THE IMPORTANCE OF FDI IN THE MACEDONIAN ECONOMY

Master’s Thesis presentation

Mentor: PhD Marjan Svetlicic

Candidate: Marjana Janchevska

Skopje, April, 2014

Globalization and multinational enterprises

- Survival in the global marketplace as a motive for companies to search for options

- Multinationals as carriers of FDI

- Motives:• Market seeking• Efficiency seeking• Resource seeking• Strategic asset seeking

Effects of FDI in a host country

A function of many factors including macroeconomic environment, political stability, FDI policy, the motive and the type of the investment

- Employment and wages- Productivity and technology spillovers- Development and reorganization of domestic companies- Competition in local markets- Implementation of economic policies in the host country- FDI and the balance of payments

The Macedonian Environment

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

Real GDP growth and inflation in R. Macedonia

GPD

Inflation

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201205

10152025303540

Unemployment rate %

The Macedonian Environment

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-14

-12

-10

-8

-6

-4

-2

0

-3.3

-7.8-6.7

-7.7 -7.7 -7.8

-1.8-2.9

-6.8

-10

-3.9

-8.2

-2.7

-0.4

-7.4

-12.6

-6.5

-2.1-3

-4

Current Account Balance % of GDP

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

-3,000.0-2,000.0-1,000.0

0.01,000.02,000.03,000.04,000.05,000.06,000.07,000.0

Trade Balance in mil. of USD

Export Import Trade Balance

The Macedonian Environment

- National treatment of foreign companies- Bilateral Free Trade Agreements – Turkey and Ukraine- Three multilateral Free Trade Agreements

• Stabilization and Association Agreement (SAA) • European Free Trade Association (EFTA) • Central European Free Trade Agreement (CEFTA)

- Connected through Corridor VIII to Eastern Europe and through Corridor X to North Europe

- Generous tax system• 10% corporate income tax, among the lowest• 10% personal tax• 18% VAT, 5% preferential VAT

The Macedonian Environment

- Benefits of being in technological industrial development zone• Personal tax exemption for the first 10 years from the day of starting

activities in TIDZ (10% afterwards);• Corporate income tax exemption for the first 10 years from the day of

starting activities in TIDZ (10% afterwards);• No VAT and customs duties for export production;• Grant of up to €500,000 for construction costs;• Land lease for up to 99 years at attractive concessionary rates;• Free connection to utilities;• Green Customs Channel expediting exports to the EU

Stylized Facts About FDI in the Macedonian Economy

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0100200300400500600700800

24 9.5 11.2 58.1150.5

88.4

215.1

447.1

105.6 117.8

323

97

424.2

699.1587

197.1 211

463.3

132.2

FDI inflows in R. Macedonia (Mil. of USD)

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

2

4

6

8

10

12

14

0.7 0.2 0.31.6

4.22.4

6

13

2.8 2.5

5.9

1.6

6.5

8.6

6

2.1 2.3

4.4

1.4

FDI in Macedonia as a % of GDP

Stylized Facts About FDI in the Macedonian Economy

- Most interesting sectors – services (telecommunications and banking) and recently manufacturing

- By country of origin – Hungary, Greece, Netherlands, Slovenia, Austria

- More investments in M&A than in Greenfield- Most important import countries – Germany, Serbia,

Bulgaria, Italy and Greece- Most important export countries – Greece, Germany, UK,

Serbia, Bulgaria

Investor’s Key Points

- Unnecessary administrative work- Weak infrastructure - Long bureaucratic procedures- Difficulty to find certified suppliers- High cost of capital - Generous tax system- Cheap labor- Workforce availability

Empirical Analysis- The modelRGDP = f(RFDI, RGDPEU, RCAPITAL_EXP, RLOANS, RPRIV_TRANSFERS)

- Data Q1 1997 through Q2 2013

- MethodologyOrdinary Least Squares Method

yi = β0 + β1 X1i + β2 X2i …. βn Xni + Ɛi

- ResultsR2= 0.36

RFDI = 0.04, 5 quarters time lag

RGDPEU = 1.13

RCAPITAL_EXP= 0.01, 2 quarters time lag

RLOANS = 0.10, 2 quarters time lag

RPRIV_TRANSFERS = 0.03, 1 quarter time lag

Recommendations

- Revise the generous fiscal regime - Attract FDI in the tradable sector, focusing on export oriented industries

encouraging at the same time linkages between the foreign investors and the domestic companies

- Invest in transport infrastructure- More international air connections, investments in the railroad, efficient access to

Durres port- Loose and shorten procedures for legal employment of foreigners

- Distinction between hierarchies of positions, application in current residing country of the foreigner

Thank You