Why Poland and other countries are attracting foreign direct investments (FDI)

7/29/2019 Why Poland and other countries are attracting foreign direct investments (FDI)

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Why Poland and othercountries are attracting

foreign direct investments(FDI)



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Why Poland and other countries are attracting foreign direct investments?

The collapse of a communist system resulted in significant changes thathave taken place in range of former centrally planned economies including the CEEcountries. These countries changed from socialist regimes to full market economies.This created whole variety of new challenges and influenced such sectors of life like

economics, politics, social aspects, etc.In the beginning of transition, countries were experiencing a slowdown and

worsening economic conditions because of that their economies were focused on heavyindustry rather than on production of consumer goods and services.

Furthermore, lack of domestic savings and inefficient financial markets causedserious problems for economic restructuring and competitive market creation.

Thereupon, foreign direct investment has been perceived as an essential source of

funds and accelerator for the economic and social transformation. FDI was acknowledged as source of capital, new workplaces, but also improves

the level of activity in a given country. Moreover investments brings itself newtechnologies, management techniques, skills, also know-how and new habits.

Governments has noticed that this aspects were vital for stable and fast development.They have introduced policies that had brought down barriers and preventions that had

been inhibiting inflow of FDI during socialism reigns. Since then this attitude wascontinued and still these countries provides solutions to attract companies to invest

there. Nowadays authorities tries to ascertain factors behind FDI, because of increasingsignificance and competition of it. They want to gain the facts of what determines the

decision of firm to invest in a defined country. Foreign direct investments are an essential tool for development of Central and

Eastern European countries. In the past twenty years this form of investments hassignificantly increased and became most common type of capital flow needed for

stabilization and economic growth. Countries such as Poland, Hungary, Czech Republicand Slovakia attract foreign investors because of their localization. In this essay we aregoing to explain closely the reason of this process, by showing several examples of FDI.

According to definition it is an investment made by a company or entity based inone country, into a company or entity based in another country. Foreign direct

investments differ substantially from indirect investments such as portfolio flows,wherein overseas institutions invest in equities listed on a nation's stock exchange.

Entities making direct investments typically have a significant degree of influence and

control over the company into which the investment is made. Open economies withskilled workforces and good growth prospects tend to attract larger amounts of foreign

direct investment than closed, highly regulated economies. Countries located in central and eastern Europe have a huge potential and are

the perfect place to invest in. Referring to Ernst & Young European AttractivenessSurvey international companies indicated Poland as the top potential investment

destination for their FDI projects in Europe. In the last decade we have witnessed anoutstanding development of Chinese economy, which became one of the most



influential economies in the world. At the moment, Chinese companies are expandingtheir business into European market and they need links such as Poland and earlier

mentioned countries to connect China with Western Europe."There will be more clients from China. We are seeing their great interest in

investment in financial institutions, mining, manufacturing, and buying shares in existing

companies," said Paweł Tynel, executive director of tax at Ernst & Young Sp. z o.o. , inan interview for China Daily. Such companies as Huawei Technologies Co Ltd, aleading global information and communications technology solutions provider, Nuctech,

which has 60 per cent. of global market for technology at border crossings used for scanning vehicles and containers, or China National Electric Engineering Co. (CNEE)

are willing to invest and build factories, power units etc. Another country where Chinese companies are locating their assets is Hungary.

Its location attracts investors and changes this country into European logistic hub.Surrounded by seven neighbour countries and with one of the biggest populationsamong CEE countries, Hungary creates outstanding market for investors. Logistic

center, rail express and factories that are beeing built by Chinese investors are only few

examples of foreign interest into this country.

The benefits of FDI for the host country can be significant, including knowledgeand technology transfer to domestic companies and the labor force, improvement of management, productivity spillovers, rise of competition, and improved access for

exports, notably in the source country. Foreign capital inflow was an important factor facilitating the privatization and reconstructing process in the CEE during beginning of

the transition process. Currently, FDI is seen as an essential factor stimulating sustained economic growth.

Poland



The biggest country in central Eastern Europe. Situated between Germany and Russia.

It has also access to the sea. With 38 501 000 population it is the largest economy

among the CEE countries. In the 2011 the FDI inflow was estimated at EUR 9.93, and

it will be unaffected by global slowdown.

Poland is recognized as having an economy with significant development

potential, overtaking the Netherlands in mid-2010 to become Europe's sixth largest

economy. Foreign Direct Investment in Poland has remained strong ever since the

country's re-democratization following the Round Table Agreement in 1989. 2011 GDP (PPP) GDP (nominal) Total $771.658 billion $513.821 billion Per capita $20,334 $13,540

Foreign direct investment in Poland has increased in the past twenty years, tobecome the most common type of capital flow needed for stabilization and economicgrowth. Foreign capital coming into the Polish economy has fulfilled a very important

role in the process of privatization and restructuring. Poland seeks to attract andpromote foreign investment and to liberalize its economy to ensure free movement of capital and profits. According to UNCTAD, the inflow of FDI to Poland increased by

46,7% in 2011, while the worldwide increase in FDI amounted to 17%.



Above we can easily see that Poland since 2000 has a stable inflow of FDI. It

maintains on the same level as „West‟.

Poland’s Attractiveness to FDI

A substantial improvement in the investment environment occurred in 90‟s. Allfactors that influence business activity may be divided into two groups: environmental

factors that define the judicial, institutional, and macroeconomic conditions, and factorswhich reflect investors‟ perception and decision making. Given these factors, Poland

has successfully attracted large amount of FDI. Poland‟s attractiveness is due in part toits political stability, continued political commitment to economic liberalization and

favorable policies toward foreign investment. Additionally, Poland‟s domestic marketsize and growth together with growing purchasing power and reduced inflation further

encouraged FDI. Low labor costs are significant for foreign investors. The labor costs inCentral Europe are four times lower than in western countries and Poland has an

abundant supply of a well-qualified labor force. Additionally the integration process withthe European Union has influenced the substantial inflow of foreign capital. Another contributing factor is the lack of fiscal discrimination between foreign investors and

domestic companies in Poland, including the benefits derived from a sophisticated taxincentives.



The majority of resources came from Luxembourg (EUR 1 945 million), Germany

(EUR 1 627 million), Italy (EUR 1 020 million), Cyprus (EUR 843 million), Switzerland(EUR 510 million), Great Britain (EUR 396 million), Sweden (EUR 343 million), Austria(EUR 327 million) and Spain together with Portugal ( EUR 252 million each of them).



Investments from specific countries and regions

The literature on the determinants of foreign investment has identified both policy andnon-policy factors as drivers of FDI. Non-policy factors include market size, distance,factor proportions and political and economic stability. Policy factors include openness,product-market regulation, labour market arrangements, corporate tax rates andinfrastructure. Non-policy related factors relevant to FDI fall into a number of categories.First, market size of the host country, usually measured by GDP, is considered animportant determinant of horizontal FDI, because the returns from such investmentdepend on economies of scale at the firm level. Second, the effect of distance andtransport costs on FDI is viewed as ambiguous. While they imply transaction costs for the investors, FDI may also carry advantages over trade when dealing with distantcountries.

Countries where domestic product-market regulations impose unnecessary costson business and create barriers to entry discourage FDI. Labour market conditions thatimpose extra costs on investors will tend to curb the inward FDI position of a country.



We can clearly determine that taking into account arguments above CEEcountries provides cheap and reliable workforce, its authorities introduced policies that

attracts investments in their countries. There were made some tax concessions andtaken measures to reduce red tape.

Hungary

The leader in FDI among CEE countries in 1990s, faced political problems which

had an impact of its attractiveness. Hungary lost its leading position.

In 2011, Hungary‟s stock of IFDI (inward FDI) was lower than that of Poland and

the Czech Republic, and its per capita IFDI lower than that of the Czech Republic and

Slovakia.1 In terms of IFDI stock relative to GDP, Bulgaria and Estonia outranks

Hungary. However, in international comparison, the Hungarian economy can still beconsidered one in which IFDI plays a major role. FDI flows to Hungary were hit hard

especially during the crisis years of 2009 and 2010. Data for 2011 indicate an increase

in FDI inflows, however, as a press release of the Hungarian National Bank states:

“This is mainly due to a large capital in transit3 flow in the fourth quarter of 2011.”



FDI as percent of GDP

The graph above shows the FDI as percent of GDP for Hungary and other

countries on an annual basis. The pick level of almost 54% of Hungarian GDP was

reached in 2007 and since then, the indicators were falling down to -27% in 2010. Even

if there are still some political problems, the country attracts international investors. The

labour force in Hungary comparatively to other CEE countries is cheap and it attracts

investors, especially from automotive industry.

The most significant investments in this industry in the year 2009 were: ○ Bosal Group: Expanded its automotive components manufacturing plant

in Kecskemé,

○ Harman-Becker: Automotive electronics, Székesfehérvár, ○ PATEC: Automotive components, Szikszó.

Hungarian location in Central Europe is great opportunity. It attracts number of

logistic companies. Foreign logistics service-providers present on the Hungarian

market, for instance Austrian (Hödlmayr, Lagermax, Gebrüder Weiss), German (DPWN,

DB-Schenker, Logwin, Dachser), Dutch (TNT, Vos), French (Geodis, Giraud), Italian

(Catone, Prioglio), American (Expeditors, UPS), British (Wincanton, Eurogate) and

Swiss (Kühne-Nagel) enterprises/groups. As a result of its location, Hungary enjoys natural advantages in the area of

logistics. Four Pan-European and 2 ERTMS corridors transit the relatively small area of

Hungary, permitting links between Western Europe and the Balkans as well as

Southwest Europe and the CIS (Commonwealth of Independent States). In addition, in

some areas there is already demand for Central-Eastern European north-south

relations as well, primarily because of the producer companies established in the

region.



As airports in Western Europe become increasingly clogged and the proportion

of high value goods increases, there is ever greater demand for the formation of a

Central-Eastern European cargo airport. Preparations for such an airport are underway

at several potential sites (for example, Taszár). Players on the air transport market in

Hungary use Budapest Ferenc Liszt International Airport to the greatest extent. In

addition, there are two other airports of regional significance in Hungary that also

conduct international air transport (Sármellék and Debrecen). Attractiveness of such countries is still increasing and in few years Central

Europe will be huge European logistic center.

Summary

To summarize we are pointing the main factors which are the reason of

attractiveness to FDI of Poland and other countries. Ongoing development of those

countries is creating more and more reasons to invest. The first of them is location. International companies invest mainly in central and

eastern Europe, because countries that are located in this region are kind of link which

connects Asia with Europe. The second factor which is connected with the previous one is distance.

Factories that are built for example in Poland, are in the perfect geographical position

and the distance between producer and client is much closer than in the situation when

factory is in China, in which case costs of transportation are much higher. This is also a

reason of building logistic hubs and rebuilding infrastructure.

The third factor influencing attractiveness for foreign direct investments is market

size. Population of countries attracting FDI begins with about 1 million and ends at level

over 45 million citizens. This shows that market potential is really high and new

investments will surely need educated and skilled labour force which is easily to find in

developing European countries. Another one is political and economic stability. The perfect example is Poland,

where during financial crisis there was still economic growth and also the political

situation is perfectly stable. The investments in Central and Eastern Europe are chance for developing

countries to grow and implement new technologies, infrastructural solutions and tocreate thousands of needed workplaces. FDI has also impact on education. Universities

are creating new study courses connected with changes in the economy and ongoing

investments. Taking into account historical background we can say that FDI was one of the

source of stabilizing the CEE countries after the transition from central economies to full

market economies. Then after years of dynamic development FDI was treated as a



source of sustainable growth, but what also is very important for economy, it is a

catalyst for new technologies and innovations. Through FDI we can have access to

solutions from variety of countries that is why we can say that investments from abroad

can provide dual success. First in terms of finance, money, second in science, life

standard, therefore these two boosts up whole economy and development in a given

country. Summarising we can say that FDI stimulates environment in a positive way.

Moreover by taking the goodness from abroad we cannot forget that we have to

stimulate our own entrepreneurs to origin their companies inside the country. This

important because of the phenomenon thatmore FDI brings even more FDI.

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Why Poland and other countries are attracting foreign direct investments (FDI)