Costs and Benefits of Foreign Direct Investment to Azerbaijan’s Economy: The Case of Oil Sector

Abstract

Azerbaijan is a young republic with a developing economy. Despite the efforts of government programs and development of non-oil sectors in recent years, the oil sector is still the most important sector of the economy. Improvement in the oil sector is the main source of the developments in Azerbaijan’s economy. In this study, we present the role of the oil sector in Azerbaijan’s economy, investigate the foreign direct investment in Azerbaijan oil sector and analyze the costs and benefits of foreign direct investment in oil industry to the Azerbaijan’s economy. After a broad literature review, it is found that foreign direct investment in Azerbaijan oil sector results in some minor costs to economy such as crowding out, negative wage spillover, profit repatriation and dual economy effect. On the other hand, foreign direct investment in Azerbaijan oil sector has great benefits for the economy, especially in terms of significant developments at macroeconomic indicators such as rapid increase in GDP. Adding to economic growth, human capital contribution, competition level, technology transfer and management and governance practices are some other benefits of foreign direct investment in Azerbaijan oil sector in Azerbaijan’s economy.