THE INTERNATIONAL COMPETITIVENESS OF ECONOMIES IN TRANSITION THE UNTAPPED POTENTIAL: A CHALLENGE FOR BUSINESS AND GOVERNMENT MOLDOVA

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1 THE INTERNATIONAL COMPETITIVENESS OF ECONOMIES IN TRANSITION THE UNTAPPED POTENTIAL: A CHALLENGE FOR BUSINESS AND GOVERNMENT MOLDOVA A STRATEGIC APPROACH TO COMPETITIVENESS SCOPE, FOCUS AND PROCESS Sofía, Bulgaria November 2003

2 Structuring the trade support network of the Republic of Moldova The export promoting institutional system of the Republic of Moldova activates in main directions: Elaboration and endorsement of the foreign trade policy and its co-ordination; The determination of strategy and monitoring of the implementation of the strategy; Export promotion activities (publishing of the promotional books, booklets, business forum, etc.). The export promotion organisational system of the Republic of Moldova comprises the public and the private institutions. Institutional framework of export promotion in the Republic of Moldova Government of the Republic of Moldova Ministry of Finance Ministry of Transport Ministry of Foreign Affairs Free Economic Zones Chamber of Trade and Industry Ministry of Economy Export Development Fund Council Moldovan Export Promotion Organization Customs Department Ministry of Industry Ministry of Agriculture and Food Industry Commercial representation Business Centers Regional branches of Chamber of Trade and Industry Non-governmental organizations Trade Point Moldova Global Trade Point Network The Government has to define a role for itself in terms of providing a predictable, transparent and non-discriminating framework for sound market decisions and participation in economic activity. The key objective should be to deliver macroeconomic stability. The main role and functions of public institutions are: - the elaboration of strategy and monitoring of the implementation of the strategy, - co-ordination and supervising the export promotion activities, - as well as the conducting at the macro level all the other elements of the system. 2

3 State authorities and state subordinated authorities, which are components of the envisaged institutional system, being in horizontal and vertical relations, according to their regulations and functions are relatively independent in accomplishing their tasks. Being a multifunctional authority of conducting the export promotion system, the Government is simultaneously the unifying and systematising link of all the elements of this system. The Government of the Republic of Moldova exerts its functions of co-ordinating the export promotion, through Ministry of Economy (Trade Department and Foreign Economic Relations Department). The role of the national trade support organization consists in: ensuring the adequate legal framework and business environment for export (free trade agreements, bilateral agreements, etc.); creating conditions of export development, promoting a foreign trade policy that would facilitate exports; creation of organisations responsible for export promotion; the creation and development of foreign representation system abroad; representing the interests of export sector in relations with banking sector, transport organizations etc. A co-ordinated approach of the National Trade Support Network ensures complementalities in programming as well as to avoid duplications of assistance to the main target groups which are the import and export companies. Institutions in the network depend on each other for information in their operations. Institutions in the network periodically collaborate with each other to organise information dissemination seminars and training aimed at solving specific issues on trade. The network institutions have collectively worked to ensure the implementation of some administrative instruments aimed at developing specialised support of the export sector. Export Development Fund Council The main aim of the Export Development Fund Council is the approval of the export promotion programmes in Republic of Moldova. The financial resources of the Fund are used for financial supporting by the state of the programmes approved by the Government. The Administrative Council of the Export Development Fund establishes the administration policy of Fund s resources. The main functions of the Administrative Council are: - Endorsement and promotion of Fund s administration policy, - Approves the plan of the export promotion activities and the yearly report on Fund s administration etc. Commercial representations Commercial representations abroad, operate under the direction of Ministry of Economy. They support economic agent s activities, giving information concerning access conditions on foreign markets, support private businesses participation to international exhibitions and forums and also provide other economic and trade information on Moldova and the countries where they are located and also business contacts. 3

4 Moldovan Export Promotion Organisation One of the trade support network institutions is the Moldovan Export Promotion Organisation (MEPO), para-statal organization, since 1999 operating as services to businesses and enterprises. MEPO/MIDA provide technical and strategic information on international trade and on Moldova s business climate. MEPO/MIDA represents and supports all significant exporters and importers and helps foreign investors to gain simple and low-risk entry into Moldovan business. Main areas of MEPO activities: 1. Export Development. MEPO helps individual enterprises to achieve profitable export sales by providing them with information, advice, training and enabling finance for export activities. 2. Investment Promotion. MEPO promote foreign direct investments and their role as the main motive power for the development of the Moldovan economy. 3. Policy Analysis. MEPO raise the importance given by government and by the business community to sound market principles and to establishing an open trading economy. 4. Human Resources Development. MEPO delivers training seminars in investment attracting and export promotion techniques to Moldovan companies, increasing their management and employees capacities. 5. Trade Information Centre. MEPO provide relevant, timely and affordable information on trade and investment issues. Trade Point Moldova - As a source of trade-related information, provides actual and potential traders with data about business and market opportunities, potential clients and suppliers, trade regulations and requirements; - Also it is a trade facilitation centre, where participants in foreign trade transactions (e.g. customs, banks, chambers of commerce, freight forwarders, transport and insurance companies) are grouped together under a single physical roof or linked virtually to the Trade Point so as to provide all required services for trade transactions; - Being a gateway to global electronic networks, it offers to businessmen the possibilities to place their commercial offers on the Trade Point site which is interconnected in a worldwide electronic network - the Global Trade Point Network (GTPNet). Chamber of Commerce and Industry The export promotion activities of the Chamber of Commerce and Industry are insured through the following measures: selecting potential commercial partners, establishing co-operation relations with foreign firms; establishing and developing relations with businesses; organising economic missions, business negotiations; organising the participation of firms at international exhibitions and fairs; organising seminars and symposiums with participation of national and foreign firms; ensure the information for firms about the international exhibitions and fairs abroad; consulting and informing about foreign market operations, implementation of new forms of co-operation, new customs tariffs, contracts etc. Free Economic Zones in the Republic of Moldova At the present time there are 6 FEZ in the Republic of Moldova. The legislation provides incentives, guarantees and privileges for businesses established in the FEZ. Goods and services manufactured and rendered in the FEZ are exempt from the VAT (which is 20% elsewhere in Moldova). 4

5 Investors into FEZ are protected from changes in the law that would negatively affect customs and tax regime by retaining the protection of the entire legislation for 10 years from the enactment of the new law. Income tax of the residents on the exportation of goods (services) hailing from free zone out of customs border of Moldova amounts to 50% of the established quota in Moldova (11%). Income tax on resident's activity, except above-mentioned, amounts to 75% of the established quota in Moldova. Residents that invested in fixed assets of their enterprises and/or in the development of the infrastructure of free zone, a capital equivalent to at least 1 million US Dollars, are exempted from payment of income tax on the exportation of goods (services) hailing from a free zone out of customs border of Moldova for 3 years, beginning with the immediate term of effecting the respective volume of investments. Residents that invested in fixed assets of their enterprises and/or in the development of the infrastructure of a free zone, a capital equivalent to at least 5 million US Dollars are exempted from payment of income tax on the exportation of goods (services) hailing from a free zone out of customs border of Moldova for 5 years, beginning with immediate term of effecting the respective volume of investments. Private sector institutions In Moldova there are more than one thousand registered institutions supporting the private sector. These are representations of international institutions, organizations and projects, as well as institutions organized on the professional basis. Due to their excessive numbers, the services and activities they are offering, they are highly dispersed and often overlapping. Very few of them cover a large number of economic agents or have extended activities in a certain geographic area. Types of institutions Most PSIs are organized on a professional basis. There are associations of producers of certain products or services (sugar, juices, dairy products, transporters, importers, insurance, banks, etc.). Moreover, there are unions and associations of employers, entrepreneurs, importers of different products, exporters, etc. Institutions functions One of the most important activities of these organizations is to represent the interests of the associations and institutions members in legal, executive institutions, in national and international organizations, structures, and in unions, in such areas as: - Coordination of investment policy in the respective branch (informing members of institutions on the efficiency of different processes and equipment, etc.); - Coordination of the export policy; - Dealing with competitiveness issues; - Keeping relations with governmental institutions etc. A limited number of PSIs cooperate with similar foreign associations, and even fewer have developed relations with international donor organizations. The range of beneficiaries of such assistance is quite limited even among members. Among other, more pragmatic activities, the institutions organize for their members conferences and exhibitions, training courses on different fields, providing technical and juridical expertise, requalification of the personnel and attracting investments to the respective branch or to specific members. 5

6 Clients feedback The impact of the enterprises cooperation with respective associations is quite feeble with very few exceptions. One of them is the private sector institutions involvement in the process of legislation and regulation for the purpose of obtaining privileges for business activities (VAT exemption, customs taxes exemption, and licensing/certification as barriers of market penetration). One particular shortcoming of many of these institutions is the lack of public relations functions often it is difficult to contact them and to obtain any kind of information. This is because they see as their main goal to defend the interest of the members. The weak points of the network The weak points of the network are: - weak connection at the inter-ministerial level, concerning the quality of delivered information (potential markets, business opportunities); - insufficient insurance of information flow: vertically and horizontally (the speed and the quality of delivered information); - are missing the chains: Business centers in regions, Association of Exporters of the Republic of Moldova, the proper link with NGOs, Export Insurance Agency; - The dispersed efforts of different institutions mislead the companies in their efforts to get support (including managerial, consulting, juridical, technological etc.); - Lack of (or very difficult access to) information on the credibility and professional level of different institutions; - International institutions and projects, which have great potential for helping the development of Moldovan PSIs, cannot assure a significant covering area, both in geographical (often covering only Chişinău or some regions) and complexity terms (the lack of complex services). Strengthening the trade support network Government s role and support to private sector institutions development should include: - Channeling technical assistance to avoid doubling activities and services; - Initiation and supporting infrastructure development programs financed through technical assistance both in hardware (roads, customs, railways, etc.) and software (providing specific training in transportation management, expedition and logistics, exports and imports, transit operations, etc.); - Development of an appropriate policy and regulatory framework for NGOs activities with special support to innovative centers and research & development centers to support new technologies and technology-related infrastructure; - Sustaining the SMEs development through the provision of non-financial services to SMEs (consulting and marketing information), and technical assistance; designing and implementing methods of gathering systematic feedback information. - Establishing more effective trade support network is of vital importance for Moldova. In order to build a stronger basis of trade support network in Moldova are necessary the following steps: - establishment of an information exchange network on a regular basis among private and public sector entities, including trade related ministries, agencies and NGO s, where specific and general research information could be deposited and accessed by network members for technical guidance; - assessment of export growth industries which will help to identify network members to be involved; - determination of trade support services needed by businessmen and allocation of responsibilities among members; - definition and division of responsibilities of trade support institutions; - development of institutional and co-ordination capacity; - it also may be suggested that donor agencies, before undertaking any project must relate to the public sector institution responsible for export trade development in order 6

7 to develop programs that would avoid duplications and facilitate complementarity and joint activities; - Providing on-the-job training programs (including modern management skills, leadership, foreign languages, computers); - Product quality enhancement and continuous improvement along the entire value chain; - Developing the institutional framework facilitating access to technology; - Institutional Supporting of the research and development function. Trade Information services The main business of today s Trade Promotion Network is to provide the private sector with up-todate market information. It is the immediate posting or dissemination of tailor made information that is needed and highly appreciated by private sector. Such information services include the distribution of e-journals and e-newsletters, the availability of on-line databases of exporters, importers and product information, and electronic versions of market profiles and analyses and other publications related to international trade. In the framework of worldwide deregulation and liberalisation, where barriers to trade are continually falling, and where new methods of doing business are emerging, reliable trade information is becoming increasingly important for managers and decision-makers alike. The main challenges in this sense are: - the capability of identifying new opportunities in the context of the globalisation of trade: - as barriers to trade fall, lowering of informational barriers (especially on markets in transition) becomes important. This can enable enterprises to operate more effectively and competitively internationally and to benefit from opportunities at an early stage. - coping with the uneven development of trade information sources: whereas information on developed markets is usually abundant and systematic (although often complex and expensive), market information on developing countries is often scarce and dispersed. - dealing with information overflow: the Internet is greatly facilitating access to market information and specialized online databases. At the same time the multitude of potential sources available can easily overwhelm businesses in trying to locate the specific information needed. - absorbing rapid technological changes: the fast-evolving global trading environment requires adoption of new technological tools for timely information processing and distribution. - developing active information networks at national, regional and international levels: exploiting available business information resources and contacts and turning these into accessible and actionable services thereby creating favourable conditions for enterprises to access business information, know-how, training and technology. 7