Durham E-Theses European Business Interests In Lebanon: An assessment of EU private foreign direct investment in the reconstruction era Khalil, Ali Moussa How to cite: Khalil, Ali Moussa (2000) European Business Interests In Lebanon: An assessment of EU private foreign direct investment in the reconstruction era, Durham theses, Durham University. Available at Durham E-Theses Online: http://etheses.dur.ac.uk/4248/ Use policy The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that: • a full bibliographic reference is made to the original source • a link is made to the metadata record in Durham E-Theses • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders. Please consult the full Durham E-Theses policy for further details. Academic Support Oce, Durham University, University Oce, Old Elvet, Durham DH1 3HP e-mail: [email protected] Tel: +44 0191 334 6107 http://etheses.dur.ac.uk 2 European Business Interests in Lebanon: An Assessment of EU Private Foreign Direct Investment in the Reconstruction Era The copyright of this thesis rests with the author. No quotation from it should he published in any form, including Electronic and the Internet, without the author's prior written consent. All information derived from this thesis must be acknowledged appropriately. Ali Moussa Khalil PhD Thesis University of Durham Centre for Middle Eastern and Islamic Studies 2000 1 3 JUL 20W European Business Interests in Lebanon: An Assessment of EU Private Foreign Direct Investment in the Reconstruction Era The copyright of this thesis rests with the author. No quotation from it should be published without their prior consent and information derived from it should be acknowledged. European Business Interests in Lebanon: An Assessment of EUPrivate Foreign Direct Investment in the Reconstruction Era Dedication To my parents... for their unlimited support European Business Interests in Lebanon: An Assessment of EU Private Foreign Direct Investment in the Reconstruction Era Acknowledgements Although the rights for this thesis rest with myself, I can sincerely testify that without the invaluable contributions of many others, this work would have not seen the light. Right at the top of the list of contributors comes my supervisor, Dr. Emma Murphy, whose support and guidance are beyond appreciation. I will always be short of words to thank her for the immense help with which she backed me, particularly, when the PhD- frustration symptoms threatened to become overwhelming. My family's contribution to this work is beyond valuation. Although migration is historically a common behaviour in Lebanon, I was the first member of my family to leave home, and I fully realise the sadness that my departure inflicted on them. Moreover, without my parents' financial support I would not be writing these words today. I am aware how difficult this turned out to be at times, and I will always remember their all round support. I would like to thank the director of the Centre for Lebanese Studies at Oxford, Mr. Nadim Shehadi for giving me access to the CLS archives and conferences, and also for his help in initiating my contacts for fieldwork in Lebanon. He might not realise the extent of his help, but I can bear witness that it was essential for getting my research on the right track. The further assistance I got from the Lebanese economist, Dr. Kamal Shehadi was vital for pursuing contacts in Lebanon. The contributions of all my interviewees (listed at the end of this thesis) whether in London or in Beirut, were fundamental for the completion of this research. The friendly atmosphere at the Centre for Middle Eastern & Islamic Studies made my stay in Durham very enjoyable. I will always recall the 1995-96 M.A. seminars with Prof. Tim Niblock and Prof. Anoushervan Ehteshami. At all times, I will remember them not only as great academics but also as true friends who were continually on call to help. I should pin up the useful comments I got from my friends, Warwick Knowles and Paola Rocchetti, who took the trouble to read through parts of my thesis. However, I would need an extra chapter to thank all my friends at Durham for all their support during the peaks and troughs of my research period. Those who were around me on my viva day, anxious as if they were the one being examined and joyful for my success, I cannot thank them enough for their touching support. They know who they are. iv European Business Interests in Lebanon: An Assessment of EU Private Foreign Direct Investment in the Reconstruction Era I owe special thanks to my examiners, Prof. Rodney Wilson and Dr. Gerd Nonneman, for a challenging viva and very useful comments. My last thanks go to Isabelle, who was the invisible force pushing me to finish my work. I will never be able to thank her enough for being by my side, helping me until the last minute. Finally, I can wholeheartedly claim that this PhD thesis is my least achievement at Durham. The friendships I established are far more precious and cherished. In ten-years time, I might forget the title of my thesis, however, I shall not forget the names of my true friends I met at Durham with whom I shall always try to keep in contact. v European Business Interests in Lebanon: An Assessment of EU Private Foreign Direct Investment in the Reconstruction Era Table of Contents List of Tables xii List of Charts xiv List of Abbreviations xvi Transliteration of Arabic terms xvii Abstract xviii Introduction 1 Part One 5 Chapter One: Historical Relations between Europe and Lebanon 6 1.1 Introduction 6 1.2 European interest in the Middle East in the 19th century 7 1.2.1 Implications of the European expansion on the region's economy 12 1.2.2 The second half of the 19th century: European economic control in the Ottoman Empire 13 1.2.3 The First World War and its legacy: absolute Franco-British supremacy in the Middle East 14 1.2.4 World War II: major changes in the powers in the region 15 1.2.5 Summary: Europe and the Middle East 17 1.3 Development in the historical relations between Europe and Lebanon 18 1.3.1 European rivalries in Mount Lebanon 19 1.3.2 The prosperity of silk production: inward foreign investment 21 1.3.3 The establishment of the French mandate 23 1.3.4 French economic interests in Lebanon during the mandate period 26 1.3.5 End of the French mandate 28 1.3.6 French interests after independence 29 1.4 Conclusion 31 VI European Business Interests in Lebanon: An Assessment of EU Private Foreign Direct Investment in the Reconstruction Era Chapter Two: The Development of Economic Relations between European Countries and Lebanon since the Establishment of the EC 34 2.1 Introduction 34 2.2 The foundation of the EC 34 2.3 The European economic approach towards southern-Mediterranean countries 36 2.3.1 The Global Mediterranean Policy 38 2.3.2 Agreements concluded with the GMP 40 2.4 Effects of the enlargements of the EC 42 2.4.1 Attempts to avoid the negative impact of the enlargement 43 2.5 The Euro-Mediterranean Partnership 47 2.5.1 Free-trade area 48 2.5.2 Economic co-operation and concerted action 49 2.5.3 Financial co-operation 49 2.5.4 MEDA Programme 49 2.5.5 The Euro-Mediterranean Associations Agreements 50 2.6 Economic relations between the EU and Lebanon 52 2.6.1 Trade (figures and agreements) 53 2.6.2 First non-preferential trade agreement 55 2.6.3 Preferential trade agreement 57 2.6.4 First co-operation agreement with the GMP (1977) 59 2.6.5 Implications for trade 61 2.7 EU capital flow into Lebanon 64 2.8 The Lebanon-EU Partnership Agreement 68 2.8.1 Capital Flow: aid and investment 70 2.9 Conclusion 74 Chapter Three: The Lebanese Economy from Independence to Reconstruction 78 3.1 Introduction 78 3.2 The history of the Lebanese economy 79 3.2.1 The formation of Lebanon 79 3.2.2 The economy after independence 82 3.2.3 Economic policies after independence 88 3.2.4 Summary: the economy before the civil war 90 vii European Business Interests in Lebanon: An Assessment of EU Private Foreign Direct Investment in the Reconstruction Era 3.3 Economic consequences of the civil war 92 3.3.1 First phase (1975-82) 93 3.3.1.1 Recession in economic sectors 93 3.3.1.2 The impact of war on foreign companies 100 3.3.2 The second phase of the civil war (1983-1990) 101 3.3.2.1 Summary: the impact of the civil war 105 3.4 Post-civil war period: recovery and reconstruction 105 3.4.1 The Ta'if Agreement 106 3.4.2 The new government; militias disarmed 108 3.4.3 The economic side of the story 109 3.4.3.1 The flow of capital 111 3.4.4 The reconstruction process: Hariri's vision of reconstruction and economic development 'Horizon 2000' 112 3.4.4.1 'Horizon 2000's' requirements for appropriate economic environment 114 3.4.4.2 Envisaged cost of recovery 115 3.4.4.3 'Horizon 2000' macroeconomic perspective 115 3.4.4.4 'Horizon 2000' sources of finance 116 3.4.4.5 Feasibility of the 'Horizon 2000' 118 3.4.5 The policies of Hariri's government in practice 120 3.4.5.1 Monetary achievements 120 3.4.5.2 Fiscal achievements 122 3.4.6 Macroeconomic picture in 1998 125 3.5 Conclusion 129 Part Two 131 Chapter Four: Theoretical Approach to the Motives for Firms Engagement in FDI Activities - Theories of Foreign Direct Investment 132 4.1 Introduction 132 4.2 Defining foreign direct investment (FDI) 132 4.3 Theories of foreign direct investment 134 4.3.1 Classical Theory of International Investment 134 4.3.2 International Product Life Cycle Theory 136 4.3.3 Monopolistic - Oligopolistic Advantage Theory 138 viii European Business Interests in Lebanon: An Assessment of EU Private Foreign Direct Investment in the Reconstruction Era 4.3.4 Market Imperfections Theory 141 4.3.5 Internalisation Theory 145 4.3.6 Eclectic / O.I.L.