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Foreign Direct Investment

The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague. Foreign Direct Investment. Jaromír Šindel ECES.

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Foreign Direct Investment

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  1. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Foreign Direct Investment Jaromír Šindel ECES

  2. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Topics about FDI • What is FDI? Effects? • Why FDI into C&EE? • Transformation and Integration Consequences • Structural Changes (more on Wednesday) • External (Im)Balances • Current Account, Financial Account, Monetary Crisis, Reinvested and Repatriated Earnings • Investment Incentives  Competition

  3. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague What is FDI? • Definition • Investment into basic capital • Long-term loans joint with yields or decision power • Reinvested earnings • 10% share on equity  Investor has long-term interest about his investment • Financial Account in Balance of Payments … more at FDI & External (Im)Balances

  4. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Forms of FDIs • Greenfield investment • High inflow of FDI; new production capacity – investment and employment effect • Brownfield investment • Like greenfield – investor buy real estate; quicker spillover effect • Mergers & acquisitions • High inflow of FDI, but no new production capacity; higher spillover effect; Investment only into better technology and for higher productivity • Joint ventures • Easier penetration for foreign investor; higher spillover effect

  5. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Effects of FDI? • Amount of investment and crowding-in ofother nvestment; • Creation of new jobs, training and humancapital development; • Transfer of technology and managerialskills; • Structural change and shift up ontechnological ladder; • Increasing of exports performance andsubstitution of imports; • Regional development and clustercreation. Source: Newton. Country Report. January 2003. www.newton.cz

  6. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Effects of FDI? Source: Newton. Country Report. April 2001. www.newton.cz

  7. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Determinants of FDI? • Characteristic of market (doing business) • Economic and political stability • Geographical position • Factors of production – costs and quality • Institutional environment • Technology level • Purchasing power of domestic demand • Business environemt • Investment Incentives

  8. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Why FDI into C&EE? Source: Newton. Country Report. October 2000. www.newton.cz

  9. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague In comparison with other countries… Source: Newton. Country Report. November 2003. www.newton.cz

  10. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague … most FDI goes to developed countries Global FDI inflows Global FDI outflows Source: UNCTAD

  11. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague …inward FDI stock in EU-15 … in new EU-10 … Source: UNCTAD. World Investment Report 2005. www.unctad.org

  12. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague …but the importance of FDI in C&EE… Source: Newton. Country Report. November 2003. www.newton.cz

  13. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague FDI inflow and stock in C&EE Source: Newton. Country Report. November 2003. www.newton.cz

  14. Transformation consequences Privatisation Structural changes Integration consequences Better environment for foreign investment, better rating (OECD, NATO, EU, euro) Better growth The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague FDI and C&EE

  15. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Why FDI into C&EE? • Privatisation • Lower wages (Productivity) • Geographical position • Qualified labour force • Investment Incentives • Membership of the EU • the adoption of the full body of EU laws (the acquis communautaire) ... reduce risk premiums for investors • EU funds ... better business environment • EURO ... better financial conditions

  16. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Why FDI into C&EE? • market-seekinginvestors • the strong economic growth of newEU member countries • in 2004: their real GDPgrew by 5.5%, more than double the EU-15average • favourable growthprospects • efficiency-seekinginvestors • competitive unit labourcosts are particularly important (wages vs. productivity)

  17. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague FDI inflow and M&A in C&EE Source: Newton. Country Report. November 2003. www.newton.cz

  18. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague FDI after privatization? • Privatisation is important reason for FDI inflow into CEEC • Greenfield FDI, reinvested earnings (capacity extension or intension) are good indicators how the CEEC are prepared for the period without privatisation related FDI • Estonia (in 2002 40 % of FDI are RE), Poland, Czech Rep.

  19. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Role of FDI (or FCE) FCEs Penetration in Manufacturing (share in employment in %, thelatest year available) Source: Newton. Country Report. December 2003. www.newton.cz

  20. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague FDI – sectoral view FDI inflows by industry in CR, 1993-2000(Millions of dollars) Source: UNCTAD www.unctad.org FDI in the car industry in CEE, 2003

  21. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Lower Wages - 2000 Source: Newton. Country Report. October 2000. www.newton.cz

  22. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Lower Wages … Future? Convergence ofwage levels in the EU: a projection,2004, 2020(Average of EU-15=100) Note: Under the assumption of a convergence rate of 1.5% per year. Source: UNCTAD. World Investment Report 2005. www.unctad.org

  23. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Investment Incentives? Source: Newton. Country Report. January 2003. www.newton.cz

  24. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Investment Incentives in 2000 Source: Newton. Country Report. October 2000. www.newton.cz

  25. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Best incentives ... taxes Taxes in V4 countries in July 2003 and announced (per cent) Note:a Excluding local/municipal taxes.b gradual reduction until early 2006.a In addition, Hungary levies a “trade tax”, althoughthis is often waived for major investment projects. Source: “Adólicit Közép-Európában”, Magyar HírlapOnline (Budapest), 30 June 2003. From UNCTAD. WIR 2003.

  26. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Invesment Incentives – problems? • Domestic vs. Foreign Investors • Selective or Non-selective Incentives • Changes in Investment Incentives – the same condition (lately in Slovakia) • Principal-agent problem, rent seeking of pressure groups … • … Moral Hazard, Corruption • KIA in Slovakia (amount of money from 6 bln. SVK to 3 bln. SVK)

  27. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Invesment Incentives – problems? • Prisoner Dilemma • incentive´s competition among governments • Multinational enterprises sometimes have bigger economic size and power than governments or nations • International competition in FDI inflow • Germany vs. C&EE (tax policy)

  28. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague !! INCENTIVE COSTS !! Invesment Incentives – problems? • Prisoner Dilemma • Incentive´s competition among governments • Government compares the yields from FDI inflow with costs from investment incentives. Government wants benefit from FDI. • Explaining why governments offer invest. incentives, even with risk of lower benefit from FDI in comparison with situation without invest. Incentives (only yields without costs).

  29. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague FDI & External (Im)Balances • Trade balance effect (imports and exports) • Export orientation, FDI´s import demand (type of FDI – buildings, machinery; FDI branch – importance and resources of raw materials, competition with domestic supliers) • Earnings effect • Exchange rate effect • Non-debt financing source of Current account deficit Source: Newton. Country Report. April 2003. www.newton.cz

  30. Type of FDI Greenfield FDI, Brownfield FDI, M&A, Joint Ventures Kind of FDI Market-seeking investor vs. Efficiency-seeking investor Type of branche Low-tech vs. High-tech vs. Resource intensive sector The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Trade balance effect

  31. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Trade balance effect Share of FDI in Manufacturing Exports(in %) Exports per Sales in Manufacturing -Comparison between FDI and DomesticEnterprises (domestic enterprises = 100) Source: Newton. Country Report. April 2003. www.newton.cz

  32. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Non-debt financing source of Current account deficit Source: Newton. Country Report. April 2003. www.newton.cz

  33. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague FDI and double-entry Earnings Source: Newton. Country Report. April 2003. www.newton.cz

  34. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Dual Economy … • Labour market … higher wages, better employees • Productivity • Trade performance … export ratio, investment ratio, returns of equity, … • Exchange rate appreciation … price competition

  35. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Dual Economy … Labour market Effect of FDI on Wages in CR, 2003 Source: KB. Economic Trends, No. 43, 2005. www.kb.cz

  36. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Dual Economy … Productivity Productivity Gap: FCEs and DCEs in 1999 (value added / employee, DCEs = 100) Source: Newton. Country Report. December 2003. www.newton.cz

  37. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Dual Economy … Productivity Relative Level of Labour Productivity in the Czech Economy (EU average = 100) Source: Newton. Country Report. December 2003. www.newton.cz

  38. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Dual Economy … Productivity Effects of FDI on Labour Productivity in CR, 2003 Source: KB. Economic Trends, No. 43, 2005. www.kb.cz

  39. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Dual Economy …Trade performance Comparison of FCEs and DCEs in the Czech Manufacturing (DCEs = 100) Source: Newton. Country Report. December 2003. www.newton.cz

  40. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Dual Economy … Exchange rate • How to cope with appreciation? • Higher productivity, better know-how, ... • Brand, lower transaction costs, ... • Multinational corporation, intra-firm trade,... • Inter-enterprise relationships

  41. Positive Effect Negative Effect The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague FDI in C&EE - Conclusion Task:COMPLETE

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