Blackmon, Pamela. "Divergent paths, divergent outcomes: linking differences in economic reform to levels of US foreign direct investment and business in Kazakhstan and Uzbekistan". Central Asian Survey, vol.26, no.3 (2007): 355-372.

Blackmon, Pamela. "Divergent paths, divergent outcomes: linking differences in economic reform to levels of US foreign direct investment and business in Kazakhstan and Uzbekistan". Central Asian Survey, vol.26, no.3 (2007): 355-372.

• Studies globally and in Eastern Europe seem to indicate a correlation between level of economic liberalization and the amount of FDI a country receives (355), preliminary work would indicate that the same is true for the former Soviet Union. Kazakhstan and Uzbekistan are good examples of this, as the shock therapy policies of Kazakhstan have earned in $19 billion in FDI from independence to 2005, whereas Uzbekistan only raised $1.3 billion during that period (356).
• This paper questions that application of reform logic to Central Asia, investigating the plausibility of this explanation, as well as other potential explanations such as the vast oil and gas resources of Kazakhstan, which may have attracted investment regardless of liberalization (356).
• There is definitely a correlation between the resource wealth of a country and the amount of FDI it receives, however, due to the extremely risky nature of investment in fossil fuel resources, investors want a better guarantee on the security of their investments from unstable or unpredictable governments, and as such economic liberalization likely has a larger effect on this sector than others. This would explain the huge gap between FDI in Kazakhstan and Turkmenistan (358).
• As of 2001 at the latest estimates, the USA was the single largest investor in Kazakhstan and the second-largest in Uzbekistan, after the UK, with high proportions of total investment in both. The main areas of investment were oil and gas, agriculture, minerals, aerospace, telecommunications and consumer goods (358).
• The most common forms of FDI were involvement in the industrial and business sectors, followed by a even split between extractive industries and foreign companies servicing those extractive industries (359). Service investors were unconcerned with economic reform, whereas extractive firms were very concerned about the long-term security of their investments from nationalization or sudden changes in tax policy (360).
• Kazakhstan has worked hard to create a friendly investor environment, beginning with a simplification of the tax code in 1995, which cut the total number of taxes from 49 to 11. By 1996, specific laws had been set out defining the exact rules regarding investment and ownership of gas and subsoil resources (361). The government has since demanded renegotiation of earlier contracts, however, the windfall from oil and gas extraction has been enough to retain profitability despite risks (362).
• Although Uzbekistan has announced its commitment to creating a welcoming environment for investors, the focus of the state on energy autarky and the cumbersome tax system both discourage investment. Frequent changes to the law on investments make investors wary, especially as it still does not give them any substantial decision-making power unless they totally buy out the company (363).
• The fears of extractive industries have not, however, translated into general industrial investment. The loans offered by the US Import-Export Bank seem to provide stable enough guarantees to alleviate most of the risks associated w/ business in Uzbekistan (363). The US ExIm Bank provides sovereign credit loans for firms operating in Uzbekistan, which essentially amounts to a guarantee that the Uzbekistani government will repay 85% of the investment if the venture fails, although this has yet to occur (364).
• The corporate representatives interviewed by the author indicated that the available of US Import-Export credits was a significant factor in their decision to invest in Uzbekistan and they likely would not have done had these loan arrangements not been available. The decision to conduct business in Kazakhstan has not nearly based around these credits to the same degree, and they were only non-sovereign and used for very large investments (635).
• A number of corporate representatives gave lack of reform in the banking sector as a primary reason for not conduct as much business in Uzbekistan as Kazakhstan. Some of the major concerns cited were harsh limits on the amount of deposited cash that could be withdrawn, the extreme difficulty of currency convertibility, and the unwillingness of state banks to give cash directly to businesses, instead preferring direct transfers (636).
• "The results of this paper indicate that economic reforms such as foreign investment laws (including production sharing agreements), contract legislation, tax legislation and banking sector development were the most important reform areas for representatives considering investing" (637).
• Extractive industries also looked at the amount of resource reserves in the state they might invest in, but this consideration was weighed against the stability of the investment and commercial environment in that country, which still constituted a primary decision-maker (637).
• "There is a big difference in the level of risk between investing billions of dollars in a country’s infrastructure, and in doing business with a country. This explains why firms were still willing to do business with Uzbekistan despite its currency convertibility issues, lack of banking sector reform and overall poor business climate" (638).