officials and the killing of anti-government protesters. For instance, one participant commented:

More than 45 people who were protesting against the government were killed during March 2011 when unidentified gunmen started shooting at the protesters. The shootings resulting in the defection of high ranking officials from the government. Another attack on the president was reported during June 2011, resulting in the injury of the president and those who were in his company. With such politically instigated violence, potential foreign investors are scared away because of the political risk involved. Even if the government has put up measures to improve its openness and the general investment, political violence of such magnitude is enough to scare away investors. As a matter of fact, I think the FDI inflows during 2011 were negative, which I believe can be attributed to the fact that political violence was rife in Yemen during the same year.

Parallel with views on political violence, another respondent pointed out that, “despite the fact that the National Dialogue Conference was convened in 2013 in order to encourage the participation of various interest groups and political parties, two delegates in the conference were assassinated before the conference had concluded…”

Another dominant theme in the responses of government officials regarding the security challenges relates to the threats posed by terrorist organizations operating in the country such as Arabian Peninsula and Al-Qaeda, which have been reported to be active in Yemen. Participants expressed concerns regarding possible attacks by these terrorist organizations on businesses and facilities owned by Western companies. Incidences of terrorist attacks have been rampant in Yemen, targeting mainly foreigners from Western countries.

According to government officials who took part in this study, such terrorist attacks are enough to discourage Westerners from setting up investments in the country. Acts of terrorism are capable of bringing to a stop the operations of multinational corporations, which makes it not worthwhile to invest in an area that is prone to terrorist activity. In addition, companies that are willing to take the risk are compelled to make significant investments in their security operations, which only reduces their profits, further discouraging investors from venturing into the country.

Interview Findings from Managers of Multinationals Operating in Yemen

Managers of multinationals operating in Yemen who participated in this study provided crucial insight regarding the state of the investment climate in Yemen, the challenges and obstacles to FDI inflows to the country, and suggestions on how to improve FDI inflows to Yemen.

Perceptions of the Yemeni investment climate. The majority of managers who participated in this research acknowledged the significant improvements in the investment climate in Yemen in the recent past. Despite the fact that Yemen is an undeveloped economy, managers of multinational companies operating in Yemen agree that the country offers potential foreign investors with low-cost labor as well as high tariff rates for project funding when compared to other countries that are more developed. Most of the participants applauded the efforts made by the government to improve the investment climate in the country. For instance, one participant noted that “the adoption of tax incentives for multinational companies has helped to steadily improve the investment climate in the country in the course of the last 10 years…” Despite these tremendous efforts by the Yemeni government, the overall business-enabling climate in Yemen still faces a myriad of challenges. As one manager stated:

Government officials in Yemen consider foreign investors an avenue for making extra income or personal profit. In order for a foreign investor to be able to successfully navigate the various centers of authority in Yemen, a proficient local partner is needed. As a foreign investor, you can hardly navigate the bureaucracy on your own without the help of a local partner who is knowledgeable and well-versed with the workings of the various government authorities.

Consistent with the above view, another respondent stated that the Yemeni government has put a lot emphasis on improving the macroeconomic climate and the investment environment; however, little effort has been directed at eliminating the hurdles of setting up foreign investment in Yemen. As that participant stated:

At a legislative level, the government of Yemen is doing a good job of trying to improve its overall investment climate. This is evident by a number of laws that have been enacted with the sole purpose of enhancing the business environment in the country. Some of these reforms that are poised to benefit foreign investment include the General Sales Tax and the International Monetary Fund, which helped the Yemen government in the introduction of indirect monetary instruments like reserve requirements, rediscount facilities, and open market operations among others. When implemented, these new laws will result in real benefits for the investment environment in the country; however, this is constrained by the fact that the implementation of these laws is slow together with weak enforcement.

Overall, the common view regarding the state of the investment climate in Yemen is that foreign investors are optimistic about the improvements in the business environment; however, the government is not doing enough to address the challenges, especially those stemming from its systems.

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Barriers and Obstacles to FDI

Managers of foreign companies who participated in this research expressed a myriad of challenges that their respective companies faced when trying to set up investments in Yemen. In addition, they also articulated the ongoing challenges associated with operating a foreign investment in Yemen. The first obstacle mentioned by the majority of participants is the rampant nature of corruption in Yemen, which acts as a significant barrier to foreign investment in the country. As one respondent stated, “bribes and kickbacks are common at every government level and is a common practice of doing business in Yemen”. Another respondent stated that “the culture of corruption in Yemen is omnipresent, especially in government offices…” Consistent with the prevalent corruption, one participant commented:

Corruption affects almost every aspect of government procurement and is usually characterized by large contracts being awarded to the company under the control of elites. The tender process is rarely used in the awarding of projects, when they are used, the tender process is usually opaque.

The second obstacle cited by managers of foreign companies who participated in this research is the problematic nature of dispute settlement in Yemen. In this regard, participants cited the inefficiency of the commercial court system in Yemen and the fact that the court system outcomes depends significantly on personal connections, influence, and bribes, which makes it extremely unreliable to settle the commercial dispute. One respondent asserted that “court cases in Yemen can last for years, and there is no guarantee that the government will enforce the decisions reached by the courts…” Another respondent said, “his firm prefers to deal with commercial disputes through private arbitration because of the unreliability of the commercial court system…” Investment disputes are a common occurrence in Yemen because the government usually fails to honor signed agreements.

The third obstacle to FDI mentioned by managers who participated in the research relates to excessive political violence in the country. Many respondents agree that Yemen faces the challenge of tribal and terrorist violence. The main issue of concern for foreign investors is that terrorists are usually after economic targets. In addition, frequent kidnapping is a common occurrence in Yemen. In this regard, one respondent stated that “In my tenure as an expatriate in Yemen, I have witnessed other expatriates and other foreign employees being kidnapped…” Tribes in Yemen usually make use of kidnappings as a means of pressuring the government to meet their demands for improved services and equitable distribution of resources. One respondent noted that “a vehicle belonging to his company was hijacked… road blocks are also set up surrounding our facilities as a means of trying to influence the government”.

The fourth obstacle mentioned by participants who took part in the study increased competition from government-owned companies. Some participants reported that the government-owned companies are still active in a number of sectors in Yemen including telecommunications, banking, manufacturing, and oil and gas. Some of the most dominant examples mentioned by respondents include the Yemen Telecommunication Corporation, Yemen Petroleum Company, Public Electricity Company, and Yemen Economic Corporation among others. An issue of concern raised by those interviews is that some government-owned companies have an exclusive monopoly over the sector they operate, and in sectors where they compete with the private sector, government-owned companies are usually favored. Other obstacles to FDI mentioned by participants include inaccurate and incomplete land records; weak intellectual property rights; and inadequate and non-transparent regulatory systems.

Measures to Improve FDI Inflows

Based on the views provided by government officials and managers of foreign companies operating in Yemen, action plans can be deduced to help Yemen enhance its investment environment as well as increase FDI inflows to the country. The most commonly cited action plans include speeding up the implementation and enforcement of new laws; adopting measures aimed at combating corruption and bureaucracy through the establishment of an independent and powerful supervisory body; encouraging private sector participation in order to lessen government monopoly; the use of political and administrative measures to combat political violence and fostering stability; and reforming the commercial court system to increase its reliability in the realm of commercial dispute resolution.

Chapter Five: Conclusions

This chapter presents the key findings from this research and makes recommendations for future research including the limitations associated with the study.

Summary of Key Findings

Government officials from the Department of Foreign Affairs and Trade and managers of foreign companies operating in Saudi Arabia who took part in this study offered important insight regarding the state of the investment climate in Yemen including the barriers and obstacles to FDI into Yemen and recommendations to help improve the business environment and FDI inflows. Regarding the investment climate in Yemen, the government has set up initiatives with the aim of improving the business climate. The government has expressed its commitment to developing a favorable business environment by enhancing its trade openness, enacting relevant laws, and adopting incentives to increase the attractiveness of Yemen to foreign investment; however, a number of barriers and obstacles exist in the investment environment.

The obstacles and barriers to FDI reported in this study include rampant corruption; dispute settlement problems; political violence; increased competition from government-owned companies; inaccurate and incomplete land records; weak intellectual property rights; and inadequate and non-transparent regulatory system. Based on the identified barriers and obstacles top FDI inflows into Yemen, a number of recommendations have been made, which include setting up a powerful and independent body to deal with corruption; encouraging private sector involvement in sectors perceived to be under government monopoly; initiating reforms in the commercial court system in order to ensure that they are reliable in settling commercial disputes, and policies that would address the political violence in the country using forums like National Dialogues.

Recommendations for Future Research

The results of this research have highlighted areas that require further research. It is imperative to note that the barriers and obstacles highlighted in this study span various components of the Yemeni government. For instance, corruption has been reported to be rampant in almost all facets of the government. Similarly, political violence has also been linked to the government. Essentially, all barriers and obstacles to FDI highlighted in this paper have some form of relationship to the government. This provides an avenue for future research to explore ways through which the Yemeni government can address the problems facing the government systems in order to enhance the investment climate. In addition, this research has focused only on qualitative aspects of barriers and obstacles; perhaps, future studies should try to quantify these variables in order to explore their relative significance in affecting FDI inflows to Yemen.

Concluding Remarks

The utilization of a qualitative approach in addressing the research problem was beneficial in exploring the obstacles and barriers to FDI in Yemen. The use of semi-structured interviews with government officials and managers of foreign companies operating in Yemen was crucial in providing insights that helped in answering the research questions. Overall, from the study, it is evident that despite the tremendous effort by the government to improve the attractiveness of Yemen to foreign investors, a number of obstacles that hinder FDI inflows into the country have yet to be addressed, which include widespread corruption; dispute settlement problems; political violence; increased competition from government-owned companies; inaccurate and incomplete land records; weak intellectual property rights; and inadequate and non-transparent regulatory system.

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