DEPARTMENT OF BALKAN, SLAVIC AND ORIENTAL STUDIES

MASTER’S DEGREE IN

POLITICS AND ECONOMICS OF CONTEMPORARY EASTERN AND SOUTH EASTERN EUROPE

Trade and Economic Integration in Eastern and SEE

Instructor : Dimitrios Kyrkilis

Foreign Direct Investments in Romania

Thessaloniki, May 2013

Postgraduate Student: Chatzipoulidis Nikolaos

CONTENTS

Abstract 2

1. Introduction 2

2. Foreign Direct Investments (FDI)

2.1 Types of FDI 2

2.2 What makes Romania attractive to Foreign Direct Investments ? 3

3. FDI inflows in Romania 4

3.1 Privatization reform 4

3.2 Foreign direct investments by country of Origin 5

4. FDI and Regional disparities in Modern Romania 6

5. Conclusions and Recommendations 8

References 9

Abstract

Foreign Direct Investment is considered to be a successful way for financing national economy through Foreign capital inflows which the host country lacks. Inflows except the fact that are vital especially for transition countries as Romania, are highly considered to be bearers of economic growth and development. An alternative way not only to finance the national economy of Romania but through spillover effects to contribute to the modernization of her. This paper will highlight the impact of FDI in Romanian economy, the way it is structured through a spatial and sectorial examination of the matter in an effort to point-out its positive but also its negative role, as the enhancement of preexisting regional disparities among country’s regions.

Key Words: Foreign Direct Investments, Romania, Privatization

1 – Introduction

Definition of FDI : Foreign direct investment, is an international investment within the balance of payment accounts. Essentially, a resident entity in one economy seeks to obtain a lasting interest in an enterprise resident in another economy. A lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise, and an investor’s significant influence on the management of the enterprise. (European Commission, 2006).According to Eurostat a direct investment enterprise can be called the one in which a direct investor owns 10% or more of the ordinary shares or voting rights. But why political authorities, transition states or developing economies are so eager to attract them?. The reason is that case studies results have shown that both the Foreign direct investors and the host country, benefit by this type of transaction, each for different and sometimes even controversial reasons. A negative spillover effect for a Foreign Direct investor may have a positive impact in the local economy. These are also called as productivity spillovers and the term refers to the transfer of technical and managerial knowledge from foreign entities to local firms, which can be happened in joint ventures, for example : transfer of “know – how”, the spillover of technology (European Commission, 2006; Javorcik & Spatareanu, 2005).

2- Foreign Direct Investments (FDI)

2.1 Types of FDIThere are 3 types of Foreign Direct Investment Greenfield development mergers and acquisitions and corporate development.

The first type of FDI is called Greenfield investment and refers to the establishment of enterprises by or together with foreign investors from scratch (NBR & NIS, 2012). Host countries seek to attract them by offering lower- taxes and other incentives because these multinational corporations build new factories and stores contributing in the regional amelioration of infrastructure (INVESTOPEDIA). Another aspect that we must take under consideration is the benefit of the Local economy: as the creation of stores, industries even manufacturing zones proceeds, more and more there will be increasing need for workforce recruitment. Besides, a positive impact for the regions that the FDI concentrated is that, due to skills shortage the companies may train locals providing them except the opportunity to earn their living, experience and critically scarce manufacturing skills which can be proved a valuable asset for them. Last but not least the adding facilities the job opportunities the spillover effects through technology and managerial leakages the commercial relations between foreign entrepreneurs and local economy lead to overall economic growth and in more plain English in economic terms these factors put the region on the map. The second type of FDI is mergers and acquisitions referring to partial or full takeovers of

enterprises by foreign investors from residents. (NBR & NIS, 2012) Mergers & Acquisitions is an important strategy in order to obtain higher market share, rapid market penetration and economies of scale. Trans-border M&A is an important part of the annual FDI (Foreign Direct Investment) flow. The third type is called corporate development an increase in foreign investor’s equity capital in foreign direct investment enterprises. through corporate alliances and joint ventures .In 2011 97.2 % of the total inflows in FDI enterprises,) went to joint ventures , 2.1 % were destined to mergers and acquisitions and only 0.7 % to greenfield investment (NBR & NIS, 2012). This clear preference has to do with the fact that joint ventures is the most prominent way for corporates to make profits, let’s examine the argue a little bit further . Joint ventures allow partners by cooperation to maximize their profits and minimize the risks acting as vital organs in the same body. Foreign investors contribution may be the advanced level of technology and managerial skills and on the other hand local partners can provide information about the peculiarities of the region, habits and wannabe partners that could possibly hurt company’s reputation if by mistake associate with them (Florea, 2009).

2.2 What makes Romania attractive to Foreign Direct Investments ?Romania over the last years since the demise of communist regime became an appealing place for a large number of Foreign Direct Investors particularly since 2004. Evolution in which main contributors where the NATO membership on 29th of March 2004 and also the verification of Romania EU membership on April 25th 2005 as the Thessaloniki Summit (June 2003) set the accession-date of January 1st 2007. On April 25th 2005, the country along with Bulgaria signed their Accession Treaties in Luxemburg (Newnations, Wikipedia a). Traditional major advantages not only for Romania but also for the whole SEE*

region in order to attract investments are the highly skilled and qualified labor force, the good productivity and competitive costs as for example low business operating costs etc also the bilateral agreements and treaties that permit mutual promotion and investment protection last but not least the low tax rate of the region (Central bank, 2006).These are only some of the comparative advantages that the region holds and Romania couldn’t be an exception to that first of all it must be stressed that Romania is one of the largest markets in CEE* with over 21 million inhabitants holding a strategic position at the crossroads of EU the CIS* and the Middle East except the fact that has access to EU a market of 500 million consumers (Vasilescu, 2009). Skilled labor force with solid knowledge of foreign languages and Computing, Engineering at significantly low prices according to EU standards is maybe according to my assessment and extend bibliography the most appealing advantage that the region and consequently Romania has to offer an asset that can be found proximate to the large markets of Western Europe offering the opportunity to investors through FDI to proceed to the creation of economies of scale in Romania (Protsenko, 2003). In emerging economies Foreign companies seek access to local markets either through local production or sale of imported products one other objective that investors pursue is the export oriented production based on local resources meaning both natural resources (agricultural land and mineral resources, oil and gas) and labor which in case of Romania are in abundance (Estrin & Meyer, 2008). As part of the European Union, Romania has access to European funds directed towards the development of the member countries (Invest in EU).

3 – FDI inflows in Romania

3.1 Privatization reformIn order to have a better understanding about FDIs and the turbulent transition from a Centrally Planned economy to a Market oriented economy it is necessary to have a look at the following table : Foreign direct investment; net inflows (% of GDP) in Romania

Source: Trading Economics

Take into consider the table and the bibliography the conclusion that we can reach, is that during the first years of transition, Romania was an unpopular place for Foreign direct investors. Many reasons were behind that and this has to do ,not only with economic reasons but also with political. The Information that we can extract is vital for the understanding not only for the Foreign Direct Investments but also for the de-centralization of the Romanian economy after the demise of communism and the shift towards an market- economy . According to political analysts, as for example Prof. Maratzidis, and extensive bibliography, although the communism fall in 1990 not all countries had or still having the same rate or form of transition. Central and Northern Eastern European countries proceed to privatization reforms and mass privatization programs quickly after the demise of communism, as on the other hand SEE countries as Romania and Bulgaria appeared to be more reluctant or even unwilling to privatize their public sector. Privatization is understood as one of the basic pillars of transformation into a market economy (World Bank, 1996), accompanied by political and economic liberalization, stabilization and institutional reforms (Kalotay & Hunya, 2000). In order to understand the opposite direction between CEE and SEE procedure, we must pay significant attention to the bearers of policies which are governments and parties that are composing them. In South Eastern Europe and especially in Balkan countries the winners of the first elections and many times of the second free s elections where ex-communist elites composing successor parties this happened in Romania and Bulgaria . In the first case the socialist (democratic)party consisted by the same elites and politicians that were in power during the communist period opposed or just delaying the privatization reforms lost the power in 1996 at third democratic elections of Romania. The election outcome although it is totally contradicted with the way that communism in this country felt regarding the execution of Ceausescu and great protests with thousands of people ,can be explained by the fact that in Romania the resistance during the communist period was weak. The opposition had not the capability or the means to mobilize people and opposition or anti-communist groups didn’t had an exact plan or program to persuade the people as they didn’t have party administration experience and lacked in organization. In Central and North Eastern European countries during the last communist years there was some strong opposition movements transform to parties as in Poland for example with Leh Valeca an anti-communist movement that came to power after the demise. If the party was western oriented liberal or even nationalist that had a tremendous impact to the rhythm and the pace of changes. At this point, a comparative research between Poland , Czech Republic and Romania would be useful.

Table 1: results of privatization in 1992 - 1995

Sources: OECD (1993); World Bank (1997)

The reference to privatization is not random because since the political and economic of the region a strong relationship among the two had developed a coexistence that in some cases can be described as a supplementary relationship .(Kalotay & Hunya, 2000) Real privatization steps leading to that direction started when Emil Constandinescu came to power after 1996 elections (wikipidia b).

3.2 Foreign direct investments by country of OriginAs it is already said both the South Eastern Europe and consequently Romania is an FDI destination for manufacturing goods that can be cheaply produced in countries that offers regional proximity with the Western developed ones. Except that Romania is a traditional industrial country of the region since the communist era, a country that manage after many difficulties to privatize its heavy industrial sector reform and attract an significant amount of Investments especially after 2004. This argument can be easily stated as Romania’s main FDI shareholders are at 80 % European Countries. The most significant shareholder in Romania is Netherlands holding 21,7 % with a great variety of companies operating at different sectors from agricultural sector to constructional sector and also great shareholders in the service sector second Austria a neighboring country with 17.5 % its regional proximity the cheap labor ,the fact Romania is a EU country and one of the lowest tax rate in the whole CEE are some good reasons for Austrian companies to seek partners in the neighboring country .Germany and France are countries that promote regional specialization and agglomeration of Romania ,first in the country level and second at the level of development regions leading to the creation of FDI agglomerations in specific regions. Italy with a smaller percent around 7.4 % although it is not a neighboring country as Austria invest in Romania for the same reasons plus the fact that Romanian and Italian language have great affiliation another serious reason for a source country to invest in the host country as the language obstacle is removed. Last is Greece with small percentages with businesses most at the service sector taking for example telecommunications services by Romtelecom company. As it already mentioned Romania is perceived as part of CEE a region in which

manufacturing goods as automobiles and other transportation means or IT software cheaply produced and transferred back to EU-15 countries. Other kind of products are food products, tobacco, wood products like furniture scientific and technical services telecommunication services.

Source: NBR & NIS (2012).

That kind of single dimensional perception of the region its more obvious if we take a look at the following table as we can see manufacturing due to big industrial sector occupies the first place.

Source: NBR & NIS (2012).

4. FDI and Regional disparities in Modern Romania

After the demise of communism and as market forces gradually replaced the preexisting type of central planned economy, regional inequalities that were maintained at low levels since the beginning of transition started to increase rapidly. The highest gap in this kind of dynamic experienced in Romania and especially between Bucharest – Ilfov region which constitutes the most developed region of the country with GDP per inhabitant rising 6 times faster than GDP in the most underdeveloped region which is traditionally the North East. First of all in order to proceed in our spatial FDI analysis and presenting and revealing the reasons that are beneath the phenomena of Regional disparities in Romania it is essential to have a clue about administrative divisions in Romania a useful tool in order identify and assess the role and the impact of FDIs in regional inequalities. Currently Romania is divided in 8 development Regions corresponding to the NUTS II level of EUROSTAT and 41 countries and one municipality consisting them a division that created in 1998 in order Romania to have a better regional development (Danciu,

Goshin, & Griescu, 2010). A policy which had as a main goal to transform Romania’s centrally planned economy into a market system economy. Examining the matter from a spatial point of view, a process of decentralization closely intertwined with the development of the administrative capacity of the territorial units (development regions) of Romania. Although the measurement had as primary goal the decentralization, the opposite results came out, as from 1998 until nowadays Romania’s economic activity related to FDI had been agglomerated in the Bucharest- Ilfov region by the outstanding number 61.7 percent. Which are the reasons that led to such results and what are the causes behind them is the main issue of this chapter (Danciu, Goshin, & Griescu, 2010).

Source: NBR & NIS (2012)

The 8 regions that consist the nowadays regional based policy of Romania are : (Bucharest – Ilfov , Centre, South, South – East, South West, West, North- West, North East) (Danciu, Goshin, & Griescu, 2010).). As we can see from the table for foreign direct investment in Romania, by development region, Bucharest – Ilfov is the clear winner managing to concentrate over the half FDI of the country and on the other hand western regions as lugers with North – East Region ranking last attracting the least FDI inflows in the whole country the marginal percentage of 2.6. Bucharest being the capital of Romania is the most important academic center with skilled and very well prepared workforce which derives from university students with their professors act as a link connecting University with Business environment. There exists qualified personnel that speaks many languages an important asset that is highly considered by Foreign companies a comparative advantage related to other EU-27 that Romania has to offer if we take under consideration the low level of wages (Danciu,

Goshin, & Griescu, 2010). Except that according to the Global competitiveness report for 2012-2013 Romania performs really bad at the pillar of infrastructure ranked at 132nd place among 144th countries in quality of overall infrastructure and 142nd in quality of roads and also placed 137th in port infrastructure with airport transport to perform a little bit higher in 121 position but significantly lower compared to EU-27 countries (World

Economic Forum, 2013). The precarious transport especially at the eastern part of the country is one of the biggest problems that Romania has to face a real obstacle that Foreign Direct Investors take highly under consideration and make them reluctant in investing in that part of the country or force them to invest in other more developed regions. The most important cities in the western part of the country and also Bucharest- Ilfov region are making efforts to modernize and connect with most Important cities of Western Europe adopting not only western infrastructure but also life style and mentality attracting FDIs but on the other hand eastern Regions are dominated by stagnation and even negative development rates having as a result the development gap to be increased (Danciu, Goshin, & Griescu,

2010). As it is clearly depicted from measurements of the regional disparities of the 41 municipalities plus Bucharest Municipality, between 2000-2005, two different dynamics are in progress. From one side municipalities that are not only above the national average but also appeared to improved their relative position such as Bucharest , Timis , Ilfov , Bihor ,and Cluj (all municipalities of either Western regions or Bucharest-Ilfov region) and on the other side Eastern or South lugger-municipalities as Vaslui , Calarasi , Ialomita and others having declining performances during 2000-2005 (Danciu, Goshin, &

Griescu, 2010; Wikipedia a). In the latest regions agriculture is predominant in North east Region by 48,4 % a sector that is oversized and underproductive way above the EU average, these regions also face deficiencies such as high unemployment, poverty, fleeing human capital through internal

or external migration and underdeveloped public services. Bucharest- ilfov region is the economic heart of the country with 68 % employed at the service sector 30.5 at industrial and only 1,6 occupied with agriculture has all the prerequisites to be the capital of Foreign Direct Investments (Botezatu, 2007). As it was stated in the introduction FDI played an important role in the formation of this situation as it was agglomerated to specific regions, “convenient” for business. That led the favorable ones to know an unprecedented growth with the GDP in some regions to be even 6 times bigger than others (Danciu, Goshin, & Griescu, 2010).

5. Conclusions & Recommendations The monolithic type of Romania’s development without taking the risk to invest in other sectors either through government spending or through FDI has a double negative outcome. First the work force was concentrated on very narrow array of professional occupations in agriculture or on industrial sector perpetuating the existing situation. Second the country did not take full advantage of its potentials , ways that it is certain to lead only to economic growth and development both at national and more specific at the local level by inducing unemployment and contribute to the amelioration of social conditions especially in the poorer regions of the county.A special resource that can attract tourists is represented by the thermal waters is Danube. Tourist facilities there could be an interesting perspective that boost evolution in sectors that if in the future make the right moves could easily attract a big amount of investments as anyone would like to be part of something successful.Romania should take serious its unique geopolitical position and proceed towards further cooperation with countries outside EU confirm its role as gate towards the east. A transit hub for capitals and investments . Romania should seek further cooperation with EU and other regional actors as Russia that may raise issues and provide opportunities with Romania to be part in big regional plans enchasing its geopolitical role .The Romanian government has to find solutions that will help the poorer regions keep up and be competitive facing the challenges that the world economic crisis had bring to the fore .The last problematic has to do with the fact that as we already said before the very bad condition of the country’s transportation system and damages the country’s image and crowd out investments in the poorer places due to the precarious transportations and poor infrastructure incapable to produce products that will reach fast and cheap the western markets.

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