This chapter provides an analysis of productivity trends in Egypt, exploring the key challenges the country faces in enhancing living standards and fostering sustained, resilient growth. It further investigates the role of FDI in driving productivity improvements, innovation, research and development (R&D), participation in Global Value Chains (GVCs), and the strengthening of business linkages. The analysis focuses on the period from 2013 to 2023, with comparative insights drawn from Egypt’s performance relative to both regional counterparts within the MENA region and the OECD average.
FDI Qualities Review of Egypt
Connecting Foreign and Domestic Firms for Productivity and Better Jobs
Abstract
Egypt, like many emerging economies, faces the critical challenge of enhancing productivity levels to improve living standards and sustain long-term economic growth. As the initial advantages stemming from low labour costs, capital accumulation, and favourable demographics begin to diminish, the shift towards innovation-driven growth has not yet fully taken off (Paus, 2017[1]). Over the past three decades, Egypt’s productivity growth has been relatively modest, primarily driven by efficiency gains within sectors (Box 1.1). However, further strategic efforts will be required to accelerate productivity growth and bolster income levels. Recognising the pivotal role of productivity, Egypt’s national development agenda, as outlined in Egypt Vision 2030, explicitly highlights the objectives of “fostering productivity, diversity, and value-added activities,” supported by initiatives in digital transformation, scientific research, and innovation (MPED, 2023[2]).
Foreign Direct Investment (FDI) holds significant potential to accelerate productivity improvements in Egypt, driven by the activities of foreign firms and the knowledge and technology spillovers they generate within domestic industries. Nevertheless, the scale and impact of such productivity and innovation spillovers have often been limited. The majority of FDI in Egypt is concentrated in capital-intensive sectors, such as construction, oil, and certain service sectors (e.g. finance, ICT), which tend to be more productive on average than other parts of the economy. Similarly, greenfield FDI flows predominantly into a narrow range of capital-intensive industries, with a particular emphasis on renewable energy, construction, and oil. These sectors, however, offer limited potential for fostering innovation, as evidenced by the modest proportion of greenfield FDI allocated to research and development (R&D) activities. However, some innovative sectors, such as Software and Information Technology (IT), have been attracting an increasing share of greenfield FDI.
The limited absorptive capacity of Egyptian firms poses a significant challenge in fully exploiting the potential benefits of FDI. Foreign affiliates operating in Egypt tend to exhibit significantly higher productivity levels, approximately 1.5 times greater than their domestic counterparts. While these foreign firms contribute to the overall productivity of Egypt’s economy, the productivity gap is also an indicator of the restricted absorptive capacity of domestic companies, which often lack the necessary capabilities to harness the technological spillovers that FDI can generate. Furthermore, the low engagement in R&D activities among both domestic and foreign firms further highlights the constraints in Egypt’s ability to absorb and adapt to new technologies, hindering the broader diffusion of innovation across the economy.
Trade and investment can be highly complementary, with the international connections and productivity gains fostered by FDI playing a crucial role in expanding export opportunities. However, Egypt’s integration into global value chains (GVCs) has diminished over time. Although linkages between foreign and domestic firms are substantial, the export orientation and sectoral composition of FDI in Egypt do not strongly support indirect exporting or the generation of meaningful spillovers via market connections. Foreign firms in Egypt source a significant portion of their inputs domestically—more so than the averages observed in MENA and OECD countries. However, the heavy concentration of FDI in resource-based sectors tends to limit the potential for spillovers, as these industries are capital-intensive and highly specialised. Nonetheless, business partnerships between foreign and domestic firms—such as strategic alliances, joint ventures, and contractual arrangements—are significantly utilised in Egypt. These partnerships can serve as vital conduits for the transfer of technology and knowledge, holding substantial potential to drive innovation diffusion and enhance domestic capabilities.
Diversifying the types of investments in Egypt, particularly towards innovation-driven manufacturing and service sectors, and strengthening the capacity of domestic firms, especially small and medium-sized enterprises (SMEs), could play a crucial role in better leveraging FDI and fostering more rapid and high-quality growth. These policy options are explored in greater depth in Chapter 3.
Labour productivity, typically measured as value added per worker or per hour worked, is a key determinant of per capita income, alongside labour utilisation rates. Broad-based productivity gains are also essential for enhancing the quality of growth, as they contribute to reducing income inequalities (OECD, 2018[3]).
For Egypt, increases in labour productivity will be crucial in raising income levels, which remain relatively low on a per capita basis despite relatively strong growth in recent decades. Between 2000 and 2023, Egypt's GDP grew at an average annual rate of 4.3%, outpacing the regional average for the Middle East and North Africa (MENA) region (3.3%) and the OECD average (1.8%) (Figure 1.1, Panel A). However, income growth has not kept pace with population growth; over the same period, Egypt's GDP per capita declined from 45.2% to 41.0% of the regional average (Figure 1.1, Panel B).
To drive higher income growth, the expansion of a more competitive private sector is essential. This could be supported by reforms aimed at addressing the high regulatory barriers to firm establishment and operations, simplifying regulatory frameworks, and strengthening regulatory impact assessments to enhance policy design. These measures, alongside efforts to improve the overall business environment, would foster a more conducive ecosystem for private sector growth (OECD, 2024[4]). In this context, Egypt has recently undertaken reforms to streamline business procedures, including the automation of business establishment procedures and the launch of a new digital licensing platform. Moving forward, Egypt could continue its efforts in streamlining procedures for obtaining permits while raising awareness of the benefits and incentives of formalisation (OECD, forthcoming[5]). Foreign investment will likely play a significant role in this process, particularly if these reforms are complemented by policies that attract greater and more diversified FDI inflows (see Chapter 3).
Source: World Bank (2022[6]).
The rate of labour utilisation in Egypt, measured as the employment-to-population ratio, stands at 65.7%, which is comparable to the OECD average of 65.5%. However, the potential for further productivity improvements through structural transformation is diminishing as modern manufacturing and services become increasingly significant sources of employment (Box 1.1). As a result, boosting output per worker has become crucial for sustaining economic progress. Historically, Egypt has faced limited growth trends, suggesting that achieving significant gains in labour productivity may be challenging, especially given the country's rapid population growth. Between 2013 and 2023, Egypt's population grew at an average rate of 2.1% per year, nearly twice the average growth rate of the middle-income country group (1.1%) (United Nations Population Division, 2024[7]). This rapid population increase further complicates efforts to raise productivity and improve living standards, making the acceleration of productivity growth even more critical for Egypt's long-term economic development. Against this backdrop, Egypt has taken recent policy measures to accelerate structural transformation and within-sector productivity through more targeted FDI attraction, sector-specific industrial strategies, and institutional support for value chain development. Egypt’s FDI Strategy 2025–2030 prioritises knowledge-based and export-oriented sectors, while ongoing initiatives in vocational training, industrial clusters, and SME development are expected to enhance the absorptive capacity of domestic firms and encourage productivity spillovers.
Improvements in productivity are the only way to continue per capita income growth over the long term. While demographic trends may continue to support Egypt’s income growth for some time into the future through the increasing share of the population of working age, structural transformation is likely to be a less important driver of growth. Favourable demographics may continue to have a positive effect on growth for several decades into the future. Egypt’s age dependency ratio – a measure of the number of young and old dependents outside of working age – is forecast to continue declining from the current 59.0% to 51.1% in 2035. The dependency ratio is expected to begin increasing in the 2060s (United Nations Population Division, 2024[7]).
Future structural change may provide less support for productivity growth, however. Opportunities for resource reallocation to higher-productivity sectors (electronics-processing, ICT, software, agro-processing, and woodwork, and furniture-making) depend on several factors related to a country’s export specialisation, monetary policy and labour market characteristics (McMillan, Rodrik and Verduzco-Gallo, 2014[8]). According to a recent study, sectors that are likely to create new opportunities for resource reallocations include assembly/electronics-processing, ICT, software, agro-processing, and woodwork and furniture-making (ILO, 2024[9]). While the shift of workers into higher-productivity sectors continues to contribute to productivity growth in Egypt – Egypt’s employment growth is most rapid in services sectors, within-sector effects ignoring changes in employment are often the most important driver of increases in value added per worker (Figure 1.2). The interaction effect has typically been negative over this period, indicating that sectors with growing productivity have actually had a declining share of employment. This effect has typically been small, however. Continuing sector-level growth may be the result of improvements in firm-level efficiency due to the use of new knowledge or technologies, improved inputs, increases in worker skills, or pressure from new sources of competition. It may also be the result of firms’ movement into high-value-added activities within established or new value chains or reallocation of productive resources and market share to higher-productivity firms (OECD, 2019[10]).
Note: The within-sector effect measures growth in value added per worker without considering the effects of worker movement between sectors; the shift effect measures productivity growth due to workers moving into higher productivity sectors; and the residual, the interaction effect, is positive when sectors with growing productivity grow in employment share and negative when sectors with growing productivity decline in employment share. This decomposition was calculated using total employment and gross value added at constant prices across three economic sectors (agriculture, industry, and services).
Source: World Bank Development Indicators (2022[6]).
Egypt’s labour productivity, measured as GDP per person employed (in constant 2021 PPP USD), is slightly higher than the MENA average (USD 60 354 for Egypt compared to USD 52 215 for the MENA region) but is just over half the OECD average (USD 109 264) (Figure 1.3, Panel A). Growth in labour productivity has also been moderate in comparison with peer economies. Real GDP per person employed increased by an average of just 2.0% per year over 1991-2022 (Figure 1.3, Panel B). This rate was exceeded by the growth seen in other emerging economies, like Poland (3.6%), Türkiye (3%), and Indonesia (2.6%) over the same period.
Source: World Bank Development Indicators (2022[6])
Foreign investment and the activity of foreign firms can influence productivity levels in the host economy. Directly, foreign firms can help grow higher-value-added sectors of the economy. Foreign firms also tend to be more productive than their domestic peers, due to a combination of structural and operational advantages. Their larger size often allows them to benefit from economies of scale, reducing per-unit costs and increasing efficiency. In addition, foreign firms typically have better access to high-quality inputs—both goods and services—through their global supply chains, which enhances the quality and competitiveness of their output. They also tend to adopt more advanced production processes and technologies, often developed or tested in other markets, which can boost productivity and innovation. Moreover, foreign firms often implement more effective management practices, shaped by international experience and corporate standards. These firms also tend to attract and invest in higher-skilled workers, offering better training and development opportunities. Together, these factors contribute to higher productivity and may create spillover effects to domestic firms. Nonetheless, a number of domestic firms also possess substantial resources and capabilities, enabling them to achieve productivity levels comparable to foreign enterprises.
Foreign firms can raise the productivity of domestic firms through technology and knowledge spillovers that can occur via supply chain linkages, partnerships, competition and imitation effects, or the mobility of labour between firms (OECD, 2023[11]). Vertical spillovers to upstream domestic suppliers are relatively common, as foreign firms may be actively involved in knowledge and technology transfer to improve their access to quality inputs (Javorcik, 2004[12]) (Blalock and Gertler, 2008[13]) (OECD, 2022[14]). The relative absorptive capacities of domestic firms are also important; positive spillovers are more likely to materialise when productivity, technology and skills gaps between foreign and domestic firms are smaller (Girma, Görg and Pisu, 2008[15]; World Bank, 2014[16]). Recent OECD analysis suggests that complementary policies supporting R&D are key to strengthening firms’ absorptive capacities. In Egypt, this could include measures such as tax credits or direct R&D subsidies, alongside efforts to create an enabling environment for innovation through improved intellectual property framework and digital and non-digital infrastructure (OECD, forthcoming[17]).
Over the period 2023-2024, significant shares of inward FDI into Egypt went to some of the most capital-intensive and, on average, most productive sectors of the economy, such as construction (49%), oil (14%) and some service sectors such as finance (7%) and ICT (3%) (Figure 1.4, Panel A). Similarly, about four-fifths of greenfield FDI received in the 2013-2023 period went to the renewable energy sector (45.7%), construction (17.5%) and coal, oil and gas (17.1%) (Figure 1.4, Panel B). While the construction sector received a substantial share of FDI in 2023-2024, the uptake was due to a few large-scale investment projects. By contrast, in 2022-2023, FDI inflows were more evenly distributed between oil (24%), manufacturing (27%), finance (13%) and other services (15%).
While these sectors contribute significantly to Egypt’s economy, their focus presents challenges in terms of maximising the potential benefits of international investment for domestic productivity. Capital-intensive industries, such as those mentioned, often have limited capacity to generate supply chain linkages with domestic manufacturing and services, which are key drivers of supplier productivity growth. By contrast, higher-technology sectors typically exhibit stronger upstream spillovers, which are more likely to foster innovation and productivity improvements in domestic firms (OECD, 2019[10]).
Note: Panel A: Egyptian FDI statistics are calculated on a directional basis. Accordingly, net FDI inflows refer to inward FDI flows (inflows minus outflows within the same relationship), and not the difference between inward and outward FDI as standalone aggregates. FDI inflows refer to foreign direct investment transactions recorded as entering Egypt (e.g. capital injections and reinvested earnings), while FDI outflows refer to transactions recorded as leaving Egypt (e.g. capital withdrawals and loans granted by Egyptian direct investment enterprises to their foreign direct investors).
Source: Panel A: Central Bank of Egypt (2024[18]); Panel B: fDi Markets (2024[19]).
Falling costs have helped to drive a rapid increase in greenfield FDI in renewable energies around the world, growing in importance from 1.2% to 27.5% of global greenfield FDI over 2003-2023. Egypt is at the forefront of this trend: it has become one of the leading global destinations for FDI in renewable energies (Figure 1.5). In total, Egypt is the recipient of 10.6% of global greenfield FDI in renewables, behind only the United Kingdom (13.9%). Much of Egypt’s FDI inflows originate in Asia-Pacific, Europe, and the United Arab Emirates (UAE). At the same time, significant new investments in renewable manufacturing in Egypt (which attracted 9.9% of global greenfield FDI in renewable manufacturing over 2019-2023) place it among a small number of countries with the potential to drive new patterns in global supply chains (OECD, forthcoming[20]).
FDI flows in renewables from source countries/regions to destination countries/regions, 2019-2023
Source: OECD (forthcoming[20])
Egypt attracts relatively high-productivity FDI, which has the potential to enhance aggregate output and competitiveness. However, these high productivity levels present certain challenges. In addition to the concentration of foreign investment in sectors with limited potential for generating positive spillovers, there exists a notable productivity gap between foreign and domestic firms, which may hinder the broader diffusion of productivity gains. On average, foreign affiliates in Egypt are almost 1.5 times more productive than domestic businesses (Figure 1.6). This productivity premium is substantial compared to peer economies and significantly exceeds the averages for the MENA region and the OECD.
The foreign firms driving these high productivity levels are likely to be leader firms that play a central role in driving productivity performance in certain industries in Egypt (OECD, forthcoming[17]). However, the significant productivity gaps are often viewed as an indicator of the limited absorptive capacity of domestic firms. This suggests that the ability of domestic firms to benefit from the presence of higher-productivity foreign firms is constrained. Moreover, despite the substantial productivity premiums in foreign firms, this advantage does not appear to translate into higher wages for workers in foreign firms, as wage levels in both domestic and foreign firms are relatively similar (see Chapter 2).
Note: Foreign ownership is defined in the World Bank Enterprise Surveys as 10% or more foreign ownership. Data for Egypt refer to 2020. Data for other countries refer to years between 2015 and 2023.
Source: World Bank Enterprise Surveys (2024[21])
There may thus be space to improve upon the capacities of Egyptian firms to absorb positive spillovers. These absorptive capacities are seen in how firms recognise and make use of new knowledge or tools. They are, in turn, determined by a combination of firm-level characteristics such as skills, resources, and technology use, as well as factors in their business environment, such as their access to finance, skills, and innovation assets (OECD, 2022[14]). Weaker competition and firm entry and exit than in similar emerging markets, difficulties in the business environment including limited access to lending from banks, and regulatory barriers all affect private sector capacities in Egypt (OECD, 2024[4]). Chapter 3 provides an in-depth analysis of the policy and institutional framework that supports private sector capacities, particularly of small and medium enterprises (SMEs).
Innovation creates new economic opportunities in addition to boosting productivity growth. Through the introduction of new products and processes that raise the value of output or increase the efficiency of production, innovation drives productivity improvements. Innovation is often the outcome of research and development (R&D) but may also take place by adopting or adapting technologies and solutions employed by other firms, especially among firms operating further from the technological frontier.
While there is growing attention to innovation in Egypt, further efforts are needed to develop a more resilient and knowledge-based economy. Egypt’s total expenditure on R&D has been increasing faster than GDP over the past two decades, with similar increases in innovation outcomes as patent applications of residents and non-residents have grown. However, at just 1.0% of GDP, R&D expenditure remains below the averages for the OECD (3.0%) and the Middle East and North Africa (1.6%) (World Bank, 2022[6]). Notably, the OECD average is pushed higher by a small number of innovation-intensive economies, including South Korea, Japan and the United States. Egypt’s relative level of GDP expenditure on R&D exceeds that of some OECD Member countries, including Chile, Latvia, and the Slovak Republic. Furthermore, although post-secondary graduates are somewhat less commonly found in Egypt than in a number of peer countries (see Chapter 2), many students are interested in technical fields. In 2023, close to one in five tertiary graduates had completed a science, technology, engineering, and mathematics (STEM) programme (UNESCO, 2024[22]). These skills could serve as a foundation for attracting more innovation-driven FDI, as evidenced by the experience of several OECD countries, including Ireland. Ireland, which boasts one of the highest shares of STEM graduates among OECD nations, has successfully attracted substantial FDI in high-value, innovation-driven sectors such as medical devices, pharmaceuticals, and computer software and IT services. This model demonstrates how a highly skilled workforce, particularly in STEM, can serve as a powerful catalyst for drawing foreign investment into sectors that drive technological advancements and productivity growth.
International investment often supports innovation and sectors receiving more FDI tend to see more rapid improvements in innovative practices and outcomes (OECD, 2022[23]; OECD, 2019[10]). Domestic firms may benefit through channels similar to those that allow for productivity spillovers, as well as partnerships between foreign and domestic firms on innovation or knowledge and technology flows (e.g. joint ventures, licensing agreements, research collaborations and R&D and technology alliances). Improvements in innovation may also be led by trade and participation in GVCs, which are in turn affected by foreign investment (OECD, 2022[14]). In Egypt, new policy approaches to investment attraction and support for domestic firms may be needed to realise the potential benefits of FDI. FDI inflows are often not focused on innovation-intensive activities and domestic firms have limited capacities to take advantage of the opportunities presented. For example, investment promotion efforts, including through the use of tax incentives, could explicitly target innovation-intensive activities. Or skills development programmes jointly developed with foreign firms could help better prepare local workers to work for high-tech foreign and domestic companies. Consultations with government stakeholders indicate that General Authority for Investment and Free Zones (GAFI) is implementing a methodology to prioritise sectors based on their alignment with Egypt’s long-term development objectives, in collaboration with the World Bank.
Little of the greenfield FDI inflows to Egypt is made in R&D and innovation activities, which accounts for just 0.2% of all inflows over 2013-2023, far below the levels of most comparison countries (Figure 1.7, Panel A). This outcome is likely driven by the sectoral concentration of FDI in low technology-intensive industries, such as oil and construction, which typically offer fewer opportunities for fostering innovation and technological advancement. Furthermore, the sectors where greenfield FDI accounts for a large share of R&D activities are generally not those that account for a large share of greenfield FDI inflows to Egypt (Figure 1.7, Panel B). In the most extreme example, all Egyptian R&D in semiconductors is funded by FDI, though this sector accounted for an extremely small share (0.01%) of total inflows into the country over 2013-2023. On the other hand, greenfield FDI financed almost none of the R&D (0.2%) in the chemicals sector, though investments in this sector accounted for a significant 5.8% of the total.
Source: fDi Markets (2024[19])
There is significant potential to foster firm-level innovation, particularly on the extensive margin. However, this potential remains largely untapped, as FDI inflows are predominantly directed away from innovation-intensive sectors. As a result, only a small proportion of foreign affiliates operating in Egypt engage in innovative activities. This trend mirrors the limited allocation of FDI towards R&D, which can be attributed to the concentration of foreign investment in low-technology-intensive industries. In addition to the low levels of aggregate R&D spending, such investments are concentrated and few firms are engaged in innovation in Egypt. Relatively few firms – whether domestic or foreign – have R&D expenditures; in 2023, just 5.5% of foreign businesses and 0.9% of domestic businesses reported R&D spending (Figure 1.8). In comparison, the OECD averages for these rates were 26.5% and 15.8%, respectively. Across MENA, these averages also exceeded Egypt’s by a considerable margin, at 12.1% of foreign-owned firms and 5.6% of domestic firms. The low levels of business R&D expenditure can be attributed to a combination of factors, including the characteristics of the investment sector and the policy framework for innovation. This encompasses the incentives available for R&D activities and collaborations, as well as the presence of strong local universities and research centres. Policies aimed at enhancing the contribution of FDI to innovation and fostering collaboration between foreign and local actors, such as local firms, universities, and research centres, are further explored in Chapter 3.
Note: Foreign ownership is defined in the World Bank Enterprise Surveys as 10% or more foreign ownership. Data for Egypt refer to 2020. Data for other countries refer to years between 2015 and 2023.
Source: World Bank Enterprise Surveys (2024[21]).
Low levels of spending on R&D lead to poor innovation outcomes for firms in Egypt. Just 1.5% of domestic firms and 4.9% of foreign firms reported introducing new or improved products or services, well below the averages of the OECD (39.1% and 47.0%) and MENA (9.4% and 13.4%) (Figure 1.9, Panel A). Similarly, a few firms had introduced new or improved processes regarding manufacturing or offering services, logistics and distribution, or supporting activities. These kinds of innovations were closer to the lower regional average; 0.4% of domestic firms and 5.0% of foreign firms in Egypt and 2.9% and 6.0% across MENA (Figure 1.9, Panel B). Egyptian process innovations were still far less common than among OECD countries, however, where 25.7% of domestic firms and 33.4% of foreign firms had introduced new processes. Attracting more innovation-intensive FDI and addressing the limitations in the capacities of many Egyptian firms implied by this lack of innovation could make a significant difference in promoting the growth of a more diversified and knowledge-based economy.
Note: Foreign ownership is defined in the World Bank Enterprise Surveys as 10% or more foreign ownership. Data for Egypt refer to 2020. Data for other countries refer to years between 2015 and 2023.
Source: World Bank Enterprise Surveys (2024[21]).
As in many other non-OECD countries, foreign firms are more energy efficient than domestic businesses in Egypt, though this difference is somewhat small (Figure 1.10, Panel B). This energy efficiency gap creates opportunities for local businesses, even if Egypt’s inflows of FDI are not concentrated in green technologies. Domestic firms can learn from and adopt the cleaner tools and practices used by international firms, particularly as reduced or reformed energy subsidies increase motivations for improved efficiency (OECD, 2022[14]). By improving energy efficiency, domestic companies could enhance their productivity, such as through reduced energy costs, which, in turn, may stimulate their growth and expansion in both local and international markets.
Energy efficiency (value added per cost of energy)
Source: World Bank Enterprise Surveys (2024[21]).
Global value chains (GVCs) break down stages of production across firms and countries to improve efficiency. While GVCs have been severely disrupted in recent years by the effects of the COVID-19 pandemic and Russia’s war of aggression against Ukraine, they continue to play a central role in global trade. Participation in GVCs can offer SMEs opportunities for enhancing productivity and innovation through knowledge and technology spillovers, developing the skills of managers and workers, and raising firm absorptive capacities. Firms active in GVCs – either through their direct involvement in trade or through linkages with the foreign affiliates of multinational enterprises present in their county – may also benefit from increased resilience (OECD, 2023[24]).
Egypt participates less in GVCs than other countries in the region. It has a lower share of backward participation, i.e. measured as the share of foreign value added to gross exports, than several peers. Moreover, this share has declined slightly in the past two decades (Figure 1.11, Panel A). Large countries such as Egypt tend to have low levels of backward participation because they tend to have a larger domestic market for intermediate inputs. However, Egypt's low backward participation could also be driven by high trade costs or restrictions. While Egypt has significantly reduced both non-regulatory and regulatory restrictions on FDI in manufacturing sectors and in several services sectors such as financial services, some barriers on FDI persist in backbone services sectors. According to the OECD FDI Regulatory Restrictiveness Index (FDIRRI), Egypt continues to record limited restrictions in the distribution sector, reflecting statutory limitations in specific sub-activities, notably commercial agency and importer registration, while wholesale and retail trade activities are open to foreign investment (OECD, 2024[25]) (see Chapter 3).
Moreover, Egypt's low backward participation in GVCs is also explained by high FDI flows in sectors with less segmented supply chains, such as real estate and coal, oil and gas. Egypt’s level of forward participation in GVCs, i.e. the share of domestic value added to foreign final demand, is also low relative to that of regional peers and has declined even more markedly in the past twenty years (Figure 1.11, Panel B). The presence of high barriers to trade and FDI are factors behind the low level of forward participation.
Note: Backward participation in GVCs refers to foreign value added in gross exports and forward participation in GVCs refers to domestic value added in foreign final demand.
Source: OECD TiVA indicators (2023[26])
Recent OECD analysis indicates that Egypt's export performance, particularly within the manufacturing sector, has been lacklustre. Moreover, Egypt shows an untapped manufacturing export potential, as exports represent a lower share of manufacturing gross output compared to other MENA and OECD countries (OECD, forthcoming[17]). FDI has the potential to help drive increased exporting by Egyptian companies, particularly SMEs and startups, and to indirectly engage these firms in international trade through supply chain linkages between foreign and domestic firms. Where productivity or technological spillovers are realised, local businesses that become more competitive may seek growth opportunities in new markets. Increased exporting by foreign firms can also provide domestic firms with access to global distribution networks and other improvements for trade. At the same time, foreign investment often provides opportunities for SMEs to engage in indirect trade by supplying international entrants producing for export. Multinational firms may build linkages with suppliers established as subsidiaries, through market relationships with independent suppliers, or through contractual partnerships such as joint ventures and licensing agreements (OECD, 2022[14]). This indirect exporting can be part of an incremental process whereby SMEs learn about trade and gradually expand their direct exporting as well (Johanson and Vahlne, 1977[27]).
Linkages between foreign affiliates and domestic firms in Egypt are fairly strong. As is commonly the case, domestic firms in Egypt are more reliant on domestically-sourced inputs than are foreign affiliates; 76.8% of inputs used by domestic firms are sourced domestically, compared with 63.6% of inputs used by foreign firms (Figure 1.12). The scale of domestic sourcing among foreign firms is also relatively high, though. While domestic sourcing accounts for close to two-thirds of the total by these businesses in Egypt, the average shares for MENA (49.1%) and the OECD (45.4%) are close to half.
Note: Foreign ownership is defined in the World Bank Enterprise Surveys as 10% or more foreign ownership. Data for Egypt refer to 2020. Data for other countries refer to years between 2015 and 2023.
Source: World Bank Enterprise Surveys (2024[21])
Despite these linkages and the export orientation of FDI, the sectoral composition of FDI into Egypt is not very supportive of indirect exporting by SMEs or the generation of beneficial spillovers through market connections. Exporting by foreign firms is relatively more important (averaging 7.6% of sales) than it is to domestic firms (averaging 2.7% of total sales). The former are also more than twice as likely to be exporters (World Bank, 2024[21]). However, the nature of the relationships in value chains tends to be dictated by the multinational lead firm (Gereffi, Humphrey and Sturgeon, 2005[28]). While lead firms in knowledge-intensive sectors often transfer knowledge to first-tier suppliers and may create spillovers for other firms, FDI in resource-based sectors tends to produce limited spillovers through supply chain linkages because of the capital intensity and highly specialised nature of these activities (UNCTAD, 2011[29]; Farole and Winkler, 2013[30]).
This unfavourable mix of investment and low levels of innovation more generally leads to few firms in Egypt – regardless of ownership – making use of foreign technologies. Just 3.6% of domestic firms and 10.1% of foreign firms use technology licenses from a foreign company (Figure 1.13). Even foreign affiliates in Egypt, which are more likely to make use of foreign technology, are less likely to do so than the average across domestic firms in the OECD (15.3%) or MENA (23.4%). While technology licensing is not the only means of accessing international knowledge and technology flows that are available to businesses, the scarcity of Egyptian firms engaging in this corroborates other evidence of the presence of barriers to productivity and innovation spillovers from FDI more generally.
More broadly, business partnerships between foreign and domestic firms—beyond technology licensing—can serve as an important conduit for the transfer of technology and knowledge. These collaborations manifest in diverse forms, including strategic alliances, joint ventures, contractual arrangements, franchising, research partnerships, and even informal co-operative frameworks. Recent OECD analysis underscores the pivotal role of such partnerships in Egypt, where foreign affiliate partnerships account for 21% of total business collaborations—substantially exceeding the OECD average of 12% and outperforming regional peers such as Jordan (13%) and Morocco (12%) (OECD, forthcoming[20]). This elevated share highlights the potential of these partnerships to drive innovation diffusion and bolster the capabilities and competitiveness of domestic firms. Strengthening the enabling environment for such collaborations will be crucial for maximising their impact on national innovation systems and long-term economic development.
Note: Foreign ownership is defined in the World Bank Enterprise Surveys as 10% or more foreign ownership. Data for Egypt refer to 2020. Data for the other countries range from 2016 to 2023.
Source: World Bank Enterprise Surveys (2024[21])
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