The Overall Attractiveness of Countries as Potential Markets and Investment Sites - Report Example

The overall attractiveness of countries as potential markets and/or investment sites  Table of Contents Chapter Introduction 4 Chapter 2 – Country overview 4 2.1 How to build business contacts? 5 2.2 Taxes in Romania 5 2.3 Infrastructure in Romania 5 2.4 Political Risk in Romania 6 2.5 UK Government Incentives 6 Chapter 3 – Export 6 3.1 Market Size 6 3.2 Base for business 6 3.3 Purchasing power 7 3.3.1 Savings rate 7 3.3.2 Recent History 7 3.3.3 Culture and individualisation level 8 3.4 Market situation of clothing industry 8 3.5 Help with trade connections 8 Chapter 4 - Foreign Direct Investment 9 4.1 Types of companies in Germany 9 4.2 Cash incentives 9 4.2.1 Joint Task 9 4.2.2 Investment Allowance 10 4.3 Staff and strike risk 10 4.4 Taxes 10 4.5 Further information 10 Chapter 5 – Conclusion 10 References 11 Bibliography 12 International Monetary Fund (2004). Romania, selected issues and statistical appendix. Washington, D. C., USA: IMF Publications 12 OECD (2005). Romania. USA: OECD Publishing. 12 Chapter 1 - Introduction Globalisation has facilitated the scopes of international trade as well as that of investment flows beyond domestic premises. Such developments have actually brought about miraculous results throughout the world. In fact, many nations today are found to depend primarily upon their current account surpluses to soar up their economic growth rate. Romania too is not muck backward from this aspect as textile mills and factories show their eagerness to venture abroad. The present paperwork is that related to the decision making process of a particular textile unit, located in Romania, to distinguish between nations which are suitable for export or those more appropriate for investing in. Chapter 2 – Country overview Romania, located in South-East European region and bordering the Black Sea, is ranked 53rd in terms of population. The nation entered into a pact with the European Union on January 1, 2007 since when its journey towards being a capitalist society gained pace. However, it has not yet adopted the Euro as its domestic currency unlike every other member-nations of Euro. The nation had frequently been victim to financial instability phases, though each time it had been bailed out either due to strong export demands within the EU or high consumption demands. In fact, the steady demand traits that the nation had faced over years had been instigation towards its fast paced economic growth as well as an answer to the nation’s widespread poverty. However, the global financial meltdown in 2007-08, adversely affected the economy with a fast depreciating growth rate (-7%), sharply rising rate of unemployment (7.8% from 4.4%) and appreciating rate of exchange (CIA, 2010). 2.1 How to build business contacts? Building business contact anywhere outside domestic premises requires the presence of some agreements at the political stratum. Similar had been the case with that of Romania that took its first step in the business community once after entering the European Union in 2007. Moreover, it is essential to remove barriers to entry prior to building healthy international trade terms. Fortunately, Romania is already in its way towards liberalisation in the true sense of the term as the nation initiates its efforts to bring down import taxes on industrial goods from 35% to 16% and that on non-agricultural commodities to 33.9% (Hagiu & Neacsu, 2008, p. 281). 2.2 Taxes in Romania Romania had popularly been known as the iron country mainly due to the stringencies with which it implements its excise duties. The economy maintains an import surcharge of 4% added with a customs commission of 0.5%. It also maintains a VAT amounting to 22% on an average. However, the national government has shown some amount of lenience with the imposition of a flat tax rate of 16% over every entity (European commission, 2010, p. 134). 2.3 Infrastructure in Romania Infrastructure for business in Romania, like that for many transition economies, is improving fast though it cannot be considered to be prepared completely to attract foreign investments. According to the President of the European Bank of Reconstruction and Development (EBRD), the organisation is working hard along with municipalities located in various provinces of the nation so as to accomplish huge improvements in the areas of drainage system, water supply and transportation. Simultaneously, it is also striving hard to make up for a lack of power in the nation, crucial for industrial productions. The nation faces hard-core competition in these aspects from its co-members in the EU, though it is remarkably improving its potentials in this respect (Lemierre, 2008, p. 34). 2.4 Political Risk in Romania The political turmoil in Romania and especially the situation after the polls of 2007 is worth mentioning. The nation was largely suffering from the brunt of joblessness and that of high price instability. However, quite unlikely this discrepancy was hardly reflected upon that of the economic growth rate of the nation that continued to be at 6%. The rate of inflation had also been low (4%) as had been the turbulences in the stock market. In addition, the government of the nation introduced a flat tax rate of 16% which is an immense boost-up for the industrial as well as private entities (CIA, 2010). 2.5 UK Government Incentives The incentives being offered by the government of UK to the foreign investors is found to be in advantage to that of the latter through the allowance of labour subsidies. However, this is applicable only in Greater Ireland rather than in the rest of UK (Yang-Sup, 2002, p. 161). Chapter 3 – Export Romania basically involves in the exports of heavy work machineries, textiles and footwear, raw and processed metal, fuels and mineral resources, chemicals as well as agricultural produce. 3.1 Market Size The export market of Romania though quite huge, is enclosed mainly within the European Union. According to the statistics for 2009, Romania has the biggest market in Germany (18.76%) followed by that in Italy (15.42%), France (8.2%), Turkey (4.99%) and Hungary (4.33%). The overall volume of exports being made by Romania is $40,600,000,000, which ranks the nation at 53 among all nations throughout the world (CIA, 2010). 3.2 Base for business The nation’s primary bases for business are Germany and Italy. Moreover, the nation is highly dependent upon its textile and clothing industry as is evident from the fact that 10.5% of its total industrial exports are accounted for by those of textile and clothing. In fact, European Union alone was found to be importing 86% of total textile and clothing exportable products, from Romania at the end of 2003. However, the figures depreciated marginally soon after the entry of competitors from Asia (Lane & Probert, 2009, p. 204). 3.3 Purchasing power Assessing the GDP of Romania after accounting for the purchasing power parity reveals the nation to be ranked at number 43 in terms of its volume of GDP. Though the nation experiences a falling rate of economic growth, the value of its GDP is found to be equal to $254.7 billion. On the other hand, the nation’s per capita income after adjustment for PPP equals to $11,500 according to the statistics of 2009. In terms of per capita income however, the nation ranks 96 among every other nation (CIA, 2010). This shows the poor individual purchasing power of the nationals. 3.3.1 Savings rate Savings rate in Romania is quite high though it has reduced considerably following the financial recession of 2007-08. The statistics for savings rate however are unavailable, though a suitable proxy could be the additions to capital formation in the nation. According to the statistics for 2009, change in the gross fixed capita; formation is -25.3% as against 16.2% in 2008 and 30.3% in 2007 (European Commission, 2010, p. 134). 3.3.2 Recent History Romania, post the financial meltdown of 2007-08, had undergone a phase of recession, with deteriorating conditions of various economic activities; however, the situation is believed to be improving gradually. Though the country had retained a high economic growth rate of 6.8% between 2004 and 2008, there was a remarkable fall in the volume of exports and hence that of financial inflows. Moreover, the rate of exchange depreciated by more than 30% between 2007 and 2009, causing a negative impact upon the balance sheets of various economical units. Economic activity receded fast thus spurring the rate of unemployment from 5.8% (2008) to 6.9% (2009). Inflation too had been above the tolerance rate, i.e., 4.7% by 2009. Moreover, the nation also experienced a huge current account deficit of 12.9% in 2008 (European Commission, 2010, p. 132-133). 3.3.3 Culture and individualisation level The latest report published by the census conducted in 2002 show that the nation comprises of 89.5% Romanians, 6.6% Hungarians, 2.5% of Romans, 0.3% of Ukrainians, 0.3% of Germans, 0.2% of Russians, 0.2% Turkish and 0.4% of the population belonging to other communities. On the other hand, 91% of the population are found to speak Romanian, 6.7% speak Hungarian, 1.1% speaks Romany and 1.2% of the population speak other than the aforementioned languages (CIA, 2010). Hence, the culture and level of individualisation in the nation is highly inclined towards that of Romania. 3.4 Market situation of clothing industry The textile and clothing industry of Romania has a huge international market, with high demands for the products coming from the member nations of European Union. In fact, according to the reports for 2006, 50% of the nation’s export demands come from the five nations of Germany, Italy, France, UK and Turkey. However, the exports of clothing and textile products from Romania suffered a drawback after the emergence of cheaper substitute goods from China. The present market scenario is rather threatening for Romania given that the extent of import tariffs have remarkably been reduced by the EU from 18% to 8%, that might provide competitive edge to South-East Asian economies like India and China, in this aspect. Moreover, the nation itself absorbs almost 10.2% of the total textile and clothing being exported by the Euro (Lane & Probert, 2009, p. 207). 3.5 Help with trade connections The nation’s trade connections are found to be in line with the demands of the economy. In order to help itself out with the trade connections, the nation entered into a pact with the European Union in 2007, so that it could enjoy a free trade regime with every nation underlying the EU. This actually helped the nation to soar up high in terms of export revenues being earned, since Romania still maintains a different and cheaper rate of exchange from Euro – the common currency of almost every nation in the EU. Apart from political benefits, the nation also enjoys benefits on the transportation front. It ranks 21 in terms of advances in railway transports, 25 in terms of other roadways, 48th in rank according to improved waterways for transport. Hence, apart from its advantage in being a part of EU, the nation does not enjoy any benefits from the aspect of transportation. Chapter 4 - Foreign Direct Investment Foreign Direct Investment outflows from Romania had been soaring up at a remarkable pace being 3.0 billion Euros in 2004, to 3.1 billion Euros in 2005 and 7.4 billion Euros in 2006. Romania, however had been the main investment destination post 2006, with large volumes of FDI flowing in from Germany, Austria and many other EU nations (Karkkainen, 2008, p. 2). 4.1 Types of companies in Germany Germany mainly is found to invest in heavy works and engineering industries. To be precise, the primary industries found in Germany are those related to heavy engineering works (electrical or electronic), automobile, ship manufacturing and aircraft manufacturing. In addition, there are also others related to the chemical industry and energy resources. 4.2 Cash incentives Given the unavailability of cotton and textile industrial units in Germany, Romania stands a good chance of making it big in the nation, either through exports or by means of investment inflows. However, there are certain other factors which need to be considered prior to setting up industrial units; they have been discussed as follows – 4.2.1 Joint Task If the industrial ventures are a joint one, in collaboration with the administration of the host nation, viz., Germany, a certain fraction out of the total profits being earned needs to be given out to the host government. On the other hand, the outsider nation can gain an access to the inside information of Germany, so that it no longer suffers from an asymmetrical availability of information. 4.2.2 Investment Allowance Many-a-times, the national administration of the host nation, in its urge to attract investors from abroad, provide investment allowances to the foreign companies. These allowances are like subsidies which if present can largely cover up company expenses. 4.3 Staff and strike risk The political and social scenario in the nation must be considered as well prior to deciding to venture out. In case that the staffs are prone to making high demands and strikes, the company will be facing huge losses despite the presence of an investment allowance. 4.4 Taxes Taxes form a very important component in the decision making process of any nation. In Germany, the amount of corporate tax being charged is at a flat rate of 15%, which is lower than that in Romania (Schanz & Schanz, 2010, p. 147). 4.5 Further information Another important consideration in this respect is the extent to which other nations around the world are in an advantageous position to invest in the host nation. In such a case, the starter company is likely to face a competition problem. Chapter 5 – Conclusion The above study evaluated Romania to be highly politically sensitive area for investment. Given the high incidence of taxes and the transition phase from communism to capitalism that the nation is undergoing, it might not be regarded as one with an employer friendly labour force as well. This is the reason why it is wiser to export in Romania rather than investing in the same. References CIA: The World FactBook (2010). Romania [Online]. Available at https://www.cia.gov/library/publications/the-world-factbook/geos/gm.html (Accessed: November 27, 2010). European Commission (2010). ‘ROMANIA: Increased stability nurtures a nascent economic recovery’ [PDF]. Available at http://ec.europa.eu/economy_finance/eu/forecasts/2010_spring/ro_en.pdf (Accessed: November 27, 2010). Hagiu, A. & Neacsu, M. (2008). ‘International Negotiaions and Trade Policy: The case of Romania’ [Online]. Available at http://anale.feaa.uaic.ro/anale/resurse/032_E05_Hagiu_Neacsu.pdf (Accessed: November 27, 2010). Karkkeinen, A. (2008). ‘EU-15 Foreign Direct Investment in the new Member States’. EuroStat [Online]. Available at http://www.eds-destatis.de/de/downloads/sif/sf_08_071.pdf (Accessed: November 27, 2010). Lane, C. & Probert, J. (2009). National capitalisms, global production networks: fashioning the value chain in the UK, USA and Germany. New York, USA: OUP. Lemierre, J. (2008). Interview by Oxford Business Group. Solid Foundations. The Report: Romania 2008. London: OBG. Schanz, D. & Schanz, S. (2010). Business Taxation and Financial Decisions. London, UK: Springer. Yang-Sup, S. (2002). European Integration and Foreign Direct Investment in the EU: The Case of the Korean Consumer Electronic Industry. London, UK: Routledge. Bibliography International Monetary Fund (2004). Romania, selected issues and statistical appendix. Washington, D. C., USA: IMF Publications OECD (2005). Romania. USA: OECD Publishing. Read More