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Assignment on Foreign Direct Investment in Romania

For the course International Business & Strategy
Chiriac Alexandra (MBA 2013-2014)


1. FDI evolution in Romania
Romania is a post-communist country, which started its transition towards capitalism after
1990. In the first years of transition, the volume of FDI was very low in Romania, on one hand due to
the slow pace of privatization and restructuring and on the other hand because there was no
strategy towards attracting FDI. Over time, foreign investors have been able to valorize relatively
large profit opportunities in Romania, either through the greenfield investments or through mergers
and acquisitions.
The graph presented below illustrates a very low amount of FDI until 1996. The level of inflows
at that time was around $264 million. Afterward started a period with unstable legislation but
the privatization offer increased significantly, so the amount of FDI inflows started growing. The
amount of FDI in 1997 was 5 times higher than in the previous year. This indicate that the
privatization process accelerated and Romania was more open to foreign investors. Joining
NATO in 2004 and becoming a member of European Union in 2007, had a positive impact on
FDI. Romania was forced to harmonize its legislation and economic practices with those of EU.
This also convinced foreign investors that the country has a stable economy and the FDI inflows
reached a level of $11.367 million in 2006.

Table 1. FDI evolution in Romania (1990-2000)
YEAR 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
FDI
inflows
0 40 77 94 341 419 263 1,215 2,031 1,027 1,057
FDI
outflows
18 3 4 7 0 2 0 -9 -9 16 -13
FDI (%
of GDP) 2,6 0,13 0,30 0,35 1,13 1,18 0,74 3,4 4,8 2,9

2,7
Source: adapted from UNCTADSTAT, FDI database (Measure US$ millions)
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Chart 1. FDI inflows in Romania (US$ Millions)


It can be seen from Table 1. And Table 2. that there are big differences between the volume of
FDI outflows and FDI inflows. The maximum values of FDI outflows were reached between 2006
and 2008. In 2002, was founded the Romanian Agency for Foreign Investment (ARIS). Its mission
was to attract, retain and grow foreign direct investments in the domestic economy. From the
graph below, we can conclude that ARIS Agency had a positive impact in attracting FDI. The FDI
inflows reached a maximum level of almost $14 billion in 2008. The economic crisis had also
affected the FDI inflows which started decreasing to only $4,8 billion in 2009. In 2009, ARIS
stopped its activity. In the next years, foreign investments continue to register a slow decrease
and in 2012 the volume of FDI was only $2,2 billion.

Table 2. FDI evolution in Romania (2002-2012)
Source: adapted from UNCTADSTAT, FDI database (Measure US$ millions)



0
40
77 94
341
419
263
1215
2031
1027
1057
0
500
1000
1500
2000
2500
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
FDI inflows 1990-2000
FDI inflows
YEAR 2002 2004 2006 2007 2008 2009 2010 2011 2012
FDI
inflows
1,141 6,436 11,367 9,921 13,909 4,844 2,940 2,523 2,242
FDI
outflows
17 70 423 279 274 -88 -20 -33 42
FDI (%
of GDP)
2,4 8,5 9,3 6,0 6,7 2,9 1,9 1,3 1,05
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Chart 2. FDI inflows in Romania (US$ Millions)


2. FDI distribution in Romania
FDI is distributed uneven over the country, most of it being absorbed by Bucharest-Ilfov region,
which represents the capital of Romania. This concentration of FDI is normal, given the fact that
the capital concentrate an important percentage of the countrys population, represents the
main economic center, the main research and education center and have the largest number of
skilled labor in the country. Some of the regions presented in the diagram below that benefit
also from FDI inflows are: the CENTRE region with 7.8 percent, followed by the WEST region
with 7.6 percent and the SOUTH-MUNTENIA region with 7.2 percent. (NBR, FDI report 2013)

Chart 3. FDI distribution by Regions in 2012
Source: National Bank of Romania, FDI report 2012
1158 1141
2196
6436 6483
11367
9921
13909
4844
2940
2523
2242
0
5000
10000
15000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
FDI inflows 2001-2012
FDI inflows
60,6
7,8
7,6
7,2
5,5
4,8
3,5
3
FDI by Regions in 2012 (in percentages)
Bucharest-Ilfov
Centre
West
South-Muntenia
South-East
North-West
South-West-Oltenia
North-East
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The graphic representation of FDI by economic activity, shows that the main flows were
concentrated primarily to manufacturing with 31.3 percent of total, out of which the principal
recipients were: oil processing, chemicals, rubber, plastic products, transport means, metallurgy
food, beverages, tobacco, cement, glassware and ceramics. Further activities that have also
attracted significant FDI are financial intermediation and insurance with 18.5 percent of total
FDI, trade 11.4 percent, construction and real estate transactions 9.2 percent, information
technology and communications only 4.8 percent. (NBR, FDI report 2012)
Chart 4. FDI distribution by Sector of Activity 2012
Source: NBR, FDI report 2012
Foreign direct investments are spread out across all the sectors of the economy, and investors
come mainly from Europe. Romania attracts foreign investors because of the low wage costs
and well-trained workforce. Multinational companies can use their already formed links to
import and export products in and from Romania, in this way the Romanian economy increases
in the world economy.
FDI inflows by country of origin shows that the major investors of Romania come from countries
members of European Union. We can see from the chart that over 50% of the FDI inflows come
from only 3 countries: Netherlands, Austria and Germany. The analyze of the FDI reports of NBR
shows that these countries have been the main investors for the last five years. (NBR, FDI
reports) Among the businesses that Netherlands own in Romania include ING Bank or insurance
31,3
5,5
9,7
18,5
11,4
2,4
9,2
1,5
0,6
4,8
4,7
0,4
FDI by Sector of Activity 2012 ( in percentages)

Manufacturing
Mining
Electricity, natural gas and water
Financial intermediation
Trade
Agriculture
Construction and Real Estate transaction
Transportation
Hotels and restaurants
IT and Communications
Professional and administrative services
Other
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company Aegon. Dutch investors have business in different areas such as transportation
systems within enterprises or production of equipment for food industry.
Austria has invested large amounts of money over the years by companies such as OMV Petrom,
Baumax, kika, Vienna Insurance, AGRANA, UNIQA and Strabag. Austrians are very present also
in the domestic banking institutions such as BCR (Erste Bank shareholder), Raiffeisen Bank and
Volksbank.
Germany has in Romania in particular businesses in automotive components. Examples of
Businesses of Germans are Lidl, Allianz Tiriac, Siemens, Praktiker, Hornbach, Metro, Continental,
Draxlmaier and Bosch.
Chart 5. FDI in Romania by country of origin in 2012
Source: NBR, FDI report 2012
3. Romanias Investment Policy
In Romania it doesnt exist anymore an investment promotion agency. In 2002, it was created
the Romanian Agency for Foreign Investments which was responsible for providing foreign
investors professional, free of charge consultative services and attract, retain and grow foreign
direct investments in the domestic economy.(www.traderomania.net, 2014) The ARIS Agency
was abolished in 2009, even that between 2002 and 2009 the FDI inflows registered a positive
evolution. Activity of the institution was transferred to the Ministry of Economy.
The main factors that attract FDI in Romania is relatively low cost of labor, the high level of
skills, market size, the legal environment, non-discriminatory and attractive for foreign
22,4
18,5
11
8,9
5
4,5
4,3
3,7
3,1
18,6
FDI by country of origin 2012 (in percentages)
Netherlands Austria
Germany France
Italy Cyprus
Greece Switzerland
USA Others
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investment, the low cost of raw materials and utilities and the open attitude of local and central
authorities towards the foreign investors.(Chirila E, 2011)

4. Mergers & Acquisitions market in Romania
In 2012, the M&A market in Romania did not register an important evolution. The main
progress was in sectors like Energy, TMT (Technology, Media and Telecommunication),
Agriculture and Financial Services. The Energy sector, with a particular attention in both oil &
gas and alternative energy source, had a positive growth and generated a considerable amount
of M&A activity in 2012. One of the largest deals signed in Romania in 2012 for the energy
sector was the acquisition of the EnergoBit Group, a Romanian supplier of electrical networks
to the power sector, by Innova Capital a leading Central European private equity fund, along
with EBRD. (www.innovacap.com, 2014) Other notable deals in 2012 included MetLifes
acquisition of Aviva Romania Life and Pensions and the sale of 92.4% stake in MKB Nextebank,
the Romania based commercial bank, to a consortium of investors led by PineBridge
Investments LLC, the US based asset management firm. (CMS, Emerging Europe: M&A report
2012)
Economists forecast state that agriculture and IT will be the main areas of interest for foreign
investors in 2014. The main interest of foreign investment is to purchase land and farms and
also cultivate them, because there are large areas of land that can be included in the bio
culture, which would raise the price of the final products.
In the past years there were registered several significant investments, which are related to the
privatization of different huge state owned companies. One important acquisition was in 2001
when Mittal Steel Company based in Rotterdam bought the majority share in the SIDEX steel
plant at Galati, which is the largest in South-East Europe. At the moment of acquisition, the
plant recorded daily losses of one million dollars. After four years of privatization, Mittal Steel
Galati became the largest private company in Romania. Plant turnover reached $ 2.1 billion in
2004.(www.wall-street.ro, 2014)
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Another important transaction was the privatization of Romanian Commercial Bank the
largest one in Romania. The privatization process started in 2002 and finished in 2006 when
Austrian bank Erste Bank paid 3.75 billion euros for 61,88% of the shares, 5.8 times more than
the accounting value of BCR, and 20 times more than the net prot of BCR. (Gaviletea Marius,
2007)
In 2004 the Austrian company OMV acquired in a privatization process 51% of the Romanian
national oil company Petrom.(Barsan M, Buiga A, 2008) Currently the OMV Petrom is the most
valuable private company in Romania with a turnover of 4, 3 billion euros in 2012.
(www.actmedia.eu, 2014)
Bibliography :
Birsan M, Buiga A, FDI in Romania: evolution and main types of large firms in the manufacturing
sector, OECD Global Forum on International Investment, 2008
Chirila Donciu Elena, Determinants of Foreign Direct Investment Development, CES Working
Papers Volume V, Issue 4, 2011
CMS, Emerging Europe: M&A Report, 2012
Gaviletea Marius, Short analysis of Romanian banking sector after BCR privatization, 2007 (181-
190)
National Bank of Romania, FDI Annual Report, 2004-2012
UNCTADSTAT, Inward and Outward FDI flows, annual, 1990-2012
www.innovacap.com, 2014
www.wall-street.ro, 2014
www.actmedia.eu, 2014
www.traderomania.net, 2014