The report “IDEA: Investing in the Digital Economy of Azerbaijan” by the World Economic Forum provides a comprehensive analysis of Azerbaijan’s digital economy landscape, focusing on foreign direct investment (FDI), digital infrastructure, and the policy environment.
The digital economy is becoming a key catalyst for global economic growth. With the advancement of Fourth Industrial Revolution technologies and the internet, digital activities are gaining increasing significance for businesses, government entities, and citizens. Foreign direct investment not only brings capital but also facilitates the transfer of know-how and technology. Therefore, attracting and fostering FDI in the digital economy (commonly referred to as “digital FDI”) becomes a crucial factor for enhancing digital capabilities for both the economy and companies. However, since this is a new area, challenges arise from information asymmetries, coordination hurdles, and the lack of regulatory conditions that would facilitate the connection of capital to digital investment opportunities.
In this context, the World Economic Forum, in collaboration with the Center for the Fourth Industrial Revolution (C4IR) Azerbaijan and the Export and Investment Promotion Agency of Azerbaijan (AZPROMO), is implementing the project “Investing in the Digital Economy of Azerbaijan” (IDEA). The project has two main objectives: increasing investment in the digital economy and using technologies to grow investments throughout the entire investment lifecycle.
The report covers survey results from 100 foreign and domestic companies that have invested in Azerbaijan’s digital economy in recent years. The survey identifies key elements that influence companies’ decisions to invest in Azerbaijan. These data are complemented by consultations with stakeholders from the public and private sectors to understand the main challenges to growing digital FDI, policy options to address these challenges, and the main technologies that can be used to facilitate and grow investments.
The research and interviews revealed the following issues hindering investment growth in the country:
The digital start-up ecosystem is still in its early stages and requires the development of new investment opportunities. Additional investments in technology-focused research and development (R&D) are also necessary. There are gaps between the rapid growth of the information and communication technology (ICT) sector and the slower progress in cybersecurity development, particularly regarding data sharing for businesses. Improvements in quality control and assessment of new digital solutions are needed to ensure a better product-market fit.
Moreover, there is a need to enhance advanced digital skills among the population, as there is a gap between the skills demanded in the job market and those provided by educational institutions. Policies limiting the use of international payment systems and the lack of clarity in cross-border payment rules are significant obstacles.
The country’s infrastructure also requires improvements, especially in internet speed, quality, and universal coverage, particularly outside the capital. Updates to data governance frameworks are necessary, as current cloud policies impact data sharing.
Companies demonstrate a lack of trust in e-payment systems. Intellectual property (IP) protection regulations may not be strictly enforced. Outdated regulatory norms and standards in some digital industries create additional administrative burdens, as companies often prefer to comply with international or European standards.
The report proposes several policy measures to address these issues and promote the growth of digital FDI and the adoption of investment technology (InvesTech):
– Support for the regional expansion of Azerbaijani start-ups and providing entrepreneurship training.
– Regularly reviewing domestic cybersecurity regulations to potentially harmonize them with international standards.
– Establishing an ecosystem conducive to mobilizing resources towards R&D through various policy instruments.
– Focusing on digital skills development in schools and raising awareness of the benefits of digitalization.
– Collaborating with the private sector to identify in-demand digital skills that will help create jobs.
– Promoting fintech solutions and strengthening financial inclusion.
– Ensuring growth in the quality and universal coverage of broadband internet through competition.
– Supporting the development of high-quality cloud services.
Specific steps for implementing three priority policy measures are also proposed:
– Facilitating the regional expansion of Azerbaijani start-ups and supporting FDI as a source of capital.
– Supporting the digital transformation of existing companies using the Smart Industry Readiness Index (SIRI) tool.
– Developing and implementing an investment incentives calculator to attract and retain investments.
These steps will help create a favorable investment environment for Azerbaijan’s digital economy, increase the level of foreign investments, and stimulate the development of digital technologies in the country.
Key Achievements
The report highlights several positive aspects and achievements related to digital transformation and the development of Azerbaijan’s digital economy. Here are some of them:
Development of the ICT Sector: The ICT sector in Azerbaijan has significantly expanded in recent years. The report emphasizes the need to diversify the ICT sector, focusing on the development of the computer services industry, mobile applications, and e-commerce platforms.
National Innovation Policy: Significant efforts are being made in Azerbaijan to create a favorable environment for startups and innovation. The establishment of numerous institutions and programs aimed at supporting business development and promoting innovation, such as large-scale networking events, technoparks, and business incubators, reflects this progress.
Improvement of the Investment Climate: Azerbaijan has undertaken several reforms to improve the investment climate in the country, including providing tax incentives and other government financial support, expanding the mechanism of public-private partnerships, and removing restrictions on profit repatriation and technology transfer.
Development of Digital Skills: The report notes that more than 65% of the population possesses basic ICT skills, enabling them to perform digital operations. Prioritizing the development of digital skills, especially in STEM (science, technology, engineering, and mathematics), is considered an important step to increase employment in digital and knowledge-intensive industries.
International Digital Megaprojects: Azerbaijan is strategically focused on implementing transregional digital megaprojects, such as the Digital Silk Way, which aims to create a modern fiber-optic network connecting Europe and Asia. This project is intended to turn the South Caucasus countries into a regional “digital hub.”
Conclusion
The report “IDEA: Investing in the Digital Economy of Azerbaijan” by the World Economic Forum presents a thorough examination of Azerbaijan’s digital economy, focusing on foreign direct investment (FDI), digital infrastructure, and policy environment. While recognizing the digital economy as a catalyst for global growth, the report identifies significant challenges and proposes targeted policy measures to enhance digital capabilities and attract digital FDI.
Key policy recommendations include supporting start-ups, harmonizing cybersecurity regulations with international standards, fostering R&D, improving digital skills, promoting fintech solutions, and enhancing internet infrastructure. Implementing these measures is expected to create a conducive environment for investment, drive digital transformation, and position Azerbaijan as a regional digital hub.
Overall, the report offers a strategic roadmap for leveraging digital FDI to advance Azerbaijan’s digital economy, addressing existing obstacles and fostering sustainable growth.
