Foreign Direct Investment in Romania

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    Assignment on Foreign Direct Investment in Romania

    For the course International Business & Strategy

    Chiriac Alexandra (MBA 2013-2014)

    1. FDI evolution in Romania

    Romania is a post-communist country, which started its transition towards capitalism after

    1990. In the first years of transition, the volume of FDI was very low in Romania, on one hand due to

    the slow pace of privatization and restructuring and on the other hand because there was no

    strategy towards attracting FDI. Over time, foreign investors have been able to valorize relatively

    large profit opportunities in Romania, either through the greenfield investments or through mergers

    and acquisitions.

    The graph presented below illustrates a very low amount of FDI until 1996. The level of inflows

    at that time was around $264 million. Afterward started a period with unstable legislation but

    the privatization offer increased significantly, so the amount of FDI inflows started growing. The

    amount of FDI in 1997 was 5 times higher than in the previous year. This indicate that the

    privatization process accelerated and Romania was more open to foreign investors. Joining

    NATO in 2004 and becoming a member of European Union in 2007, had a positive impact on

    FDI. Romania was forced to harmonize its legislation and economic practices with those of EU.

    This also convinced foreign investors that the country has a stable economy and the FDI inflows

    reached a level of $11.367 million in 2006.

    Table 1. FDI evolution in Romania (1990-2000)

    YEAR 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

    FDI inflows

    0 40 77 94 341 419 263 1,215 2,031 1,027 1,057

    FDI outflows

    18 3 4 7 0 2 0 -9 -9 16 -13

    FDI (% of GDP) 2,6 0,13 0,30 0,35 1,13 1,18 0,74 3,4 4,8 2,9

    2,7

    Source: adapted from UNCTADSTAT, FDI database (Measure US$ millions)

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    Chart 1. FDI inflows in Romania (US$ Millions)

    It can be seen from Table 1. And Table 2. that there are big differences between the volume of

    FDI outflows and FDI inflows. The maximum values of FDI outflows were reached between 2006

    and 2008. In 2002, was founded the Romanian Agency for Foreign Investment (ARIS). Its mission

    was to attract, retain and grow foreign direct investments in the domestic economy. From the

    graph below, we can conclude that ARIS Agency had a positive impact in attracting FDI. The FDI

    inflows reached a maximum level of almost $14 billion in 2008. The economic crisis had also

    affected the FDI inflows which started decreasing to only $4,8 billion in 2009. In 2009, ARIS

    stopped its activity. In the next years, foreign investments continue to register a slow decrease

    and in 2012 the volume of FDI was only $2,2 billion.

    Table 2. FDI evolution in Romania (2002-2012)

    Source: adapted from UNCTADSTAT, FDI database (Measure US$ millions)

    0 40 77 94 341 419 263

    1215

    2031

    1027 1057

    0

    500

    1000

    1500

    2000

    2500

    1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

    FDI inflows 1990-2000

    FDI inflows

    YEAR 2002 2004 2006 2007 2008 2009 2010 2011 2012

    FDI inflows

    1,141 6,436 11,367 9,921 13,909 4,844 2,940 2,523 2,242

    FDI outflows

    17 70 423 279 274 -88 -20 -33 42

    FDI (% of GDP)

    2,4 8,5 9,3 6,0 6,7 2,9 1,9 1,3 1,05

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    Chart 2. FDI inflows in Romania (US$ Millions)

    2. FDI distribution in Romania

    FDI is distributed uneven over the country, most of it being absorbed by Bucharest-Ilfov region,

    which represents the capital of Romania. This concentration of FDI is normal, given the fact that

    the capital concentrate an important percentage of the countrys population, represents the

    main economic center, the main research and education center and have the largest number of

    skilled labor in the country. Some of the regions presented in the diagram below that benefit

    also from FDI inflows are: the CENTRE region with 7.8 percent, followed by the WEST region

    with 7.6 percent and the SOUTH-MUNTENIA region with 7.2 percent. (NBR, FDI report 2013)

    Chart 3. FDI distribution by Regions in 2012

    Source: National Bank of Romania, FDI report 2012

    1158 1141 2196

    6436 6483

    11367 9921

    13909

    4844 2940 2523 2242

    0

    5000

    10000

    15000

    2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

    FDI inflows 2001-2012

    FDI inflows

    60,6

    7,8

    7,6

    7,2

    5,5

    4,8 3,5

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    FDI by Regions in 2012 (in percentages)

    Bucharest-Ilfov

    Centre

    West

    South-Muntenia

    South-East

    North-West

    South-West-Oltenia

    North-East

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    The graphic representation of FDI by economic activity, shows that the main flows were

    concentrated primarily to manufacturing with 31.3 percent of total, out of which the principal

    recipients were: oil processing, chemicals, rubber, plastic products, transport means, metallurgy

    food, beverages, tobacco, cement, glassware and ceramics. Further activities that have also

    attracted significant FDI are financial intermediation and insurance with 18.5 percent of total

    FDI, trade 11.4 percent, construction and real estate transactions 9.2 percent, information

    technology and communications only 4.8 percent. (NBR, FDI report 2012)

    Chart 4. FDI distribution by Sector of Activity 2012

    Source: NBR, FDI report 2012

    Foreign direct investments are spread out across all the sectors of the economy, and investors

    come mainly from Europe. Romania attracts foreign investors because of the low wage costs

    and well-trained workforce. Multinational companies can use their already formed links to

    import and export products in and from Romania, in this way the Romanian economy increases

    in the world economy.

    FDI inflows by country of origin shows that the major investors of Romania come from countries

    members of European Union. We can see from the chart that over 50% of the FDI inflows come

    from only 3 countries: Netherlands, Austria and Germany. The analyze of the FDI reports of NBR

    shows that these countries have been the main investors for the last five years. (NBR, FDI

    reports) Among the businesses that Netherlands own in Romania include ING Bank or insurance

    31,3 5,5

    9,7

    18,5

    11,4

    2,4

    9,2

    1,5

    0,6

    4,8

    4,7

    0,4

    FDI by Sector of Activity 2012 ( in percentages) Manufacturing

    Mining

    Electricity, natural gas and water

    Financial intermediation

    Trade

    Agriculture

    Construction and Real Estate transaction

    Transportation

    Hotels and restaurants

    IT and Communications

    Professional and administrative services

    Other

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    company Aegon. Dutch investors have business in different areas such as transportation

    systems within enterprises or production of equipment for food industry.

    Austria has invested large amounts of money over the years by companies such as OMV Petrom,

    Baumax, kika, Vienna Insurance, AGRANA, UNIQA and Strabag. Austrians are very present also

    in the domestic banking institutions such as BCR (Erste Bank shareholder), Raiffeisen Bank and

    Volksbank.

    Germany has in Romania in particular businesses in automotive components. Examples of

    Businesses of Germans are Lidl, Allianz Tiriac, Siemens, Praktiker, Hornbach, Metro, Continental,

    Draxlmaier and Bosch.

    Chart 5. FDI in Romania by country of origin in 2012

    Source: NBR, FDI report 2012

    3. Romanias Investment Policy

    In Romania it doesnt exist anymore an investment promotion agency. In 2002, it was created

    the Romanian Agency for Foreign Investments which was responsible for providing foreign

    investors professional, free of charge consultative services and attract, retain and grow foreign

    direct investments in the domestic economy.(www.traderomania.net, 2014) The ARIS Agency

    was abolished in 2009, even that between 2002 and 2009 the FDI inflows registered a positive

    evolution. Activity of the institution was transferred to the Ministry of Economy.

    The main factors that attract FDI in Romania is relatively low cost of labor, the high level of

    skills, market size, the legal environment, non-discriminatory and attractive for foreign

    22,4

    18,5

    11 8,9 5 4,5

    4,3

    3,7

    3,1

    18,6

    FDI by country of origin 2012 (in percentages)

    Netherlands Austria

    Germany France

    Italy Cyprus

    Greece Switzerland

    USA Others

    http://www.traderomania.net/
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    investment, the low cost of raw materials and utilities and the open attitude of local and central

    authorities towards the foreign investors.(Chirila E, 2011)

    4. Mergers & Acquisitions market in Romania

    In 2012, the M&A market in Romania did not register an important evolution. The main

    progress was in sectors like Energy, TMT (Technology, Media and Telecommunication),

    Agriculture and Financial Services. The Energy sector, with a particular attention in both oil &

    gas and alternative energy source, had a positive growth and generated a considerable amount

    of M&A activity in 2012. One of the largest deals signed in Romania in 2012 for the energy

    sector was the acquisition of the EnergoBit Group, a Romanian supplier of electrical networks

    to the power sector, by Innova Capital a leading Central European private equity fund, along

    with EBRD. (www.innovacap.com, 2014) Other notable deals in 2012 included MetLifes

    acquisition of Aviva Romania Life and Pensions and the sale of 92.4% stake in MKB Nextebank,

    the Romania based commercial bank, to a consortium of investors led by PineBridge

    Investments LLC, the US based asset management firm. (CMS, Emerging Europe: M&A report

    2012)

    Economists forecast state that agriculture and IT will be the main areas of interest for foreign

    investors in 2014. The main interest of foreign investment is to purchase land and farms and

    also cultivate them, because there are large areas of land that can be included in the bio

    culture, which would raise the price of the final products.

    In the past years there were registered several significant investments, which are related to the

    privatization of different huge state owned companies. One important acquisition was in 2001

    when Mittal Steel Company based in Rotterdam bought the majority share in the SIDEX steel

    plant at Galati, which is the largest in South-East Europe. At the moment of acquisition, the

    plant recorded daily losses of one million dollars. After four years of privatization, Mittal Steel

    Galati became the largest private company in Romania. Plant turnover reached $ 2.1 billion in

    2004.(www.wall-street.ro, 2014)

    http://www.innovacap.com/http://www.wall-street.ro/
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    Another important transaction was the privatization of Romanian Commercial Bank the

    largest one in Romania. The privatization process started in 2002 and finished in 2006 when

    Austrian bank Erste Bank paid 3.75 billion euros for 61,88% of the shares, 5.8 times more than

    the accounting value of BCR, and 20 times more than the net profit of BCR. (Gaviletea Marius,

    2007)

    In 2004 the Austrian company OMV acquired in a privatization process 51% of the Romanian

    national oil company Petrom.(Barsan M, Buiga A, 2008) Currently the OMV Petrom is the most

    valuable private company in Romania with a turnover of 4, 3 billion euros in 2012.

    (www.actmedia.eu, 2014)

    Bibliography :

    Birsan M, Buiga A, FDI in Romania: evolution and main types of large firms in the manufacturing

    sector, OECD Global Forum on International Investment, 2008

    Chirila Donciu Elena, Determinants of Foreign Direct Investment Development, CES Working

    Papers Volume V, Issue 4, 2011

    CMS, Emerging Europe: M&A Report, 2012

    Gaviletea Marius, Short analysis of Romanian banking sector after BCR privatization, 2007 (181-

    190)

    National Bank of Romania, FDI Annual Report, 2004-2012

    UNCTADSTAT, Inward and Outward FDI flows, annual, 1990-2012

    www.innovacap.com, 2014

    www.wall-street.ro, 2014

    www.actmedia.eu, 2014

    www.traderomania.net, 2014

    http://www.actmedia.eu/http://www.innovacap.com/http://www.wall-street.ro/http://www.actmedia.eu/http://www.traderomania.net/