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ROMANIA: Developing market offers FDI opportunities

Oxford Analytica Daily Brief Service. (Jan 05, 2007).

Abstract (summary)
Romania's leading position regionally for foreign direct investment (FDI). Romania has emerged in the past few years as one of the most attractive destinations for FDI in Central-Eastern Europe. Institutional development linked to EU accession, a relatively wellqualified and cheap labour force, low taxation and huge untapped market potential are likely to remain the main advantages.

Full Text
SUBJECT:Romania's leading position regionally for foreign direct investment (FDI). SIGNIFICANCE:Romania has emerged in the past few years as one of the most attractive destinations for FDI in Central-Eastern Europe. Institutional development linked to EU accession, a relatively well-qualified and cheap labour force, low taxation and huge untapped market potential are likely to remain the main advantages. ANALYSIS: Romania's economic fortunes look positive as it joins the EU. The economy expanded by 7.8% in the first nine months of 2006 and growth should continue at a similar pace (see ROMANIA: Economic growth is likely to continue - January 18, 2006). However, despite decelerating inflation, gains in productivity and competitiveness, and respectable export growth in the past decade, imports have grown faster, and the 2006 current account deficit may exceed 9% of GDP. In 2006, most imports were due to capital investment and accompanied by record foreign direct investment (FDI) inflows. According to the National Forecast Commission, in the first ten months, the current account deficit of 7.8 billion euros (10.2 billion dollars) was covered by FDI inflows of about 7.9 billion euros. However, maintaining such high levels of FDI could prove a challenge for the government in the coming years, as privatisation draws to a close. FDI favourite According to UNCTAD, Romania ranks 24th in the world for attractiveness to foreign investors and 1st in Central-Eastern Europe (CEE), capturing just over half of all funds directed there. Such high FDI inflows will be vital not only for the financial stability of the country, since current account deficits should remain high in the coming years, but also for its overall development. The business environment is generally positive, with low labour costs, geographical proximity to Western Europe, relatively low taxation (the corporate tax rate is 16%) and recently
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streamlined bureaucratic procedures. Starting a business now takes an average of eleven days (compared with 29 in CEE and 20 in the EU-15) and only five documents (seven in CEE and the EU-15). These factors, together with huge untapped potential in several key sectors -ranging from retail banking to telecoms and home computers -- have led to optimistic projections for the future. Economy Minister Varujan Vosganian expects the FDI stock to reach 100 billion euros by 2020, from nearly 22 billion in 2005. FDI composition There is an encouraging spread of FDI across sectors and countries of origin, between privatisation and greenfield projects, and between large, medium and small projects: During 1991-2005, 52.0% of FDI inflows went into industrial projects; professional services, 21.7%; commerce, 14.9%; and transport, 7.1%; greenfield projects attracted 42% of the total. In 2005, such higher value-added sectors as telecoms, services, energy, engineering and electronics attracted more than half of all FDI inflows -- about 2.84 billion dollars. By country of origin, in 2005, the Netherlands, Austria, Germany and France led the table, followed by Italy and the United States. Outsourced services Outsourcing is just beginning. In 2001, Romanian entrepreneurs started the country's biggest call-centre, EasyCall, with 600 employees. It has been bought by Computer Generated Solutions , which has similar operations in the United States, Canada and India, and intends to make Romania its main base for CEE and the Middle East. The market for such services is still small if growing. IBM employs 500 in Romania (compared with 1,500 in the whole of CEE), providing support and services for its clients, including development and testing of software. Oracle has 800 employees in three locations responsible for closing deals and payments. Hewlett-Packard employs 800 in Romania and may recruit another 1,200 in 2007; expansion is motivated by relatively cheap property plus the communication skills of employees. In its Bucharest centre, 30 foreign languages are spoken. Accenture and Genpact, a division of General Electric , are to begin operations in the next few months. The small time difference between an operation in Romania and clients in Europe and the Middle East (compared with a US base) is an additional advantage. Enterprise size A recent survey of the largest companies operating in Romania by the Ziarul Financiar daily reveals that 60 out of 100 are foreign owned, including Commercial Bank of Romania, Petrom, Lafarge , Orange, Mittal Steel Galati, Automobile Dacia, Coca-Cola and Carrefour. However, much investment is small scale. Since 2001, the Romanian Agency for Foreign Investment (ARIS) has monitored those projects worth over 1 million dollars in most fields, except for banking, insurance and strategic investments, which are subject to special legislation. Only six of the projects monitored by ARIS have attracted investment of more than 100 million dollars. The vast majority are much more modest. An example is Romalp Industries, a network of 50 small and medium-sized engineering enterprises mostly based in
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the Rhones-Alpes region, which have more than 2,000 employees in Romania, including two factories in Oradea, one in Moroveni and one in Deva. Although some specialised retraining of the labour force has been necessary, salaries about one-sixth of those in France have helped Romalp remain competitive subcontractors for big carmakers. Market opportunities The low level of development of commercial and financial services, mobile telephony and information technology suggests that growth may accelerate in industry and services. Mobile phone penetration is 62%, compared with 81% in CEE and 99% in the EU-15, while only 11% of the population own a computer (18%, CEE; 48%, EU-15). Similarly, there has been steep increase in car ownership, with 1 million new cars sold in the past six years, compared with just 2 million cars owned in 1990. With an overall total of just over 4 million (including vans and buses), Romania has the lowest car ownership in Europe; up to 17 million adults could be sold a car. A boom is expected in the development of air travel. Low-cost Hungarian operator Wizz Air has announced plans to use Baneasa airport near Bucharest, alongside Katowice, Warsaw, Gdansk, Budapest and Sofia, providing flights from Baneasa to the new destinations of Budapest, Barcelona, Rome, Dortmund and London, and attracting 500,000 passengers in 2007. Outlook In the next two years, the privatisation agency plans to sell the last of its assets. The state is majority owner in some 50 enterprises, including 20 of the top 100 companies in Romania, estimated to be worth 16 billion euros. They include Romgaz, Henri Coanda airport, the state lottery and the savings bank Casa de Economii si Consemnatiuni. It owns residual shares in 70 enterprises. The privatisation of energy sector assets is likely to remain controversial, with investigations continuing into the conduct of earlier privatisations (see ROMANIA: Government is distracted by rivalries - December 15, 2006). Although further energy privatisations are on hold, pending the completion of the investigations, the privatisation process as a whole is likely to continue apace under the strengthened Agency for the Realisation of State Assets (AVAS). Under new leadership, AVAS has announced plans to accelerate the disposal of state property, completing the process by end-2008. CONCLUSION: The completion of privatisation in the next few years still offers important opportunities for foreign investors. However, if Romania is to continue to attract the funds it needs for both financial stability and development, the government will have to define a coherent strategy for encouraging FDI, identifying those incentives allowed under EU law. Copyright Oxford Analytica Ltd. 2007. No publication or distribution is permitted without the express consent of Oxford Analytica.

Indexing (details)
Subject Foreign investment; Emerging markets
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Location Classification Identifier / keyword

Romania 1300: International trade & foreign investment, 9176: Eastern Europe Eastern Europe, Europe, Romania, Eastern Europe, France, Hungary, Economic conditions, Industry, Politics, Balance of payments, Consumer, Corporate, Foreign investment, International trade, Government, Economic growth, Integration, Public policy, Privatization, Reforms, Wages & salaries, Airlines, Automobile industry, Banking industry, Computer industry, Electronics industry, Energy policy, Fiscal policy, Manufacturing, Service industries, Technology, Telecommunications industry ROMANIA: Developing market offers FDI opportunities Oxford Analytica Daily Brief Service 1 0 2007 Jan 05, 2007 2007 Oxford Analytica Ltd BUSINESS AND ECONOMICS Reports English News 192448344 http://search.proquest.com/docview/192448344? accountid=15533 Copyright Oxford Analytica Ltd. 2007. No publication or distribution is permitted without the express consent of Oxford Analytica. 2012-03-07 ProQuest Central

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