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Lecture 8

Lecture 8. Foreign direct investments in the Central and Eastern European countries. Learning objective. The main concepts and definition related to foreign direct investments (FDI) Determinants of foreign direct investments locations Benefits and costs of foreign direct investments

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Lecture 8

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  1. Lecture 8 Foreign direct investments in the Central and Eastern European countries

  2. Learning objective • The main concepts and definition related to foreign direct investments (FDI) • Determinants of foreign direct investments locations • Benefits and costs of foreign direct investments • Host policy and institutions attracting FDI inflow • Foreign direct investments in Central and East European countries after 1990

  3. FDI Vocabulary • There are 2 kinds of international investment: Foreign Portfolio Investment(FPI) • An investment in a portfolio of foreign securities such as stocks and bonds that do not entail the active management of foreign assets. FPI is ‘foreign indirect investment’ Foreign Direct Investment (FDI) • Defined by the United Nations as involving an equity stake of 10% or more in a foreign-based enterprise.

  4. Key definitions and kinds of FDI • Horizontal FDI isa type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host country. • Vertical FDI isa type of FDI in which a firm moves upstream or downstream in different value chain stages in a host country. • FDI flow - the amount of FDI moving in a given period (usually a year) in a certain direction • FDI stock - the total accumulation of inbound FDI in a country or outbound FDI from a country across a given period of time (usually several years).

  5. Horizontal FDI duplicates its home country-based activities at the same value chain stage in a host country through FDI

  6. If a firm through FDI moves upstream or downstream in different value chain stages in a host country, we label this vertical FDI

  7. MNE(Multinational Enterprise)versus non-MNE • An MNE, by definition, is a firm that engages in FDI. Note that non-MNE firms can also do business abroad by (1) exporting and importing, (2) licensing and franchising, (3) outsourcing, (4) engaging in FDI or other means. • What sets MNEs apart from non-MNEs is FDI. • Since the 1950s, MNEs have experienced significant growth. • In 1990, there were 37,000 MNEs, with 170,000 foreign affiliates. • By 2009, more than 82 000 MNEs (more than double the 1990 number) managed about 810 000 foreign affiliates (almost five times the 1990 number).

  8. Why do firms engage in FDI? OLI paradigm, which proposes that FDI is the most appropriate form of international business if three conditions are met: • ownership advantages (O-advantages) • Resources of the firm that are transferable across borders, and enable the firm to attain competitive advantages abroad. • locational advantage (L-advantages) • Advantages enjoyed by firms operating in certain locations. • Internalization advantages (I-advantages) • Advantages of organizing activities within a multinational firm rather than using a market transaction.

  9. Benefits and costs of FDI

  10. Host policy and institutions attracting FDI inflow • Opening the economy for the entry of foreign direct investment. This includesliberalization of investment regime towards foreign direct investment, by reducingthe barriers to entry, strengthening standards of treatment for foreign investors andimproving the functioning of market; • Active involvement of host country governments in attracting foreign direct investment,by marketing their countries via one-stop national investment promotionalagency. Investment agencies at the national and regional levels have proliferatedrecently as officials have recognized that attracting investment to a country or areaneeds to be approached as a product to be marketed. Establishingspecialenterprisezones(lowertaxes, specialpricesfor land etc.) • Targeting of foreign investors, that is, routed promotional efforts towards attractingsuch kind of foreign direct investments that are accordant with development priorities of the host country; • promoting of the additional investment.

  11. Fiscal and non-fiscal incentives of FDI

  12. Global Trends in FDI • Several developed nations are the sources of FDI outflows. • About 90% of total world-wide FDI comes from the developed world. • Both developing and developed nations are the recipient of inflows of FDI.

  13. Top 10 recipients of FDI inflows

  14. Top 10 economies for FDI outflows

  15. Top 10 host economies, 20141. USA,2. China,3. UK,4. Singapore,5. Brazil,6. Canada,7. Australia8. India9. Netherlands10. Spain

  16. FDI – last global tendenciesGlobal FDI flows have stalled at levels substantially below the peak levels reached before the financial crisis and ensuing global recession that began in 2008. FDI flows were 45 percent lower than the peak in 2007. This is less than the drop in FDI flows between 2000 and 2003; FDI flows in 2003 were 60 percent lower than the peak in 2000.

  17. Why CEE?Lowlaborcosts, 2010

  18. Why CEETaxation

  19. Foreign direct investments in Central and East European countries after 1990 • The central and eastern Europe (CEE) region experienced a five-fold increase in foreign direct investment(FDI) inflows between 2003 and 2008, rising from US$30 billion to US$155 billion. • The most important factor behind thegrowth of the EU-CEE countries afterthe EU accession was the enhanced attractiveness as the place for investmentlocation. • The capital was mainly originating fromWestern Europe, and was going both to the export-oriented manufacturingsector, as well as to the domestic market-oriented sector of services.

  20. FDI in CEE • The biggest FDI flow went to Poland, followed by Bulgaria, the Czech Republic, and Hungary. • The Central European countries, already benefited from high FDI inflow before the EU accession, continued receiving the capital at a considerably higher scale. • The only exception was Slovenia which changed from the position of a recipient to the position of the exporter of capital. • The enhanced FDI inflowsreflected the process of shifting part of the manufacturing production from Western Europe to the new Member States. This process slowed down considerably, but probably only temporarily, during the global financial crisisin 2007-2009 and 2012-13.

  21. The main trends in FDI inflow to CEE • During the last twenty years, the inflow of FDI had a significant impact on changes in the structure ofthe CEE economies. • The role of manufacturing has clearly increased, in particular, those of its brancheswhich are most strongly integrated into global supply chains (GSC). They include production ofelectrical and electronic devices and the automotive industry. • In the same period, different trendswere observed in the EU-15 countries, i.e. the deindustrialisation and the increasing role of services inthoseeconomies.

  22. Economies of Latin America andmost of all of Eastern and South-Eastern Asia, did not benefit from the foreign investment inflow tothat extent. They even often acted as net exporters of capital. In case of the Asian and LatinAmerican countries, this situation resulted from changes following the financial crises in the 1980s and 1990s. Net foreign capital inflow to selctedrgions in % of GDP

  23. Investments inflow to CEE countries 2009-2013 as % of GDP The observed decline in FDI inflow tothe CEE region after 2008 should be treated rather as a change resulting from the weakening of theeconomic growth in the global economy, especially in Western European countries, than the permanentretreat of foreign investors from the CEE region. FDI Capital investments Other investments Net balance

  24. FDI in CEE CEE FDI inflows 1997-2008 The Czech Republic, Poland, and Hungary have been major regional destinations for FDI inflows since the mid-1990s. These countries also saw FDI rise from 2003, although by a proportionately smaller amount than many of the other nationsinthe region.

  25. The average level of FDI as a share of GDP 1997-2008 • The historical average level of FDI inflows to CEE was around • 4% of GDP between 1997 and 2008. Bulgaria, Estonia and Serbia all recorded higher levels; and Slovenia was • below the regional average. • The most important factors driving the FDI inflow were: • Higher income, • Lower labor costs, • - lower investor riskiness as measured by credit risk premium; and • - achieved or probable EU membership.

  26. The world’s most attractive regions to invest The CEE countries still remain an attractive investment destination for European corporations, even despite growing labor costs.

  27. Most attractive countries to establish operation

  28. Key Location Factors

  29. Benefits of FDI inflow1. FDI job creation, CEE versus WE

  30. Top 15 countries by FDI job creation

  31. FDI – sectoral analysis – top 10, 2003-2009 Sectoral analysis of FDI inflow in CEE regionin 2003-2009 highlights the importance of realestate and extractive industries in attracting FDI to the region. This is borne out in aggregated CEE data, where these twosectors accounted for more than a third of total FDI inflowsbetween 2003 and 2009. The 2009 recession brought decline in FDI inflow. But not all sectors saw lower FDI inflows in 2009. The value of alternative energy FDI projects rose last year, as did inflowsinto the electronic components sector.

  32. Benefits of FDI inflow2. Changesinthestructure of economy Shift from industry (manufacturing: mining, gas, electricity) to services (banks, insurance).

  33. Changes in the structure of value added in manufacturing • Considerable changes also occurred in the structure of value added within the manufacturing sectorin the CEE countries. • The role of food and textile industries as well as manufacture of coke andrefined petroleum product gradually decreased. In mid-1990s, those sectors were the most importantones in in the CEE manufacturing. However, their role was successively decreasing. In 1995-2012 itdecreased by over 1/3 from 6.2% to 4.0% of total value added. On the other hand, the role of industriesstrongly integrated within the GSC increased, i.e. production of machinery, electrical and electronicdevices, computers and transport vehicles. Value added in the automotive industry and production ofelectrical devices increased five-fold and in the case of computers and electronic devices – even ninefold. • At the same time, in the EU-15 countries, the reduction of the relative production value in theaforementioned sectors of industry was, to a large extent, responsible for the continued decrease in theshare of value added of manufacturing.

  34. The percentage of value added generating by foreign companies in manufacturing in CEE • In 2003, foreign companies were responsible for generating over 40% ofvalue added in the Czech Republic and over 50% in Slovakia and Hungary. Following the accession ofthe CEE countries to the EU, the role of foreign companies increased even more. • In 2011, the share ofthe value added created by foreign enterprises in the total value added grew to almost 60% in theCzech Republic and to over 60% in Slovakia and Hungary. It was slightly smaller (50%) in Poland,however, also in this case the upward tendency was noticeable. • Almost 100% of production volume andover 90% of the value added in the automotive sector in 2011 was generated by foreign companies, inparticular, companies from Germany (they were responsible for over a half of production in the Czech Republic, Slovakia and Hungary).

  35. Foreign Direct Investments in Poland Poland - Foreign DirectInvestments 35 Data: NBP • Main foreign investors in Poland areEuropean Union countries. • At the end of 2012 FDI inward stock accounted to EUR176.9bn. • According to NBP data for 2011, companies from theNetherlands, Germany, France and Luxembourg are the biggest foreign investors in Poland

  36. Ernst&Young Report – EuropeanAttractivenessSurvey 2013 Number of FDI Projects in CEE Number of jobs created by FDI in CEE Poland was thecontinent’sstrong performer in 2012, attracting 22.3% moreprojectsthanin 2011. Withinthe CEE region, Poland outpaced Russia to becometheleadingdestinationfor FDI projectsin 2012. With13,111 jobscreated by FDI, up 67.3%, Poland ranked 3rd interms of jobcreationforthewhole of thecontinent (afterthe UK and Russia). US investmentsrosesharplyin services projects, while German companiesincreasedtheirpresenceintheautomotive and logistics sectors. Poland isalso developing BPO centresin finance, accounting, contact and research. Poland was thetop improvergloballyinthe past year, according to theWorldBank’sDoing Business 2013 report. Ithas won attention as thefastestgrowing EU membersince 2008, and beneftsfrom a skillednativeworkforce and an extensive and able migrant workforce. Poland was theleading CEE destinationaccording to investors, claiming 37% of thevotes.

  37. Chinese investments in CEE countries • Today China holds 1/3rd of the world’s currency reserves. • By 2030, the Chinese economy will surpass the United States, becoming the world’s largest market. • Between 2007 and 2012, the Chinese economy grew by close to 60 %; emerging Asia as a whole by almost 50%. Over the same period, economies of high income countries have grown by a mere 3%. • Europe as a whole has witnessed a 102% increase in investment from China since their “going out” strategy began in 2010. 15% of Chinese companies that have gone out have chosen Europe as their destination. In CEE, the same phenomenon has been taking place.

  38. Chinese FDI inflow to Europe, in mln euro Chinese FDI in Europe Grows ExponentiallyLess than ten-eleven years ago, Chinese investments in the region were almost inexistent. in the CEE region. During the period 2004-2010, China’s investments stock was multiplied by 6.8 in Asia, 5.3 in Latin America, 8.6 in North America and 7at the international level, but by more than 18 in the CEE region. Value of greenfield projects and acquisitions with stake of 10% or more by Chinese com panies in EU-28 economies

  39. Chines FDI in the EU Structure by sectors Energy – 28% Automotive – 13% Agriculture & food – 12% Real Estate – 11% Idustrial Equipment – 9% ITI – 6% Commodities – 5% Funance & Business Service – 4%

  40. The main destination of Chinese FDI is Germany

  41. China’s FDI stock in the CEE region, 2006 and 2010,millions of US$ The role of culture and common perceptions in Sino-CEE relations is enormous! The main obstacle to increasing investment links between CEE and China lies in misunderstanding of the other’s cultural and business ethics. China’s policies tend to be driven by both political and economic motives. In fact, rarely do the Chinese separate business form politics, a crucial cultural difference when it comes to investment strategies.

  42. Thank you !

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