According to the latest World Investment Report, investment flows into the Middle East and North Africa (MENA) region have grown considerably over the past year, buoyed by high oil prices, ongoing privatizations, and new opportunities in the service sector. 

While the 85% annual growth in investments is certainly good news, the reality is that much more remains to be done.  Despite impressive growth, investment in the region is still a mere $31 billion – less than 2% of global FDI inflows.

Over the past several years, there has been a growing appreciation of the role that private capital can play in the region.  Businesspeople increasingly see outside capital as a source of funding that can help them move forward and remain competitive.  Governments regard investment as a key ingredient of economic transformation, something that can help spur private sector activity and, most importantly, provide jobs for millions entering the workforce each year.

The challenge, of course, is to move from public statements about the need for investment to real actions that provide high-reward and low-risk opportunities for investors.  Investors look for stability and predictability – or, in other words, a good business climate.

So, if governments and business in the MENA region want to attract investment, remain competitive in the global economy, and create jobs, they have to take action to improve the business climate. 

Part of the answer, of course, is creating better regulations.  Reforms are needed to improve protection and enforcement of property rights, institute transparent tax codes, develop efficient court systems, reduce trade barriers, and introduce bankruptcy procedures.  On a more fundamental level, a greater effort is needed to secure economic freedoms.  According to the recent Index of Economic Freedom, despite some improvements, the region is still lagging behind others in that regard.

The business climate is also an important determinant of another, often overlooked, variable in the economic growth equation.  In addition to investment flows, it is useful to take into account deal flow. 

At a recent conference on entrepreneurship that CIPE held together with the Egyptian Capital Market Association, the Egyptian Junior Business Association (EJB), and the Arab Private Equity Association in Cairo, the issue of deal flow was brought up by Hani Tawfik, chairman of the Arab Private Equity Association.  He noted that despite increasing levels of investment, deal flow remains at low levels – and barriers to doing business are responsible. 

In addition to improving the business climate, more effort also needs to be put into improving the attractiveness of local companies to foreign investors.  One tool that has been effective in doing just that around the world is corporate governance.

In essence, corporate governance is an assurance mechanism.  Good corporate governance mechanisms signal to potential investors that their money will be properly managed and used, that accountability measures are in place, and that their rights will be protected.

It is no coincidence that studies by McKinsey & Company and other organizations show that investors are willing to pay premiums for well-governed companies, especially for those in emerging markets.  These premiums, according to experts, can be as high as 40%.

One additional spillover benefit of corporate governance, not commonly recognized, is that it is an effective tool to control corruption.  Most importantly, it can help to build more transparent relationships between business and governments.  In other words, good corporate governance can reduce favoritism, cronyism, and murky transactions between companies and government officials by making such behavior harder to sustain.

So, how does one go about building good corporate governance in the MENA region?  The efforts of the Egyptian business community and government are a model example.

Last year, the Egyptian Institute of Directors (EID) and other government and private sector representatives developed a corporate governance code, written in Arabic (not translated from English!) by local experts with references to international best practices as well as Egyptian realities of doing business.  The approach EID has taken is completely different from others, where such codes are borrowed from other countries or translated from other languages.

Recently, EJB launched its “Manual for Family Business Governance” at a conference attended by more than 600 business association leaders. Egyptian Prime Minister Ahmed Nazif spoke at the conference, which was also attended by the Egyptian Ministers of Investment, Finance, Trade and Industry, Education, and Social Affairs.  The manual is based on the code of corporate governance introduced last year.

Prime Minister Nazif told the audience that he appreciated EJB's initiative to “start building governance at the grassroots level and relating corporate governance to public governance.” He announced that “transparency and citizens' engagement in policymaking is the heart of corporate governance.”  He also said that the government has started applying transparency rules by disclosing information about government subsidies, such as those allocated to the energy and social services sectors.

Egyptian Minister of Investment H.E. Dr. Mahmoud Moheildin emphasized that corporate governance is the basis for “political, economic, and democratic reforms in Egypt.” He has also announced that the code of corporate governance, developed with CIPE’s support, has been incorporated into the stock exchange listing rules.

Egypt is certainly moving in the right direction by including good governance in the private sector as a part of its reform agenda.  The most important development is that the government is working with the private sector to make this possible.  This is good news for investors, and it is even better news for the local business community and Egyptian citizens, who only stand to benefit from such efforts.

An important aspect of advancing corporate governance reform in the MENA region has been defining the term in Arabic.  When CIPE first began to explore corporate governance opportunities in the region, the major challenge was simply talking to people about it – it is possible to say ‘corporate governance’ in English, but there was no equivalent in Arabic. 

Thanks to the efforts of many Arab experts, driven initially by Egyptian Minister Dr. Youssef Boutros-Ghali, the region now has a term for corporate governance - hawkamat ash-sharikat.

During the aforementioned entrepreneurship conference in Cairo, a similar issue was raised by regional private sector experts in regards to entrepreneurship – there is no Arabic equivalent.  This is the challenge reformers have to tackle if they are to lead their countries to economic prosperity that is based on the spirit of private enterprise.