Economic Reforms and Foreign Investment: Why Uzbekistan Now?

Uzbekistan is moving away from its former centrally planned economy and accelerating its transition to a free market economy; since 2017, a series of reforms have been implemented that have dramatically improved the business environment, including liberalizing foreign exchange, easing the visa regime, and promoting privatization of state-owned enterprises. The results of these reforms can be seen in the following specific indicators.

  • GDP growth: GDP growth has remained stable and high, with recent growth rates of around 5%. This indicates that the country is establishing itself as an economic driver in the Central Asian region.
  • Foreign Exchange Reserves: Foreign exchange reserves have remained stable, enhancing the stability of the country’s economic base.
  • Population: With approximately 35 million people, Central Asia has one of the largest populations in the region, and a very young labor force with approximately 60% of the population under the age of 30. This implies long-term consumer market growth and an advantage in labor-intensive industries.

Foreign Investment Incentives: Specific Incentives

In order to strongly attract foreign direct investment, the Government of Uzbekistan offers several tax incentives. Of particular importance to Japanese business owners are the following incentives

Tax incentive periods based on the amount of direct investment (exemptions from land tax, corporate property tax, and water use tax)

Direct investment amount Preferential treatment period
More than $300,000 but less than $3,000,000 3 years
More than $3 million but less than $10 million 5 years
More than $10 million 7 years (depending on specific conditions)

*Source: Based on the latest information from JETRO and other public organizations

These incentives are available to companies that meet certain requirements in such encouraged sectors as oil and natural gas, automobiles, IT and software development, food, and textiles, etc. When developing an M&A strategy, prior consideration of the applicability of these incentives will directly lead to a shorter payback period.

M&A Market Trends: Identifying Target Sectors

The M&A market in Uzbekistan is driven primarily by two drivers: privatization of state-owned enterprises and business expansion of domestic companies. Japanese business owners should focus on the following fast-growing sectors

1. IT and Software Development Sector

Uzbekistan is aggressively establishing IT parks and offering preferential treatment to the IT industry with the aim of becoming a “Silicon Valley. With an abundance of young, talented programmers, the country is becoming increasingly attractive as an offshore development center targeting neighboring countries and the European market. The acquisition or capital tie-up of small and medium-sized IT companies creates an opportunity to secure inexpensive, high-quality development resources and to integrate Japanese technological capabilities.

2. light industry and textile sector

The country is one of the world’s leading cotton producers and has established an integrated supply chain from upstream to downstream. The government encourages the production of high value-added finished products (cotton, wool, finished blended fabrics, knitted fabrics, etc.), and by introducing Japan’s advanced quality control technology and brand power, exports to global markets can be expected to expand.

3. food and agriculture sector

With abundant agricultural resources and fertile land, the country is modernizing its food processing industry. In particular, Japan’s advanced technology and know-how are in demand in areas such as the development of cold chain logistics and Halal certification. M&A of local food processing companies can provide a new foothold in the Central Asian, Russian, and Middle Eastern markets.

M&A Strategies and Challenges for Japanese Companies to Succeed

Successful M&A in Uzbekistan requires a strategy based on an understanding of its unique business culture and legal system.

Strategic Approach

  • Long-term perspective: Rather than pursuing short-term profits, a long-term business plan of five years or more is necessary to take advantage of the young labor force and vast market with high growth potential.
  • Thorough partner selection: Selecting a local partner (e.g., joint venture) with a strong relationship with the local government and credibility in the market is essential for obtaining permits and facilitating business operations.
  • Technology Transfer and Human Resource Development: By systematically introducing Japanese “kaizen” and quality control (QC) know-how to the local subsidiary and retaining talented human resources, you can establish a competitive advantage.

Key Issues to be Considered

While the market is becoming increasingly attractive, the M&A process presents unique challenges.

  • Difficulty of due diligence: Accounting standards and transparency of financial reporting may differ from those in Japan, and pre-acquisition financial and legal due diligence should be conducted carefully and over time with the assistance of highly specialized local consultants.
  • Currency risk and restrictions on fund transfers: Foreign currency restrictions that once existed have been eased, but there is still a risk of currency fluctuation and the complexity of procedures for large fund transfers to be aware of.
  • Frequent changes in the legal system : As part of economic reforms, the legal system is frequently amended, so a system is required to continuously follow up on the latest amendments to laws and regulations even after the M&A is executed.