The unavoidable imperative of strategic investment

The capital divide

The economic history of Cyprus is a tale of resilience, often defined by its agile recovery from external shocks and its strategic location. Yet, the demands of the modern global economy, characterised by rapid technological disruption and acute geopolitical uncertainty, require more than mere resilience; they demand structural transformation.

For an island nation with a small, service-based economy, the future of sustained prosperity hinges on a simple, irrefutable premise: large-scale, high-quality capital investment must cease to be viewed as a discretionary luxury and must, instead, be embraced as the fundamental engine of national competitiveness.

The global evidence is overwhelming, pointing to a massive, worldwide investment chasm that requires proactive national policy to bridge. McKinsey estimates that the world needs to invest a cumulative $106 trillion in infrastructure alone through to 2040.

In this global race for capital, Cyprus must distinguish itself not just as a stable location, but as a strategic gateway committed to future-proofing its economy through projects of genuine scale and consequence.

This editorial will articulate the powerful economic rationale for these major projects, detail their structural benefits, particularly the critical role of foreign direct investment in technology transfer, and outline the policy reforms required to ensure their timely and efficient execution here on the island.

The quantifiable return on capital

The justification for committing significant public and private resources to major projects rests firmly on established, verifiable economic metrics. Large-scale capital deployment, especially in infrastructure, delivers far more than temporary stimulus; it generates permanent increases in national productivity.

This is the essence of the infrastructure multiplier effect.

Research from the McKinsey Global Institute (MGI) provides a foundational metric for this argument: infrastructure investment consistently yields a high socioeconomic rate of return (SCRR), estimated at approximately 20 per cent in the long run. This is perhaps the most powerful quantifiable argument: every single euro invested effectively delivers a 20 cent long-run increase in gross domestic product (GDP). This sustained return is generated by removing the inherent friction points (the logistical, energy, or digital bottlenecks) that silently inhibit business efficiency across the entire economy.

Furthermore, the initial stimulus is highly pronounced. Analysis by KPMG confirms the ‘multiplier effect’, showing that every $100 spent on infrastructure boosts private-sector output by a median of between $13 and $17.

These immediate spillovers translate directly into job creation and economic activation across diverse sectors, proving that large projects are crucial catalysts for both short-term buoyancy and long-term structural health.

For Cyprus, these returns are particularly salient.

The economy, while currently exhibiting positive GDP growth (3.9 per cent GDP growth rate in 2024, projected to grow by 2.9 per cent in 2025 as per the IMF) requires new, counter-cyclical pillars to support its traditional reliance on tourism and services.

Moving ahead, we must commit to capital expenditure not as a reaction to economic cycles, but as a proactive strategy to secure a permanent uplift in total factor productivity (TFP).

This means aggressively funding projects that reduce operational constraints, ensuring that Cypriot businesses, from the largest multinational to the smallest start-up, can operate with the highest possible efficiency.

FDI, technology transfer and the human capital nexus

While domestic investment is important, foreign direct investment (FDI) remains the most potent vehicle for structural modernisation. FDI is fundamentally superior to standard financial flows because it does not just bring money; it imports proprietary knowledge, cutting-edge technology and world-class management expertise that the host economy may not possess.

The International Monetary Fund (IMF) confirms that FDI is a critical channel for technology transfer, contributing disproportionately more to economic growth than domestic investment alone. This technological infusion is becoming exponentially more critical as the global economy accelerates its digital transformation.

For instance, targeted capital expenditure in infrastructure supporting Generative Artificial Intelligence (GenAI) is projected by EY to boost global GDP growth by 0.5 per cent to 1 per cent by 2033. This quantifiable uplift provides a clear strategic target for Cyprus: the focus must be on attracting FDI into high-value, digitally-intensive sectors.

The good news is that Cyprus has already made strategic progress in this area.

Policy efforts focused on attracting capital in fields like energy, investment funds and innovation have yielded measurable results, with FDI reaching over €3.5 billion in 2023. Critically, the technology sector has now matured into a new pillar of the economy, contributing more than 10 per cent of the country’s GDP. The rise of greenfield investments, particularly the reported 600 per cent surge in software and ICT investments in 2022 compared to pre-pandemic levels, validates the strategy of focusing on modern, exportable, digitally-focused capital.

However, the benefits of advanced FDI are not automatic; they are inherently conditional on the host country’s absorptive capacity – its ability to recognise the value of new external knowledge, assimilate it and apply it to commercial ends.

IMF research highlights that the higher productivity associated with FDI is only realised when the host country possesses a minimum threshold stock of human capital. This means that to maximise the value of an incoming tech firm, Cyprus must concurrently invest heavily in upskilling its local workforce.

The PwC Global AI Jobs Barometer starkly illustrates this urgency, showing that productivity growth has nearly quadrupled in AI-exposed industries and that workers with relevant AI skills command an average wage premium of 56 per cent.

Therefore, the strategic mandate is clear: large-scale investment must be strategically coupled with large-scale, skills-first workforce retraining programs to ensure the creation of high-wage jobs and maximum knowledge spillover to the domestic small and medium enterprise (SME) ecosystem.

Prioritising strategic verticals: energy and digitalisation

For a geographically isolated economy like Cyprus, capital investment must be laser-focused on overcoming structural dependencies, particularly in energy security and digital connectivity.

The energy sector presents the most acute, immediate challenge. The island’s high reliance on oil and persistently high electricity prices for both consumers and businesses demand transformative investment.

Major projects like the Vassiliko energy centre are necessary, yet execution challenges and political hurdles have plagued key, price-reducing initiatives, notably the LNG import terminal and the Great Sea Interconnector cable. These setbacks highlight a critical national challenge: the attractiveness of the projects is not in doubt, but their timely, corruption-free execution is.

Simultaneously, the digital realm has redefined modern infrastructure. Digital assets are no longer a luxury but a critical prerequisite for economic activity and the fastest-growing category of global deal value.

Cyprus’ policy drive is to establish itself as a leading EU business gateway, a strategy reinforced by rising investments in data centres and high-speed fibre-optic networks. Prioritising technology-enabling projects is essential for securing the island’s future economic standing.

Crucially, these two verticals, digitalisation and the green transition, must converge. Data centres require immense power; therefore, digital capacity must be strategically coupled with investment in resilient, renewable energy systems to ensure operational stability, mitigate rising global average annual losses from climate-related infrastructure damage (estimated between $732 billion and $845 billion), and meet decarbonisation commitments.

The policy mandate: governance, execution and de-risking

Attracting the high-quality, long-term capital required for these mega-projects demands more than attractive tax rates; it requires a transparent, efficient and reliable governance framework.

Capital is global and highly sensitive to regulatory predictability.

The foundational pillar for attracting high-quality FDI is the security of private assets, a principle highlighted by PwC as critical for long-term prosperity. As a member of the European Union, Cyprus enjoys the competitive advantage of being a reliable, consistent and predictable partner that respects the rule of law.

Policymakers must continually leverage and publicise this inherent stability to position Cyprus as a safe harbour for long-term capital, particularly against a backdrop of rising global volatility.

Beyond stability, efficiency is paramount. A perennial obstacle to large projects is the slow, often complex administrative approval process. The structural reform of local government, including the shift to the centralised “Ippodamos” e-permitting system, is a welcome, though initially challenging, step.

The introduction of fast-track procedures for medium-risk projects aims to free up resources to concentrate on applications for the genuinely large-scale, transformative investments. This commitment to transparency and predictability is essential to meet investor demands.

In addition, the government has wisely adopted a mandatory FDI screening framework, aligning with EU Regulation 2019/452. The proposed bill requires non-EEA/Swiss investors to notify the finance ministry of significant acquisitions in “strategic entities” across sectors like energy, transport, and health. Though an additional regulatory layer, this measure is framed as necessary to upgrade international reputation, ensure national security and ultimately de-risk investments for compliant, long-term capital.

Furthermore, sophisticated financing mechanisms must be utilised. Indeed, public-private partnerships (PPPs) have emerged as necessary tools for delivering complex infrastructure projects, particularly when government funds are constrained. PPPs allow governments to shift large upfront capital spending off their near-term financing commitments and, crucially, mandate the transfer of administrative and technological expertise from the private sector to the public sector, helping build institutional capacity to manage future complex projects efficiently.

The choice to transcend

Cyprus has successfully pivoted from a historical reliance on cyclical industries to build a new, modern pillar around technology and high-value services. However, this transition is fragile and incomplete. The data unequivocally confirms that strategic capital investment is the unavoidable imperative for solidifying this transformation.

The evidence is clear: large projects deliver a 20 per cent long-term return on GDP and act as critical conduits for the technological knowledge that modernises an economy. Success now depends not merely on attracting the capital, but on the political commitment to execute projects efficiently, enforce the new governance frameworks, and proactively invest in the human capital required to fully absorb the technological benefits of high-quality FDI.

Cyprus has the vision, the strategic location and the EU institutional framework to attract the necessary capital. The choice is now one of execution.

We must overcome the bureaucratic inertia and regulatory complexity that deter investment and, instead, embrace the full scope of strategic capital deployment. Focusing on the twin pillars of green transition and digitalisation, and refining policy frameworks for speed and integrity, can enable Cyprus to transcend its inherent small-economy vulnerabilities and secure a more resilient, high-productivity future.