Download Foreign Direct Investment

Jaromír Šindel
ECES
The Puzzles of Central and Eastern Europe Transformation and Integration
Foreign Direct Investment
ECES, Prague
• What is FDI? Effects?
• Why FDI into C&EE?
• Transformation and Integration
Consequences
• Structural Changes (more on Wednesday)
• External (Im)Balances
The Puzzles of Central and Eastern Europe Transformation and Integration
Topics about FDI
– Current Account, Financial Account, Monetary
Crisis, Reinvested and Repatriated Earnings
ECES, Prague
• Investment Incentives  Competition
• 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
ECES, Prague
• Financial Account in Balance of Payments …
more at FDI & External (Im)Balances
The Puzzles of Central and Eastern Europe Transformation and Integration
What is FDI?
• 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
The Puzzles of Central and Eastern Europe Transformation and Integration
Forms of FDIs
• Joint ventures
ECES, Prague
– Easier penetration for foreign investor; higher
spillover effect
• Amount of investment and crowding-in of other
nvestment;
• Creation of new jobs, training and human capital
development;
• Transfer of technology and managerial skills;
• Structural change and shift up on technological
ladder;
• Increasing of exports performance and
substitution of imports;
• Regional development and cluster creation.
ECES, Prague
Source: Newton. Country Report. January 2003. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Effects of FDI?
ECES, Prague
Source: Newton. Country Report. April 2001. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Effects 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
ECES, Prague
• Investment Incentives
The Puzzles of Central and Eastern Europe Transformation and Integration
Determinants of FDI?
ECES, Prague
Source: Newton. Country Report. October 2000. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Why FDI into C&EE?
The Puzzles of Central and Eastern Europe Transformation and Integration
In comparison with other countries…
ECES, Prague
Source: Newton. Country Report. November 2003. www.newton.cz
90%
90%
80%
80%
CEEC, Europe
70%
CEEC, Europe
China
+ HongKong
Kong
China
+ Hong
60%
S, E, S-E Asia
S, E, S-E Asia
Latin America
50%
Japan
Latin America
United States
European
Japan Union 40%
30%
United States
European Union 20%
70%
60%
50%
40%
30%
1998
20%
2000
2001
10%
0%
0%
1998
2000
2001
Global FDI inflows
Source: UNCTAD
1998
2000
2001
ECES, Prague
10%
The Puzzles of Central and Eastern Europe Transformation and Integration
100%
… most FDI goes to developed
countries100%
Global FDI outflows
ECES, Prague
Source: UNCTAD. World Investment Report 2005. www.unctad.org
The Puzzles of Central and Eastern Europe Transformation and Integration
…inward FDI stock in EU-15 …
in new EU-10 …
ECES, Prague
Source: Newton. Country Report. November 2003. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
…but the importance of FDI in
C&EE…
ECES, Prague
Source: Newton. Country Report. November 2003. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
FDI inflow and stock in C&EE
• Transformation
consequences
• Integration
consequences
• Privatisation
• Structural changes
• Better environment
for foreign
investment, better
rating (OECD, NATO,
EU, euro)
• Better growth
The Puzzles of Central and Eastern Europe Transformation and Integration
FDI and C&EE
ECES, Prague
•
•
•
•
•
•
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
ECES, Prague
• EURO ... better financial conditions
The Puzzles of Central and Eastern Europe Transformation and Integration
Why FDI into C&EE?
• market-seeking investors
– the strong economic growth of new EU
member countries
– in 2004: their real GDPgrew by 5.5%, more
than double the EU-15 average
– favourable growth prospects
• efficiency-seeking investors
The Puzzles of Central and Eastern Europe Transformation and Integration
Why FDI into C&EE?
– competitive unit labour costs are particularly
important (wages vs. productivity)
ECES, Prague
ECES, Prague
Source: Newton. Country Report. November 2003. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
FDI inflow and M&A in C&EE
• 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
The Puzzles of Central and Eastern Europe Transformation and Integration
FDI after privatization?
– Estonia (in 2002 40 % of FDI are RE), Poland,
Czech Rep.
ECES, Prague
FCEs Penetration in Manufacturing (share in employment in
%, the latest year available)
ECES, Prague
Source: Newton. Country Report. December 2003. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Role of FDI (or FCE)
FDI inflows by industry in CR, 1993-2000 (Millions of dollars)
The Puzzles of Central and Eastern Europe Transformation and Integration
FDI – sectoral view
Source: UNCTAD www.unctad.org
ECES, Prague
FDI in the car industry in CEE, 2003
ECES, Prague
Source: Newton. Country Report. October 2000. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Lower Wages - 2000
Convergence of wage levels in the EU: a projection, 2004,
2020 (Average of EU-15=100)
Source: UNCTAD. World Investment Report 2005. www.unctad.org
ECES, Prague
Note: Under the assumption of a convergence rate of 1.5% per year.
The Puzzles of Central and Eastern Europe Transformation and Integration
Lower Wages … Future?
ECES, Prague
Source: Newton. Country Report. January 2003. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Investment Incentives?
ECES, Prague
Source: Newton. Country Report. October 2000. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Investment Incentives in 2000
Taxes in V4 countries in July 2003 and announced (per cent)
The Puzzles of Central and Eastern Europe Transformation and Integration
Best incentives ... taxes
ECES, Prague
Note:a Excluding local/municipal taxes. b gradual reduction until early 2006. a In addition, Hungary levies a “trade tax”, although this
is often waived for major investment projects.
Source: “Adólicit Közép-Európában”, Magyar Hírlap Online (Budapest), 30 June 2003. From UNCTAD. WIR 2003.
• 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
The Puzzles of Central and Eastern Europe Transformation and Integration
Invesment Incentives –
problems?
– KIA in Slovakia (amount of money from 6 bln.
SVK to 3 bln. SVK)
ECES, Prague
• Prisoner Dilemma
– incentive´s competition among governments
– Multinational enterprises sometimes have
bigger economic size and power than
governments or nations
The Puzzles of Central and Eastern Europe Transformation and Integration
Invesment Incentives –
problems?
• International competition in FDI inflow
– Germany vs. C&EE (tax policy)
ECES, Prague
• 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).
FDI inflow into CR and HUN in the
four different sitatuations
Czech Government
YES to Inc.
YES to Inc.
CZ:
!! INCENTIVE
COSTS !!
HU:
Hungarian
Gov.
HU:
90
CZ:
HU:
200
250
CZ:
HU:
80
110
100
ECES, Prague
NO to Inc.
180
230
CZ:
NO to Inc.
The Puzzles of Central and Eastern Europe Transformation and Integration
Invesment Incentives – problems?
• 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
ECES, Prague
Source: Newton. Country Report. April 2003. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
FDI & External (Im)Balances
• Type of FDI
– Greenfield FDI, Brownfield FDI, M&A, Joint Ventures
• Kind of FDI
– Market-seeking investor vs. Efficiency-seeking investor
• Type of branche
The Puzzles of Central and Eastern Europe Transformation and Integration
Trade balance effect
– Low-tech vs. High-tech vs. Resource intensive sector
ECES, Prague
Share of FDI in Manufacturing Exports (in %)
Source: Newton. Country Report. April 2003. www.newton.cz
ECES, Prague
Exports per Sales in Manufacturing - Comparison between FDI and
Domestic Enterprises (domestic enterprises = 100)
The Puzzles of Central and Eastern Europe Transformation and Integration
Trade balance effect
ECES, Prague
Source: Newton. Country Report. April 2003. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Non-debt financing source of
Current account deficit
ECES, Prague
Source: Newton. Country Report. April 2003. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
FDI and double-entry Earnings
• Labour market … higher wages, better
employees
• Productivity
• Trade performance … export ratio,
investment ratio, returns of equity, …
ECES, Prague
• Exchange rate appreciation … price
competition
The Puzzles of Central and Eastern Europe Transformation and Integration
Dual Economy …
Effect of FDI on Wages in CR, 2003
ECES, Prague
Source: KB. Economic Trends, No. 43, 2005. www.kb.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Dual Economy … Labour market
Productivity Gap: FCEs and DCEs in 1999 (value added / employee, DCEs = 100)
ECES, Prague
Source: Newton. Country Report. December 2003. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Dual Economy … Productivity
Relative Level of Labour Productivity in the Czech Economy (EU average = 100)
ECES, Prague
Source: Newton. Country Report. December 2003. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Dual Economy … Productivity
Effects of FDI on Labour Productivity in CR, 2003
ECES, Prague
Source: KB. Economic Trends, No. 43, 2005. www.kb.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Dual Economy … Productivity
Comparison of FCEs and DCEs in the Czech Manufacturing (DCEs = 100)
ECES, Prague
Source: Newton. Country Report. December 2003. www.newton.cz
The Puzzles of Central and Eastern Europe Transformation and Integration
Dual Economy …Trade performance
• How to cope with appreciation?
•
•
•
•
Higher productivity, better know-how, ...
Brand, lower transaction costs, ...
Multinational corporation, intra-firm trade,...
Inter-enterprise relationships
The Puzzles of Central and Eastern Europe Transformation and Integration
Dual Economy … Exchange rate
ECES, Prague
• Positive Effect
• Negative Effect
Task: COMPLETE
The Puzzles of Central and Eastern Europe Transformation and Integration
FDI in C&EE - Conclusion
ECES, Prague