This chapter discusses recent trends in the composition and origin of foreign direct investment inflows into Uzbekistan, with a particular focus on the evolution of investment since the beginning of the country’s economic reforms. It also explores how FDI affects productivity and trade, innovation, employment and skills, and gender – key topics affecting national development – through both direct and indirect impacts. Uzbekistan’s performance is assessed against a group of comparator economies and key barriers to better leveraging investment are identified.
Roadmap for Sustainable Investment Policy Reforms in Uzbekistan
Abstract
Recent reforms to investment policy and economic policy more broadly have significantly improved the business environment in Uzbekistan, driving new interest from investors and creating opportunities for private sector development in the country. The potential of FDI is acknowledged in national development planning for driving growth in income and job creation, developing new sectors of the economy, and enhancing innovation capacities is acknowledged in the National Development Strategy 2022-2026 and the Uzbekistan – 2030 Strategy. However, foreign direct investment could contribute more to the Uzbek economy. The public sector still plays a large role in the economy and is responsible for driving much of new investment. More diversification in investment and additional efforts to leverage these inflows to support development goals are needed.
Beginning in 2017, liberalising reforms and the privatisation of a number of state-owned enterprises have opened up Uzbekistan to increased investment. FDI inflows have grown as a result, despite the challenges posed by the COVID-19 pandemic and impacts of the Russian war of aggression in Ukraine. However, stocks of foreign investment remain small relative to those in comparator countries.
Foreign direct investment is not very diversified by sector or country of origin. Mostly greenfield FDI, inflows have been concentrated in the manufacturing and energy and extractive sectors, taking advantage of Uzbekistan’s natural resource wealth. Banking and some other services sectors have seen the beginning of some interest in recent years, though this remains limited. Chinese and Russian investors account for the largest shares of investment, particularly due to large and capital-intensive energy and infrastructure projects. The potential remains for greater involvement of OECD member countries and other advanced economies in Uzbekistan. FDI is also fairly concentrated by region as a result of its sectoral concentration, though special economic zones (SEZs) are increasingly influencing the geographic distribution of investment.
Foreign businesses make significant direct contributions to Uzbek productivity, innovation, employment and skills, and gender equality. While their activities have the potential to create positive spillovers in the rest of the economy, firm capacities and labour market inefficiencies in Uzbekistan may prevent the realisation of these indirect benefits of foreign investment. While supply chain linkages are fairly strong – foreign firms, like domestic businesses, source most of their inputs within the country – the limited absorption capacities of many SMEs and barriers to labour mobility hinder spillovers through other channels.
The activities of foreign multinational enterprises in Uzbekistan provide a much-needed boost to productivity in the country. On average, the labour productivity of foreign businesses is 63.8% higher than that of domestically-owned firms, though this is at least partly the result of the concentration of foreign investment in sector with above-average productivity. Foreign-owned businesses are also much more export-oriented, supporting growing international trade in Uzbekistan.
While Uzbekistan has a relatively strong foundation for innovation, there is little commercialisation and involvement of the private sector. Foreign-owned businesses introduce new knowledge and technologies; they are more likely to make use of ICT and international licensed technologies. While domestic firms are slightly more likely to introduce process innovations, they were much less likely to introduce new products or services or to invest in research and development. Spillovers related to technology and innovation driven by business linkages or imitation could benefit domestic SMEs with the capacities to make use of these new practices.
In addition to its innovation potential, Uzbekistan has a relatively young and well-education population that would benefit from more diversified investment. FDI is creating jobs, though the number of jobs created relative to the amount of investment is moderate as a result of high levels of investment in capital-intensive activities. Most jobs are created in consumer products, textiles, and automotive OEM. Foreign-owned firms are not more likely to hire skilled workers, but more of these businesses provide training to develop workers’ skills. In line with their productivity premium, foreign businesses also pay higher wages. Foreign firms also support gender equality, complementing the state’s policy direction, such as the adoption of the National Gender Equality Strategy 2030. Despite being most found in male-dominated sectors, these firms are more likely to employ women, and receive support from national programmes aimed at increasing female participation in the labour market.
Investment attraction has been prioritised in recent planning and reforms. Increasing FDI is a priority identified in the national development plan. The Development Strategy of the New Uzbekistan for 2022-26, which targets a significant increase in inflows to USD 70 billion over five years. The Integrated National Financing Strategy for the Republic of Uzbekistan adopted in 2024 aims to provide an integrated approach to channelling both public and private investment flows to foster national development, aligning existing policies and tools (UNDP, 2023[1]). Clarity for domestic and international investors was improved with the Law on Investments and Investment Activity in 2019, institutional reforms have established a new Ministry of Investment, Industry and Trade and restructured the Investment Promotion Agency, and regulatory information was made more accessible and transparent (World Bank, 2022[2]).
Investment generally has been a major contributor to Uzbekistan’s growth in recent years, though much of this has been public rather than private sector investment. Gross fixed capital formation (GFCF) accounted for 32.2% of GDP in 2023, higher than in 16 peer economies with available data (Figure 2.1). In 2023, the greatest shares of investment in fixed assets were made in other machinery and equipment (38.6% of the total), non-residential buildings (23.0%), and other facilities (13.5%).1
Source: World Bank.
The change in GFCF as a share of GDP over the past ten years (10.4 percentage points) also exceeds that in the comparison group of countries, despite a small decline since the beginning of the COVID-19 pandemic. The impact of reforms is visible in this historical trend; most growth in the past decade occurred between 2017 and 2019, when GFCF increased from 23.0% to 36.8% of GDP. Public investment has primarily been responsible for this growth (IMF, 2024[3]). Despite improvements in the business environment, private sector investment has been hindered by barriers in access to finance. In particular, the underdevelopment of the banking sector and underdevelopment of domestic capital markets, which affect smaller and larger firms, respectively (OECD, 2023[4]).
Historically, FDI to Uzbekistan has been lower than in neighbouring Central Asian economies, partly as a result of regulatory restrictions on investment inflows. Eased restrictions in the recent past have contributed to improved investment attraction (OECD, 2023[4]). Domestic and foreign investors’ rights were clarified in the Law on Investments and Investment Activity in 2019. These measures were supported by institutional reforms including the establishment of the Ministry of Investment, Industry, and Trade (MIIT) through the merger of the State Investments Committee and Ministry of Foreign Trade in 2022.
FDI is low but growing, supported in part by recent privatisation efforts. The stock of FDI in Uzbekistan in 2023 was estimated at USD 14.9 billion. Equivalent to 14.6% of GDP, this share is relatively low in comparison with similar economies in the region and beyond (Figure 2.2). Investment inflows have been growing relatively quickly, however. Inflows have increased in recent years, totalling USD 2.2 billion in 2023 and averaging 2.8% of GDP over 2019-23 (Figure 2.3). As such, FDI inflows account for a relatively small share of GFCF. While year-to-year variations are partly driven by large-scale and capital-intensive energy and construction projects, stronger inflows in most years since 2017 are at least in part a result of reforms to investment regulation, increased efforts in investment promotion, and improvements to the business environment generally. While the COVID-19 pandemic and Russian war of aggression in Ukraine and associated sanctions have affected investors – Russia is among the most important sources of FDI – Uzbekistan has weathered these threats fairly well and continues to attract new investment.
Source: OECD calculations, using IMF Statistics.
Source: OECD based on IMF Statistics.
The total value of greenfield projects far outweighs that of mergers and acquisitions (M&A) among investment inflows (UNCTAD, 2024[5]). Historically, there have been fewer mergers and acquisitions in Uzbekistan because of its large state-owned sector. Limited privatisation has precluded some of these opportunities, which drove much of the FDI inflows into other Central Asian and Eastern European countries during their economic transitions (Carstensen and Toubal, 2004[6]). The value of M&A inflows is increasing with renewed efforts at SOE privatisation, however. Recent examples of this include Singapore’s Indorama Corporation purchasing most of the government’s stake in mineral fertiliser producer Ferganaazot and the sale of Ipoteka Bank to Hungary’s OTP Bank in 2023.
FDI inflows have been concentrated in the manufacturing and energy and extractive sectors, which together account for more than two thirds of investment in most years. Over 2019-23, about three quarters of total FDI inflows were directed to the manufacturing (41.8%); electricity, gas, steam, and air conditioning supply (20.6%); and mining and quarrying (12.5%) sectors (Figure 2.4). Motivated primarily by the country’s natural resource reserves, investment in extractive sectors far outweighs their contributions to gross value added. Indeed, some of the largest gas producers are foreign-owned, including Lukoil (Russia), Uz-Kor Gas Chemical (Korea), and Epsilon Development Company (USA) (MIIT, 2022). At 20.6% of gross value added, manufacturing is one of the largest sectors in the country, though smaller than agriculture, forestry, and fisheries (24.3% of gross value added). Foreign investment in manufacturing has included projects in light industry and downstream activities related to Uzbekistan’s extractive sectors, including the production of fertilisers and petrochemicals. New manufacturing subsectors include electric vehicle production, through a partnership between China’s BYD and the state-owned UzAuto Motors, which opened a factory in 2023.
Source: Uzbekistan’s Ministry of Investment, Industry, and Trade.
Increasing foreign direct investment in other areas of the economy has the potential to support economic diversification. Opportunities in other sectors have been recognised and promoted by the government. MIIT’s Investment Guide, for example, highlights the potential for investors in agriculture, oil and gas, energy, manufacturing (food processing; textile, leather, and silk; chemicals; pharmaceuticals; and construction materials), ICT, finance, education, and healthcare (MIIT, 2022[7]). Investment in financial and other services may be attractive. While services generally are not a major focus of foreign investors, non-construction services accounted for 12.9% of FDI over 2019-23. Among other areas, the underdeveloped financial sector has led to some interest from international investors in banking. Rising incomes and a large and young population also make Uzbekistan an attractive destination for market-seeking foreign direct investment, an underexploited dimension of FDI inflows into the country (OECD, 2023[4]). Based on cost competitiveness, available skills, and proven performance and future potential, renewable energy, electrical equipment, and packaging materials have also been identified as other promising and high-potential sectors in addition to banking (World Bank, 2022[2]). Attracting investment in new sectors will require reforms to ensure access to domestic and imported inputs, enhance regulatory transparency and predictability, and improve access to export markets.
Diversifying the sectors attracting investment and the countries of origin of FDI are likely to be complementary goals. China and Russia are the main sources of international investment and borrowing, accounting for at least one-third of annual FDI and loans in fixed capital between 2007 and 2023 (). Large energy and infrastructure projects undertaken by Chinese and Russian companies have contributed significantly to the overall importance of these countries of origin in total FDI inflows. China has been the most important source of FDI inflows in most years since 2009, though its share has declined since then, from 46.0% to 25.6% in 2023 as inflows are becoming more diverse in terms of county of origin. China is a major trade partner, including through natural gas exports via the Central Asia-China gas pipeline on which the China National Petroleum Corporation (CNPC) and Uzbekneftegaz reached an agreement in 2007 on the construction and operation of the section is Uzbekistan. China is also a partner in investment through the China-Central Asia-West Asia Economic Corridor of its One Belt, One Road initiative, which the Uzbek government has described as being aligned with national development priorities (Development Strategy Center, 2019[8]).
Source: Uzbekistan’s Ministry of Investment, Industry, and Trade.
The share of investment from advanced economies has declined in recent decades, potentially hindering new sources of investment beyond the sectors that have traditionally attracted most FDI. Between 2000 and 2004, OECD member countries accounted for a total of 77.3% of FDI and loans in fixed capital. This share had approximately halved by 2010 and has remained relatively low since, accounting for 30.4% of the total in 2019-23, though Korea, Switzerland, and Türkiye remain relatively important. A number of European firms, including Électricité de France (EDF) and Siemens, are active in renewable energy and gas, as are larger Japanese firms.
The concentration of FDI by sector also contributes to its geographic concentration. Investments are generally concentrated in the capital and economic centre of the country and its surrounding areas (the Tashkent City and Tashkent Region), as well as in the oil- and gas-rich Surkhandarya Region. These three regions together accounted for 37.7% of foreign direct investments in fixed capital over 2019-23 (Figure 2.6). Relative to regional shares of GDP, FDI is low in Tashkent City, however, and high in Surkhandarya and Syrdarya. Overall, the regional concentration of FDI is declining. Between 2016 and 2023, the share of total inflows of FDI in fixed capital into the three most-targeted regions more than halved, falling from 84.3% to 37.1%. Improvements to the investment climate and diversification in the types of investment support geographical diversification as well, helping to address regional development gaps and to create jobs in lagging areas of the country. Between 2017 and 2019, the number of territorial subdivisions that attracted FDI inflows grew by 34.9% (UZ Daily, 2020[9]).
Note: FDI values are the total of 2019-23 and GDP values are from 2023.
Source: Uzbekistan’s Ministry of Investment, Industry, and Trade.
The regional distribution of investment is increasingly influenced by the location of special economic zones, which form an important element in Uzbekistan’s efforts to attract and leverage investment to foster growth and development. The Law on Special Economic Zones adopted in 2020 allows for the creation of free economic zones focused on export-oriented manufacturing; special scientific and technological zones encouraging the development of innovation clusters; tourist and recreational zones fostering investment in hotels and other tourist facilities and infrastructure; free trade zones located at border points, airports, and railway junctions; and special industrial zones with particular regimes of management, economic, and financial activities. Special zones have been used to develop clusters and foster the growth of new sectors. For example, the IT Park in Tashkent offers a reduced corporate income tax rate and other financial incentives to foster investment by technology firms and the growth of startups. SEZs are seen as a tool for promoting regional development by attracting investment to new areas of the country, particularly by decentralising investment outside of extractive activities that is typically focused on the capital (Ahn, Juraev and Gu, 2024[10]). While some progress has been made in this regard, investment in SEZs remains concentrated in a small number of sites.
These sites have become important destinations for investment, attracting UZS 6.3 trillion in capital investment in 2023. While breakdowns on the composition of investment in SEZs by investor origin are not available, the design of incentives for these zones means that FDI likely accounts for a large share of this total. Regardless, investment in SEZs is highly concentrated. Two SEZs – Navoiy, in the north of the country, and Angren, near Tashkent – together attracted more than half of investment over 2019-23 (Figure 2.7). Most investment (86.4%) in SEZs in this period was in manufacturing, followed by arts, entertainment, and recreation (4.7%) and mining and quarrying (4.7%). Most of this investment in 2023 came from Germany (49.5%) and was directed to Navoiy and Sridaryo, which are heavily focused on manufacturing. Other important sources of investment in special zones came from the Russian Federation (20.5%) and China (15.7%).
Source: Uzbekistan’s Ministry of Investment, Industry, and Trade.
Foreign direct investment inflows have broad impacts on development (Box 2.1). Foreign-owned firms in Uzbekistan are more productive and more export-oriented, are more likely to spend on research and development, boost demand for skilled workers and invest in skill development, and create jobs for women. In addition to these direct contributions, the operations of foreign firms in host countries can also foster spillovers that benefit domestic firms. These spillovers tend to occur through value chain linkages between foreign businesses and their suppliers and customers, strategic partnerships involving knowledge and capacity transfer, the movement of workers that have acquired skills in foreign firms into other businesses or entrepreneurial projects, pressure from increased competition, and the imitation of foreign firms’ products or practices (OECD, 2023[11]).
The OECD FDI Qualities Indicators describe how FDI relates to specific aspects of sustainable development in host countries. An in-depth assessment of all 17 SDGs, and their corresponding targets, was undertaken to identify the full spectrum of FDI Qualities – that is, areas where FDI may contribute to achieving the SDGs. This assessment further considers the extent to which FDI’s potential for advancing the SDGs is reflected in the OECD Policy Framework of Investment (PFI), including related frameworks and guidelines, such as the OECD Guidelines on Multinational Enterprises and the OECD Policy Guidance for Investment in Clean Energy Infrastructure.
The FDI Qualities Indicators currently focus on five clusters; namely, productivity and innovation, employment and job quality, skills, gender equality, and carbon footprint. These clusters have been selected in consultation with various stakeholders of the FDI Qualities Policy Network, which includes policymakers, the private sector, the civil society, international organisations and the academia. For each of the five clusters, a number of different outcomes are identified and used to produce indicators that relate them to FDI or activity of foreign multinationals, allowing for comparisons both within and across clusters so as to identify potential sustainability trade-offs.
Taking into account the country-specific context, policymakers can use the FDI Qualities Indicators to assess how FDI supports national policy objectives, where challenges lie, and in what areas policy action is needed. Indicators also allow cross-country comparisons and benchmarking against regional peers or income groups, which, taking into account the country context, can help to identify good practices and make evidence-based policy decisions.
Source: OECD (2019), FDI Qualities Indicators: Measuring the sustainable development impacts of investment, OECD Publishing, Paris, http://www.oecd.org/investment/fdi-qualities-indicators.htm.
While foreign firms sourcing a considerable share of their inputs domestically creates the potential for productivity spillovers through Uzbek supply chains, the narrow focus of international investors and limited absorption capacities may hinder the impact of these linkages. Barriers to labour mobility also undermine this channel for the diffusion of spillovers. Although imitation of successful competitors is another possible channel by which positive spillovers are realised, the concentration of FDI in a few capital-intensive sectors means that fewer domestic SMEs are influenced in this way.
Upstream suppliers are often most likely to be the beneficiaries of productivity spillovers from foreign firms, as these businesses engage in knowledge transfers to raise the quality of inputs received (OECD, 2019[12]). The strong focus of Uzbekistan’s investors on the extractive industry and the limited development of downstream activities in the county weakens the potential for creating strong supply chain linkages through FDI (World Bank, 2022[2]). Nevertheless, both foreign and domestic firms source most of their inputs domestically, though the former have more internationally-oriented supply chains. Foreign-owned businesses source an average of 66.3% of inputs domestically, while domestically-owned businesses average 84.3% domestic input use (Figure 2.8). Despite this, many firms, regardless of ownership, also make use of imported inputs; 56.3% of foreign firms and 43.4% of domestic firms source at least some material inputs and/or supplies from international suppliers. Furthermore, capital and intermediate goods are important components of total imports. In 2022, intermediate goods accounted for a relatively large 30.8% of all imported products. This suggests that additional opportunities remain for strengthening domestic firms’ roles in Uzbekistan’s supply chains.
Note: Foreign firms are defined as those with at least ten percent foreign ownership.
Source: World Bank Enterprise Surveys.
Uzbekistan’s domestic businesses, including its many SMEs, could benefit considerably from knowledge and technology spillovers from foreign firms. A number of firms have demonstrated their capacities to innovate and adopt new practices. Some SMEs – particularly young and knowledge-intensive firms, though also more established businesses in low-tech sectors – are also capable of innovation and rapid growth, making large impacts on growth (OECD, 2021[13]). Larger firms are often more innovative and capable of benefitting from FDI-related productivity spillovers (OECD, 2019[12]). The capacities of SMEs therefore also play an important role in determining the extent to which knowledge, innovation, and productivity spillovers from foreign firms active in Uzbekistan benefit domestic businesses.
However, many of Uzbekistan’s smaller firms are significantly less productive, limiting their absorption capacities. Average SME productivity is below that of the economy as a whole and these firms are highly heterogeneous. According to the results of recent quarterly surveys of Uzbek SMEs, labour productivity – as measured by net revenue per employee – varies considerably across firms (Figure 2.9). Median net revenue per employee is lowest in micro firms but similar in small and medium-sized businesses. In most sectors, however, median labour productivity increases with firm size category. The business environment may pose an additional challenge. Efficient firms and competitive pressures are needed to foster spillovers to domestic SMEs. As such, the large informal and SOE sectors in Uzbekistan pose barriers to realising these opportunities created by FDI. Competition policy therefore plays an important role in shaping productivity spillovers and their fair distribution among firms (OECD, 2023[11]).
UZS million
Note: Primary sector is defined as the sector in which the firm recorded the greatest revenues.
Source: Authors’ calculations, using data from Uzbekistan Statistics Agency.
2.3.1. Productivity and trade
Labour productivity in Uzbekistan remains quite low in comparison with peer economies, though it is growing fairly rapidly. In comparison with the OECD member country average and 18 similar economies, Uzbekistan had the sixth lowest GDP per person employed in 2023, though its increase since 2000 was the sixth-highest in this group (Figure 2.10). GDP per person employed grew quickly over 2008-21, when it averaged 5.1% growth per year, behind only Turkmenistan (6.4% average growth over the same period). While Uzbekistan managed the global COVID-19 pandemic relatively well, its close ties with Russia began to affect the economy as a result of Russia’s war of aggression against Ukraine. The war and sanctions affected remittances, trade, and financing from Russia (IMF, 2022[14]).
Constant 2021 USD PPP
Source: World Bank
Growth in total factor productivity (TFP), which measures changes in output not attributed to the accumulation of labour or capital and thus captures the effects of using new technologies or management practices, has also been moderately strong. The logic of income convergence suggests that this is not surprising (Ataev, 2024[15]). Uzbekistan had the sixth highest average growth rate in total factor productivity, when compared with 17 peer economies (Figure 2.11). Its TFP growth was particularly strong over 2003-08, averaging 3.3% per year. Compared with changes in labour productivity, TFP growth has been relatively weaker as a result of increases in capital per worker.
2000 value = 100
Source: Authors’ calculations, using data from The Conference Board.
Low productivity in Uzbekistan is partly a structural issue: employment is concentrated in lower-productivity areas of the economy, with little recent change. Over 2011-23, annual growth in value added was driven mostly by manufacturing; agriculture, forestry, and fisheries; and construction (Figure 2.12). The scale of their contributions was primarily a result of their importance in gross value added, though the manufacturing sector did also see relatively strong growth. This means that the potential to drive further improvements in productivity though structural change exists. The highest-productivity sectors in 2023 were real estate (1089% of the national average), finance and insurance (75% of the national average), and mining and quarrying (734% of the national average); finance and insurance, and mining and quarrying were also the top two sectors by productivity growth over 2010-23. But most of the largest sectors by employment – including agriculture, forestry, and fisheries; wholesale and retail trade and motor vehicle repair; and construction – have below-average productivity levels and weak rates of growth.
Source: OECD calculation, using data from MIIT.
The shift in employment away from agriculture and other relatively large lower-productivity sectors has been stalled for some time. Structural transformation was most rapid in the Uzbekistan following independence. Employment in agriculture fell from 31.5% of the total in 1991 to 17.2% in 2010. Limited progress on reform since then and underinvestment in sectors with greater potential to drive growth and job creation mean that this share has since declined more gradually and remained at a relatively high 13.9% in 2023 (World Bank, n.d.[16]).
Recent productivity growth has not been driven by shifts in employment to higher-productivity sectors. Annual productivity growth between 2011 and 2023 averaged 4.9% and has remained consistent, with a range of 4.7 percentage points. Rather than arising through structural transformation and the movement of labour into higher-productivity sectors, almost all this productivity growth has occurred through within-sector effects (Figure 2.13). The greatest shift in employment came from the decline of the agriculture, forestry, and fisheries sector, where the share of total employment declined by 3 percentage points over 2010-23.
Note: The shift-share decomposition was calculated using data on gross value added and employment in 19 industries.
Source: Authors’ calculation, using data from MIIT and Uzbekistan Statistics Agency.
Aggregate productivity depends on productivity within firms, the effects of resource reallocation among existing firms, and the results of business creation and destruction (OECD/APO, 2022[17]). Foreign firms are likely to be more productive and innovative than domestic businesses in host economies because of their access to better technology, managerial practices, and resources for capital investment which support productivity and innovation. As multinational enterprises, they also are typically larger and more capital-intensive than many of their peers (OECD, 2019[12]). The labour productivity premium of foreign firms in Uzbekistan is large; on average these firms are 63.8% more productive (Figure 2.14).
Note: Labour productivity in foreign firms is higher if index > 0. Foreign firms are defined as those with at least ten percent foreign ownership.
Source: World Bank Enterprise Surveys.
The composition of FDI contributes to this premium. FDI inflows are concentrated sectors with above-average productivity, though not in the areas of the economy with the highest or fastest-growing productivity. The three sectors that attracted the most FDI inflows over 2019-23 – manufacturing; electricity, gas, steam and air conditioning supply; and mining and quarrying – all have above-average levels of value added per worker (Figure 2.15). Nor have sectors with rapidly improving productivity, such as financial and insurance activities, received high levels of attention from international investors. In fact, labour productivity in mining and quarrying declined relative to other sectors over 2019-23. Foreign direct investment nevertheless directly supports aggregate productivity growth through the expansion of higher-productivity sectors, though it contributes less to broad-based growth in other areas of the economy.
Note: MIIT data on FDI inflows by sector is matched to value added per worker by sector, using Uzbekistan Statistics Agency data. As such, some discrepancies in sector definitions are possible. FDI inflow shares exclude investment in residential construction.
Source: Authors’ calculations, using MIIT and Uzbekistan Statistics Agency data.
FDI also directly supports export growth, as many foreign firms active in Uzbekistan are motivated by access to resources and are concentrated in export-oriented sectors. The higher average productivity of multinational enterprises and their international connections also means that these businesses are more likely to export and to rely to a greater extent on foreign markets (OECD, 2023[11]). While an average of 11.1% of foreign-owned businesses’ sales were direct exports, these only accounted for 2.1% of sales by domestically-owned businesses in Uzbekistan in 2019 (Figure 2.16). Foreign firms’ presence can indirectly boost trade through supply chain relationships, though indirect exporting appears to be limited in Uzbekistan. Including indirect exporting in addition to direct exports does not significantly change the export intensity of sales by either foreign (13.1%) or domestic (2.9%) firms.
Note: Foreign firms are defined as those with at least ten percent foreign ownership.
Source: World Bank Enterprise Surveys.
2.3.2. Innovation
Innovation is central to economic diversification and productivity growth. R&D intensity also plays an important role in shaping how economies participate in international trade and global value chains (Belderbos et al., 2016[18]). Recognising the importance of developing these capacities, Uzbekistan is in the process of building a national innovation system to support technological upgrading and innovation (UNESCO, 2020[19]). Institutional co-ordination on innovation policy has been bolstered through the establishment of the Ministry of Innovative Development in 2017 and the Republican Council on Science and Technology – an advisory body on science, technology, and higher education – in 2019. The policy framework is being developed under the National Science, Technology and Innovation Policy for Uzbekistan (2022-2030) and the 2020 Law on Innovative Activity, which brings together relevant topics including the regulation of innovation, identification of priority areas, and creation of an enabling environment and systems of state support, among others. These reforms and significant public investments in research and technological capacities appear be improving the innovation environment in Uzbekistan (Abduvaliev, 2024[20]).
Uzbekistan has some established strengths in innovation, though private sector involvement and commercialisation remain limited. At 547.5 full time equivalent researchers per million inhabitants in 2023, Uzbekistan has a higher concentration of researchers than in lower middle-income countries generally, among which the average is just 322.5 per million. Incidentally, about half of these researchers are women, despite gender imbalances in many other areas of the Uzbek economy. R&D expenditure as a percent of GDP is relatively low, however, at just 0.1% of GDP in 2021 (Figure 2.17). As in many other post-Soviet economies, most R&D is carried out by the public sector (Rakhmatova, 2023[21]). According to WIPO’s Global Innovation Index, innovation outputs are low for the level of inputs such as Uzbekistan’s relatively strong institutions (WIPO, n.d.[22]). Lack of resources and personnel have been challenges. Similarly, the weak collaboration between academia and the private sector, limited venture capital, and insufficient entrepreneurship have hindered the country’s science, technology, and innovation parks from being more effective as drivers of innovative clusters (UNCTAD, 2024[23]).
Source: World Bank.
FDI can support countries such as Uzbekistan in building their knowledge- and innovation-based economies. Innovative foreign firms affect innovation by domestic businesses through competition and imitation effects or knowledge transfers (OECD, 2019[12]). Foreign businesses in Uzbekistan are significantly more technology-intensive, whether that refers to ICT use or licensed technologies. About half as many Uzbek firms as foreign firms use a website to manage their relationships with customers or suppliers (24.5% of domestic firms and 55.2% of foreign firms do so). The gap in the use of technology licensed from a foreign company is greater, which is done by 27.1% of foreign firms and 11.6% of Uzbek firms.
Compared with foreign-owned firms in Uzbekistan, domestically-owned firms were more likely to innovate their operations but less likely to introduce new products or services and, relatedly, were much less likely to invest in research and development. Process innovations such as new manufacturing methods, ways of providing services, logistics, or supporting activities were introduced by 13.4% of foreign-owned firms but 14.7% of domestically-owned firms, suggesting that cutting costs and improving efficiency are higher priorities among domestic businesses (Palikot, 2023[24]) (Figure 2.18). New products or services, however, were introduced by 37.5% of foreign-owned firms and only 22.8% of domestic firms. While 12.2% of surveyed foreign firms had R&D expenditures, only 4.3% of domestic firms did.
Note: Foreign firms are defined as those with at least ten percent foreign ownership.
Source: World Bank Enterprise Surveys.
Domestic absorptive capacities to benefit from investment by foreign firms that are more innovative and that make use of better technology are critical. Spillovers through technology transfers benefitting domestic businesses are more effective when domestic firms already have a strong basis of knowledge and innovation capacities. As such, large technology gaps between foreign and domestic firms can pose barriers to the latter’s adoption of new tools and practices (OECD, 2019[12]). The large productivity premium of foreign firms in Uzbekistan suggests that this gap may limit spillovers from being realised, though the smaller innovation and technology use gaps suggest that some firms may be better placed to benefit from FDI inflows in this way.
2.3.3. Employment and skills
Uzbekistan has a relatively high-skilled population that could be better leveraged to help transform the economy. Almost all the population 25 years and older (96.8%) has completed at least upper secondary education. The gross graduation ratio from first degree tertiary education programmes was 19.5 in 2023, similar to the country income group average (19.6). A fairly large share of these graduates came from science, technology, engineering, and mathematics (STEM) programmes, which can play a particularly important role in supporting technological upgrading and innovation. In 2023, 36.8% of tertiary graduates came from STEM programmes, exceeding the rate in many peer economies (Figure 2.19).
Source: UNESCO.
While the youth unemployment rate is about double the national average, the labour market does a reasonably good job of integrating graduates. The unemployment rate among those with advanced education (1.5%) was lower than the national average (5.3%) in 2020, the most recent year with available data. By contrast, the unemployment rate of this group (13.2% in 2022) significantly exceeded that of the total population (4.8% in 2022) in lower middle-income countries. Notably, both domestic and foreign firms were significantly less likely that businesses elsewhere in the region to identify an inadequately trained workforce as a major or very severe constraint (World Bank, 2019[25]). Nevertheless, the underdevelopment of the private sector and stalled diversification mean that these strengths are under-utilised. The rate of job creation has lagged behind that of population growth and more than a third of workers – disproportionately women – work informally (World Bank, 2024[26]). The potential to leverage skills through FDI is further undermined by the emigration of skilled workers, barriers to labour mobility, and gaps in specific skills such as digitalisation that limit innovation and technological upgrading (Box 2.2).
Skill loss through migration outflows is an issue, though it is not as serious as might be expected from the numbers of people leaving the country. Although annual net migration has been negative since the mid-1980s and remittances represent an important source of income in Uzbekistan, accounting for 14.0% of GDP in 2023, migrants leaving the country are not typically among the most educated. In fact, while 11% of non-migrants held a bachelor degree, only 4% of migrants held this qualification (Seitz, 2019[27]).
Despite some deregulation and streamlining in recent years, many occupations have education and licensing requirements that limit labour market flexibility. Worker mobility was historically hindered significantly by the propiska system of residence registration. Though this system has been reformed since 2018, taxes and barriers in access to education may interfere with internal mobility (Honorati and Marguerie, 2021[28]). Somewhat low levels of urbanisation – about half of the population lives in cities, a share the government plans to increase – may similarly prevent the realisation of gains from creating productive clusters and associated labour mobility (World Bank, 2022[29]). Cities tend to have greater human and physical capital, more favourable demographics, and better infrastructure, which fosters knowledge-intensive investment and the emergence of dynamic SMEs capable of driving stronger growth (OECD, n.d.[30]).
Skills and infrastructure gaps are the greatest barriers to firm-level digitalisation in Uzbekistan. Digitalisation has been a priority policy area for the government in the past decade. Recent reforms began with the adoption of the Comprehensive Program for the Development of the National Information and Communication System in 2013 and has continued under the Digital Uzbekistan – 2030 plan, which covers digital infrastructure, e-government, the development of the domestic market for ICT goods and services, the development of IT parks, and skill development. Connectivity gaps remain, however; the quality of connections is inconsistent, and Internet access can be expensive. Fixed broadband Internet costs 4.1% of GNI, exceeding the 2% target established in the Sustainable Development Goals (ITU, n.d.[31]). The level of advanced, standard, and basic digital skills has also remained low and is seen be firms as a potential barrier to investing in and benefitting from ICT (OECD, 2023[4]).
Foreign direct investment can boost demand for skilled workers and foster skill development. Workers’ skills are complementary to innovation and technology and have direct effects on firm performance, capacities to engage in trade, and resilience and adaptability to changing market conditions (OECD, 2019[12]). FDI in skill-intensive activities raises demand for skills. Foreign firms may also invest in developing human capital through programmes training their own workers or those of suppliers and other domestic partners, as well as motivating domestic firms to offer more training opportunities through competition and imitation effects.
Foreign direct investment in Uzbekistan directly creates a significant amount of employment. Job creation through FDI in Uzbekistan is highly variable, averaging 7 704 jobs created per year over 2019-23 as a result of greenfield FDI, though a large increase in new investment pushed the number of jobs created to 19 913 in 2023 (Figure 2.20). The intensity of job creation in Uzbekistan – 1.9 jobs created per USD million in greenfield inflows in 2023 – is lower than in a number of comparison countries, though it slightly exceeds the OECD member country average (1.7 jobs) (Figure 2.21).
Source: fDi Markets.
Source: fDi Markets.
Despite Uzbekistan’s relatively skilled population, investment inflows have not been generating employment in typically knowledge-intensive sectors. Jobs created through greenfield FDI in the recent past have been concentrated in consumer products, textiles, and automotive, which together accounted for half of employment creation over 2021-23 (Figure 2.22). This is partly a result of the high job creation intensity of investment in these sectors. The number of jobs created per USD million in greenfield investment over 2021-23 in Uzbekistan was greatest in textiles (40.0), plastics (38.9), and consumer products (34.8).
Source: fDi Markets.
Foreign direct investment directly and indirectly affects demand for skills and skill development. Foreign firms still appear to attract higher-skilled workers and to invest more in developing the skills of their employees. While domestic firms identify a higher share of their workers as being skilled than do foreign firms (59.9% versus 54.1%), a relatively high share of workers in Uzbekistan, regardless of firm ownership, are production workers (Figure 2.23).Despite the classifications that firms gave to their workers, foreign firms tend to hire more workers who had completed high school.
Note: Foreign firms are defined as those with at least ten percent foreign ownership.
Source: World Bank Enterprise Surveys.
While relatively few firms in Uzbekistan offer formal worker training programmes, a much greater share of workers have access to these programmes, suggesting that their use is more common in larger operations and, possibly, that these are offered to large shares of the workforce in these companies. The mobility of workers that gained new skills working with foreign firms is an important channel through which knowledge flows from foreign to domestic firms (OECD, 2019[12]). Compared with domestic peers, foreign businesses are much more likely to offer training and to offer it to more of their workers; 22.9% of foreign firms offer formal training and offer it to 45.3% of workers (Figure 2.24). The same numbers for Uzbek businesses are 16.3% and 33.3%, respectively.
Note: Foreign firms are defined as those with at least ten percent foreign ownership.
Source: World Bank Enterprise Surveys.
Not surprisingly, these higher-skilled workforces are better paid than those in other firms. At 44.2%, the foreign wage premium in Uzbekistan is ranked 10th out of the 18 comparison countries also included in measure of foreign labour productivity premia in Figure 2.14. While some of the sectors that attract the most FDI, such as mining and quarrying, also pay relatively high wages, higher foreign productivity premia are generally associated with higher foreign wage premia. The better performance of foreign firms does not translate fully into additional wage benefits for workers, however. This is particularly true when foreign firms are more active in highly concentrated markets where they generate productivity-related rents (OECD, 2019[12]). The significant focus of international investors on Uzbekistan’s extractive sector may therefore be expected to limit the extent to which productivity premia reach workers.
2.3.4. Gender equality
Uzbek society is generally very equal, with low poverty rates for its income level: its Gini index was just 31.2 in 2022. The percent of the population in extreme poverty (below the USD 2.25 per day in 2017 PPP poverty line) declined significantly to just 2.3% in 2022, well below the lower middle income country group average of 12.6%. But important barriers to inclusion still need to be addressed, particularly by gender. Women have low rates of labour force participation and often work in lower-paid and low-quality jobs. They also face additional barriers to entrepreneurship. Significant improvements have been made in the recent past, such as the removal of job restrictions for women in the 2022 Labour Code, but access to childcare remains an issue for many and additional steps are needed in the private sector. Few firms have implemented explicit gender inclusion strategies or track data on gender inequalities (UNPFA, 2022[32]). While women own an increasing share of businesses, they still represent a minority of owners at just 29.2% in 2022 (ILO, 2020[33]). In addition to cultural barriers, female entrepreneurs and potential entrepreneurs are held back in growing or starting businesses by their lack of property ownership and resultant inability to provide banks with necessary collateral. In 2016, women owned less than a quarter of the property registered with the national real property registry and cadastre system, by value (ILO, 2020[33]).
Improvements to gender equality in work would make a large difference to inclusion and potential for growth. In addition to the gender imbalance in the labour force generally, women are also concentrated sectors with below-average pay, such as healthcare and social services and education. This, and the small number of women in higher-level positions within businesses, results in a significant pay gap (ILO, 2020[33]). At 27.2%, the gender wage gap in Uzbekistan is relatively high, and holds across most professions, except sales and service workers and skilled agricultural, forestry, and fishery workers (Figure 2.25). Women are also more likely to be found in the informal economy, where employment is often lower-paid, more vulnerable, and lacking social security coverage (ILO, 2020[33]).
Source: ILOSTAT.
Foreign firms can create opportunities for women in host economies by increasing demand for their labour, increasing employment and putting upward pressure on wages. They may also introduce gender mainstreaming policies that benefit their workers and inspire change in other businesses. These effects are strongest when FDI is concentrated in less male-dominated sectors of the economy (OECD, 2019[12]). As such, more diversified foreign investment in Uzbekistan that is less concentrated in extractive sectors and manufacturing that employ relatively few women may do even more to advance gender equality.
Women are not commonly found among business leaders in Uzbekistan, though foreign-owned businesses do provide some better opportunities for female workers and are more likely to at least partly female-owned. Almost no foreign firms have a female top manager, while just 0.1% of domestic firms do, about half the average share of both foreign and domestic firms in OECD member countries. Female employment is relatively high, however; 47.2% of workers in foreign firms and 33.9% of workers in domestic firms are female (Figure 2.26). Foreign firms are also slightly more likely to have female participation in ownership (0.3%), compared with 0.2% of domestic businesses. Notably, the workforce of foreign firms is more equal by gender despite their being relatively few jobs created from greenfield investment in services and other sectors with a higher share of female employment.
Note: Foreign firms are defined as those with at least ten percent foreign ownership.
Source: World Bank Enterprise Surveys.
More employment of women in foreign firms is not merely the result of the sectors in which foreign firms tend to operate in Uzbekistan, as FDI is instead concentrated in sectors that are either heavily male-biased in employment or that are roughly balanced by workers’ gender. Women accounted for no more than half of employment in the sectors that attracted the most FDI inflows over 2019-23; manufacturing (43.7% female); electricity, gas, steam, and air conditioning supply (14.7%); and mining and quarrying (12.9%) (Figure 2.27). In contrast, the services sectors where most women work see relatively little involvement by foreign firms. Healthcare and social services and education, which are both about three-quarters female by employment, accounted for just 1.7% and 0.4% of total investment inflows over these five years. Considerable space still exists, therefore, for foreign firms to influence greater gender equality in employment among their Uzbek peers.
Note: Bubble size is proportional to total employment by sector. FDI shares exclude investment in residential construction.
Source: MIIT and Uzbekistan Statistics Agency.
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← 1. “Other machinery and equipment” excludes transport equipment and ICT equipment. ”Other facilities” excludes residential buildings and non-residential buildings.