FDI in Greece

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FDI in Greece Greek FDI
Chair Professor Kevin Featherstone Fragkiskos
Filippaios, MEF Fellow Kostas Tzioumis, NBG
Fellow Hellenic Observatory Seminar Series
February 12th, 2008
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Outline

• General (definition, trends, determinants)
• FDI Inflow in Greece
• FDI Outflow from Greece
• Assessment policy recommendations

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Definition

• An investment made to acquire lasting interest in
  enterprises operating outside of the economy of
  the investor.
• Threshold of 10 per cent of equity ownership to
  qualify an investor as a foreign direct investor
  (OECD)
• Forms of investment classified as FDI are equity
  capital, the reinvestment of earnings and the
  provision of long-term and short-term
  intra-company loans (between parent and affiliate
  enterprises).

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Global trends

• Improvements in crucial determinants of FDI
  Institutions, taxation, liquidity, FX, etc.

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Greek FDI inflows (1) A politicians view

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Greek FDI inflows (2) A clearer view

• Sources of Inward FDI in Greece (2001)
• European Union 70 50 from Luxembourg and
  Holland
• Other European countries 16

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Greek FDI inflows (3) South EU perspective

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Greeces performance Inward FDI

• UNCTAD (2006) ranks Greece 114th in terms of
  inward FDI performance (out of 141 countries).
  The rest of the EU averages 67.
• At the same, Greece is ranked 36th in terms of
  FDI potential, based on its macroeconomic
  conditions. The rest of the EU averages 33.

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Reasons for underperformance (1)

• Product market structure
• OECD (2007) Greece has one of the more
  restrictive business environments for inward
  investment
• US State Dept. (2007) Competition in many
  industry sectors in Greece can be characterized
  as oligopolistic, making it difficult for new
  entrants.
• World Bank (2007) ranks Greece 100th in the Ease
  of Doing Business Index (out of 187 countries).
  The average rank for the rest of the EU is 31.
• Labour market
• World Bank (2007) ranks Greece 142nd (out of 178
  countries) with regard to labour regulation.

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Reasons for underperformance (2)

• Corruption
• Transparency International (2007) ranks Greece
  56th in the Perception of Corruption Index (24th
  in the EU).
• Poor AML supervision in banking/insurance sector
  equity mkt.
• Taxation
• Tax framework
• Legislative Decree (2687/1953) allows for
  unilateral changes in terms of tax regime for the
  FDI project.
• Investment mismatch
• GDP ? Services 71, Industry 22, Agriculture
  7
• FDI ? Services 56, Industry 44,
  Agriculture 0

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Reasons for underperformance (3)

• Marketing
• No centralized authority to coordinate policy
  reform and assess progress.
• Focus on privatization, without foreign control
• Rather than greenfield investments or
  joint-ventures, Greek governments have focused on
  equity investments in privatisation of utility
  firms banks.
• 2000-2005 1.5 billion (mean)
• 2006 3.4 billion
• 2007 2.2 billion

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Theoretical FrameworkThe IDP in a Nutshell

• The net outward position of a country (outward
  investment inward investment) follows five
  stages of development which are closely related
  to the economic development of the country.
• Stage 1 Least developed countries attract and
  undertake negligible amounts of FDI.
• Stage 2 Developing countries attract
  increasingly FDI as a result of cheap inputs as
  a result of FDI, domestic investors enhance
  their own ownership advantages through
  spillovers local advantages are also upgraded.
• Stage 3 The developing country becomes
  gradually an outward exporter itself expansion
  is in neighbouring, culturally similar countries
  conform with the Uppsala School (Johanson and
  Vahlne, 1977 1990). Investment in developed
  countries occurs as well.

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Investment Development Path (Dunning 1981)
Net Outward Investment Position
GDP per Capita
Stage 4
Stage 5
Stage1
Stage 2
Stage3
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Theoretical FrameworkThe IDP in a Nutshell (II)

• Stage 4 The country becomes a net outward
  investor, revealing the level of economic
  development as well as the dynamism of local
  firms.
• Stage 5 This stage describes developed economies
  i.e. the USA, the UK, Germany with high volumes
  of inward and outward FDI.

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Greece and Its IDP

• Greece is now a stage 3 country.
• Stage 1 the end of WWII, the opening up of the
  Greek economy foreign investors in chemicals,
  basic metals and transportation sector
• Stage 2 (70s and 80s) the accession into the
  EU ensured the transition from stage 1 to stage
  2 foreign investors in mainly Heckscher-Ohlin
  type industries i.e. textiles, food and drink and
  consumer goods throughout 80s and 90s
• Stage 3 (90s and 00s) the opening up of
  Central and Eastern Europe government measures
  to enhance the competitiveness of Greece and
  increasing convergence with the EU core

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Investment Development Path (Dunning 1981)
Net Outward Investment Position
GDP per Capita
Stage 4 Today ???
Stage 5
Stage 1 End of WWII
Stage 2 70s and 80s
Stage 3 90s and 00s
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Investment Development Path Coefficient(Net
Outward Investment as of GDP)
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Motivation

• Greece is a typical example of how a small
  country can become a FDI outward investor and a
  regional centre as it moves up on its economic
  development path.
• Data from the Hellenic Ministry of National
  Economy (1998) show that Greek investment in the
  Balkan region accounts for almost 12 of the
  total FDI. It is estimated that more than 2,500
  Greek companies have invested in Central, Eastern
  and South Eastern European Countries (Hellenic
  Centre for Investment, 2005).
• Greece has also increasingly invested in
  countries such as India, China, UK or US.
• Some Central and Eastern European countries as
  well as developing countries such as India and
  China have become FDI outward investors.

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The case of Greece as an outward investor

• Key regional player and one of the largest
  investors in the Central and Eastern and South
  Eastern European Countries (Bastian, 2004 Demos,
  Filippaios, Papanastassiou, 2004 Kekic, 2005)
• Current developments in the region have changed
  the role of domestic subsidiaries (Manolopoulos,
  Papanastassiou, Pearce, 2005 Stoian
  Filippaios, 2008)
• This process was enhanced by Greek policies
  aiming to transform the country into a key player
  for the region.
• The Greek-Balkan Reconstruction Plan, offering
  almost 500 million euros, is an indicative policy
  fulfilling that aim (Hellenic Centre for
  Investment , 2005).
• Furthermore, this expansion has been facilitated
  by the upgrading of the Athens Stock Exchange
  (ASE) from a developing to a developed financial
  market, i.e. a reliable source for raising funds.

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Greek firms grabbed the opportunities and
expanded rapidly in the newly opened markets

• Albania - it was the second largest investor
  after Italy at the end of 2001 (WIIW, 2005)
• Romania - Greece was the second largest investor
  at the end of 2003 following the Netherlands
  (WIIW, 2005)
• Bulgaria - Greece on the third position following
  Germany and Austria (WIIW, 2005)
• FYROM - it was the second investor following
  Hungary (WIIW, 2005)
• Moldova - Greece holds the seventh place (WIIW,
  2005)

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The Greek investment occurred through two
channels

• First, Greek subsidiaries of multinational
  enterprises started internationalising.
• Firms such as 3E, a Coca- Cola soft drinks
  subsidiary, Delta, partner of Danone, Intracom, a
  partner of Siemens working in telecommunications,
  Chipita, a PepsiCo food subsidiary and many
  others started investing abroad, thus becoming
  regional headquarters.
• This strategic change appears to be verified by a
  prior study of Pantelidis and Kyrkilis (1994)
  where they argue that it is possible for
  foreign subsidiaries to readjust their market
  strategies along time and in accordance with
  changing conditions.
• Second, purely domestic firms, ranging from small
  entrepreneurial to large traditional firms,
  seized the opportunities and engaged in foreign
  production by using their accumulated experience
  and expertise.

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Explaining Greek FDI abroad

• Until now only a few attempts were made in the
  international literature with a seminal one from
  Petrochilos (1988). Almost all studies are
  either purely descriptive or do not go beyond the
  analysis of specific case studies.
• For a long time, the lack and inconsistency of
  FDI data dissuaded scholars from examining the
  Greek case.
• The adoption from Bank of Greece of the New
  Balance of Payment System since 1996, gives us
  the opportunity to inspect the locational
  determinants of inward FDI in Greece from
  1996-2001, for different sectors and a range of
  investing countries.
• Previous studies (Demos, Filippaios
  Papanastassiou, 2004 Filippaios Stoian, 2006
  Stoian Filippaios, 2008 Filippaios, 2008)
  showed that traditional factors (size of the
  economy, as well as its openness are significant)
  attracting FDI seem to dominate the decision
  process of Greek firms. Capital productivity and
  labour costs on the sectoral level are also
  influencing the decision of Greek investors.

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Why the South East region of Europe?

• The emerging economies offered
• A Large and unsaturated potential market in terms
  of population and Gross Domestic Product (GDP)
• A cheap and relatively skilled labour force and
  accessible and low-priced natural resources.
• Improvements in the institutional framework,
  political stability and the prospects for
  European Union (EU) membership have acted as
  important catalysts for foreign direct investment
  (FDI) in the Agenda 2000 transition countries.
• Market seeking and rent seeking multinationals
  have increasingly expanded into Central, South
  and Eastern Europe and names such as General
  Motors, Nestlé, British Petroleum, Orange and
  Marks and Spencers are common place in the area.
  

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Literature review

• Exploring the Greek case contributes to several
  strands of literature
• Studies on country specific ownership advantages
  Grosse and Tevino (1996) and Deichmann (2001).
• Studies on institutional determinants of FDI
  Wheeler and Mody (1992) Brunetti et al (1997)
  Brenton et al (1999) Henisz (2000) Rodrik and
  Subramanian (2003) Carstensen and Toubal
  (2004) Disdier and Meyer (2004) Dunning (2004)
  Trevino and Mixon (2004) Bevan et al (2004)
  Bevan and Estrin (2004) Pournarakis and
  Varsakelis (2004).
• Studies on institutional determinants of entry
  mode choice Oxley (1999) Meyer (2001) Meyer
  and Estrin (2001) Smarzynska (2002) Tihanyi
  and Roath (2002)

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Institutional and Business Environment Factors

• We have adapted the data from a World Bank survey
  on the investment climate in 58 countries
  conducted on 28,000 companies in 2002 so that
  figures are comparable. We have then put these
  business barriers in the order of their
  importance to investors so that 1 represents the
  issue considered the most significant obstacle to
  the operation and growth of business.

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Firms perceptions of business barriers in
selected transition countries. In parenthesis the
grading of importance (2002)
Source World Bank (2005)
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Data and Sample

• Greek FDI in the South East European Region
  (Source Bank of Greece, 2007)
• Time span 2001-2006
• Sectoral disaggregation
• Data on the external environment from World Bank,
  IMF, ICRG, Freedom House, Economist Intelligence
  Unit.
• Capturing Economic, Political, Social and
  Institutional aspects of the environment

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Trade Balance - Albania
Source IMF, Direction of Trade Statistics
Annual values January 2008 Units US Dollars
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Trade Balance - Turkey
Source IMF, Direction of Trade Statistics
Annual values January 2008 Units US Dollars
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Trade Balance - Bulgaria
Source IMF, Direction of Trade Statistics
Annual values January 2008 Units US Dollars
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Trade Balance The Rest
Source IMF, Direction of Trade Statistics
Annual values January 2008 Units US Dollars
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Greek FDI Abroad2001-2006
Source Bank of Greece, 2007
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Greek FDI Abroad (II)2001-2006
Source Bank of Greece, 2007
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Greek FDI - 2001
Source Bank of Greece, 2007
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Greek FDI - 2002
Source Bank of Greece, 2007
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Greek FDI - 2003
Source Bank of Greece, 2007
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Greek FDI - 2004
Source Bank of Greece, 2007
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Greek FDI - 2005
Source Bank of Greece, 2007
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Greek FDI - 2006
Source Bank of Greece, 2007
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2006 - Manufacturing
Source Bank of Greece, 2007
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2006 Financial Intermediation
Source Bank of Greece, 2007
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Results

• Greece is one of the leading investors in
  Central, Eastern and South Eastern European
  Countries, thus understanding the process that
  determines Greek investments in the region is of
  crucial importance for policy makers
• Interrelation of ownership and locational
  advantages that can explain foreign investment
  activity

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Results
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Recommendations

• Inward FDI
• Liberalisation of Markets
• Privatisations with transfer of technology and
  Know-how
• Creation of Specialised Factors of production
• Targeted FDI attraction policies, corresponding
  to Greek comparative and competitive advantages
• Exploitation of Public Private Partnerships (PPP)

• Outward FDI
• Understanding of who, when, why (3W)
• Support of Greek entrepreneurs SMEs as well as
  larger corporations
• Efficient and effective use of expansion abroad
  through the acquisition of knowledge

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Thank you for your attention

• Any Questions?