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FDI in Greece

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Title: FDI in Greece


1
FDI in Greece Greek FDI
Chair Professor Kevin Featherstone Fragkiskos
Filippaios, MEF Fellow Kostas Tzioumis, NBG
Fellow Hellenic Observatory Seminar Series
February 12th, 2008
2
Outline
  • General (definition, trends, determinants)
  • FDI Inflow in Greece
  • FDI Outflow from Greece
  • Assessment policy recommendations

3
Definition
  • An investment made to acquire lasting interest in
    enterprises operating outside of the economy of
    the investor.
  • Threshold of 10 per cent of equity ownership to
    qualify an investor as a foreign direct investor
    (OECD)
  • Forms of investment classified as FDI are equity
    capital, the reinvestment of earnings and the
    provision of long-term and short-term
    intra-company loans (between parent and affiliate
    enterprises).

4
Global trends
  • Improvements in crucial determinants of FDI
    Institutions, taxation, liquidity, FX, etc.

5
Greek FDI inflows (1) A politicians view

6
Greek FDI inflows (2) A clearer view
  • Sources of Inward FDI in Greece (2001)
  • European Union 70 50 from Luxembourg and
    Holland
  • Other European countries 16

7
Greek FDI inflows (3) South EU perspective

8
Greeces performance Inward FDI
  • UNCTAD (2006) ranks Greece 114th in terms of
    inward FDI performance (out of 141 countries).
    The rest of the EU averages 67.
  • At the same, Greece is ranked 36th in terms of
    FDI potential, based on its macroeconomic
    conditions. The rest of the EU averages 33.

9
Reasons for underperformance (1)
  • Product market structure
  • OECD (2007) Greece has one of the more
    restrictive business environments for inward
    investment
  • US State Dept. (2007) Competition in many
    industry sectors in Greece can be characterized
    as oligopolistic, making it difficult for new
    entrants.
  • World Bank (2007) ranks Greece 100th in the Ease
    of Doing Business Index (out of 187 countries).
    The average rank for the rest of the EU is 31.
  • Labour market
  • World Bank (2007) ranks Greece 142nd (out of 178
    countries) with regard to labour regulation.

10
Reasons for underperformance (2)
  • Corruption
  • Transparency International (2007) ranks Greece
    56th in the Perception of Corruption Index (24th
    in the EU).
  • Poor AML supervision in banking/insurance sector
    equity mkt.
  • Taxation
  • Tax framework
  • Legislative Decree (2687/1953) allows for
    unilateral changes in terms of tax regime for the
    FDI project.
  • Investment mismatch
  • GDP ? Services 71, Industry 22, Agriculture
    7
  • FDI ? Services 56, Industry 44,
    Agriculture 0

11
Reasons for underperformance (3)
  • Marketing
  • No centralized authority to coordinate policy
    reform and assess progress.
  • Focus on privatization, without foreign control
  • Rather than greenfield investments or
    joint-ventures, Greek governments have focused on
    equity investments in privatisation of utility
    firms banks.
  • 2000-2005 1.5 billion (mean)
  • 2006 3.4 billion
  • 2007 2.2 billion

12
Theoretical FrameworkThe IDP in a Nutshell
  • The net outward position of a country (outward
    investment inward investment) follows five
    stages of development which are closely related
    to the economic development of the country.
  • Stage 1 Least developed countries attract and
    undertake negligible amounts of FDI.
  • Stage 2 Developing countries attract
    increasingly FDI as a result of cheap inputs as
    a result of FDI, domestic investors enhance
    their own ownership advantages through
    spillovers local advantages are also upgraded.
  • Stage 3 The developing country becomes
    gradually an outward exporter itself expansion
    is in neighbouring, culturally similar countries
    conform with the Uppsala School (Johanson and
    Vahlne, 1977 1990). Investment in developed
    countries occurs as well.

13
Investment Development Path (Dunning 1981)
Net Outward Investment Position
GDP per Capita
Stage 4
Stage 5
Stage1
Stage 2
Stage3
14
Theoretical FrameworkThe IDP in a Nutshell (II)
  • Stage 4 The country becomes a net outward
    investor, revealing the level of economic
    development as well as the dynamism of local
    firms.
  • Stage 5 This stage describes developed economies
    i.e. the USA, the UK, Germany with high volumes
    of inward and outward FDI.

15
Greece and Its IDP
  • Greece is now a stage 3 country.
  • Stage 1 the end of WWII, the opening up of the
    Greek economy foreign investors in chemicals,
    basic metals and transportation sector
  • Stage 2 (70s and 80s) the accession into the
    EU ensured the transition from stage 1 to stage
    2 foreign investors in mainly Heckscher-Ohlin
    type industries i.e. textiles, food and drink and
    consumer goods throughout 80s and 90s
  • Stage 3 (90s and 00s) the opening up of
    Central and Eastern Europe government measures
    to enhance the competitiveness of Greece and
    increasing convergence with the EU core

16
Investment Development Path (Dunning 1981)
Net Outward Investment Position
GDP per Capita
Stage 4 Today ???
Stage 5
Stage 1 End of WWII
Stage 2 70s and 80s
Stage 3 90s and 00s
17
Investment Development Path Coefficient(Net
Outward Investment as of GDP)
18
Motivation
  • Greece is a typical example of how a small
    country can become a FDI outward investor and a
    regional centre as it moves up on its economic
    development path.
  • Data from the Hellenic Ministry of National
    Economy (1998) show that Greek investment in the
    Balkan region accounts for almost 12 of the
    total FDI. It is estimated that more than 2,500
    Greek companies have invested in Central, Eastern
    and South Eastern European Countries (Hellenic
    Centre for Investment, 2005).
  • Greece has also increasingly invested in
    countries such as India, China, UK or US.
  • Some Central and Eastern European countries as
    well as developing countries such as India and
    China have become FDI outward investors.

19
The case of Greece as an outward investor
  • Key regional player and one of the largest
    investors in the Central and Eastern and South
    Eastern European Countries (Bastian, 2004 Demos,
    Filippaios, Papanastassiou, 2004 Kekic, 2005)
  • Current developments in the region have changed
    the role of domestic subsidiaries (Manolopoulos,
    Papanastassiou, Pearce, 2005 Stoian
    Filippaios, 2008)
  • This process was enhanced by Greek policies
    aiming to transform the country into a key player
    for the region.
  • The Greek-Balkan Reconstruction Plan, offering
    almost 500 million euros, is an indicative policy
    fulfilling that aim (Hellenic Centre for
    Investment , 2005).
  • Furthermore, this expansion has been facilitated
    by the upgrading of the Athens Stock Exchange
    (ASE) from a developing to a developed financial
    market, i.e. a reliable source for raising funds.

20
Greek firms grabbed the opportunities and
expanded rapidly in the newly opened markets
  • Albania - it was the second largest investor
    after Italy at the end of 2001 (WIIW, 2005)
  • Romania - Greece was the second largest investor
    at the end of 2003 following the Netherlands
    (WIIW, 2005)
  • Bulgaria - Greece on the third position following
    Germany and Austria (WIIW, 2005)
  • FYROM - it was the second investor following
    Hungary (WIIW, 2005)
  • Moldova - Greece holds the seventh place (WIIW,
    2005)

21
The Greek investment occurred through two
channels
  • First, Greek subsidiaries of multinational
    enterprises started internationalising.
  • Firms such as 3E, a Coca- Cola soft drinks
    subsidiary, Delta, partner of Danone, Intracom, a
    partner of Siemens working in telecommunications,
    Chipita, a PepsiCo food subsidiary and many
    others started investing abroad, thus becoming
    regional headquarters.
  • This strategic change appears to be verified by a
    prior study of Pantelidis and Kyrkilis (1994)
    where they argue that it is possible for
    foreign subsidiaries to readjust their market
    strategies along time and in accordance with
    changing conditions.
  • Second, purely domestic firms, ranging from small
    entrepreneurial to large traditional firms,
    seized the opportunities and engaged in foreign
    production by using their accumulated experience
    and expertise.

22
Explaining Greek FDI abroad
  • Until now only a few attempts were made in the
    international literature with a seminal one from
    Petrochilos (1988). Almost all studies are
    either purely descriptive or do not go beyond the
    analysis of specific case studies.
  • For a long time, the lack and inconsistency of
    FDI data dissuaded scholars from examining the
    Greek case.
  • The adoption from Bank of Greece of the New
    Balance of Payment System since 1996, gives us
    the opportunity to inspect the locational
    determinants of inward FDI in Greece from
    1996-2001, for different sectors and a range of
    investing countries.
  • Previous studies (Demos, Filippaios
    Papanastassiou, 2004 Filippaios Stoian, 2006
    Stoian Filippaios, 2008 Filippaios, 2008)
    showed that traditional factors (size of the
    economy, as well as its openness are significant)
    attracting FDI seem to dominate the decision
    process of Greek firms. Capital productivity and
    labour costs on the sectoral level are also
    influencing the decision of Greek investors.

23
Why the South East region of Europe?
  • The emerging economies offered
  • A Large and unsaturated potential market in terms
    of population and Gross Domestic Product (GDP)
  • A cheap and relatively skilled labour force and
    accessible and low-priced natural resources.
  • Improvements in the institutional framework,
    political stability and the prospects for
    European Union (EU) membership have acted as
    important catalysts for foreign direct investment
    (FDI) in the Agenda 2000 transition countries.
  • Market seeking and rent seeking multinationals
    have increasingly expanded into Central, South
    and Eastern Europe and names such as General
    Motors, Nestlé, British Petroleum, Orange and
    Marks and Spencers are common place in the area.

24
Literature review
  • Exploring the Greek case contributes to several
    strands of literature
  • Studies on country specific ownership advantages
    Grosse and Tevino (1996) and Deichmann (2001).
  • Studies on institutional determinants of FDI
    Wheeler and Mody (1992) Brunetti et al (1997)
    Brenton et al (1999) Henisz (2000) Rodrik and
    Subramanian (2003) Carstensen and Toubal
    (2004) Disdier and Meyer (2004) Dunning (2004)
    Trevino and Mixon (2004) Bevan et al (2004)
    Bevan and Estrin (2004) Pournarakis and
    Varsakelis (2004).
  • Studies on institutional determinants of entry
    mode choice Oxley (1999) Meyer (2001) Meyer
    and Estrin (2001) Smarzynska (2002) Tihanyi
    and Roath (2002)

25
Institutional and Business Environment Factors
  • We have adapted the data from a World Bank survey
    on the investment climate in 58 countries
    conducted on 28,000 companies in 2002 so that
    figures are comparable. We have then put these
    business barriers in the order of their
    importance to investors so that 1 represents the
    issue considered the most significant obstacle to
    the operation and growth of business.

26
Firms perceptions of business barriers in
selected transition countries. In parenthesis the
grading of importance (2002)
Source World Bank (2005)
27
Data and Sample
  • Greek FDI in the South East European Region
    (Source Bank of Greece, 2007)
  • Time span 2001-2006
  • Sectoral disaggregation
  • Data on the external environment from World Bank,
    IMF, ICRG, Freedom House, Economist Intelligence
    Unit.
  • Capturing Economic, Political, Social and
    Institutional aspects of the environment

28
Trade Balance - Albania
Source IMF, Direction of Trade Statistics
Annual values January 2008 Units US Dollars
29
Trade Balance - Turkey
Source IMF, Direction of Trade Statistics
Annual values January 2008 Units US Dollars
30
Trade Balance - Bulgaria
Source IMF, Direction of Trade Statistics
Annual values January 2008 Units US Dollars
31
Trade Balance The Rest
Source IMF, Direction of Trade Statistics
Annual values January 2008 Units US Dollars
32
Greek FDI Abroad2001-2006
Source Bank of Greece, 2007
33
Greek FDI Abroad (II)2001-2006
Source Bank of Greece, 2007
34
Greek FDI - 2001
Source Bank of Greece, 2007
35
Greek FDI - 2002
Source Bank of Greece, 2007
36
Greek FDI - 2003
Source Bank of Greece, 2007
37
Greek FDI - 2004
Source Bank of Greece, 2007
38
Greek FDI - 2005
Source Bank of Greece, 2007
39
Greek FDI - 2006
Source Bank of Greece, 2007
40
2006 - Manufacturing
Source Bank of Greece, 2007
41
2006 Financial Intermediation
Source Bank of Greece, 2007
42
Results
  • Greece is one of the leading investors in
    Central, Eastern and South Eastern European
    Countries, thus understanding the process that
    determines Greek investments in the region is of
    crucial importance for policy makers
  • Interrelation of ownership and locational
    advantages that can explain foreign investment
    activity

43
Results
44
Recommendations
  • Inward FDI
  • Liberalisation of Markets
  • Privatisations with transfer of technology and
    Know-how
  • Creation of Specialised Factors of production
  • Targeted FDI attraction policies, corresponding
    to Greek comparative and competitive advantages
  • Exploitation of Public Private Partnerships (PPP)
  • Outward FDI
  • Understanding of who, when, why (3W)
  • Support of Greek entrepreneurs SMEs as well as
    larger corporations
  • Efficient and effective use of expansion abroad
    through the acquisition of knowledge

45
Thank you for your attention
  • Any Questions?
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