Lack of Foreign Investments in the Non-Oil Sector of Azerbaijan
Date Issued
2025-05-12
Author(s)
Yusifova, Aytaj
Mammadli, Rana
Mustafazada, Sona
Abstract
This capstone project investigates the persistent underperformance of foreign direct investment
(FDI) in Azerbaijan’s non-oil sectors despite government initiatives to diversify the economy. It
focused on three main factors – economic reliance on oil revenues, restrictive legal and
regulatory environment for foreign companies, and lack of high-skill labor force in non-oil
sectors – which were found to hinder investment. Through qualitative analysis of policy
documents, legal frameworks, and international economic reports, the study evaluates the impact
of these constraints on Azerbaijan's investment climate. Three policy options – strategic financial
incentives, legal and institutional reforms, and human capital development – were assessed based
on 𝑒3𝑓2 framework made up of 5 critical indicators of policy success such as effectiveness,
efficiency, equity, flexibility and feasibility. The research concludes that while Azerbaijan has
made progress in promoting diversification, further legal and institutional reforms will strengthen
investor trust, reduce governance-related risks which play essential role in attracting sustainable
FDI into non-oil industries and fostering a more inclusive and diversified economic growth.
(FDI) in Azerbaijan’s non-oil sectors despite government initiatives to diversify the economy. It
focused on three main factors – economic reliance on oil revenues, restrictive legal and
regulatory environment for foreign companies, and lack of high-skill labor force in non-oil
sectors – which were found to hinder investment. Through qualitative analysis of policy
documents, legal frameworks, and international economic reports, the study evaluates the impact
of these constraints on Azerbaijan's investment climate. Three policy options – strategic financial
incentives, legal and institutional reforms, and human capital development – were assessed based
on 𝑒3𝑓2 framework made up of 5 critical indicators of policy success such as effectiveness,
efficiency, equity, flexibility and feasibility. The research concludes that while Azerbaijan has
made progress in promoting diversification, further legal and institutional reforms will strengthen
investor trust, reduce governance-related risks which play essential role in attracting sustainable
FDI into non-oil industries and fostering a more inclusive and diversified economic growth.