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FDI Inflows in Romania
Mihai Copaciu
CEROPE
Bucharest, May 10, 2011
Preliminary Draft – For discussion only
Aims of the paper
1. Overall FDI
trends
1.1. Size and
structure of the
stock
1.2.FDI&Foreign
trade&labour
costs
3. Determine the
main effects of FDI
firms on the domestic
economy
– micro data (to be
completed)
4. A set of policy recommendations
2. Identify the main
determinants of FDI
inflows 2.1. macro data
(EU10)
2.2. impact of institutional
variables
1.Overall FDI trends
1.1. Size and structure of the
stock
1.2.FDI & Foreign trade &
labor costs
1.Overall FDI trends• Increasing FDI inflows starting with 2004
– (Expectation of) EU membership;
– International context characterized by abundant liquidity and a
relatively low degree of risk aversion;
– But still faster increase in the current account, the latter financed
increasingly through (short term) debt creating inflows.
• Significant adjustment in FDI inflows after the beginning of
the crisis
– Increased risk aversion;
– Increased probability of capital outflows => agreement with IFIs;
– Current account deficit adjusted significantly reflecting the drop in
both internal and external demand.
FDI stock per capita (euro) – 2009
8418.4
8088.7
6814.1
6743.6
5147.9
4678.9
3547.0
3379.9
2922.3
2322.5
0 1000 2000 3000 4000 5000 6000 7000 8000 9000
Estonia
Czech Republic
Hungary
Slovakia
Slovenia
Bulgaria
Latvia
Poland
Lithuania
Romania
Source: Eurostat, own calculations
1.1.Lowest FDI stock in per capita terms
EU10-Structure of the inward FDI stock (% of GDP, 2009)
0
10
20
30
40
50
60
70
80
90
100
Bulgaria* Czech
Republic*
Estonia* Hungary* Lithuania Latvia Poland Romania Slovenia Slovakia*
Not allocated
Services
Constructions and Energy
Manufacturing
Agriculture and Mining
Source: Eurostat ; *- latest data available for 2008
1.1.EU10: Structure of the FDI stock to GDP ratio
1.1.Romania: structure of the FDI stock to GDP ratio
Romania-Structure of the inward FDI stock (% of GDP, 2003-2009)
0.2 2.2 2.1 2.3 1.9 1.7 2.39.4
11.3 10.2 12.0 11.3 10.913.80.5
0.4 1.41.8 1.7 3.2
3.58.3
10.8 13.7
19.1 19.5 18.8
23.5
0
5
10
15
20
25
30
35
40
45
2003 2004 2005 2006 2007 2008 2009
Agriculture and Mining Manufacturing
Constructions and Energy Services
Source: Eurostat
Structure of the inward FDI stock in manufacturing (% of GDP, 2009)
0
1
2
3
4
5
6
7
Food products Total textiles
and w ood
activities
Total
petroleum,
chemical,
rubber, plastic
products
Total metal and
mechanical
products
Total off ice
machinery,
computers,
RTV, comm.
eq.
Manufacture
of medical,
precision and
optical instr.,
w atches
Total vehicles
and other
transport
equipment
Miscellaneous
manufacturing
Bulgaria:15.1%Czech Rep.:19.1%Estonia:10.0%Latvia: 5.0%Lithuania:10.1%Hungary:16.3%Poland:13.2%Romania:13.8%Slovenia:7.4%Slovakia:20.7%
Source: Eurostat , *- latest data available for 2008
1.1. Manufacturing oriented FDI – most of
them resource and efficiency seeking
Structure of the inward FDI stock in services (% of GDP, 2009)
0
5
10
15
20
25
30
Trade and
repairs
Hotels and
restaurants
Transport and
storage
Post and
telecom
Financial
intermediation
Business
activities
Real estate Other
services
Bulgaria:62.5%
Czech Rep.: 29.6%
Estonia:53.9%
Latvia:32.1%
Lithuania:21.9%
Hungary:37.5%
Poland:24.2%
Romania:23.5%
Slovenia:20.8%
Slovacia:27.8%
Source: Eurostat , *- latest data available for 2008
1.1. Services oriented FDI – mostly market
seeking
Romania – export and import activity of FDI firms in 2009
Exports (FOB) Imports (CIF)
mil.
euro
% of total
sector
mil.
euro
% of total
sector
Total economy 19643 69.8 22525 60.1
Industry, of
which:
17264 79.3 15155 76.5
Manufacturing 16440 79.7 14423 78.8
Trade 1827 51.7 6214 45.4
Other activities 552 19.7 1156 29.0 Source: NBR, NSI (Foreign Direct Investments in Romania in 2009)
1.2. FDI firms make most of Romania’s
external trade
1.2. In 2010 Romania had among the EU10 countries the
highest exports’ level relative to the maximum reached in
2008
EU10 - 2010 exports/imports as a share of 2008 exports/imports (%)
0 20 40 60 80 100 120
Bulgaria
Czech Rep.
Estonia
Latvia
Lithuania
Hungary
Poland
Romania
Slovakia
Slovenia
Exports
Imports
Source: Eurostat , own calculations
1.2. Increasing share of higher added value
exports
High technology exports* as a share of manufactured exports (%)
0
5
10
15
20
25
30
35
40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Euro area European Union Bulgaria
Czech Republic Estonia Hungary
Latvia Lithuania Poland
Romania Slovak Republic Slovenia
Source: World Bank , * High-technology exports are products with high R&D intensity, such as in
aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery.
1.2. Significant comparative advantage in
terms of relative costs
Hourly labor costs (euro)
0
5
10
15
20
25
30
35
40
45
Business economy Manufacturing Electricity, gas,
steam and air
conditioning supply
Construction Services*
EU27 Euro area 16 Bulgaria
Czech Rep. Estonia Latvia
Lithuania Hungary Poland
Romania Slovenia Slovakia
Source: Eurostat, Labor Force Survey 2008. *- Services except public administration, defense, compulsory
social security, activities of households as employers and extra-territorial organizations and bodies.
1. FDI in Romania – main features
• FDI in manufacturing (stock of 13.8% of GDP in 2009):– Resource and efficiency seeking;
– Mostly vertical nature;
– FDI firms make most of Romania’s foreign trade;
– Still relatively low, but increasing share of higher value added exports in total external trade.
• FDI in services (stock of 23.5% of GDP in 2009):– Mostly market seeking;
– Both vertical and horizontal nature.
• FDI in agriculture and mining – very small
• In terms of labor costs Romania still has a significant comparative advantage relative to the other EU10 countries (except Bulgaria), EU and EA16.
2. EU10: main determinants of
FDI inflows
2.1. Macro data
2.2. Impact of institutional
variables
2. EU10 – Main determinants of FDI inflows
• EU10 panel regressions
• The same methodology as Walsh and Yu (2010)
– besides total FDI determinants, trying to see if they differ whether
the FDI flows into the tradable or non-tradable sectors:
• Tradable sector FDI: agriculture+minning+manufacturing;
• Non-tradable sector FDI: constructions+energy+services;
– Checking the relevance (one by one) of institutional variables;
Data sources: Eurostat (FDI and sectoral data), WDI, EBRD and
Transparency International (for institutional variables).
2.1. Aggregate FDI inflows –
macroeconomic determinants
Higher FDI inflows result from:
• an increase in the
openness degree of the
economy
• lower relative costs (REER
depreciation in real terms)
• higher GDP growth
• Lower GDP/capita at PPS
Variables Total FDI inflows/GDP
Openness 0.118***
(0.035)
REER -0.163*
(0.093)
Inflation -0.018
(0.085)
FDI stock lagged 0.000
(0.000)
GDP growth 0.175**
(0.076)
GDP per capita at PPS -0.126***
(0.043)
Sargan p-value 0.572
Standard errors in parentheses. A decrease/increase
in REER means a depreciation/appreciation in real
terms of the domestic currency.
* p<0.10, ** p<0.05, *** p<0.01
2.1. Tradable sector oriented FDI –
macroeconomic determinants
Higher FDI inflows in
the tradable sector
result from:
• an increase in the
openness degree of
the economy
• lower relative costs
(REER depreciation in
real terms)
Variables
FDI inflows/GDP in the
tradable sector
Openness 0.027**
(0.013)
REER -0.073*
(0.040)
Inflation 0.062
(0.065)
FDI stock lagged 0.000
(0.000)
GDP growth 0.008
(0.030)
GDP per capita at PPS -0.023
(0.019)
Sargan p-value 0.377
Standard errors in parentheses. A decrease/increase in
REER means a depreciation/appreciation in real terms of
the domestic currency.
* p<0.10, ** p<0.05, *** p<0.01
2.1. Non-tradable sector oriented FDI –
macroeconomic determinants
Higher FDI inflows in
the non-tradable
sector result from:
• higher GDP
growth (higher
growth potential of
the domestic
market).
Variables
FDI inflows/GDP in the
nontradable sector
Openness 0.026
(0.046)
REER 0.083
(0.132)
Inflation 0.178
(0.271)
FDI stock lagged 0.000
(0.001)
GDP growth 0.172*
(0.094)
GDP per capita at PPS -0.086
(0.069)
Sargan p-value 0.546
Standard errors in parentheses. A decrease/increase
in REER means a depreciation/appreciation in real
terms of the domestic currency.
* p<0.10, ** p<0.05, *** p<0.01
2.2. EU10:The impact of institutional variables
• Mixed results regarding the impact of education (primary, secondary and tertiary enrollment) on FDI inflows.
• Privatization of the state owned system increases FDI inflows, both in the tradable and non-tradable sector.
• Better governance and enterprise restructuring have also a positive impact on FDI inflows, both in the tradable and non-tradable sectors.
• Banking reform and interest rate liberalization has a positive impact on FDI in the tradable sector.
2.2. EU10:The impact of institutional variables
• No impact of perceived level of corruption on FDI inflows.
• An improved competition policy leads to higher FDI inflows especially in the tradable sector.
• Better roads and railways infrastructure lead to
higher FDI in the tradable sector.
• Improved telecommunications and railways
infrastructures positively affect the FDI inflows in
the non-tradable sector.
4.Romania: policy recommendations
4. Increasing role for the institutional
factors• Foster the openness of the economy and thus
strengthen the real convergence process– The openness degree of the Romanian economy is still
rather low compared to the other EU10 countries.
• Encourage investments in the more capital intensive sectors (vertical spillovers)– Labor costs gap expected to diminish throughout the
real converge process, with some of the FDI relocating towards lower labor costs regions (e.g. textiles).
– Market specific and institutional factors will be more important in an economy’s whose competitiveness is increasingly based on more capital intensive goods.
4.Privatization
• Restructuring the still state owned
enterprises is a must.
• Choose between further privatization,
preferable in a high transparency way, or
assure competitive governance for these
firms.
– The latter can be seen also an intermediate
step towards privatization, aiming at improving
the performance of state-owned firms.
4.Corporate governance and
enterprise restructuring
• Although a governance code exists for the listed
companies, Romania ranked at the end of 2010
lowest among EU10 countries for this indicator.
• The initiative of AmCham to adopt a code of
corporate governance code for its members is an
example for authorities to extend such a code
economy wide. This will enhance long term capital
investments, both domestic and foreign.
4.Competition policy
– Among EU10 countries, Romania ranked last at
the end of 2010.
– Positive developments especially in terms of
legislation.
– Further steps:
• Unrestricted entry should go together with an
efficient monitoring from the competent authorities.
• Competition Council - adding human resources with
skills in law and quantitative analysis to the already
existing one should become a priority.
4.Infrastructure
– The low quality of infrastructure has been
continuously mentioned as a drawback for
Romania in attracting more FDI.
– Give full priority to projects aimed at improving
the existing infrastructure or developing new
one.
– As a support for these actions, increasing the
absorption capacity of EU funds should receive
an at least equal attention.
4.Corruption
– For EU10 estimations do not show a significant
impact of perceived corruption level on FDI
inflows.
– For Romania it has been also frequently
mentioned by foreign investors as an obstacle
for higher FDI inflows in Romania.
– Although progress has been made, increasing
further the efficiency and the accountability of
the judicial system is a must.
4. Time consistency
• Do not obstruct the business environment by
increased volatility induced by political tensions,
frequent changes in the legislation, fiscal one
included.
• A time consistent policy, “say what you do and do
what you say” type is the primary condition that
should be respected in order not only to facilitate
more FDI inflows, but also to ensure a smooth
functioning of the economy as a whole.
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