Clare Nuttall in Astana -

France has shot up into the top three investors in Kazakhstan as the profile of investment into the country shifts from the oil and mining industries into high-tech manufacturing.

Along with companies from east Asia, French companies are leading a rising trend of investment into Kazakhstan's high-tech manufacturing sector, with many of these investments located in the capital Astana because of the existing manufacturing base in the city and government incentives.

Kazakhstan has seen a sharp upturn in foreign direct investment (FDI) recently. Almost 50% of the $165bn worth of FDI the country has received since independence in 1991 was made in the last three years, since the launch of the state industrialisation programme. And for the first time, Kazakhstan is attracting FDI to high-tech industries such as pharmaceuticals, computer manufacturing, electronics and optical products, Kairat Karmanov, deputy chairman of Kazakhstan's export and investment agency KazNex Invest, tells bne. "Geographically, the biggest change is that France entered the top 10 investors into Kazakhstan," Karmanov says.

In the first nine months of 2012, France was ranked third among countries directly investing into Kazakhstan, after the Netherlands and the US, overtaking China, the UK and Russia. "More companies from South Korea, Malaysia and Taiwan have come to Kazakhstan and are investing mainly outside the oil and gas sectors," Karmanov adds.

Most of the high-tech investments are in Astana, the location of railway sector investments by GE, Alstom and Talgo, Eurocopter's helicopter assembly plant, and the new space satellite assembly plant being built under an agreement with France's EADS. "Astana is already established as a manufacturing base. The city has engineering capacity and, with the opening of the Nazarbayev University, the educational basis as well," Karmanov says.

France's Alstom is one of several international companies to have set up railway-related manufacturing within the Astana New City special economic zone. Alstom, Russia's Transmashholding and Kazakhstan's national railways operator Kazakhstan Temir Zholy (KTZ) opened an electric locomotive production plant in Astana in December. This followed the opening of a diesel locomotive assembly plant by GE Transportation and KTZ in 2009. Together with KTZ and TransMashDiesel, GE now is setting up a diesel engine plant in Astana that is due to open in 2013, and will serve the CIS market. Spain's Talgo has also opened a plant to build passenger carriages in a joint venture with KTZ.

Outside the rail manufacturing sector, France's EADS Astrium is working with state-owned Kazakhstan Gharysh Sapary to build a space satellite assembly plant in Astana, as Kazakhstan seeks to create its own space programme.

Helicopter manufacturer Eurocopter, a subsidiary of EADS, has also set up a joint venture with Kazakhstan Engineering to assemble helicopters. Eurocopter Kazakhstan Engineering plant serves the entire Commonwealth of Independent States (CIS) market from its plant in Astana. In March, the company announced that Kazakhstan will become one of the first countries in the world where Eurocopter's newly developed EC 645 T2s are assembled.

While Astana is at the centre of the new wave of high-tech manufacturing investments in Kazakhstan, it is not the only destination. The northern city of Kostanai, 570 kilometres from Astana, has emerged as a new hub for auto-manufacturing.

France's PSA Peugeot Citroën plans to start assembling cars in Kostanai from June this year, as demand for new cars grows in the increasingly affluent Kazakh market. Peugeot signed an agreement with Kazakhstan's Agromash Holding on the assembly and distribution of Peugeot passenger cars and LCVs during the France-Kazakhstan joint committee meeting in Paris on March 7. The French automaker follows Japan's Toyota, which in February said it would start assembling SUVs in Kazakhstan.

Speaking after the joint venture plans were announced, Peugeot's managing director for Russia, Ukraine and the CIS, Bernd Schantz, said the project was an "important milestone" in the company's business development in the CIS region, which is "one of the priority zones for our group".

Kazakhstan's attractiveness as an investment destination, from where manufacturing companies can supply the Eurasian region, has increased with the founding of the Customs Union with Russia and Belarus, and Kazakhstan's steady rise on the World Bank's "Doing Business" index. According to Karmanov, Kazakhstan has the most stable economy in the former Soviet Union, and a steadily improving investment climate. Kazakhstan has been one of the top 10 reformers on the World Bank's Doing Business Index for the last two years, and now stands in 49th place on the index, after rising more than 30 places. "Since Kazakhstan co-founded the Customs Union, any investor can export to Russia duty free and has access to 170 possible customers. Kazakhstan also has a more attractive tax regime than Russia, with a corporate tax rate of 20% compared to 30% in Russia, and a 12% VAT rate, compared to Russia's 18%," Karmanov says.

KazNex is continuing to work with investors with the aim of persuading more companies to choose Kazakhstan as a manufacturing site rather than simply a source of raw materials. Karmanov hopes that companies from long-term investors such as the US and UK, which until now have been focused on the oil and gas sector, may start to enter other sectors of the Kazakhstani economy.

He also hopes that domestic high-tech manufacturing, as well as operations set up foreign investors, will become a possibility. In December, a delegation from KazNex visited Silicon Valley to talk to companies, venture capitalists, scientists and professors at Harvard and Stanford. "Ultimately we want to have strong national champions in Kazakhstan, in addition to bringing in foreign investment," Karmanov says. "Ten or even five years ago, this isn't something we would have thought of."