Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute for International Economic Studies

www.wiiw.ac.at

Conference

„Innovation: Engine for Economic Growth“

Sofia, 30-31, October 2014

Attracting High-Tech FDI

Gábor Hunya, wiiw hunya@wiiw.ac.at

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Role of FDI in economic growth and competitiveness Foreign direct investment (FDI) can transfer capital, knowledge, generate growth,

fixed capital formation, exports and employment; increase competition, operate in

islands or integrated

Investing companies have firm-specific advantages, superiour knowledge

Attractive countries have location-specific advantages (cost, agglomeration,

market, resources, etc.)

Inward FDI policy (sequencing): attract FDI, generate spillover, support upgrading

of production structures, motivate reinvestment of subsidiary profits, attract R&D

Generating spillovers to domestic economy to support growth, employment,

knowledge, interaction between foreign and domestic firms, spin-offs

Since the 2008 crisis: low investments, meagre FDI inflow in the EU

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Source: Eurostat, wiiw calculations.

1Q'07

2Q'07

3Q'07

4Q'07

1Q'08

2Q'08

3Q'08

4Q'08

1Q'09

2Q'09

3Q'09

4Q'09

1Q'10

2Q'10

3Q'10

4Q'10

1Q'11

2Q'11

3Q'11

4Q'11

1Q'12

2Q'12

3Q'12

4Q'12

1Q'13

2Q'13

3Q'13

4Q'13

1Q'14

50

60

70

80

90

100

110

120BG CZ HU RO SI SK EU-15 NMS-11

Gross fixed capital formation, 4Q 2008 =100, seasonally adjusted and adjusted data by

working days

Investment activity: NMS levels remain below 2007

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FDI-Inflow declined more than investmentsInflow in % of gross fixed capital formation, 2004-2013

2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

5

10

15

20

25

30

NMS-11 SOE-7

Source: wiiw Database on Foreign Direct Investment in Central, East and Southeast Europe, 2013.

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Less decline from low level after the crisisFDI inflow in % of gross fixed capital formation

2009 2010 2011 2012 2013

-10

-5

0

5

10

15

20

25

30

Bulgaria Croatia Czech R. HungaryPoland Romania Slovakia Slovenia

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Greenfield investments in the NMS, (fdimarkets.com)Number of projects, Capital investment in EUR 10 million, Job creation in 100 jobs

2008 2009 2010 2011 2012 20130

1000

2000

3000

4000

5000

6000

7000

8000

9000

ProjectsCapitalJobs

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Number of Greenfield Projects, 2011-2013

Bulgaria Croatia Czech R. Hungary Poland Romania Slovakia Slovenia0

50

100

150

200

250

300

2011 2012 2013

Quelle: http://www.fdimarkets.com.

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Distribution of FDI projects by main activities 2009-2013, %

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Bulgaria and Sofia in international competition

for high-tech FDI

Bulgaria got only 27 projects in five years in the activities: Design, Development &

Testing; ICT & Internet Infrastructure; Shared Services Centre; Customer Contact

Centre; Headquarters; Technical Support Centre; Research & Development

Bulgaria has only one Fast Growth Technology Firm (Deloitte, Fast 50 Central

Europe 2014)

Sofia in Europe – lowest operating cost, worst environment for advanced services

location (IBM-Plant Location International); among them best for shared service

centres; de-coupled from manufacturing

Sofia: better position in terms of regulation and market access than in terms of

infrastructure and living conditions – cost/quality trade-off

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De-industrialization or re-industrialization?Industrial production, Sept 2008 =100

2007

2q 2007

3q 2007

4q 2007

2008

2q 2008

3q 2008

4q 2008

2009

2q 2009

3q 2009

4q 2009

2010

2q 2010

3q 2010

4q 2010

2011

2q 2011

3q 2011

4q 2011

2012

2q 2012

3q 2012

4q 2012

2013

2q 2013

3q 2013

4q 2013

2014

70

80

90

100

110

120

130

CZ HU PL SI SK BG RO

Seasonally adjusted data.Source: Eurostat.

INVESTMENT IS A RELATIONSHIP NOT A SINGLE TRANSACTION

Investment policy is an ongoing process:• Removing legal, regulatory, and administrative impediments to attracting and retaining FDI.• Maximizing its integration and spillovers in the domestic economy.• Using regional integration to foster FDI.

Vision and Strategy

Investment Attraction

Investment EstablishmentRetaining Investment

Linkages & Spillovers

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Spillovers occure when technology gap is small

The more subsidiaries are integrated into foreign parent companies – equity-,

strategic management-, technology-, export-import flows-wise - the higher

productivity growth they experience

Only few intra-industry spillovers from FDI, restricted to certain countries and

categories of firms

Knowledge spillovers occur more frequently if the technology gap between

domestic and foreign firms is not too large – increase human capital capacity

Generate spillovers by reducing the technology gap by upgrading absorption capacity of local firms and by stimulating linkages with local firms supporting the development of technology SMEs, high-growth firms

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Generate technology and R&D improving FDI

FDI incentive should help achieve qualitative goals (export propensity, transfer of

technology, R&D activity, local suppliers etc.)

Stimulate technological activities in foreign subsidiaries & technological

cooperation between domestic firms and foreign subsidiaries

Tools: technology and science parks, support/subsidy for interaction, support for

inhouse training, impact assessment / best practice

Need for: realistic strategy, efficient and collaborative public governance,

coordinated use of funds, interaction between government and business

BUT: high-tech and R&D subsidiaries do not perform domestic innovation –

suppliers, spinn-offs may!