Foreign Investment and Economic Growth: Does a Golden Visa Create Productive Investment?

Foreign investments are a means to support an economy's growth, as they can bolster the amount of money available to companies, create jobs and increase productivity. Not all foreign investment results in an economy's growth of productive potential; some may bring $ into a country, but where the money flows ultimately determines whether it will have a long lasting effect on that economy. Malta's Residence by Investment programme, otherwise known as a Malta Golden Visa, serves as a perfect example of this; although it can bring money to the local economy by attracting wealthy foreign individuals, only the portion of the capital that goes toward productive investment will create an economic impact for that location.

Where do the dollars go?

The Malta Permanent Residence Programme (MPRP) appeals to non-European Union (non-EU), non-European Economic Area (non-EEA), and non-Swiss nationals who meet the financial and property qualification criteria. An applicant to the MPRP must pay an administration fee of €60,000 as well as a €37,000 government contribution, provide €2,000 to an eligible NGO, and purchase property with a minimum value of €375,000 or lease property for a minimum amount of €14,000 annually.

With respect to the economic activities generated by the MPRP, government contributions are revenue for governmental use, while property purchases and leases provide income to landlords, sellers, and intermediaries. In addition, applicants will likely incur expenses for legal assistance, financial services, hospitality, and other local businesses. In 2024, the residency by investment schemes created over 132 million Euros in economic value to Malta as reported by the Residency Malta Agency. This amount includes all direct government funding, property purchases, lease agreements and donations throughout this time period. However, it does not indicate how much new GDP was generated as a result of these different types of payments and transactions. Some transactions are essentially transfers of wealth or already-existing assets, which would not be counted as new production.

The second distinction is the difference between productive investment as opposed to asset purchases. This distinction is important since capital inflows do not necessarily create new GDP growth. For example, a foreign investor who finance's a new technology company creates jobs, builds intellectual property and increases future production. However, an individual purchasing a currently existing apartment only serves to pass on financial resources to the prior owner and will have little additional effect on production.

This distinction is captured by the economic concept of capital formation. It describes how investment expands the total quantity of capital used for production within an economy by introducing new machinery, infrastructure, technology, and business premises. If a company increases its labour force or increases its output through investment in productivity-enhancing measures, the amount of goods and services produced (and labour required to do so) is increased. Conversely, purchasing an existing home usually transfers ownership of an asset; this type of transaction generally does not create any new productive capacity unless other construction or production occurs as a result of the transaction itself.

In its 2024 report, the Daphne Caruana Galizia Foundation analysed the economic impact of Malta's residence-by-investment schemes and their effects on the distribution of wealth. They found that fewer than 150 jobs were created by the earlier residency programme after three years, but thousands of demands for residential units were created by applicants applying to these programmes. Therefore, it is possible that property transactions do not generate a comparable number of jobs as would investment in expanding businesses.

This differentiation is particularly important in Malta, where increased demand due to foreign buyers creates more competition for existing properties, which in turn drives prices and rents higher. Property owners benefit from the increased prices and rents, while local families now must compete for fewer available units at increased costs. Constructing and maintaining an adequate supply of housing can be disrupted by limited construction capacity; therefore, when demand exceeds supply, housing prices may increase faster than housing units can be added to the current supply due to construction constraints.

Multiplier Effect and Limitations

Economic activity created by foreign expenditures also generates a multiplier effect. For example, once a foreign resident purchases an apartment, pays for local legal assistance and/or eats out at their local restaurant – this creates additional economic activity because the business owner of each of these entities will then re-spend part of their income to purchase products and services from other businesses located in Malta. This is an example of how a foreign influx of money generates, or provides support for, continued economic activity in Malta, through its local economy. However, the size of the multiplier effect created by foreign expenditure support will depend on the amount of the foreign expenditure that remains in the local economy. Payments made to businesses outside Malta, payments for imported goods, and payments to foreign intermediaries; these economic “leakages” will create less income available to support economic activity in Malta. Therefore, two businesses may receive the same amount of foreign spending; however, the foreign spending received by the business may create very different levels of economic activity depending on how the spending is structured within the economies of the two countries.

Malta has a very different investment environment than the rest of Europe. According to a 2024 report from the European Commission, the amount of research and development (R&D) expenditures in 2024 was approximately 0.54% of Malta's gross domestic product (GDP), compared to a 2.24% average by Member States of the EU. The amount of venture capital investment made into businesses in Malta during the years 2022 through 2024 was approximately 0.005% of the nation's GDP. Therefore, these statistics suggest that Malta may have limited access to capital to implement innovative new ideas and high-growth companies; however, these figures do not imply that the implementation of residency-through-investment programmes resulted in the limitations referenced.

What Should Economic Growth Policy Focus On?

The overarching question is whether or not the residency programme enhances or displaces the productive uses of capital. With the assistance of the government, the government should be providing additional infrastructure and services to the public, while wealthy foreign residents' money may continue to support local businesses. However, if the capital is indefinitely tied to existing property and related services, these types of capital investments are likely to create fewer new economic activities and sustain those businesses than if the capital was directed to ongoing innovation in the research, technology and product development of new businesses.

Malta’s golden visas are often referenced in investment migration; however, it can be misleading concerning the difference between residency rights versus citizenship rights. In respect to the Maltese Government’s Malta Permanent Residence Programme (MPRP), it gives an individual with permanent residency; however, the MPRP does not extend to Maltese citizenship rights.

In establishing a true metric of the effectiveness of the MPRP for policymakers, counting applications or total financial contributions into Malta will not suffice. Relevant measures to determine if there are tangible benefits are the number of additional jobs created, additional wages earned, approved business formations, increased productivity, net tax revenues after accounting for the cost of providing public service, and the percentage of total financial resources directed to new productive assets. These measures will facilitate analysing the amount of financial transactions created by the implementation of the MPRP from the amount of productive asset capacity created in Malta's economy.