FDI ATTRACTIVENESS IN GREECE
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Pantelis Pantelidis
University of Piraeus
Piraeus, Greece
Efthymios Nikolopoulos
London School of Economics
London, United Kingdom
1. During the last decades, the global Foreign Direct Investment (FDI) inflows have increased substantially from $25 bn in 1973 to $1271 bn in 2000.
2. The competition among countries for the attractiveness of FDI has also increased, especially among countries of the same geographical zone (e.g EU, Asian Countries etc).
3. Furthermore, the fact that in 2004 10 new countries (Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic, Slovenia) became members of the EU increased the “race” for FDI in this region.
FDI THEORY
1. The eclectic paradigm of international production created by Dunning has synthesized many parts of the prevailing until then theories of FDI. The eclectic paradigm suggests that there are three sets of variables, which determine the extent and the form of FDI:
Ownership specific advantages
Location-specific advantages
Internalisation advantages
2. Dunning identified four categories of motives for FDI:
Resource seeking
Market seeking
Efficiency seeking
Strategic asset seeking
The aim of this paper is:
A. To construct and test a model explaining the inward FDI position of Greece on the basis of its location advantages
B. To construct a comparative index of FDI attractiveness in order to find the differences in the attractiveness between Greece and other EU countries.
The main object is to identify the factors that attract or discourage foreign investors.
Also to examine whether during the last few years the attractiveness of the country has been improved or worsened compared to the rest countries of the EU.
THE ECONOMETRIC MODEL
The model can be summarised in the following equation.
FDI= f(Y, I, ER , TE, HU, KA, X, M, XPX, Q, W, EU)
(+) (-) (+) (+) (+) (+) (+) (+) (+) (+) (-)
Where:
FDI = Inward foreign direct investment in Greece.
Y = real GNP which is a proxy for market size.
I = relative interest rate. It is calculated by the ratio of the interest rate in the EU to the interest rate in Greece.
ER = Exchange rate between the US dollar and the Greek drachma for period 1976-2001 (drachmas per US dollar) and between the US dollar and the Euro for period 2002-2004 (drachmas per US dollar).
TE = Ratio of national patents to the number of university graduates. That variable is a proxy for technological capabilities.
HU = Ratio of university graduates to total population. That variable is a proxy for human capital.
KA = Gross fixed capital formation per capita is a proxy for capital intensity.
X = Greek exports.
M = Greek imports.
XPX = ratio of exports of primary commodities to total exports which is a proxy for natural resource endowments.
Q = Industrial production index is a proxy for economic activity.
W = wage rate index is a proxy for unit labour cost.
EU = Dummy variable for the Greek membership in EU after 1981.
The equation is estimated by OLS in loglinear form with quarterly data (with seasonal adjustment) for period 1976-2004
Table 1: OLS estimates of FDI equation for period 1976-2004.
Coefficient
/ Phillips-Perron Unit Root Test in Level (t-stat.)FDI / -5.10*
Constant / -18.11(2.36)*
Y / 1.59 (2.95)* / -4.30*
I / -0.15 (1.24) / -5.60*
ER / -0.44 (0.67) / -6.65*
TE / 0.28 (1.78)** / -4.80*
HU / 1.53 (2.30)* / -3.35*
KA / -0.12 (0.45) / -4.45*
X / 0.19 (1.14) / -6.50*
M / 0.67 (1.34) / -4.90*
XPX / 0.24 (0.65) / -5.60*
Q / 2.34 (1.75)** / -4.87*
W / -1.13 (1.98)* / -3.50*
EU / 0.68 (0.68) / -4.56*
R2=0.71 / DW=1.96 / F stat=11.3*
· * means significant at 5% level.
· ** means significant at 10% level.
· The values in parenthesis are t-statistics.
FDI ATTRACTIVENESS INDEX
The 7 categories, the 31 factors and their weights are:
1. General Macroeconomic conditions of local market 19%
▪ GDP per capita (US$ per capita at PPP) 14%
▪ Market size, (measured as private final consumption expenditure per capita, US$ per capita) 19%
▪ Stability of Macroeconomic condition (index), 34%
▪ Strength of financial institutions as % of GDP (measured as Banking sector assets as % of GDP), 15%
▪ Central Government budget surplus/deficit (percentage of GDP), 8%
▪ Credit flows from financial institutions (index), 10%
2. Political Environment and Public Governance 25%
▪ Risk of political instability (index), 25%
▪ Legal framework (index), 23%
▪ Bureaucratic procedures (index), 19%
▪ Bribing and corruption (index), 12%
▪ Legislation concerning the encouragement of foreign capital (Ease of Doing Business), (index), 21%
3. Labour 17%
▪ Labour cost (hourly compensation in US$ for manufacturing workers), 40%
▪ Labour productivity (GDP per person employed per hour US$), 23%
▪ Skilled workforce (index), 24%
▪ Labour force (percentage of population), 13%
4. Energy 8%
▪ Energy cost (US$ per kwh), 66%
▪ Energy consumption (Millions MTOE per capita) , 34%
5. Taxes/incentives 17%
▪ Average corporate tax rate on profit (percentage of profit before taxes), 23%
▪ Collected corporate tax (On profits, income and capital gains as percentage of GDP), 11%
▪ Collected indirect tax revenues (Taxes on goods and services as a percentage of GDP), 18%
▪ Taxes on international trade, % of total current revenue, 14%
▪ Collected personal income tax, (On profits, income and capital gains as a percentage of GDP), 9%
▪ Investment incentives (index), 25%
6. Infrastructure for transport and telecommunications 12%
▪ Roads, density of networks (km per square km), 27%
▪ Railroads, density of networks (km per square km), 12%
▪ Water transportation (Meets or not the business requirements) (Index), 14%
▪ Quality of Air transportation, (index), 11%
▪ International fixed telephone costs (US$ per 3 minutes), 13%
▪ Communications Technology, (voice and data) (index), 12%
▪ Local Telephone cost (US$ per 3 minutes), 11%
7. Research and Development expenditures 2%
▪ Research and development expenditures per capita (US$ per capita), 100%
The formula that is going to be used in order to normalize the value of each factor for each country is n= [(D-min)/(max-min)] +0.0001. Also, in the cases where the indicators are reverse of the general logic of the model (e.g. the energy cost for which it is desirable to be as low as possible), the normalized values will be obtained by reversing the formula, thus the formula that is going to be used in these situations is n= [(max-D)/(max-min)] +0.0001.
Table 2: FDI Attractiveness scoreCountries / Index 2004 / Countries / Index 2002 / Countries / Index 2000
1 / Luxembourg / 68,62532 / 1 / Luxembourg / 69,76051 / 1 / Finland / 69,98981
2 / Ireland / 63,66271 / 2 / Finland / 65,35846 / 2 / Sweden / 68,49419
3 / Finland / 61,4312 / 3 / Sweden / 61,96175 / 3 / Luxembourg / 66,8244
4 / Denmark / 60,59383 / 4 / Denmark / 61,71846 / 4 / Netherlands / 64,92362
5 / Netherlands / 59,76945 / 5 / Ireland / 61,12647 / 5 / Ireland / 64,00464
6 / Austria / 57,3948 / 6 / Netherlands / 60,06048 / 6 / Denmark / 63,33091
7 / Sweden / 57,06289 / 7 / Austria / 58,32273 / 7 / Austria / 60,39295
8 / Estonia / 53,45059 / 8 / Belgium / 56,03991 / 8 / Germany / 58,12079
9 / United Kingdom / 52,47623 / 9 / United Kingdom / 55,45684 / 9 / United Kingdom / 54,24049
10 / France / 52,1562 / 10 / France / 53,75081 / 10 / Belgium / 53,83369
11 / Belgium / 51,42834 / 11 / Spain / 53,42738 / 11 / Estonia / 53,23645
12 / Spain / 48,84828 / 12 / Germany / 50,55419 / 12 / Spain / 53,05746
13 / Germany / 48,43741 / 13 / Estonia / 48,36864 / 13 / Hungary / 51,34139
14 / Slovak Republic / 47,40493 / 14 / Czech Republic / 46,367 / 14 / France / 49,65273
15 / Hungary / 46,07559 / 15 / Hungary / 40,50369 / 15 / Czech Republic / 44,99684
16 / Czech Republic / 45,63728 / 16 / Portugal / 39,433 / 16 / Greece / 43,46015
17 / Greece / 37,69673 / 17 / Greece / 39,24382 / 17 / Portugal / 40,78904
18 / Portugal / 37,5206 / 18 / Slovak Republic / 37,57863 / 18 / Slovak Republic / 40,62457
19 / Slovenia / 33,93097 / 19 / Slovenia / 35,59785 / 19 / Slovenia / 33,06866
20 / Italy / 32,72904 / 20 / Italy / 35,31385 / 20 / Italy / 32,66497
21 / Poland / 25,60464 / 21 / Poland / 25,20239 / 21 / Poland / 30,88798
Table 3: Categories- Index 2004
Countries / General Macroeconomic conditions 19% / Political Environment and public governance 25% / Labour 17% / Energy 8% / R&D 2% / Taxes/Incentives 17% / Infrastructure 12%
Luxembourg / 1 / 8 / 4 / 1 / 10 / 8 / 5
Ireland / 2 / 3 / 5 / 18 / 13 / 1 / 20
Finland / 9 / 2 / 15 / 6 / 2 / 18 / 14
Denmark / 4 / 1 / 17 / 19 / 3 / 20 / 4
Netherlands / 3 / 6 / 11 / 5 / 8 / 10 / 1
Austria / 8 / 4 / 9 / 17 / 7 / 6 / 6
Sweden / 10 / 5 / 14 / 2 / 1 / 11 / 10
Estonia / 13 / 7 / 18 / 14 / 18 / 3 / 11
United Kingdom / 5 / 9 / 20 / 10 / 9 / 5 / 13
France / 6 / 13 / 7 / 4 / 6 / 9 / 7
Belgium / 7 / 14 / 19 / 3 / 5 / 14 / 2
Spain / 12 / 12 / 12 / 8 / 15 / 7 / 12
Germany / 11 / 15 / 21 / 9 / 4 / 12 / 3
Slovak Republic / 20 / 11 / 1 / 16 / 21 / 2 / 16
Hungary / 19 / 10 / 2 / 15 / 16 / 16 / 9
Czech Republic / 18 / 16 / 3 / 11 / 12 / 4 / 8
Greece / 17 / 18 / 6 / 12 / 19 / 19 / 18
Portugal / 16 / 17 / 8 / 20 / 17 / 13 / 17
Slovenia / 15 / 20 / 13 / 7 / 11 / 21 / 15
Italy / 14 / 19 / 16 / 21 / 14 / 17 / 19
Poland / 21 / 21 / 10 / 13 / 20 / 15 / 21
CONCLUSIONS
1. Greece’s attractiveness as a host country for FDI during the last few years not only has not improved, but it has followed a downward trend. Greece did not utilize the opportunities that occurred from its entrance into the EMU and the organization of the Athens Olympics.
2. The main factors that discourage foreign investors from investing in Greece are the inefficient public governance, the inefficient legislation, the high taxation, the lack of significant investment incentives, the inefficient infrastructure and the general macroeconomic conditions.
3. The level of political willingness and the capability to set up all- and not only parts- of the reforms are, among others, crucial factors for the transformation of Greece into an attractive host country for FDI.
4. The econometric model has an adequate explanatory ability and highlights market, economic activity, labour cost, availability of human capital and technological ability as the more decisive determinants.
5. These results offer a possible explanation on the rather low level of FDI coming into Greece. The latter has a market of rather low sophistication and size and a weak record in creating technological and human capital inputs in appropriate quantity and quality along with chronic macroeconomic imbalances. In that respect its attractiveness is limited. However, as these handicaps will be eliminated the prospects of improving its FDI position will increase.