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FDI in Greece & Greek FDI

Chair: Professor Kevin FeatherstoneFragkiskos Filippaios, MEF Fellow

Kostas Tzioumis, NBG Fellow

Hellenic Observatory Seminar SeriesFebruary 12th, 2008

Outline

• General (definition, trends, determinants)

• FDI Inflow in Greece

• FDI Outflow from Greece

• Assessment & policy recommendations

Definition

• An investment made to acquire lasting interest in enterprises operating outside of the economy of the investor.

• Threshold of 10 per cent of equity ownership to qualify an investor as a foreign direct investor (OECD)

• Forms of investment classified as FDI are equity capital, the reinvestment of earnings and the provision of long-term and short-term intra-company loans (between parent and affiliate enterprises).

Global trends

• Improvements in crucial determinants of FDI: Institutions, taxation, liquidity, FX, etc.

Greek FDI inflows (1): A politician’s view

0

1

2

3

4

5

6

1980 1985 1990 1995 2000 2005

Inward FDI in Greece, 1980-2006 Flows- Billion USD (current)

Greek FDI inflows (2): A clearer view

Sources of Inward FDI in Greece (2001):• European Union: 70% [~50% from Luxembourg and Holland]• Other European countries: 16%• United States: 7%

0

0.5

1

1.5

2

2.5

1980 1985 1990 1995 2000 2005

Inward FDI in Greece, 1980-2006 Flows- Billion USD (constant 1980 prices)

0%

2%

4%

6%

8%

10%

1980 1985 1990 1995 2000 2005

Inward FDI in Greece, 1980-2006 % of gross capital formation

Greek FDI inflows (3): South EU perspective

•

0%

10%

20%

30%

1980 1985 1990 1995 2000 2005

Inward FDI: Greece, Portugal & Spain, 1980-2006 % of gross capital formation

SpainPortugal

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2

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1 6 11 16 21 26

Inward FDI in Greece, 1980-2006 Flows- Billion USD (constant 1980 prices)

Spain

Portugal

Greece’s performance: Inward FDI

• UNCTAD (2006) ranks Greece 114th in terms of inward FDI performance (out of 141 countries). The rest of the EU averages 67.

• At the same, Greece is ranked 36th in terms of FDI potential, based on its macroeconomic conditions. The rest of the EU averages 33.

Reasons for underperformance (1)

• Product market structure– OECD (2007): “Greece has one of the more

restrictive business environments for inward investment”

– US State Dept. (2007): “Competition in many industry sectors in Greece can be characterized as oligopolistic, making it difficult for new entrants.”

– World Bank (2007) ranks Greece 100th in the Ease of Doing Business Index (out of 187 countries). The average rank for the rest of the EU is 31.

• Labour market– World Bank (2007) ranks Greece 142nd (out of 178

countries) with regard to labour regulation.


• Corruption– Transparency International (2007) ranks Greece 56th

in the Perception of Corruption Index (24th in the EU).– Poor AML supervision in banking/insurance sector &

equity mkt.

• Taxation– Tax framework– Legislative Decree (2687/1953) allows for unilateral

changes in terms of tax regime for the FDI project.

• Investment mismatch GDP Services: 71%, Industry: 22%, Agriculture: 7%FDI Services: 56%, Industry: 44%, Agriculture: 0%


• Marketing– No centralized authority to coordinate policy

reform and assess progress.

• Focus on privatization, without foreign control– Rather than greenfield investments or joint-

ventures, Greek governments have focused on equity investments in privatisation of utility firms & banks. 2000-2005: $ 1.5 billion (mean) 2006: $ 3.4 billion 2007: $ 2.2 billion

Theoretical FrameworkThe IDP in a Nutshell

• The net outward position of a country (outward investment –inward investment) follows five stages of development which are closely related to the economic development of the country.

• Stage 1: Least developed countries attract and undertake negligible amounts of FDI.

• Stage 2: Developing countries attract increasingly FDI as a result of cheap inputs; as a result of FDI, domestic investors enhance their own ownership advantages through spillovers; local advantages are also upgraded.

• Stage 3: The developing country becomes gradually an outward exporter itself; expansion is in neighbouring, culturally similar countries conform with the Uppsala School (Johanson and Vahlne, 1977; 1990). Investment in developed countries occurs as well.

Stage1

Stage 2

Stage3

Stage 4 Stage 5

GDP per Capita

Net O

utwa

rd

Inve

stm

ent P

ositi

on Investment Development Path (Dunning 1981)

Theoretical FrameworkThe IDP in a Nutshell (II)

• Stage 4: The country becomes a net outward investor, revealing the level of economic development as well as the dynamism of local firms.

• Stage 5: This stage describes developed economies i.e. the USA, the UK, Germany with high volumes of inward and outward FDI.

Greece and Its IDP• Greece is now a stage 3 country.• Stage 1: the end of WWII, the opening up of the

Greek economy; foreign investors in chemicals, basic metals and transportation sector

• Stage 2 (70’s and 80’s): the accession into the EU ensured the transition from stage 1 to stage 2; foreign investors in mainly Heckscher-Ohlin type industries i.e. textiles, food and drink and consumer goods throughout 80’s and 90’s

• Stage 3 (90’s and 00’s): the opening up of Central and Eastern Europe; government measures to enhance the competitiveness of Greece and increasing convergence with the EU core

Stage 1End of WWII

Stage 270s and 80s

Stage 390s and 00s

Stage 4Today ???

Stage 5

GDP per Capita

Net O

utwa

rd

Inve

stm

ent P

ositi

on Investment Development Path (Dunning 1981)

Investment Development Path Coefficient

(Net Outward Investment as % of GDP)

-16

-15

-14

-13

-12

-11

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

Year

Val

ue

Series1 -3 -5 -7 -9 -11 -13 -13 -13 -13 -15 -3 -5 -5 -7 -7 -6 -8 -8 -8 -10 -6 -5 -4

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Motivation• Greece is a typical example of how a small country can

become a FDI outward investor and a regional centre as it moves up on its economic development path.– Data from the Hellenic Ministry of National Economy

(1998) show that Greek investment in the Balkan region accounts for almost 12% of the total FDI. It is estimated that more than 2,500 Greek companies have invested in Central, Eastern and South Eastern European Countries (Hellenic Centre for Investment, 2005).

• Greece has also increasingly invested in countries such as India, China, UK or US.

• Some Central and Eastern European countries as well as developing countries such as India and China have become FDI outward investors.

The case of Greece as an outward investor

• Key regional player and one of the largest investors in the Central and Eastern and South Eastern European Countries (Bastian, 2004; Demos, Filippaios, & Papanastassiou, 2004; Kekic, 2005)

• Current developments in the region have changed the role of domestic subsidiaries (Manolopoulos, Papanastassiou, & Pearce, 2005; Stoian & Filippaios, 2008)

• This process was enhanced by Greek policies aiming to transform the country into a key player for the region. – The ‘Greek-Balkan Reconstruction Plan’, offering almost 500 million

euros, is an indicative policy fulfilling that aim (Hellenic Centre for Investment , 2005).

– Furthermore, this expansion has been facilitated by the upgrading of the Athens Stock Exchange (ASE) from a developing to a developed financial market, i.e. a reliable source for raising funds.

Greek firms grabbed the opportunities and expanded rapidly in the newly opened

markets: • Albania - it was the second largest investor after Italy at

the end of 2001 (WIIW, 2005)

• Romania - Greece was the second largest investor at the end of 2003 following the Netherlands (WIIW, 2005)

• Bulgaria - Greece on the third position following Germany and Austria (WIIW, 2005)

• FYROM - it was the second investor following Hungary (WIIW, 2005)

• Moldova - Greece holds the seventh place (WIIW, 2005)

The Greek investment occurred through two channels:

• First, Greek subsidiaries of multinational enterprises started internationalising. – Firms such as 3E, a Coca- Cola soft drinks subsidiary, Delta,

partner of Danone, Intracom, a partner of Siemens working in telecommunications, Chipita, a PepsiCo food subsidiary and many others started investing abroad, thus becoming regional headquarters.

– This strategic change appears to be verified by a prior study of Pantelidis and Kyrkilis (1994) where they argue that ‘it is possible for foreign subsidiaries to readjust their market strategies along time and in accordance with changing conditions’.

• Second, purely domestic firms, ranging from small entrepreneurial to large traditional firms, seized the opportunities and engaged in foreign production by using their accumulated experience and expertise.

Explaining Greek FDI abroad• Until now only a few attempts were made in the international

literature with a seminal one from Petrochilos (1988). Almost all studies are either purely descriptive or do not go beyond the analysis of specific case studies.

• For a long time, the lack and inconsistency of FDI data dissuaded scholars from examining the Greek case.– The adoption from Bank of Greece of the New Balance of Payment

System since 1996, gives us the opportunity to inspect the locational determinants of inward FDI in Greece from 1996-2001, for different sectors and a range of investing countries.

• Previous studies (Demos, Filippaios & Papanastassiou, 2004; Filippaios & Stoian, 2006; Stoian & Filippaios, 2008; Filippaios, 2008) showed that traditional factors (size of the economy, as well as its openness are significant) attracting FDI seem to dominate the decision process of Greek firms. Capital productivity and labour costs on the sectoral level are also influencing the decision of Greek investors.

Why the South East region of Europe?

• The emerging economies offered:

– A Large and unsaturated potential market in terms of population and Gross Domestic Product (GDP)

– A cheap and relatively skilled labour force and accessible and low-priced natural resources.

– Improvements in the institutional framework, political stability and the prospects for European Union (EU) membership have acted as important catalysts for foreign direct investment (FDI) in the ‘Agenda 2000’ transition countries.

• Market seeking and rent seeking multinationals have increasingly expanded into Central, South and Eastern Europe and names such as General Motors, Nestlé, British Petroleum, Orange and Marks and Spencer’s are common place in the area.

Literature reviewExploring the Greek case contributes to several

strands of literature:

• Studies on country specific ownership advantages: Grosse and Tevino (1996) and Deichmann (2001).

• Studies on institutional determinants of FDI: Wheeler and Mody (1992); Brunetti et al (1997); Brenton et al (1999); Henisz (2000); Rodrik and Subramanian (2003); Carstensen and Toubal (2004); Disdier and Meyer (2004); Dunning (2004); Trevino and Mixon (2004); Bevan et al (2004); Bevan and Estrin (2004); Pournarakis and Varsakelis (2004).

• Studies on institutional determinants of entry mode choice: Oxley (1999); Meyer (2001); Meyer and Estrin (2001); Smarzynska (2002); Tihanyi and Roath (2002);

Institutional and Business Environment Factors

• We have adapted the data from a World Bank survey on the investment climate in 58 countries conducted on 28,000 companies in 2002 so that figures are comparable. We have then put these business barriers in the order of their importance to investors so that 1 represents the issue considered the most significant obstacle to the operation and growth of business.

Albania Bulgaria FYRoM Romania Serbia & Montenegro

Economic and regulatory policy uncertainty

48.5(4)

48.5(2)

37.3(3)

43.3(4)

59.8(1)

Macroeconomic stability 58.7(1)

36.3(4)

35.2(4)

53.4(2)

45.9(3)

Corruption 47.5(5)

31.2(5)

34.9(5)

35.2(5)

Skills and education of available workers

13.2(7)

16.6(6)

3.7(7)

10.8(7)

19.7(6)

Business licensing and operating permits

22.9(6)

23.1(5)

17.4(6)

23.2(6)

17.7(7)

Consistency/predictability of officials’ interpretations of regulations affecting the firm

54.5(2)

61(1)

42.3(2)

54.5(1)

53.5(2)

Confidence in the judiciary system

50.6(3)

46.5(3)

50.6(1)

45.8(3)

39.5(4)

Source: World Bank (2005)

Firms’ perceptions of business barriers in selected transition countries. In parenthesis the grading of

importance (2002)

Data and Sample• Greek FDI in the South East European

Region (Source: Bank of Greece, 2007)• Time span 2001-2006• Sectoral disaggregation• Data on the external environment from

World Bank, IMF, ICRG, Freedom House, Economist Intelligence Unit.

• Capturing Economic, Political, Social and Institutional aspects of the environment

Trade Balance - AlbaniaAlbania

-2,500,000,000.00

-2,000,000,000.00

-1,500,000,000.00

-1,000,000,000.00

-500,000,000.00

0.002001 2002 2003 2004 2005 2006

Source: IMF, [Direction of Trade Statistics] [Annual values] [January 2008] [Units: US Dollars]

Trade Balance - TurkeyTurkey

-60,000,000,000.00

-50,000,000,000.00

-40,000,000,000.00

-30,000,000,000.00

-20,000,000,000.00

-10,000,000,000.00

0.00

10,000,000,000.00

2001 2002 2003 2004 2005 2006


Trade Balance - BulgariaBulgaria

-7,000,000,000.00

-6,000,000,000.00

-5,000,000,000.00

-4,000,000,000.00

-3,000,000,000.00

-2,000,000,000.00

-1,000,000,000.00

0.00

1,000,000,000.00

2001 2002 2003 2004 2005 2006


Trade Balance – The RestThe Rest

-20,000,000,000.00

-15,000,000,000.00

-10,000,000,000.00

-5,000,000,000.00

0.00

5,000,000,000.00

2001 2002 2003 2004 2005 2006

Bosnia World

Bosnia Greece

Croatia World

Croatia Greece

FYROM World

FYROM Greece

Romania World

Romania Greece

Serbia&MontenegroWorld

Serbia&MontenegroGreece

Slovenia World

Slovenia Greece


Greek FDI Abroad2001-2006

Country/Year 2001 2002 2003 2004 2005 2006 Grand Total

Albania 7.3% 7.8% 8.4% 6.3% 7.0% 5.0% 6.4%

Bosnia 0.0% 0.0% 0.0% 3.0% 2.0% 0.0% 0.8%

Bulgaria 36.9% 24.4% 19.6% 20.6% 17.7% 12.1% 18.2%

Croatia 0.1% 0.1% 0.1% 0.0% 0.1% 0.0% 0.0%

FYROM 10.7% 11.0% 11.1% 13.2% 6.7% 4.7% 8.0%

Romania 43.9% 41.9% 45.5% 40.7% 49.2% 31.6% 39.9%

Serbia&Montenegro 0.0% 13.9% 13.6% 13.4% 15.9% 17.6% 14.6%

Slovenia 0.0% 0.0% 0.1% 0.1% 0.2% 0.0% 0.1%

Grand Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Bank of Greece, 2007

Sector/Year 2001 2002 2003 2004 2005 2006

Grand Total

1495.-mining and quarrying 0.0% 1.0% 0.9% 0.8% 0.5% 0.3% 0.5%

3995.-manufacturing 12.6% 15.5% 15.0% 17.3% 14.8% 8.6% 12.7%

4195.-electricity,gas and water 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

4500.-construction 0.3% 2.4% 2.0% 1.7% 1.0% 0.5% 1.1%

5295.-trade and repair 2.9% 3.5% 4.5% 6.3% 5.6% 3.2% 4.3%

5500.-hotel and restaurants 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

6495.-transp,storage,communic. 52.2% 55.2% 55.7% 47.5% 47.3% 30.0% 42.8%

6895.-financial intermediation 31.7% 21.9% 21.4% 26.0% 30.5% 57.1% 38.2%

7395.-real estate, renting 0.3% 0.4% 0.3% 0.2% 0.2% 0.1% 0.2%

9995.-other services 0.0% 0.2% 0.1% 0.1% 0.1% 0.0% 0.1%

9996.-not allocated 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Grand Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Greek FDI Abroad (II)2001-2006


Greek FDI - 2001

Level4.shp0220 - 2721464 - 16073109352 - 160656553193 - 659206


Greek FDI - 2002

Level4.shp0105 - 149615481 - 143691202272 - 256286449409 - 770824


Greek FDI - 2003

Level4.shp0216 - 149641915 - 207862273099 - 335032484028 - 1121147


Greek FDI - 2004

Level4.shp01318 - 7628882862 - 176276370935 - 376155576623 - 1139662


Greek FDI - 2005

Level4.shp03094 - 5440083011 - 272077284520 - 647141719965 - 2005863


Greek FDI - 2006

Level4.shp00 - 467.751467.751 - 389590389590 - 13644701364470 - 2457370


2006 - Manufacturing

Level4.shp06200 - 2894087350 - 131880158670232030


2006 – Financial Intermediation

Level4.shp00 - 2976029760 - 451700451700 - 957570957570 - 2208970


Results• Greece is one of the leading investors

in Central, Eastern and South Eastern European Countries, thus understanding the process that determines Greek investments in the region is of crucial importance for policy makers

• Interrelation of ownership and locational advantages that can explain foreign investment activity

ResultsDependent: FDI Flows Normalised by GDP GDP Per Capita -0.102** -0.101** -0.127 (0.041) (0.043) (0.134) Unit Labour Cost -6.808** -6.261** -4.590 (3.153) (2.642) (11.312) Trade Balance as % of GDP -0.945 -3.291 2.425 (2.828) (5.565) (20.902) Secondary Education Enrollment -12.515** -11.267 -12.865* (5.008) (7.514) (7.290) Tertiary Education Enrollment 17.213* 16.948 17.197 (9.679) (10.306) (36.257) Public Debt over GDP -4.778** -5.230*** -7.338** (2.014) (1.716) (3.357) Socioeconomic Conditions 6.844 6.265* 6.326 (4.159) (3.292) (6.732) Corruption -3.197 -2.578 -1.180 (3.703) (4.333) (6.845) Rule of Law 2.566* 1.984 3.927 (1.413) (2.963) (4.090) Democratic Accountability 1.093** 1.039* 1.024*** (0.443) (0.547) (0.379) Ethnic Tensions -1.08383 -0.898 -1.212 (0.83470) (1.344) (2.507) Distance form Greece 0.118 (0.357) Marginal Corporate Taxation -5.394 (11.093) Number of Observations 648 648 648 Adjusted R-square 0.932 0.855 0.853

Recommendations• Inward FDI

– Liberalisation of Markets– Privatisations with transfer

of technology and Know-how

– Creation of Specialised Factors of production

– Targeted FDI attraction policies, corresponding to Greek comparative and competitive advantages

– Exploitation of Public Private Partnerships (PPP)

• Outward FDI– Understanding of who,

when, why (3W)– Support of Greek

entrepreneurs – SMEs as well as larger corporations

– Efficient and effective use of expansion abroad through the acquisition of knowledge

Thank you for your attention

Any Questions?