Increasing investment attractiveness of CIS countries - Research Paper Example

Increasing investment attractiveness in the CIS countries Submitted by…………………………………….. LITERATURE REVIEW The coming to an end of the USSR convention resulted in the successor countries being left with several economic difficulties. As a comparison with other developed nations, the USSSR exhibited an extensive industrial sector, which in its own way was biased in establishing heavy industry. Blessing (1993) asserts that the division of the Soviet Union implied the termination of central planning. Supply chains were no more and enterprises thereafter had to get means to supply to customers, which was under confrontation with the foreign competitors. The system of central planning made impossible the establishment of technological growth, several production firms became economically outdated in the new market conditions. Both heavy and light industries, according to Nwogugu (2011), needed to become modern so that the industries have a good base in a competitive global market. In addition, the service sector also required serious improvements. So as to meet each objective, the economies of CIS countries needed to undergo a serious restructuring through an increased level of investments. However, the financing of the investments was not as possible as a result of the subsequent economic crisis that came after the dissolution of the USSR and barred the savings (Nwogugu, 2011). The CIS countries had inadequate means to compensate for the insufficient savings to finance the investments. Unfortunately, the privatized businesses showed to be more resourceful in facilitating capital outflow from the CIS, rather than raise and use the capital to finance the restructuring of the economy. Thus, there were low investments in fixed assets in the CIS countries during the first decade and a half after the dissolution as compared to the Eastern Europe countries (Du, 2013). As compared to the Baltic and Eastern European nations, the CIS countries experience serious economic crisis and gradual growth in restructuring the productive framework in the respective countries; resulting in the need of increased investments (Shiellis, 2003). The significance of the investments can extend to close the investment gap because of insufficient savings. The external factors that are increased investments include the transfer of managerial skills, technology, processing of information, and a proficient knowledge in sales and marketing. The dissolution of central planning created market of 100 million consumers in Eastern Europe and 300 million in the successor countries to the USSR. Shiellis says that among the CIS, Russia is having the highest population and several states advocated to embrace the policy of free trade, which permitted imported commodities to meet the local demand. As a result, the imported commodities become wide during the first years of change as the people used their savings in buying the western goods and services. Due to the economic crisis and escalating inflation rate immediately after the transition, there was a significant decrease in the savings and lowered incomes resulting in the inability for the local consumers to purchase the western products. On the contrary, foreign investors in Eastern Europe privatized the firms from the government and already began to restructure the industries with the objective of increasing the local production. The increased production level was able to sustain the local demand. Nwogugu (2011) reports that the CIS countries were experiencing a low start off in the per capita as compared to the Eastern Europe and Baltic countries. This situation explains why, contrary to the wider consumer base, the markets in the CIS countries remain negligible. Although the successor CIS countries of the USSR made an effort to maintain and later establish a free trade area, the dissolution of the USSR resulted into an introduction of boundaries and broke its economic state. Thus, it is in order to say that is the lack for an attractive market seeking investment in the CIS countries. A research by OECD (2011) mentioned that several of the CIS countries lack a good base for attracting FDI. OECD claims that there exist small markets and most of the markets lack resources for attracting foreign investments. In addition, several of the CIS countries are not sea-accessible with poor transport network, not forgetting the high costs of production that result into low revenues. The market in these countries should grow, but for that to take place, there is the need for investments, both local and foreign. For the respective governments to attract such investments, they should create incentives for the investors like friendly policies and enable suitable investment climate for them to cope up with the Eastern Europe countries. The CIS nations started to record good performance especially during the 1990s and it continued until the dissolution that resulted into an economic recession, reducing their revenue (Shiellis, 2003). The income level of the CIS reduced to 82 per cent in 2004. A look at the current accounts of the CIS countries reveal mixed outcomes and a comparison with the Baltic countries prove that the CIS countries have deficits. According to Großbritannien (2006), if nations need to increase their attractiveness for investments, then there are several aspects that should be put into consideration. To create incentives for the investors, the CIS governments ought to create policies of investments that are friendly. Part of the recommendations by OECD (2011) submitted that nations to increase their market base, the governments should focus on how to set up a suitable environments for investment opportunities. Investors like a macro-economy that is stable; which subsequently can help to reduce the risks that could be experienced. In the past decade or so, The CIS country governments have begun to improve their performance in their macro-economy. Arguing in line with Heenan (2013), the dissolution of the Soviet Union made the successor countries go through numerous economic crisis that brought reduction in the income per capita in the most of the CIS countries. Heenan adds that in 2005, the CIS countries only had a cumulative revenue returns of 82 percent. Shiellis (2003) also noted that while the income level in the Russian government was at 81 percent during the 1988 level, states like Kazakhstan, Belarus, Uzbekistan, Russia and Turkmenistan had lower income. The economic regression was more serious in Ukraine and Moldova. Sauvant (2013) argues in his work – “Yearbook on international investment law & policy” – that tax rates and tax incentives are crucial aspects for investors. He submits that the government should lower tax rates and offer proper tax incentives in the country so as to attract more investors. For the CIS countries to attract more investors and be on the same or higher platform that the Baltic and Eastern Europe countries, the respective CIS governments should adopt such tax policies. Not only should there be a review on the tax policies but also the governments should reduce the administrative problems that affect the establishment of a new business. Before investing, a prospective investor evaluates the tax levels in the respective country, available incentives and the tax burdens coming from administrative policies in accordance with the setting up of new business. For example, it is obvious that corporate taxes extensively have an effect on private businesses. As a result, if these countries are to experience increased investments, especially from foreigners, there is need to reduce the country’s corporate tax rates. In addition, there is a big possibility for the CIS countries to create incentives lower for corporate businesses than for sole proprietorships. Generally, a poor investment is as a result of a country creating barriers that greatly increase capital for investing in a particular business and strict administrative hurdles for investments. Vos (2011) also submits that political stability greatly determine the economic progress, which in turn attract investments. The CIS countries should embark on to attaining the desired level of stability. A report by OECD (2011) also adds that with a stable political and economic arena, it becomes efficient and easy to do prediction how the established businesses would perform. A stable economy is a measuring tool for the investors to evaluate whether their establishments would bear profits, and if so, to what limit. Moreover, economic and political instability can contribute to inflations, which at times renders the currency nearly obsolete. Sauvant (2013) also hinted that in order to foreign direct investment and local direct investment, a stable political environment is key, not only for the investors but also for the employees, the government, and the business enterprises. Irrefutably, acts of crime, conflicts, and counterfeit currency are prevalent issues experienced in the most of CIS countries, and unfortunately, such issues acts to challenge the efficacy to undertake investments in trade activities. Thus, the judiciary has a serious obligation in ensuring the creation of effective mechanisms to deal with these such bad factors for investment. Großbritannien (2006) found that aside from policies and law, a significant strategy to increase investment attractiveness is to enhance the quality of shareholder service. Establishing a qualified and authorized body which can coordinate administrative activities with regard to prospective investors is an irreplaceable tool for creating partnerships. OECD (2011) found that an approach of improving labor productivity as well as competitive labor cost greatly assisted in improving economic growth of European countries. The CIS nations that have big domestic markets and lower labor productivity, such as Estonia and Slovakia, needs foreign investors that specialize in producing goods and services for consumption in domestic market. However this need greatly depend on the investment environment. The Gap in the Research This research has noted that investment situation of the descendant states, that is, the CIS countries has been widely researched. However, particular steps that these countries should take to successfully attract investments and restructure their respective economies has not been explored. This is a gap we intended to fill. We focused on the ways of attracting investment in the countries; an alternative way of discussing the strategies that can help to improve the economy CIS countries. A practical debate is that circumstances to boost investment in the countries are extensively looked at in the literature than the local investments. Majorly, the research scrutinized the strategic measures that the CIS countries should embrace in order to create a conducive environment for investors; and the arguments was based on the literature comparison between the Baltic and Eastern European states. It is arguable that the CIS nations are not suitable places for foreign investments and as a result there is a limited level of investment. METHODOLOGY This research employed secondary research methods; which was based on information collected from journals articles and reports of reliable organizations. We evaluated the information using quantitative and qualitative approach so as to achieve our research objective. The obligation of the research was to explore the possible ways to increase the investment attractiveness of CIS countries and as a result, articles and reports that were of relevance were used. We acknowledged that the CIS countries have not received enough investors, locally and abroad. The countries were and are still bared by the distance, time and costs, relevance to the European Union. The CIS have a small market that cannot effectively attract investments in lump sum. The respective governments made it much harder by permitting the local people to privatize the firms and as a result barring them from investments by the foreigners. The victimized governments should formulate a policy to cover the loopholes to increase attractiveness for investments. There are several limitations and criteria that are of importance in studying this topic. Most of the used resources have a possibility of being in existence for the over the last ten years, period to understand prevalent state and to come up with ways and future plans for CIS countries. Preference was accorded to articles which related to investments in CIS countries and resources that accord to CIS economies. Moreover, articles that use statistics and reports will be preferred. Considering the fact that the topic is small proximity to sphere of international investments, the author also will incorporate the resources which asses this sphere to understand the international experience of increasing investment attractiveness. All resources might be reliable, the information that is given in graphs and tables will be checked from other reliable resources if it is possible. For example, the information about investment environment and foreign direct investments that was explored by Shiells, (2003) provides a clear picture of weaknesses of CIS economies that might drive away potential investors and might show the reader the expectations of investors. Additionally, the article has a reliable statistics which are based on official reports and that might help to compare this information with other resources. Comparing this article with other resources might help to find changes and trends that exist is in this economies in last ten years period. Moreover, the authors are reputable and websites are official and peer-reviewed. That will help to give reliable results of analyses and to estimate the potential opportunities and risks better. Bibliography Blessing, M., 1993. Investing in Eastern European countries-an arbitration. 4th ed. Bassel: Swiss Arbitration Association. Großbritannien. 2006. Investing in Britains potential: Building or long-term future. London: HM Treasury. Nwogugu, M., 2011. Risk in the global real estate market international risk regulation, mechanism design, foreclosure, title systems and REITS. New Jersey: Wiley. Organisation for Economic Co-operation and Development. 2011. Attractiveness for innovation: Location factors for international investment. Paris: OECD. Patrick Heenan, M. L., 2013. The CIS handbook. 3rd ed. s.l.:Routledge. Shiellis, C., 2003. FDI and the investment climate in the CSI countries. Whington DC: International Monetary Fund, European 2 Dept.. Sauvant, K. P. 2013. Yearbook on international investment law & policy 2011-2012. S.l.: Oxford University Press. Vos, R., 2011. Globalization and economic diversification policy challenges for economies in transition. 6th ed. London: Bloomsbury Academic. Read More