Transcript presentation

2ND EUROFRAME CONFERENCE
ON ECONOMIC POLICY ISSUES IN
THE EUROPEAN UNION
TRADE, FDI AND RELOCATION: CHALLENGES FOR
EMPLOYMENT AND GROWTHIN THE EUROPEAN
UNION?
June 3, 2005, Vienna, Austria
MAIN DETERMINANTS OF FOREIGN
DIRECT INVESTMENT IN THE SOUTH
EAST EUROPEAN COUNTRIES


Valerija Botrić, Institute of Economics,
Zagreb
Lorena Škuflić, Graduate School of
Economics and Business, Zagreb
MAIN DETERMINANTS OF FOREIGN DIRECT
INVESTMENT IN THE SOUTH EAST
EUROPEAN COUNTRIES
The focus of the paper:

Overview of the economic determinants
and the FDI statistics at the global level
and in particular in the CEEC-8 and the
SEEC-7

Main determinants of the FDI in the
SEEC-7
What is the FDI ?


Foreign direct investment (FDI) is
investment of foreign assets into
domestic structures, equipment,
and organizations.
Foreign direct investment (FDI) is
money invested by a company from
one country in a facility or operation
in another country.
What is the FDI?


The FDI represents investment in facilities in
a foreign country for production, distribution,
marketing purposes, R&D, etc.
Control must take place

Defining direct investment is arbitrary
actual ownership may be less than 100%,
usually a minimum of 10-25% of voting
stock
Foreign Direct Investment and Control
International investors want to control their
operations in another country aiming to
achieve their global objectives
 Control always must accompany investment
 Companies are reluctant to transfer vital
resources to another organization without
control

Capital
Patents
Trademarks
Management
know-how
8-3
Why is FDI important for developing
countries ?

FDI is considered responsible for welfare
increase in the host country due to
advantages related to the:







introduction of new technologies and
innovation,
new managerial techniques,
development of additional skills
increased capital,
job creation
improvement of working conditions,
the development of industrial sector
FDI inflows, global and by group of countries,
1970-2003 in billion of US $
1400000
1200000
1000000
800000
600000
400000
200000
World
European Union
Central and Eastern Europe
Developed countries
Developing countries
Source: authors’ calculation based on UNCTAD, www.unctad.org.
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
0
The FDI in Central East European
countries, 1990-2003
25000
20000
in million US $
15000
10000
5000
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
-5000
Czech Republic
Latvia
Slovakia
Log. (CEEC-8)
Estonia
Lithuania
Slovenia
Hungary
Poland
CEEC-8
Source: UNCTAD, http://www.unctad.org/sections/dite_dir/docs/wir_inflows_en.xls
year
The FDI inflows in SEEC-7, by
country, 1993-2003
TFYR
Macedonia
100%
Serbia and
Montenegro
80%
60%
Romania
40%
Croatia
20%
Bulgaria
0%
1993
1995
1997
1999
2001
2003
Bosnia and
Herzegovina
Albania
Source: UNCTAD, http://www.unctad.org/sections/dite_dir/docs/wir_inflows_en.xls
What is important for the FDI?
Host
country
determinants
Policy framework
Macroeconomic,
political and social
environment
Economic Determinants
Business facilitation
Depends of the
investor’s motives
Activities aimed
to boost the FDI
Addapted from UNCTAD, 1998, World Investment Report
Possible FDI Determinants in the
SEEC-7
Variable
Type of FDI
Expected effect
GDP
Market seeking
Positive
GDP growth
Market seeking
Positive
Population
Market seeking
Positive
Labor cost
Resource/asset seeking
Negative
ICT
Resource/asset seeking
Positive
Openness
Efficiency seeking
Positive
Inflation
Efficiency seeking
External debt
Efficiency seeking
Service sector share
Privatization
Positive
Financial sector development
Positive
Private sector share
Positive
Estimation method
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pooled the data in our sample and
used the GLS regression method
Estimating equation
FDI    X  
Determinants of FDI in SEEC, 19962002, GLS regression
Variable
Estimated coefficient
Constant
-49,26
(-0,29)
GDP
0,09***
(4,94)
GDP p.c.
-0,23**
(-2,56)
Population
-0,10***
(-3,20)
Openness
5,43***
(3,30)
Inflation
0,11
(0,73)
External debt
0,02
(1,43)
Telephone
2,04
(0,61)
Internet
-14,04
(-0,69)
Adjusted R2
0,66
Number of observations
49
Determinants of FDI in SEEC, 19962002, GLS regression
Variable
Estimated coefficient
Constant
-1274,20***
(-4,28)
GDP
0,07***
(5,37)
Population
-0,07***
(-3,20)
Openness
9,20***
(4,46)
External debt
0,03**
(2,47)
Private sector share
11,84***
(3,13)
Internet
-45,33***
(-2,74)
Large scale privatization
-223,98***
(-3,21)
Unemployment
12,31**
(2,35)
Wage
-0,56*
(-1,91)
Financial sector
154,89*
(1,98)
Adjusted R2
0,84
Number of observations
49
Determinants of the FDI stock in the SEEC-7,
1996-2002, GLS regression
Variable
Estimated coefficient
Constant
-306,37
(-1,42)
GDP
-0,01*
(-1,99)
Population
0,02*
(1,76)
External debt
-0,01***
(-2,71)
Service sector share
9,51**
(2,48)
Internet
63,67***
(11,00)
Unemployment
-6,55***
(-5,32)
Wage
0,60***
(3,60)
GDP growth
1,55**
(2,01)
Adjusted R2
0,89
Number of observations
49
CONCLUSIONS
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Market-seeking determinants of FDI
give mixed signals in different
specifications;
The relationship between labour
market indicators and FDI is not
clear;
Oppeness; share of private sector,
share of services have significant
and positive impact on the FDI in
the SEEC-7
The FDI Patterns
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
More recent growth has been in high-tech
manufacturing and services versus
mature manufacturing and raw materials
development
The FDI to the developing countries

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Vertical investment: driven by differences in
factor endowments and prices between home
and host countries
The FDI to the developed countries

Horizontal investment: driven by market
seeking strategies