Foreign direct investment (FDI) is a key driver of economic growth, technological advancement, productivity increase and international competitiveness.

For small countries like Cyprus, it offers essential capital, specialised knowledge and access to global markets, while playing a pivotal role in reshaping the production model and bolstering economic resilience.

In the past, Cyprus has attracted investors thanks to its favourable tax system, strategic location and skilled workforce. However, as global investment trends shift toward sustainability and digital transformation, small economies must adapt to remain competitive.

In addition, Cyprus faces challenges due to concerns about transparency and financial oversight.

Another limiting factor is the small size of the domestic market, which discourages international businesses seeking a broad scope for their operations.

Furthermore, bureaucracy, complex regulatory frameworks, delayed reforms and political uncertainty reduce investor confidence.

Excessive reliance on a narrow pool of investor countries can also expose national economies to geopolitical shocks and policy shifts, beyond their control. The Cypriot real estate sector’s downturn following EU sanctions on Russia – prompted by the invasion of Ukraine – is a reminder of this fragility.

Diversifying the origin of FDI – attracting investments from the EU, US, Asia and the Middle East – is not just a strategic preference, it is a safeguard for economic stability.

Meanwhile, high levels of FDI in tourism and real estate, although providing immediate economic stimulus, are not productive from a long-term perspective. These sectors often generate short-term gains through construction activity, job creation and increased consumer spending, but they lack the innovation spillovers and productivity enhancements of technology or manufacturing investments.

Rising property prices – driven by foreign demand for luxury developments and second homes – can severely impact housing affordability for local residents. These dynamics risk displacing communities, inflating rental markets and widening socioeconomic divides.

In some cases, they may also lead to the hollowing out of urban centres, where properties remain vacant or underutilised, serving as speculative assets rather than contributing to vibrant local economies.

Moreover, tourism-dependent economies are highly vulnerable to external shocks, such as geopolitical instability, climate-related disruptions and shifts in travel preferences, making overreliance on this sector a risky long-term strategy.

In recent years, Cyprus has made notable progress in the technology sector. In 2023, the total FDI reached €3.2 billion, with more than 800 tech companies operating in the country, creating over 2,500 jobs. Today, the tech sector is estimated to contribute more than 10 per cent to the Cypriot GDP.

Examples from countries such as Ireland and Estonia are instructive. Despite its small size, Estonia has attracted tech investments through digital governance and its e-residency programme. Ireland has leveraged its EU membership, skilled labour force and pro-investment policies to attract pharmaceutical and tech giants.

Additional examples further illustrate how small nations can successfully harness FDI. Lithuania has emerged as a regional fintech hub by streamlining licensing procedures and offering regulatory sandboxes for innovation.

Singapore, despite its limited landmass, has become a global leader in logistics and finance by investing in infrastructure and maintaining a transparent, business-friendly environment.

At the same time, Cyprus must protect vital sectors of its economy by establishing a transparent FDI promotion and acceptance policy, aimed at attracting reputable long-term investors.

Multiple nations have already implemented investment screening mechanisms to safeguard and enhance national security and strategic industries. For instance, Germany and France have broadened their FDI review thresholds to include sensitive technologies and data infrastructure.

The EU’s FDI Screening Regulation encourages member states to coordinate reviews of foreign investments in sectors such as energy, defence and media, aiming to balance openness with sovereignty, long-term resilience and security considerations.

In conclusion, Cyprus has the foundations to turn challenges into opportunities. With targeted reforms and a shift toward green technologies, fintech, educational and medical services, as well as the rapidly growing defence/military industry, the country can align with EU priorities and strengthen its role as an attractive destination for FDI.

The EU Recovery and Resilience Facility offers funding opportunities for infrastructure upgrades, support of sustainable projects and improvement of the regulatory framework.