Role of foreign direct investment in the development of the industry and role of industrial policy in attracting FDI

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1 Role of foreign direct investment in the development of the industry and role of industrial policy in attracting FDI Seminar on Industrial Policy EU Commission Ministry of Economy & Regional Development Serbian Chamber of Commerce 4 February, 2011, Belgrade

2 Concepts, definitions Statistical data Global trends of FDI Content Stages of industrial development and FDI resources labour technology innovation Role of institutions (legal system, guarantees) Hungarian case study (progress, policies, EU accession, lessons) OECD and EU rules

3 Concepts, definitions Industry = manufacturing + strategic business services Strong links; blurred borders; outsourced activities (design; IT; accounting; logistics; manpower recruitment, training; marketing; research and development + facility management; catering; security guard service; cleaning services etc.) Important component of mfg output services (eg.software, application/utilisation of products): eg: NOKIA (transport, health, banking )

4 Statistical data Definition: Foreign Direct Investment United Nations Conference on Trade and Development (UNCTAD) World Investment Report X FDI GDP growth

5 Total trade in merchandise and services, (source: UNCTAD, World Investment Report)

6 Foreign direct investment stock, (source: UNCTAD, World Investment Report)

7 Policy objectives (FDI policy) Growth and employment creating new jobs, realising new investments, bringing in new technologies competitiveness attracting MNEs Location factors Raw materials; skills; infrastructure; Attractiveness policies Political stability Direct and indirect incentives Factor development Legal guarantees and institutions (exchange rate policy; safety of investments and remittances; market entry; etc.)

8 Global trends of FDI Trade of commodities and services; FDI dynamics in comparison to GDP growth Reasons and explanations trade theories, stages (firms seek to optimise the production process by locating various production stages to different sites according to optimal location factors across countries) changing landscape of distribution of industrial activities -- distribution/sales production R&D, HQ functions -- low-end, low-tech up in the value chain Inward and outward FDI role of MNEs Global industries vs. Local industries, activities (changes, due to transport costs, telecommunication costs, technology development, extreme specialisation; financial considerations Internationalisation of industries (OECD Outlook)

9 Stages of industrial development and FDI The global FDI flow has been increasing continuously 2007: total USD 1,5 trillion (a growth of 18% compared to 2006) Strong economic growth in some regions of the world (China, Brazil, India, SE Asia, Central and Eastern Europe, etc.) Growth of corporate profit and the prices of stocks (relative decrease of wages; productivity growth) Increasing number of mergers and acquisitions (M&As) Share of EU 12 (new members) in the global FDI flow relatively stable

10 Case of Hungary / 1 History (development, changes, progress) of inward FDI Policy objectives Conditions Privatisation vs green field investments Industry preferences Policy measures

11 FDI regulation (chronology) 1972: legislation permits the establishment of companies with foreign participation subject to approval by the authorities 1988: (a) national treatment for foreign investments; (b) 50 % foreign ownership permitted without prior agreement (license required for larger interest); (c) law guarantees free and full repatriation of profits, and exempts in kind contributions from custom duties; (d) companies with foreign participation permitted to set up their own custom-free zones and tax allowances are granted

12 FDI regulation (continued) : introduction of tax incentives for foreign investors 1991: reduction of the allowances given to foreign investors in 1988 and introduction of specific tax incentives to encourage activities in selected sectors (R&D) and regions with high unemployment, concessions for investments in infrastructure 1992: complete foreign ownership made possible without prior agreement 1993: abolition of tax incentives exclusively for companies with foreign participation

13 FDI regulation (continued) 1995: (a) revised privatisation law introduced to accelerate the process; (b) abolition of duty free treatment for in-kind contribution connected to FDI 1996: financial support programmes consolidated in the Targeted Allocation for the Development of the Economy (managed by the Ministry of Industry, Trade and Tourism, later M. of Economic Affairs) 1998: legislation permitting establishment of branches introduced 2004: state-aid rules adjusted to EU rules (tax allowances linked to the size of the investments caps!)

14 Case of Hungary / 2 High FDI stock / capita ~ 6,3 thousands (CZ: 8; SK: 8,3; BG: 4,7; PL: 3,3; RO: 2,4) Sectoral distribution in mfg industries, 2008 Transportation equipments 23% Electronics 18% Food and beverages 10% Chemical industry 9% Metal industry 9% clear targets Car mfg, biotech, electronics, pharmaceuticals + tourism, health industries

15 Case of Hungary /3 Outward FDI Historical trends and ties MNEs affiliates Hungarian flagship companies and SMEs, too Geographical distribution neighbouring countries (Slovakia 20%, Croatia 8%, Bulgaria 6% 11 close countries: 55%) and Cyprus, Luxembourg, the Netherlands, Switzerland (tax optimisation) on-off large transactions

16 Case of Hungary (statistics) Inward and outward FDI stock, selected years Inward FDI stock (USD mn) Outward FDI stock (USD Mn) Ratio of outward/inward FDI stock (%) ,9 2,5 5,6 12,6 21,0

17 OECD and EU rules impacts upon policy and institutions HU policy certain international obligations OECD rules Code of Liberalisation of Capital Movements - Lisbon Treaty (competition policy, Single Market, state aid rules) - bilateral investment treaties [UNCTAD: 58 treaties] Government agencies and institutions Hungarian Investment and Trade Development Agency (IPA) Hungarian Development Bank (EximBank, Exp Guarantee Ltd.) Lobbying (for large investors and investments)

18 Advantages and disadvantages of inward FDI + Close and quick integration into global value chains (market access, technology transfer, knowledge transfer) Job creation Productivity improvements (+ spill-over effects) competitiveness Higher growth rate --- Fragmentation (threat of disintegration) of local value chains Local value added (at least the ratio of VA to total output) can be lower Larger fluctuations of output Increased mobility of investments (dangers of outward migration)

19 Lessons, recommendations Framework conditions, economic policy fundamentals Openness (trade, capital, investments, etc.) Competitive taxation Competitive administrative procedures Education and training (skills) Efficient law enforcement etc. Industrial policy & FDI policy priorities and measures (coordinated) Clear vision of development objectives E.g. innovations, green growth, Clusters MNEs and SMEs Competition policy

20 Thank you for your attention. Laszlo Csernenszky