Foreign Direct Investment and Export performance; Austria

Presented by - Ngwesse ElvisSurpervised by – Prof. Joseph Francois Department of ECN JKU.

FDI and host country export performance; (Austria)

Globalization can be described as the increasing interdependence of national economies of both

adcanced and developing countries. Such econopmic integration occurs when countries open

themselves to the expanding flow of trade, capital and labour (UNCTAD)

Economic globalization; this centers on the decline of national markets and the rise of global

markets as MNC´s focal point, be it for the production and sale of final and intermediate goods

or for the procurement of inputs (capital and labour) (Brakman et, al. 2006).

Schools of Globalization; Two schools exist, the first insist positive benefits for the host

country and the second insist negative benefits for the host country.

Point of research interest: Positive school.

This cross-boarder investments across regional and global markets is being carried out by multinational

companies (MNC).

Multinational Company; A MNC is a firm that manages production establishments in two or more

countries. A multinational company (MNC) can be formed either by purchasing an existing firm in some

other country which is not the parent country where the MNC is located i.e. by acquisition or by merger, or

by formation of a new legal entity i.e. by Greenfield investment. The above described expansion strategies

are termed foreign direct investment (FDI) (UNCTAD).

Why do firms carry out this cross-boarder investments?

Dunning (1977) states that, firms strive to become MNC in order to explore intrinsic competitive

advantege such as ownership of better technology not pocessed by their foreign counterparts .

Dunning in 1976 then developed the OLD paradigm that explained the three main advantages

for a MNC to be a net exporter of FDI;

Ownership advantage

Location advantage

Internalization advantage

(License)

Problems associated with Licensing include;

Some licensee´s can damage brand name.

Some can become future potential competitors.

Limits the licensor´s knowledge about foreign market in case of e.g. product development.

Trade Theories.

David Ricardo; Comparative advantage theory modeled a situation in which trade and gains

from trade arise as a consequence of differences between countries (Markusen, 2002)

Heckscher-Ohlin: For many years, international differences in relative factor endowments were

the basis of the dominant positive theory of international trade (Markusen and Venables, 2000)

The new trade theory is integrated with the new growth theory which is also essentially based

upon market imperfections. Technology and knowledge spillovers are key mechanisms which

link international trade and endogenous growth (Deraniyagala and Fine 2001).

The old trade theories stressed constant return and factor endowment

The new trade theories stress increasing returns and relative and absolute factor endowment for

trade to take place (Svensson and Markusen, 1984).

MNC as transmitters!

Due to the existence of firm specific, intangible assets that give them offsetting cost advantage

over foreign country producers (Markusen and Horstmann, 1996).

MNC act as a vehicle for the transfer of production technology , managerial skills, thus helping

to spread knowledge in a world of imperfect competition (Markusen, 1980).

But research suggests that FDI impacts the host economies through different ways e.g.

competition effect and knowledge spillovers (Beugelsdijk et, al. 2008).

There also exist two types of multinationals having different degree of spillover;

Vertical MNC.

Horizontal MNC.

Horizontal MNC impact host economy 50% more than Vertical MNC (Beugelsdijk et, al.

2008).

Due to the interaction between foreign and domestic firms most espacially in the same

industry (intra-industry) there is bound to be spillovers to domestic firms.

There is the beleive that exporting firms then increase their productivity and become

competative in national and international markets, hence increasing the host counry export

performance.

National governments are at an increasing pace of creating national environments suitable for

this MNC in order to increase FDI inflows e.g tax allowances due to the expectations of such

benefits from MNC.

Previous Research on MNC and their effect on host country export performance has been

recognised by for example the following researchers;

Zhang and Song (2000) China

Jacorcik (2004) Lithuania

Blomström and Kokko (1997)

Kutan and Vuksic (2007) Transition economies

FDI can promote exports due to spillover effects by MNC but some short commings were

outlined, e.g.

Sector and Regime (government).

MNC´s can provide a channel for the introduction of new technology, diffusion of information,

as well as an important competitive stimulus; there by increasing productivity and increasing

international specialization of domestic firms leading to export growth (Balasubramanyam et

al.1999).

Austria and her position in Europe.

Acess to mature and emerging markets

Acting as a bridge between the economically stable west and growing east (Puceta 1999).

Main export partner is the EU with 63 per cent (Germany 35%, Italy 9%, France 5%) followed

by Switzerland (5 per cent), the US (5 per cent) and Hungary (4%) (OeNB).

Austria as a gate way into eastern Europe e.g. companies;

Cargo-partner, PSA Peugeot Citroën, Schenker, Arvato (ABA 2007).

Privitization in Austria. This has been wholly to improve the poor performances of many

public enterprises.

Headquarters remained in Vienna

A core of Austrian shareholders

Österreichische Industrieholding (ÖIAG), Böhler-Uddeholm (25%), Voest Alpine steelworks

(34.7%), Telekom Austria (47.2%), and the engineering and services group, VA Technologie

(24% State-owned) (UNCTAD).

Foreign investors successfuly obtained shares in important Austrian industry

sectors e.g.

Austria’s largest bank (Bank Austria),

Austrian Tobacco Company,

Voest-Alpine VA (a major steel producer),

VA Tech (a metallurgy),

In 2005, the government sold its 34.7 % stake in VA, in which U.S. institutional investors now

holds more than 20%. 

In 2005, Siemens, which held a 16.5 % share in VA Tech, made a successful public takeover

bid, as the government sold its 14.7 % share in VA Tech to Siemens. 

In 2006, the government successfully privatized 49 % of its postal company through an IPO. 

In 2006, the U.S. investment fund Cerberus Capital Management took over more than 75 % of

the shares of BAWAG P.S.K. (BAWAG) bank (Austria’s fourth largest banking group) from

its owner, the Austrian Trade Union Federation.

(ABA).

Investment policy in Austria.

Tax policy on foreign multinationals. Although Austria is a high-tax country, it is becoming

more attractive to companies and headquarters, especially after implementing a corporate tax

cut from 34% to 25% in 2005.

New legislation abolished the Austrian non-resident capital gains tax for most foreign

investors.

Austria also offers a highly favorable provision for group taxation, unique in Europe, which

allows offsetting profits and losses of group operations .

(ABA)

Legal frame work for FDI.

Admission and establishment

Ownership and control

Operational conditions

Foreign exchange controls

Incentives

0

1000

2000

3000

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5000

6000

7000

8000

9000

10000V

alu

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years

M & A in Millions of Euros

Daten…

Source, WIR 2007

0

5000

10000

15000

20000

25000

30000

350001970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

FD

I In

flo

w

years

FDI Inflow in Millions of Euro

Flow

Source; wir 2008

0

20000

40000

60000

80000

100000

120000

140000

Ex

po

rt v

alu

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Years

Export performance in Millions of Euro

Datenreihen1

Source; WIFO, 2008

CHAPTER ONE Introduction.

CHAPTER TWO Theory and Empirical Evidence Theories on FDI

CHAPTER THREE Austria data, History and facts on FDI

CHAPTER FOUR Empirical chapter/ regression

CHAPER FIVE Conclusion