FOREIGN DIRECT INVESTMENT FDI and Slovenia Concepts, trends, issues, policies Matija Rojec Universit

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FOREIGN DIRECT INVESTMENT (FDI) and
SloveniaConcepts, trends, issues, policies
Matija RojecUniversity of Ljubljana and
IMADmatija.rojec_at_gov.si

• Ljubljana, March 5, 2008

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Issues to be tackled

• FDI distinguishing features
• Determinants and types of FDI
• Development implications of FDI for host
  countries
• Host country determinants of FDI FDI policy
• Inward/outward FDI and Slovenia

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What distinguishes FDI from other types of
international involvement/ capital flows?

• Control of foreign affiliate. FDI enables control
  of sources (ownership specific advantages)
  transferred abroad by foreign investor majority
  equity share
• Active role of foreign investor in a foreign
  entity
• Establishing and maintaining of lasting economic
  cooperation between foreign investor (parent
  company) and his foreign affiliate (or local
  partner)
• Investment in kind transfer of various sources
  in a package

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Determinants of MNE activity (1) WHY ?
Ownership specific advantages of companies
investing abroad

• To go international (exports, contractual
  cooperation, FDI) a company needs some specific
  advantages which would compensate for inherent
  advantages of local companies
• Types of advantages product innovations,
  production management, organizational and
  marketing systems, innovatory capacity, tacit
  knowledge, bank of human experience, marketing,
  finance, know-how, multinationality etc.

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Determinants of MNE activity (2) HOW ?
Internalization of market

• Why/when a company would internalize its
  ownership specific advantages instead of selling
  or renting them on external market.
• Inefficient markets. For certain types of
  transactions (e.g. technology and various
  knowledge) external market is to expensive and
  inefficient (search and negotiating costs, broken
  contracts, buyer uncertainty, to control
  suppliers, to enable transfer pricing) and
  companies tend to internalize transactions
  (intra-firm transactions)

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Determinants of MNE activity (3) WHERE ?
Location specific variables/ advantages

• Why/when a production abroad (via FDI, i.e.
  establishing an affiliate abroad) instead of
  production at home followed by exports.
• Location specific advantages are linked to a
  specific location 3 types
• lower production costs
• marketing factors (size, growth sophistication)
• economic system and policy elements (import
  barriers, incentives/disincentives)

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Determinants of MNE activity (4)Alternative
routes of servicing markets
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Main types of FDI (1)

• (Natural) Resource-seeking
• Physical resources, human resources
• Market-seeking
• Domestic markets, adjacent markets
• Efficiency-seeking
• Investments aimed at increasing the
  efficiency of the MNEs regional or global
  activities by the integration of its assets,
  production and markets i.e. rationalization of
  production to exploit economies of specialization
  and scope

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Main types of FDI (2)

• Strategic (created) asset-seeking
• To advance regional or global strategy, i.e. to
  acquire resources and capabilities which the
  investing firm believes will sustain or advance
  its core competences in regional or global
  markets. The assets may range from innovatory
  capability and organizational structures, to
  accessing foreign distribution channels and a
  better appreciation of the needs of consumers in
  unfamiliar markets.
• (Dunning)

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Selected indicators of FDI - Worldwide(bill. of
USD, current prices WIR 2007)
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Inward/outward FDI stock in World and EU in 2006,
bill. USD
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Development implications of FDI for host
countries (1)FDI and growth
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Development implications of FDI for host
countries (2)Analysis of FDI effects

• Macro effects (effect on GDP growth, technical
  progress, productivity growth)
• Sectoral effects (productivity growth, inter and
  intra industry spillovers to domestic firms)
• Firm level effects (productivity growth,
  spillovers)

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Development implications of FDI for host
countries (3)Firm level effects (a)

• 1. Direct effects on recipient firms
• Transfer of technology
• Transfer of management skills
• Helping the strategic restructuring of firms
• Use of intangible assets of parent firms
• Efficient corporate governance

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Development implications of FDI for host
countries (4)Firm level effects (b)

• 2. Spillover effects on other firms (1)
• Horizontal (intra-industry) spillovers
• Positive effects intra-sector diffusion of
  technology, mainly through
• labor turnover (job reallocation)
• imitation processes and
• entry of international supporting professional
  service firms (accounting firms, etc.)
• Negative effects business stealing effects

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Development implications of FDI for host
countries (4)Firm level effects (b)

• 2. Spillover effects on other firms (1)
• Vertical (inter-industry) spillovers
  (organization of vertical supply-chains)
• backward linkages local firms serve as suppliers
  of inputs to foreign subsidiaries
• forward linkages foreign subsidiaries serve as
  suppliers of inputs to local firms

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Host country determinants of FDI (1)
Dunning
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Host country determinants of FDI (2)

• Primary factors (structural variables)
• Market factors size, growth, GDP/pc, access to
  neighbouring/export markets (e.g. EU membership)
• Cost factors labour quality/costs, raw
  material/intermediates quality/costs, labour
  productivity, other sources/costs, infrastructure
  etc.
• Factors of investment/business climate in the
  broadest sense political/economic stability,
  regulatory framework, taxes. Labour market
  regulation, product market regulation,
  competition policy, trade policy, privatization
  policy etc.
• FDI regulation/policy legal framework for FDI,
  investment incentives, performance requirements,
  marketing of a country etc.

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Host country determinants of FDI
(3)(Contributions to inter-country deviations
of inward FDI position of OECD countries,
1980-2000)
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FDI policy (1)Types of/trends in FDI policies

• Non-interventionist approach. Encouragement of
  FDI, few requirements or controls
• Structural adjustment and upgrading approach.
  Attempt to incorporate FDI into national
  development strategies
• Selective investment approach. Sectoral
  restrictions incentives and regulations to
  assure accordance with national objective
• Controlled investment approach. Strict control of
  FDI with many restrictions and authorization
  procedures minority foreign shares (Dunning).

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FDI policy (2)National regulatory changes
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FDI policy (3) Scope of FDI policy

• Investment incentives are a secondary determinant
  of foreign investors investment decisions. They
  are important when other location determinants
  are more or less equal
• Specific foreign investors friendly policy cannot
  compensate for the lack of basic attractiveness
  of a country and/or for an unadequate/business
  unfriendly legal, institutional and policy
  framework
• The more countries and their general investment/
  business environments are similar (e.g. EU
  countries) the more important is specific FDI
  policy

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FDI policy (4) Elements of FDI policy

• What are the means and ways with which the
  countries compete with each other for FDI?
• investment incentives offered to foreign
  investors,
• image building of a host country,
• direct acquisition of FDI,
• assuring certain services to foreign investors.
• Investment incentives, which are in the core of
  FDI policy, is the only element which is
  frequently contested in theory and policy
  discussions

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FDI policy (5) Recent trends in FDI policies

• Transition from automatic to selective /
  discriminatory / criterial granting of incentives
• Less general and more specifically targeted
  incentives, e.g. for introduction of new
  technology, export promotion, RD, employment
  (especially of educated labour force),
  spillovers, environment friendly projects etc.
• Within financial incentives less subsidies and
  more repayable type of incentives
• Stricter, often project related monitoring of the
  efficiency of incentives allocation and sanctions
  in the case of not-fullfilling the required
  performance requests
• More accent to the increasing of the absorption
  capacity of domestic firms for taking advantage
  of spillovers from foreign subsidiaries

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SLOVENIA - BASIC DATA (1) Inward and Outward FDI
stocks in Slovenia in 1994-2006 (in EUR million)
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SLOVENIA - BASIC DATA (2) Inflows and Outflows
of FDI in Slovenia in 1994-2006 (in EUR million)
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SLOVENIA - BASIC DATA (3) Major Investing
Countries in Slovenia(Inward FDI stock in 2006,
share in )
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SLOVENIA - BASIC DATA (4) Major Host Countries
of Slovenia(Outward FDI stock in 2006, share in
)
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SLOVENIA - BASIC DATA (5) Major Industries of
Inward FDI in Slovenia(Inward FDI stock in 2006,
share in )
Industry 41,3 (Mnfctg 37.1) Services 58,5
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SLOVENIA - BASIC DATA (6) Major Industries of
Outward FDI in Slovenia(Outward FDI stock in
2006, share in )
Industry 40,5 (Mnfctg 39.6) Services 59,5
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SLOVENIA BASIC DATA (7)Foreign penetrationFDI
Inward and Outward Stocks in Slovenia as a share
of GDP 1994-06
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SLOVENIA BASIC DATA (8)FDI penetration in
EU-25FDI Inward and Outward Stocks in EU-25 as a
share of GDP 2006
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SLOVENIA BASIC DATA (9)Why less FDI in
Slovenia than in most EU-25

• Small local market
• Privatization and enterprise restructuring
• Unfinished transition process (implementation
  gap)
• Administrative barriers
• Problems in acquiring industrial locations
• Relatively rigid and protective labour
  legislation and labour market

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SLOVENIA INWARD FDI (1)Foreign
penetrationImportance of FIEs for Slovenian
non-financial corporate sector 2006 in EUR
mill. and of all enterprises
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SLOVENIA INWARD FDI (2)Restructuring
impactDistribution of manufacturing value added
in All enterprises and FIEs in Slovenia,
1994-2001, in
All enterprises
FIEs
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SLOVENIA INWARD FDI (3)Restructuring impact
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SLOVENIA INWARD FDI (4)Restructuring
impactForeign penetration in manufacturing value
added in Slovenia, 1994-2001,
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SLOVENIA INWARD FDI (5)Restructuring
impactExport propensity of FIEs in Slovenia,
1994-2001, in
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SLOVENIA INWARD FDI (6)Productivity
impactCumulative changes in labour productivity,
In 6 CECs, for FIEs DEs, in 1995-2001, in
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SLOVENIA INWARD FDI (7)Operational
characteristicsSelected indicators of foreign
and domestic enterprises in Slovenia, 2006
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SLOVENIA INWARD FDI (8)Operational
characteristicsWhere does better performance of
foreign enterprises come from?

• Ownership specific advantages
• Advantages of being multinational (intergration
  into foreign parent network)
• Economies of scale
• Concentration in activities in which a host
  country has competitive advantages
• No corporate governance problem
• Do foreign investors acquire the best companies?

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SLOVENIA INWARD FDI (9)Operational
characteristicsStructure of sales and supplies
of manufacturing foreign subsidiaries in Slovenia
Sample of 72 manufacturing subsidiaries
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SLOVENIA INWARD FDI (10)Operational
characteristics Distribution of control
0only FIE, 0.33mainly FIE, 0.66mainly foreign
parent, 1only foreign parent. The nearer to 0
the more initiatives is undertaken by FIEs.
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SLOVENIA INWARD FDI (13) Motivation Strategies
of foreign investors in Slovenia 1. Outside the
manufacturing industry market-seeking
motive strongly dominate. 2. Most cases of
FDI in the manufacturing share the
following common characteristics (i)
Investing in Slovenia is not a solitary operation
but is going on in the context of
foreign investors internationalisation
strategy. (ii) Foreign investors do not
follow a single motive but a multiple
set of market, factor cost and strategic
motives. (iii) Cheaper labour is an
important motive but the accent is always
on the favourable price of skilled labour.
(iv) Good opportunity and good previous
cooperation are important stimulators
for investment decision.
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SLOVENIA INWARD FDI (14) Motivation Strategies
of foreign investors in Slovenia 3. In
spite of the relevance of local market motive,
factor cost advantages-seeking FDI is
predominant in Slovenia. 4. Four kinds of
factor cost advantages FDI can be
identified (i) Relocation of existing
facilities or consolidation of existing
unprofitable sites at
home. (ii) Investment as an alternative
option of domestic investment. (iii) A
combination of market-seeking, factor cost
advantages-seeking and strategic
considerations.
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SLOVENIA OUTWARD FDI (1)Motivation pattern of
Slovenian investors abroad
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SLOVENIA OUTWARD FDI (2)Motivation
market-seeking motives of Slovenian investors
abroad
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SLOVENIA OUTWARD FDI (3)Main barriers to
outward FDI
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SLOVENIA OUTWARD FDI (4)Main factors
influencing the successof outward FDI
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SLOVENIA OUTWARD FDI (5)Effects on Slovenian
parent company
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