PROSPECTS FOR INCREASING THE ATTRACTIVENESS OF THE COUNTRY'S

INVESTMENT ENVIRONMENT

THESIS

OTABOYEV AKHMED

MASTER STUDENT, JOINT DEGREE PROGRAM

BETWEEN TASHKENT STATE UNIVERSITY OF ECONOMICS AND
FACULTY OF ECONOMICS AND BUSINESS EDUCATION
UNIVERSITAS PENDIDIKAN INDONESIA

2023

ABSTRACT

This thesis examines the complex network of factors affecting a country's investment
potential, focusing on the key variables of inflation, market potential, and credit rates. As
global economies become increasingly interconnected, understanding and optimizing these
factors will become a top priority for policymakers, investors, and economic analysts.
The study begins by examining the multifaceted effects of inflation on the investment
climate. Through in-depth analysis of historical data and economic models, we try to uncover
how investors react to changes in the inflation rate. The study examines how moderate inflation
can encourage investment by fostering a sense of stability, while hyperinflation or deflationary
pressures can deter potential investors.
Market potential appears as another important factor determining the country's investment
attractiveness. Through a comprehensive market analysis, we assess the current and future
prospects of various sectors, identify potential development areas that can attract domestic and
foreign investment. The study also explores the role of innovation, technology and regulatory
frameworks in shaping market potential and offers insights into creating an enabling
environment for sustainable investment.
Credit rates are examined for their impact on investment decisions as a country's financial
stability. The thesis examines how favorable credit rates serve as a catalyst for capital flow,
encourage business expansion and entrepreneurs to start new projects. Conversely, high credit
rates can limit the availability of funds and limit investment opportunities.
To provide a holistic view, the study uses a quantitative approach using statistical models
to assess the interaction of inflation, market potential and lending rates on overall investment
trends. Case studies and real-world examples are combined to contextualize the findings,
providing actionable insights for policymakers and stakeholders seeking to improve the
investment climate in their countries.
In conclusion, this thesis aims to contribute to the existing knowledge on investment
potential by revealing the complex interactions between inflation, market dynamics and lending
rates. The findings are intended to inform strategic decision-making and help create an
environment that attracts and supports domestic and foreign investment, ultimately promoting
economic growth and prosperity.
 TABLE OF CONTENTS

ABSTRACT ....................................................... i
TABLE OF CONTENTS ....................................... ii
LIST OF TABLES ............................................... vi
LIST OF FIGURES ............................................. vii
CHAPTER 1: INTRODUCTION ...................................
1.1 Research Background
1. Global economic growth and investment in the global areas
2. Fenomena About investment Central Asia
3. What The impacte of investment (Inflation, Market potential, cost of capital,
Poverty,Government Expenditure)
4. Inflation (What, Fenomena) in Central Asia
5. Market potential(GDP) in Central Asia
6. Cost of capital(Lending rate) in Central Asia
7. Research Gap (Different With Previous Study )
8. Why you choose Central Asia for your thesis
9. why is it important to choose this topic for your thesis
1.2 Research Question
1. Inflation effect Investment
2. Market potential(GDP) impact on Investment
3. Cost of capital(Lending rate) impact on investment
4. The impact of three variables on investment attraction
1.3 Research Objective
1. Inflation effect Investment
2. Market potential(GDP) impact on Investment
3. Cost of capital(Lending rate) impact on investment
4. The impact of three variables on investment attraction
1.4 Benefit Research
1. Theory Benefit
2. Practical Benefit
1.5. Research structure
Chapter 2: Literature Review, Research Framework, and Hypothesis

Literature Review

2.1: Economic Theories Shaping Investment Climates

2.2: Factors Influencing Investment Climates

2.3: Regional and Sectoral Dynamics

2.4: Key Variables and Indicators

2.4.1 Inflation

2.4.2 Market Potensial

2.4.3 Cost of Capital

2.4.4 Investment

2.5 Research Framework

2 5.1 Inflation and Investment

2.5.2 Market Potential and Investment

2.5.3: Cost of Capital and Investment

2.6 Research Hypothesis

Chapter III: Research methodology

1. Research project

2. Objectives of the study

3. Variables and indicators

3.1. Dependent variable

3.2. Independent variables

4. Data Collection

4.1. Sources of information

4.2. Study period

5. Data analysis

5.1. Descriptive statistics

5.2. Bivariate analysis

5.3. Regression Analysis

LIST OF TABLES
LIST OF FIGURES
 CHAPTER 1:
INTRODUCTION

In a world characterized by economic volatility and unprecedented global challenges, the

search for strategies to increase a country's investment potential has never been more urgent.
This thesis seeks to illuminate the current problems of the present time, in which the main focus
is on the influencing factors of inflation, market potential and credit rates as a decisive factor in
the formation of the country's economic landscape.
In recent years, countries around the world have faced unique challenges, from the effects
of global pandemics to the changing tides of geopolitical landscapes. In the face of such
complexities, the stability and resilience of economies largely depends on their ability to attract
and stabilize investment. Thus, understanding the contemporary relevance of investment
capacity building is important for policy makers and economic stakeholders.
Current relevance of the selected Thesis topic:
Post-Pandemic Inflation:
The COVID-19 pandemic has created unprecedented challenges, disrupting supply chains
and creating inflationary pressures in various sectors. As economies seek to recover, the
relationship between inflation and investment will take center stage. How countries deal with
these complexities will have a significant impact on investor confidence and their economic
trajectory1.
Market potential in the conditions of technological transformation:
The rapid development of technology is reshaping markets, presenting challenges and
opportunities. From the rise of digital economies to the increasing importance of sustainable
practices, the dynamics of market potential have undergone significant changes. This thesis aims
to explore how countries can take advantage of these changes to attract investment in sectors that
meet the demands of the modern global market.
Loan rates in a low interest environment:
A persistently low interest rate environment driven by central bank policy has a profound
impact on the cost of capital and investment decisions. In this context, studying how credit rates
affect investment choices is crucial to understanding the current economic landscape. In
addition, the possible consequences of these rate changes are studied in order to anticipate and
prepare for future economic changes2.

1
Understanding PostCOVID Inflation Dynamics Martín Harding, Jesper Lindé, Mathias Trabandt January 2023,
2
Low Interest Rate Environment Definition, Example, Effects JAMES CHEN, ERIKA RASURE, KATRINA MUNICHIELLO
2021. https://www.investopedia.com/terms/l/low-interest-rate-environment.asp
 As we embark on this research, it is clear that the findings of this thesis will not only
contribute to the academic debate, but also provide essential insights for policymakers and
businesses seeking to navigate the complexities of the contemporary economic landscape. By
addressing these contemporary challenges, we aim to provide a roadmap for countries seeking to
increase their investment potential in an ever-changing global economy.
1.1.1. Research Background
In pursuit of economic prosperity, it is necessary to understand the nuances of the country's
investment potential. This study examines three key factors that are crucial in shaping the
investment landscape: inflation, market potential and credit rates.
Effect of Inflation:
The role of inflation in investment dynamics is twofold. Moderate inflation can instill
confidence among investors, fostering a sense of stability. However, excessive inflation or
deflationary pressures often serve as a stifling, disruptive investment environment.
In the wake of the global COVID-19 pandemic, countries are grappling with inflationary
challenges. Analyzing the contemporary impact of inflation on investment decisions is important
in developing an economic recovery strategy.
Market dynamics:
Market potential is the basis for investment attraction. Understanding current market trends
and identifying growth sectors is critical to economic expansion.
The rise of digital economies, sustainable practices and technological transformations call
for exploring how countries can use these trends to increase their investment attractiveness.
Importance of loan rates:
Credit rates determined by central bank policy have a profound effect on the cost of
capital. A low-interest environment encourages investment, while changes in rates can reshape
investment landscapes.
When global interest rates are at historic lows, learning how countries manage this
environment and prepare for potential rate changes is critical to anticipating investment
behavior3.
Modern Context:
The world is facing unprecedented challenges, from the effects of a global pandemic to
technological disruption and geopolitical uncertainty.

3
Forces That Cause Changes in Interest Rates REEM HEAKAL, MICHAEL J BOYLE, VIKKI VELASQUEZ.
2022. https://www.investopedia.com/insights/forces-behind-interest-rates/
 In such conditions, the stability of economies depends on their ability to attract and support
investments. This study seeks to identify the contemporary relevance of these factors, providing
policymakers and stakeholders with insight into today's economic complexities.
The main problems of research:
1. Challenges in the availability and use of comprehensive, up-to-date information on
various aspects of the investment environment, and lack of reliable and detailed information on
the regulatory framework and industry-specific key indicators for investors;
2. Political instability, geopolitical tensions seriously affect a country's investment climate,
and uncertainties related to leadership changes, policy changes or geopolitical conflicts make
long-term planning difficult for investors and economic stakeholders;
3. Inadequate infrastructure, covering transport, energy and digital networks, can hinder
economic activity and deter potential investors. Identifying and eliminating these deficiencies
will create an environment that supports sustainable investment and economic growth;
4. A Skilled and Educated Workforce Improving Innovation and Competitiveness, Skills
and Education Gaps in the Workforce and Creating a Skilled Workforce.
Several more similar examples can be provided. It depends on one's perspective when
examining the process.
1.1.2 Global economic growth and investment in the global areas
We can observe that the global economy has decreased due to the geopolitical and
economic conflicts in the world. In order to get out of this situation, the leaders of all the
countries expressed their opinions in various conferences and negotiations and united in order to
develop the global economy.
As the economy recovers, investor interest in healthcare, technology, and sustainable
industrial recovery sectors will increase. New measures continue to be applied to the global
economy, reshaping industries as technological progress spurs innovation and creates new
investment opportunities4.
Investors are increasingly attracted to technology-based sectors such as artificial
intelligence, renewable energy and digital infrastructure as they demonstrate robust growth
potential.
Global market integration:
Global markets are more interconnected than ever, fostering cross-border investment and
cooperation. Investors are diversifying portfolios by accessing international markets, taking
advantage of opportunities in emerging economies, and accessing different asset classes.
Emerging trade agreements and geopolitical shifts are affecting global trade patterns. Investors

4
Global Risks Report 2023, https://www.weforum.org/publications/global-risks-report-2023/
closely monitor geopolitical developments, adjust portfolios based on changing trade dynamics,
and look for regions with stable trading environments.
Sustainability as an investment driver:
Increasing attention to sustainability and ESG (Environmental, Social, Governance)
criteria is reshaping investment preferences. Sustainable investing is increasingly popular,
focusing on companies that demonstrate a commitment to responsible practices while aligning
portfolios with long-term global trends.
Interest rate environment:
Central banks have kept interest rates historically low to stimulate economic activity
around the world. A low interest rate environment encourages investment in stocks and high-
yielding assets, and any change in interest rates can affect investment strategies.
Opportunities for infrastructure development:
Infrastructure development projects are gaining attention as governments prioritize
economic stimulus measures. Investors are exploring opportunities in infrastructure, including
renewable energy projects, transportation and digital infrastructure, aligned with global efforts
for sustainable development.
Durability and flexibility:
Economic stability and flexibility are becoming the main criteria for making investment
decisions. Investors judge countries and sectors based on their ability to overcome challenges,
favoring resilient economies and sectors with sustainable risk management strategies.
1.1.3. Fenomena About investment Central Asia
Economic growth and stability: Central Asian countries have created an environment of
stability and demonstrated consistent economic growth. Average annual GDP growth rates
ranged from 3.5% to 6% across the region between 2015 and 2019.
Diversification efforts:
Central Asian countries are actively diversifying their economies beyond traditional sectors
such as natural resources. Non-oil sectors, including manufacturing and services, have increased
their contribution to GDP, demonstrating economic diversification.
Foreign direct investment flow:
Central Asia has attracted a significant flow of direct investment, which means that the
interest of international investors is increasing. FDI inflows have grown steadily and reached
$8.8 billion in 2022, reflecting a positive trend in foreign investor confidence.
Infrastructure development:
 Strong infrastructure development projects are underway to enhance connectivity within
and beyond the region. Investments in infrastructure projects, including transport and energy, are
steadily increasing, contributing to improved regional connectivity.
Regional cooperation and trade agreements:
Central Asian countries have developed regional cooperation through trade agreements by
promoting economic integration. With the establishment of the Eurasian Economic Union
(EEU), interregional trade has increased, contributing to increased economic cooperation.
Emerging startup ecosystems:
Central Asian countries are witnessing the emergence of vibrant startup ecosystems that
attract the attention of venture capital. The number of start-ups and venture capital investments
has increased, indicating a shift to a knowledge-based economy.
Policy reforms to attract investment:
Central Asian governments have implemented policy reforms to create a favorable
environment for investors. Ease of doing business ratings have shown improvements reflecting
proactive measures to streamline business processes.
Renewable Energy Initiatives:
There is a growing focus on renewable energy projects that align with global sustainability
trends. Investments in renewable energy have increased, with a focus on solar and wind energy
projects.
Growth of tourism sector:
Central Asia is increasingly recognized as a tourist destination investing in hospitality and
tourism. Tourist arrivals have shown an upward trend, with governments investing in
infrastructure to support the tourism industry.
Regional stability as an investment magnet:
Despite geopolitical challenges, the overall stability of the region has attracted investment
from various sectors. Central Asia has maintained political stability, creating a favorable
environment for long-term investment.
Table 1. Foreign direct investment, net inflows (BoP, current US$) - Kazakhstan,
Uzbekistan, Kyrgyz Republic, Tajikistan, Turkmenistan

№ Country Foreign direct investment Year

1. Kazakhstan 4,91 milliard

2022
2. Uzbekistan 2,5 milliard
2022
3. Kyrgyz Republic 290 850 200 million
2022
4. Tajikistan 174 305 128 million
2022
5. Turkmenistan 936 039 710 million 2022
 In conclusion, the investment landscape of Central Asia for 2015-2022 reflects a positive
trajectory characterized by economic diversification, foreign direct investment flows,
infrastructure development and proactive policy measures. The region's commitment to creating
a favorable business environment makes it an attractive destination for investors looking for a
variety of opportunities.
1.1.4 What The impacte of investment (Inflation, Market potential, cost of capital,
Poverty, Government Expenditure)
Inflation and Investments:
Moderate inflation can boost investor confidence, while high inflation can deter
investment. Inflation rates in various regions have shown an investment-friendly stability over
the period, averaging between 2% and 5%.
Market potential and investment growth:
Strong market potential attracts investments that stimulate economic growth. Sectors with
high market potential have increased investment, contributing to GDP growth of 4% to 7% in
various economies.
Capital Impact Value:
The cost of capital significantly influences investment decisions; low costs often stimulate
economic activity. Central banks have kept interest rates low, with global averages between
0.5% and 3%, encouraging borrowing and investment.
Poverty alleviation and investment impact:
Investments can contribute to poverty reduction by creating jobs and stimulating economic
development. Poverty rates improved in areas where investment increased, with the poverty rate
falling from 1% to 3% during this period.
Government spending and the investment environment:
Public spending on infrastructure and development projects is positively associated with an
improved investment climate. Countries that allocate a significant portion of their budgets to
infrastructure have seen a corresponding increase in private investment that drives economic
growth.
Statistical overview (2015-2022):
Global GDP growth: Averaged around 3.5% annually, reflecting sustained economic
expansion.
FDI inflows: grew by an average of 15% and totaled $40 trillion globally, indicating
sustained international investor confidence.
 Inflation rate: stable, with global inflation averaging between 2% and 3.5%, creating a
favorable environment for long-term investment.
Global poverty rate: A reduction from 10% to 8% on average, demonstrating the potential
of investment in poverty reduction.
Government spending on infrastructure: increased by 10%, indicating a commitment to
create a favorable investment climate and stimulate economic growth.
In summary, the impact of investment is multifaceted, affecting inflation, market
dynamics, capital values, poverty rates, and government spending. Statistical trends from 2015 to
2022 highlight the interconnectedness of these factors and highlight the role of strategic
investments in stimulating economic development and solving social problems.
1.1.5 Inflation (What, Fenomena) in Central Asia
What is inflation?
Inflation is an increase in the general level of prices of goods and services, which leads to a
decrease in the purchasing power of the currency. Understanding inflation dynamics in Central
Asia is essential for assessing economic stability and making informed policy decisions.
Inflation phenomena in Central Asia:
General Inflation Trends:
The average inflation rate of 3% to 6% was observed in Central Asian countries in 2015-
2022. The World Bank provides detailed information in the source "World Development
Indicators".
Country specific differences:
Kazakhstan and Uzbekistan have relatively lower inflation rates, averaging around 4%,
while Tajikistan and Kyrgyzstan have slightly higher rates, ranging from 5% to 7%.5
Figure 1. Inflation rate in Central Asia, average consumer prices (annual percent
change)

5
Source: World Bank, World Development Indicators.
Impact on consumer prices
 Figure 1 shows dynamic inflation rates in Central Asian countries. The dynamics show that
the price increase that started in 2021 continued in 2022. In 2021, this indicator was the highest
in Turkmenistan, making 15 percent (4.4 percent in 2010). Inflation in Kyrgyzstan was 11.9%
(8% in 2010), 10.8% in Uzbekistan (12.3% in 2010), 9% in Tajikistan (6.5% in 2010), 8% in
Kazakhstan (2010 7.1 percent in the year).6
Inflation and monetary policy:
Central banks in the region have implemented various monetary policies to manage
inflation, making periodic adjustments to interest rates.
Central Asian national central banks and World Bank reports.
Food and energy price dynamics:
Changes in food and energy prices contributed to short-term changes in inflation rates.
Country reports from national statistical agencies and the World Bank.
Inflation Expectations and Economic Stability:
Maintaining a low and stable inflation rate has been a key focus for Central Asian
governments to ensure economic stability and investor confidence.7
Inflation and exchange rates:
Exchange rate fluctuations affected inflation, currency depreciation led to import inflation. 8
Statistical overview (2015-2022):
Average inflation rate: 4% to 6% for Central Asian countries.
Highest Inflation: Kyrgyzstan and Tajikistan have experienced peaks of 7% for some
years.

6
https://www.eurasian-research.org/publication/the-risks-of-inflation-in-central-asia/
7
Source: Economic forecast reports of Central Asian national central banks and the World Bank.
8
Economic forecast reports of Central Asian national central banks and the World Bank.
 Lowest Inflation: Kazakhstan and Uzbekistan have consistently maintained low inflation
rates, averaging around 4%.
Figure 2. Average inflation in Central Asia, %

Figure 2 shows the average inflation in Central Asia, which was the lowest (7%) in 2015.
In 2020, it reached 8.4% and increased to almost 13% in 2022.9

Central Asia showed a mix of inflation trends over the period 2015-2022, driven by
various economic factors. First of all, the data obtained from the World Bank and national
statistical agencies provide insight into the inflation phenomena that shape the economic
landscape of the region.

1.1.6 Market potential(GDP) in Central Asia

Gross domestic product (GDP) as an indicator of market potential:
Overall GDP growth:
Data: Central Asian countries collectively demonstrated steady GDP growth over 2015-
2022. As the largest economy in the region, Kazakhstan has consistently contributed
significantly to the total GDP of Central Asia.
Trends in GDP per capita:
Changes in GDP per capita showed the disparity in economic development between
Central Asian countries.
Sector contribution to GDP:
Diversification efforts have been reflected in changes in the contribution of sectors such as
services, industry and agriculture to the overall composition of GDP.

9
https://www.eurasian-research.org/publication/the-risks-of-inflation-in-central-asia/
 Foreign direct investment and GDP growth:
The positive relationship between FDI inflows and GDP growth highlighted the role of
FDI in economic expansion.10
Impact on infrastructure development:
Investments in infrastructure projects had a positive impact on GDP growth and helped
increase market potential.
Impact of regional economic integration:
Initiatives such as the Eurasian Economic Union (EEU) have helped strengthen economic
cooperation, influencing regional GDP dynamics.
Statistical overview (2015-2022):
Average GDP growth rate: 3% to 6%, highlighting overall economic stability and
expansion.
Changes in GDP per capita: Kazakhstan has consistently maintained a high level of GDP
per capita compared to other Central Asian countries.
Change in contribution by sector: Services and industry sectors contributed to GDP,
reflecting efforts to diversify the economy.
Impact of FDI: The positive correlation between FDI inflows and GDP growth highlighted
the role of FDI.
Regional cooperation: Regional economic integration efforts have helped to increase
economic cooperation by influencing the overall GDP dynamics.
Market potential in Central Asia has demonstrated a steady growth trajectory and emerging
economic structures reflected in GDP trends. Primary data from the World Bank and national
sources provide valuable information on the factors shaping the region's market potential from
2015 to 2022.
1.1.7 Cost of capital(Lending rate) in Central Asia
Understanding Cost of Equity and Average Loan Rates. Central Asian countries have
maintained different lending rates that reflect the cost of capital for businesses and individuals.
Interest rate trends. Interest rates have fluctuated in response to central bank policy,
inflation rates, and general economic conditions.
Effects of monetary policy. Central banks used monetary policy tools to manage lending
rates in order to balance economic growth and inflation.
Different rates between countries. As large economies, Kazakhstan and Uzbekistan have
lower credit rates compared to smaller Central Asian countries.

10
Source: Central Asian National Investment Promotion Agencies and World Bank economic outlook reports.
 Policy responses to economic conditions. Central banks adjust lending rates depending on
economic conditions, with periods of rate cuts or increases based on inflation and growth
perspectives.
Average loan rates: 5% to 12% across Central Asian countries. Interest rate fluctuations—
There have been periodic adjustments in response to economic conditions, with some years
experiencing more stability than others.
Differential rates: Larger economies such as Kazakhstan and Uzbekistan have generally
maintained lower lending rates than smaller countries in the region.
Effects of Monetary Policy: Central banks have used a variety of monetary policy tools to
manage lending rates, balancing the need for economic stimulus with inflation control.
Regional Variations: Different Central Asian countries have shown unique trends in
lending rates due to their unique economic conditions.
The cost of capital represented by credit rates in Central Asia is a dynamic aspect
influenced by various economic factors. Primary data from national central banks and the World
Bank provide valuable information on regional value of capital trends from 2015 to 2022.
1.1.8 Research Gap (Different With Previous Study )
A research gap in the Central Asian investment environment. While existing research
addresses broad economic factors, there is a research gap in examining the sector-specific
dynamics that significantly affect the investment climate in Central Asia. can reveal important
nuances for policy interventions and investment strategies.
A rare examination of regional cooperation effects. Some studies have recognized efforts
towards regional economic integration, but there is a gap in comprehensive assessment of how
cooperation initiatives affect the investment climate in Central Asian countries.
World Bank data integration. Integrating World Bank data on regional economic
cooperation allows for a more holistic understanding of their impact on investment dynamics.
While sustainable investment is gaining global importance, the extent to which Central
Asian countries integrate environmental, social and governance (ESG) criteria into their
investment landscape remains understudied.Include primary data on the adoption of sustainable
practices by businesses and governments. fills the gap and provides insight into the region's
commitment to responsible investment.
Lack of analysis on public spending and investment relations. Limited research has
provided a static view of the relationship between public spending and investment over time
without offering a comprehensive longitudinal analysis. The use of World Bank time series data
provides a more dynamic understanding of how public spending patterns affect investment
trends in Central Asia.
 Ignoring micro-level perspectives on credit rate effects. Existing research often provides a
macro-level analysis of credit rates, neglecting the micro-level perspective of how individual
firms perceive and respond to changes in credit rates. Collecting primary data from businesses
can fill this gap, providing insight into the real effects of credit rate changes on investment
decisions at the organizational level.
Identified research shortcomings indicate opportunities for a more detailed and
comprehensive study of the investment environment in Central Asia. Integrating primary data
alongside World Bank sources can enrich understanding of micro-level effects of sector-specific
dynamics, regional cooperation, sustainable practices, public spending trends, and credit rates on
investment decisions.
1.1.9 Why you choose Central Asia for your thesis
My thesis topic is the prospects of increasing the investment attractiveness of a country. I
could write a thesis using examples from other countries on this topic. I chose to focus on
Central Asia for two reasons: firstly, I am from Uzbekistan, which is located in Central Asia;
secondly, I decided to start studying the economies of the countries I am familiar with to further
develop my scientific research topic in the future.
1.1.10 Why is it important to choose this topic for your thesis
The purpose of choosing this topic for my thesis is to read more information about
investments, my interest in investment projects and the investment potential of my native
country of Uzbekistan. to contribute to further development, to conduct my work in the world's
famous investment organizations and enterprises.