Foreign Direct Investments in Croatia: Trends, Structure and Effects

Vedran Šošić, VicegovernorSeptember 2015

Recent changes in FDI statistics

Note: Net FDI is calculated as the difference between liabilities (inward FDI) and assets (outward FDI). Source: HNB

Assets/liability vs.directional approach

Net FDI according to BPM5 and BPM6

Note: Net FDI according to both BPM5 and BPM6 is expressed as % of GDP according to ESA2010 methodology. Source: HNB

0

1

2

3

4

5

6

7

8

9

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

% of G

DP

BPM5 BPM6

‐1

0

1

2

3

4

5

6

7

8

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

% of GDP

Assets  Outward FDI Liabilities 

Inward FDI Net 

3

1. Trends and structure of FDIs in Croatia and international comparison

FDI dynamics in Croatia

Note: Negative sign indicates net capital inflow.Source: HNB

In addition to foreign borrowing, FDIs were important source of financing

CAD in the pre-crisis period...

... but net FDI inflow declined since the onset of the crisis, with strong impact of round-tripping in 2014

‐6

‐4

‐2

0

2

4

6

8

10

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

% of GDP

RT, assets RT, liabilities Assets excl. RT

Liabilities excl. RT Net liabilities growth

Note: In BoP statistics, round-tripping (RT) was recorded in 2008 (0.8EUR bn), 2009 (0.7 EUR bn), 2010 (-0.6 EUR bn) and 2014 (1.5 EURbn). The signs follow analytical approach; acquisition of assets ispresented with negative and incurrence of liabilities with positive sign.Source: HNB

‐15

‐12

‐9

‐6

‐3

0

3

6

9

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

% of GDP

Direct inv. Portfolio inv.  Fin. derivativesOther inv. Reserve assets Current account

Relatively strong FDI inflow in Croatia compared to other CEE countries

Note: Average values for Bulgaria are obtained using 2010-2014 data and for Slovakia using 2008-2014. Net liabilities are calculated as difference between liabilities and assets. Therefore, positive sign refers to net investment inflow.

Sources: Eurostat; HNB

Average in 2004 – 2014 period Net FDI, average in the pre-crisis and post-crisis period

0

2

4

6

8

10

12

14

EE RO HR LV CZ BG PL LT SK HU SI

% of G

DP

Assets Liabilities Net liabilities

‐1

0

1

2

3

4

5

6

7

EE BG HR LV RO CZ PL SK HU LT SI

% of G

DP2004‐2008 2009‐2014

Structure of FDI flows and stocks in Croatia

Note: Data doesn’t include round-trippingSource: HNB

FDI inflow dominated by equity investment, with strong growth of reinvested earnings in 2014

Source: HNB

‐3‐2‐1012345678

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

% of G

DP

Equity Reinvested earningsDebt instruments Liabilities

‐75

‐50

‐25

0

25

50

75

100

0

10

20

30

40

50

60

70

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

%

% of G

DPEquity and reinvested earningsDebt instrumentsNet FDI liabilities, annual growth rate (right)

BoP, net incurrence of liabilities IIP, stock of net FDI liabilities

Relatively strong equity investment in Croatia

Note: Data includes round-tripping.Sources: Eurostat; HNB

2004 – 2008 average 2009 – 2014 average

0

2

4

6

8

10

12

14

CZ EE HR LV LT HU PL SI

% of G

DP

Equity Reinvested earnings Debt instruments

‐2‐1012345678

CZ EE HR LV LT HU PL SI

% of G

DP

Equity Reinvested earnings Debt instruments

Most of investment in Croatia...

Note: Data doesn’t include round-tripping. IFI refers to international financial institutions.Source: HNB

... from Austria, Netherlands, Germany, Hungary

... in financial intermediation, trade, real estate, telecommunication

Note: Data doesn’t include round-tripping. Source: HNB

‐0,4

‐0,2

0,0

0,2

0,4

0,6

0,8

1,0

1,2

AT

NL

DE

HU LU IT FR SI CH

NA BE SE UK IFI

SAD

Other

%of GDP

2000‐2008 2009‐2014

‐0,20,00,20,40,60,81,01,21,41,61,82,0

Fin. interm

ediation

Other business act.

Wholesale trade

Real estate act.

Post and telecomm.

Retail trade

Man. of chemicals

Man. of coke, ref. petr.

Man. of other non‐

metallic min. products

Hotels and restaurants

Other

% of GDP

2000‐2008 2009‐2014

Real estate and trade boost equity investments;financial intermediation dominates in reinvested earnings

Note: Data doesn’t include round-tripping. Source: HNB

Equity investment Reinvested earnings

‐0,2‐0,10,00,10,20,30,40,50,60,7

Fin. interm

ediation

Man. of chem

icals

Construction

Extr. of crude petr., nat. gas

Other mining

Recreational act.

Retail trade

Real estate act.

Man. of basic metals

Hotels and restaurants

Man. of coke, ref. petr.

Wholesale trade

Post and

 telecom

m.

Other

%of GDP

2000‐2008 2009‐2014

‐0,20,00,20,40,60,81,01,21,4

Real estate act.

Wholesale trade

Other business act.

Man. of chem

icals

Retail trade

Hotels and restaurants

Recreational  act.

Extr. of crude petroleum, 

nat. gas

Man. of coke, ref. petr.

Fin. interm

ediation

Man. of food

 and

 beverages Other

%of GDP

2000‐2008 2009‐2014

Retained profits declined while dividends remain stable

Source: HNB

Profit of FDI firms Utilisation of profit earned

Source: HNB

‐0,4‐0,2

00,20,40,60,81

1,21,4

Fin. interm

ediation

Man. of chemicals

Post and telecomm.

Construction

Extr. of crude 

petroleum, nat. gas

Man. of food and 

beverages

Man. of basic m

etals

Retail trade

Man. of coke, ref. 

petroleum prod.

Other

% of GDP

2011 2012 2013 2014

‐120

‐90

‐60

‐30

0

30

60

90

‐1,0

‐0,5

0,0

0,5

1,0

1,5

2,0

2,5

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

in%

% of GDP

DividendsReinvested earningsReinvested earnings/Profit (right)

The importance of financial intermediation in the structure of reinvested earnings and dividends

Source: HNB

‐100

‐50

0

50

100

150

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

%

Reinvested earnings (as % of total) Dividends (as % of total)

In the post-crisis period the share of financial intermediation in total realization of reinvested earnings increased

Approximately 90% of total reinvested earnings were realized in financial intermediation in 2009-2014 period

High net FDI liabilities, but modest greenfieldinvestments in Croatia

Sources: Eurostat; HNB

Stock of net FDI liabilities Value of greenfield investment projects

Note: Data for a specified period refers to an average annual value during this period. In case of Lithuania, calculated averages don’t include 2003.Source: UNCTAD, World Investment Report 2015

0

10

20

30

40

50

60

70

80

90

BG EE SK CZ HR LV HU

RO PL LT SI

% of G

DP

Net liabilities

2004 2008 2014

0

5

10

15

20

25

BG

RO SK LV EE HU LT PL

CZ

HR SI

% of GDP

2003‐2008 2009‐2014 2003‐2014

13

2. Effects of FDIs in Croatia

banking & manufacturing

Croatian banking sector today predominantly foreign-owned ...

Note: Charts show the share of foreign-owned banks in total banking sector assets (left) and in total number of banks in a country (right).Source: ECB (Consolidated banking data), June 2014

Assets No of banks

0

10

20

30

40

50

60

70

80

90

100

EECZLT

HRSK

ROBG PL

LV

HU SI

LU

MT FI

BE IE CY

UK

AT

PT

DK IT ES

NLSE

DE

GRFR

%

0

10

20

30

40

50

60

70

80

90

100

CZ

SK

RO EE LT

BG SI

LV

HR

HU PL

LU CY IE GR

NLESSEPT

MT

UKBE FIIT FR

AT

DE

DK

%

... and well-placed in European rank tables

EE

MT

IELT SE HRBGLU

LV CZ SKGRDKBERO FI DE SI NL PLHUCYUK FRAT IT ES PT

8

16

24

32

40

SE FI UKEE DEMT NL

DK SK FR LV BE AT PLLT ES PT

HR IT HU

RO SI IE BG

GR

CY

0

5

10

15

20

25

30

35

40

45

HU

PT

AT

RO IT DE FR NL GR FI UK SI IE BE DK ES CY LU SE MT BGHR

SK PL LT LV CZ

EE

‐2,5

‐2

‐1,5

‐1

‐0,5

0

0,5

1

1,5

2

DK

SELU

FIIT

AT NL DE FRIE HR

LT PTMT ES BE CY EE GR SI PL

LV UK HU SK BGRO

CZ

80

140

200

260

Tier 1 ratio Loan to deposits*

NPL ratio

Return on assets

*Loan to deposit ratio is calculated as total loans and advances to non-financial institutions deposits.Source: ECB (Consolidated banking data), June 2014

Foreign banks in Croatia - early evidence Early evidence supportive of positive impact of foreign banks:

“foreign-owned banks are on average the most efficient” (Jemrić&Vujčić, 2002)

“de novo foreign banks are substantially the most cost efficient ... foreign banks as a group are more efficient than domestic private or state banks” (Kraft et al, 2002)

“arrival of foreign-owned banks has contributed to a higher level of competition, improved efficiency and better quality of products and services”; “foreign banks have been more profitable, had lower operating costs, and maintained better asset quality than domestic banks” (Kraft, 2002)

16

Efficiency indicators

Note: X-efficiency can only be calculated for six-year periods because residuals from bank cost equation have to be averaged for longer periods to dismantle random factor from efficiency factor.Source: HNB

Traditional indicators Bank x-efficiency

50

100

150

200

250

300

350

0

20

40

60

80

100

120

199

4199

5199

6199

7199

8199

9200

0200

1200

2200

3200

4200

5200

6200

7200

8200

9201

0201

1201

2201

3201

4

%%

Foreign banks share (%) Cost to income ratio (%)

C5 - assets (%) Labour to deposit ratio - right

0

20

40

60

80

100

1994

-199

9

1995

-200

0

1996

-200

1

1997

-200

2

1998

-200

3

1999

-200

4

2000

-200

5

2001

-200

6

2002

-200

7

2003

-200

8

2004

-200

9

2005

-201

0

2006

-201

1

2007

-201

2

2008

-201

3

2009

-201

4

%

Average x-efficiency Weighted average X-efficiency

Evolution of bank efficiency in Croatia Significant efficiency gains in the last 18 years. Mostly the result of market consolidation - traditional efficiency indicators are

heavily influenced by the economies of scale, as average bank is becoming larger. X-efficiency (managerial efficiency not infected with economies of scales or risk

management) scores of banks have stabilized (Turk-Arisis, 2002 and Huljak 2015). Foreign banks in Croatia - far larger and more challenging to run (more products,

wide presence, potential agency problems, ...), but managerial efficiency scores are similar to domestic banks. However, operational efficiency is no guarantee for success.

Early evidence (Kraft 2002) suggests that the transfer of skills and knowledge regarding risk management from foreign owners to newly acquired banks was an important channel of technology transfer.

Foreign banks were more conservative in their risk management and provisioning policies (higher provisioning expenses, higher risk-based capital, and higher level of recoveries).

18

FDIs in industry in the pre-crisis period

FDI manufacturing firms more successful than domestic in terms of faster growth in revenues, capital and productivity but positive effects on employment can not be confirmed (Škudar, 2002)

Positive effects of FDIs on productivity (Marić, 2008): Own-firm effects: FDI firms are on average by one-third more

productive than domestic firms in the same sector Spillover effects: FDIs had positive effect on other domestic firms in

different sectors of the economy Positive effects in the 1999-2002 period stronger compared to 2003-

2005 period

19

Impact of global crisis on performance of non-financial corporations

Global crisis had asymmetric impact on Croatian non-financial corporations (HNB, 2012):

State-owned and export-oriented firms were less affected

Evidence on whether FDI firms were affected less or more not clear

FDI firms made much sharper cuts in the workforce, as a way to cope with the crisis – they are more flexible and respond more promptly to the requirements of their owners

20

FDIs and Croatian exports

FDIs had relatively mild positive impact on manufacturing exports (Vukšić, 2005)

Foreign sector is more export-oriented than domestic but FDIpenetration in manufacturing is relatively low (Hunya and Škudar, 2006)

Increase in NFC’s export intensity is closely related to the presence of foreign capital, favourable financing conditions and economic environment conducive to enterprise growth (HNB, 2013)

21

Share of FDI firms in Croatian exports

0

10

20

30

40

50

60

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

%

Sources: FINA for data until 2010, later CBS and HNB

FDIs and exports

Share of FDI and domestic firms exporting at least 1% of their sale, 2013

Share of foreign controlled enterprises in merchandise exports, 2011

Source: World Bank, Business Environment and Enterprise PerformanceSurveys (BEEPS)

0

10

20

30

40

50

60

70

80

90

SI LV BG EE HR

HU

RO CZ

PL

SK LT

%

Percent of FDI firms exporting directly (at  least 1% of sales)

Percent of domestic firms exporting directly (at  least 1% of sales)

Note: Foreign controlled enterprises refer to companies were share of foreign ownership exceeds 50% . Data for Slovenia refers to 2012.Sources: Eurostat; HNB (for Croatia)

0

10

20

30

40

50

60

70

80

RO SK HU BG EE PL

LT HR LV SI CZ

% of total exports

FDIs in tradable sector and exports

Notes: Tradable sector is defined as mining and quarrying, manufacturing, electricity, gas and water supply. Economic activities for Bulgaria and Croatia are based on NACE Rev.1 and for other countries on NACE Rev. 2 classification. Data for Czech R., Poland, Romania and Slovakia refer to 2012 and for other countries to 2013.

Sources: WiiW; HNB calculations

Positive correlation between FDI in tradable sector and exports of goods and services

20

30

40

50

60

70

80

90

100

5 10 15 20 25 30

Expo

rts of goo

ds an

d service

s, GD

P, 201

3

Stock of FDI  in tradable sector / GDP, 2013

HR

LV

SKHU

CZ

BG

ROPL

EELT

SI

Conclusion

Relatively strong FDI inflow, but its structure not “optimal”

Effects of FDIs are positive, but of lesser magnitude compared to peers – particularly on exports.

Attracting new FDI into the tradable sector important

Providing investment-friendly institutional environment key precondition for FDI growth

Product and labour market reforms promoting higher labour force participation, education and innovation

24

Thank you!