FDI in Greece & Greek FDI

FDI in Greece & Greek FDI Chair: Professor Kevin Featherstone Fragkiskos Filippaios, MEF Fellow Kostas Tzioumis, NBG Fellow Hellenic Observatory Seminar Series February 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

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%

Greek FDI inflows (3): South EU perspective

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.

Reasons for underperformance (2) • 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%

Reasons for underperformance (3) • 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.

Investment Development Path (Dunning 1981) Net Outward Investment Position GDP per Capita Stage 4 Stage 5 Stage1 Stage 2 Stage3

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

Investment Development Path (Dunning 1981) Net Outward Investment Position GDP per Capita Stage 4 Today ??? Stage 5 Stage 1 End of WWII Stage 2 70s and 80s Stage 3 90s and 00s

Investment Development Path Coefficient(Net Outward Investment as % of GDP)

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 review Exploring 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.

Firms’ perceptions of business barriers in selected transition countries. In parenthesis the grading of importance (2002) Source: World Bank (2005)

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

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

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

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

Greek FDI Abroad2001-2006 Source: Bank of Greece, 2007

Greek FDI Abroad (II)2001-2006 Source: Bank of Greece, 2007

Greek FDI - 2001 Source: Bank of Greece, 2007

2006 - Manufacturing Source: Bank of Greece, 2007

2006 – Financial Intermediation Source: Bank of Greece, 2007

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

Results

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 Recommendations

Thank you for your attention Any Questions?

FDI in Greece & Greek FDI