Draft
FOREIGN DIRECT INVESTMENT INCENTIVES STRATEGYOF MONTENEGRO
Jun, 2006.
T A B LEO FC O N T E N T S
I N T R O D U C T I O N
1. INTERNATIONAL MOVEMENT OF CAPITAL AND FOREIGN DIRECT INVESTMENTS
1.1 Global trends in the movement of international capital
1.2 International movement of capital – trends and projections for developing countries
1.2.1 Countries of Southeast Europe and the Commonwealth of Independent States
1.3 International movement of capital – position of Montenegro
2. COMPETITIVE POSITION OF MONTENEGRO AS A LOCATION FOR FOREIGN DIRECT INVESTMENTS
2.1 Montenegro – Basic information
2.2 Development goals of Montenegro
3. COMPARATIVE ANALYSIS OF MONTENEGRO AND WESTERN BALKANS REGION COUNTRIES
3.1 Standard risks of business operations (conventional risks)
3.1.1 The risk of general conditions of business operations – parametre – Index of Economic Freedom
3.1.2 Country financial risk – Parametre - grade “Standard and Poors“
3.1.3 The risk of transparency of procedures and corruption – Parametre - Index of Transparency
3.1.4. The risk of intellectual property protection – Parametre – Intellectual Property Index
3.2 The level of the achieved legislation reforms related to the creation of general business conditions
3.2.1 Competitiveness of legal and economic framework of Montenegro – environment for foreign investments
3.2.2 Economic and institutional framework of Montenegro for encouraging foreign investments
3.3 The amount of operational costs of a foreign investor’s investment
3.3.1 Education of labour – adapting to the new structure of economy and competitiveness in relation to SEE region
3.3.2 Operational costs of energy, water and industrial land
4. SWOT ANALYSIS
5. STRATEGY MEASURES FOR ENCOURAGING INVESTMENTS IN MONTENEGRO 2006-2010
5.1Montenegrin Investment Promotion Agency - MIPA
5.2Promotion of Montenegro as an FDI location
5.2.1Target investor groups and target sectors
5.2.2Main activities to promote FDI
5.2.3Promotional techniques
5.3. General strategic measures
6. MONITORING AND EVALUATION
BASIC PRINCIPLES
References:
Abbreviations:
APPENDIX- Sectoral Analysis
I N T R O D U C T I O N
Foreign Direct Investments (FDI) represent one of the most important instruments through which a national economy can encourage production, know-how imports, increase in employment, infrastructure development, poverty reduction, etc. The benefits achieved through the increase in FDI's have created strong competition in the global market of free capital, all with the aim to attract as many and as diverse FDI's as possible. The general trend in the global FDI market is the erasure of geographic borders between developing countries and developed ones: in the past three years, developing countries have not only represented a growing FDI market, but have also been aimed at attracting capital intensive investments, as well as R&D investments.[1]
In that sense, FDI policy in the global market shows an upward trend of institutional liberalization in FDI protection, creation of institutions for encouraging and communicating with potential investors, as well as the trend of creating a legal basis through the strengthening of bilateral connections between the countries (BIT, DTT[2]). From the aspect of risks that cause FDI influx, in recent years, there has been an increase in the importance of the intellectual property protection risks, property and workers protection risks, as compared to the reduction in the importance of conventional risks, such as the financial risk, interest rate risk and political risk.
Montenegro, as a small and very open economic system, has the potential to be flexible in fitting into the global FDI trends, and in that sense it primarily has to devote its attention to the improvement of the overall investment climate in the country, through the implementation of the key goals defined in the Economic Reforms Agenda 2005-07. In this strategic document attraction of foreign investments is marked as one of the primary goals, having in mind the positive effect they have on speeding up the production process and creation of new employment, through the opening of new enterprises, i.e. companies. However, besides the changes related to the liberalization of the FDI influx regime (protection of property rights, tax relieves, labor legislation...), the FDI attraction activity requires a simultaneous promotion of the introduced positive changes. For that reason, according to the FIAS[3] recommendations, as well as according to the world trend in the development of business attraction instruments, it is necessary for Montenegro to focus on defining key measures of investment policy, targeting foreign investors through the implementation of fiscal, financial and institutional incentives, as well as on defining key promotional activities.
The first step in the implementation of FDI policy in Montenegro, undertaken in March 2005, was to establish the Montenegrin Investment Promotion Agency – MIPA, which took over the role of promoter of investment projects, and which will be based on the implementation of the FDI Incentives Strategy of Montenegro.
Finaly, the ultimative step toward afirmation of Montenegro as interesting investment ambient has been achieved on May, 12 th 2006. when citizents of Montenegro voted Montenegrian independency. Adopting Declaration on independency by the Parliamnet on 3 th of June 2006 Montenegro became the youngest European country which conducts independently its economic policy as well as process of creation of future economic growth. Gaining indpendency represents a positive signal toward investors , which now consider Momtenegro as a stable environment worth to invest.
1. INTERNATIONAL MOVEMENT OF CAPITAL AND FOREIGN DIRECT INVESTMENTS
Table 3.0.0.0.0.0.0.033└Û▹3 ΅Global trends in the movement of international capital
If we look at the movement of foreign direct investments (FDI) in the world market in 2004, we can say that there has been a mild increase in FDI influx by 2% (648 billion USD) as compared to 2003. This insignificant increase was not sufficient to inhibit the downward trend that started as early as in 2001, when there was a serious drop in the global FDI market of 41% (from 1.4 billion USD to 818 billion USD), which continued in 2002 – 17% (679 billion USD) and 12% in 2003.
Mild increase in FDI (in 2004) is reflected in a significant increase of these investments (Picture 1) in developing countries, as well as the countries of South East Europe (SEE), amounting to 40% (233 billion USD), and which actually neutralized the drop in FDI of 14% in the developed countries. As a result of this trend, we have a 36% participation of the developed countries in the overall FDI’s, which is the highest level since 1997.[4] Although FDI is showing a downward trend in the global market since 2000, the upward trend at the global level is noted by the domestic investments, which confirms the fact that FDI do not necessarily have to follow the pace of domestic investments, despite the fact that both forms of investments have a similar reaction to the developments in national economy, starting from the economic growth pace, all the way to the structural changes in it. Today, FDI represent 8% of the domestic investments globally, whereas this percentage is a bit higher in the countries of Central and Eastern Europe, due to the privatization and EU accession processes.
Picture 1: Overview of FDI movement by regions, 1990 – 2004
Source: UNCTAD, FD/ - TNC database ().
The main causes of global drop in FDI in the period 2000-03, stated by UNCTAD are macroeconomic, microeconomic and institutional changes. At the macroeconomic level, most of the countries have experienced an insufficient economic growth, which caused more cautious investments by foreign investors. At the microeconomic level, most of the big companies have had a high debt/equity ratio[5], which lead to disinvestments. Besides FDI, there was a negative trend in Mergers and acquisitions (M&As)[6], as the most attractive form of investment, which have dropped from 370 billion USD in 2002, to only 297 billion USD in 2003 (a 20% drop). However, in 2004 there has been a significant increase in M&A of 28% (381 billion USD), that is, during the same year 5100 M&A agreements were signed, which represents a 12% increase.
A significant increase in FDI in 2004 is characterized by the following indicators:
a)Macroeconomic indicators:
According to the IMF projections, global economic growth in 2004 was 5.1% (the biggest one since mid-80’s), which enabled many countries (Latin America, UK, USA) to attract a large number of FDI (Figure 1). Another positive macroeconomic trend, starting from 2001, is a significant drop in the country risk globally.
Figure 1: Global GDP and FDI increase for the period 1980-2004 in %
Source: UNCTAD, 2005
b) Microeconomic indicators:
During 2004 there was an increase in the price of shares in all leading stock exchanges, as well as an increase in the scope of trade in stock (especially in NYSE[7], where there was an approximate increase in stock trade of 60%, as compared to 2003). At the same time, there has been an increase in the price of oil and gas, which all caused an increase in FDI in the countries rich in these raw materials.
Table 3Institutional indicators:
Privatization process has been almost finished in most of the transition countries; thus, it only partially contributed to the FDI increase in 2004. However, during the year 2004 there has been a significant trend of FDI liberalization in the field of real estate, thus, the overall FDI in real estate were equal to 30 billion USD, which represents a triple value of real estate FDI realized in 2003.
As a consequence of favorable economic developments (especially a significant drop in interest rates. Increase in competitiveness of developing countries), 2004 is characterized by a significant increase in Greenfield investments (growth from 9300 Greenfield projects in 2003 to 9800 in 2004), especially in developing countries, thus, this type of investments has been recognized as the basic factor of FDI increase in the world market. China and India represent the most attractive locations for this form of investment in 2004, as well as in 2003.
From the aspect of sector-based FDI distribution, in 2004 the upward trend continued in the service sector, so that the FDI level in this sector was 63%, out of which 1/3 related to financial services.
If we take into consideration the distribution of corporate functions, in 2004, there was an important increase in corporate representative offices, as well as in management centers in the developing countries (over 350 representative offices and H&Q[8] centers), which proves that the management units that used to be based in developed countries are slowly moving to thedeveloping countries. A trend that follows is the increase in R&D investments in developing countries, so that in 2004 there were 429 R&D projects registered in developing countries, as compared to 316 of them that were realized in the preceding year.
From the aspect of FDI structure, three most important elements are still: assets (ownership capital), intra-corporate crediting and reinvested profits. If we look at the developing countries, reinvested profit represents the fastest growing FDI element, so that in 2004 it participated with 42% in the overall FDI in developing countries, as compared to 15% in the developed countries.
1.2 International movement of capital – trends and projections for developing countries
When we speak about movement of FDI in developing countries, unlike the general trend in the world, in 2004 there was a significant increase in FDI of 40%, fr4om 172 billion USD to 233 billion USD, which represents 37% of total FDI influx in the world, and represents the highest level since 1997. In this period, Africa experienced a significant increase of 20%, with the increase of 15 billion USD in 2003 to 18 billion USD in 2004. Asia-Pacific region also an FDI increase from 107 billion USD in 2003, to 148 billion USD in 2004. After a four-year reduction in FDI in the region of Latin America (in 2003 there was a marginal drop in FDI from 51 billion USD to 50 billion USD), in 2004 there was a significant FDI increase to the amount of 68 billion USD (44% increase). Finally, in this region, recognized by UNCTAD statistics as South East Europe and CIS, in 2004 FDI influx reached the level of 35 billion USD, as compared to 24 billion USD in 2003 (45,8% increase).
1.2.1 Countries of Southeast Europe and the Commonwealth of Independent States
In the most recent UNCTAD World Report, due to the EU enlargement, there has been a change in the very structure of developing countries, as well as a change in the meaning of the term Central and Eastern Europe.
Table 1: Re-classification of country groups in WIR05NEW CLASSIFICATION
New EU member states (classified as “developed countries” / Southeast Europe (SEE) and
Commonwealth of Independent States (CIS)
OLD CLASSIFICATION / SEE / CIS
Former Central and Eastern Europe
Albania / / Albania
Byelorussia / Byelorussia
Bosnia and Herzegovina / Bosnia and Herzegovina
Bulgaria / Bulgaria
Croatia / Croatia
CzechRepublic / CzechRepublic
Estonia / Estonia
Hungary / Hungary
Latvia / Latvia
Lithuania / Lithuania
Republic of Moldova / Republic of Moldova
Poland / Poland
Romania / Romania
Russian Federation / Russian Federation
Serbia and Montenegro / Serbia and Montenegro
Slovakia / Slovakia
Slovenia / Slovenia
Macedonia / Macedonia
Ukraine / Ukraine
Central Asia (developing countries)
Armenia / Armenia
Azerbaijan / Azerbaijan
Georgia / Georgia
Kazakhstan / Kazakhstan
Kyrgyzstan / Kyrgyzstan
Tajikistan / Tajikistan
Turkmenistan / Turkmenistan
Source: UNCTAD, 2005
Out of 19 countries in the group of countries from Table 1, as many as 16 have achieved a higher level of FDI influx in 2004 as compared to 2003. In SEE region, the countries that especially stand out are Bulgaria and Romania, which have participated with 1/5 in total FDI for the whole group in 2004, which is more than 70% of FDI realized in the SEE region. As a consequence of this trend, Romania, with the realized influx of over 5 billion USD has taken the second position, according to the country groups ranked on the basis of realized FDI influx (UNCTAD WIR Analysis, 2005), while Serbia and Montenegro is placed into group 3.
Table 2: Southeast Europe and Commonwealth of Independent States: distribution of FDI influx by amount, 2003-2004.2003 / 2004
Amount / Economy / Economy
Over 5 billion $ / Russian Federation / Russian Federation and Romania
$1 billion - $4,9 billion / Azerbaijan, Romania, Bulgaria, Kazakhstan, Croatia, Ukraine and Serbia and Montenegro / Azerbaijan, Kazakhstan, Bulgaria, Ukraine, Croatia
Less than
$1 billion / Bosnia and Herzegovina, Georgia, Albania, Byelorussia, Armenia, Turkmenistan, Macedonia, Republic of Moldova, Uzbekistan, Kyrgyzstan and Tajikistan / Serbia and Montenegro, Georgia, Bosnia and Herzegovina, Albania, Tajikistan, Armenia, Byelorussia, Macedonia, Republic of Moldova, Turkmenistan, Uzbekistan, Kyrgyzstan
Source: UNCTAD, WIR, 2005
Projections of the biggest Trans-National Corporations (TNC) related to FDI movement [9]According to the UNCTAD research applied to 335 biggest TNC’s, with the total property assessed to amount to 1.9 trillion USD, out of which 38% or 725 billion is invested outside the basic market[10], the following conclusions were made:
- when selecting the FDI location, China was mentioned as the most attractive destination (approx. 60% of the interviewed TNC’s marked this country as the best one for investments), the second place is taken by South America, while the third most attractive investment country is Poland.
- Activities that will attract investments from the developed countries into developing ones will primarily be the activities in the field of production, distribution and sales channels and supporting services.
- The most popular investment models in the period 2005 - 2006 are M&A, “Greenfield” and license issuance.
Region of developed countries – most of the interviewed TNC’s, approximately 50%, expect that the FDI in this region will remain the same in the period 2005–07, whereas they are almost unified in the opinion that there will be a drop in FDI’s in Western Europe, while there will be an increase in FDI’s in USA, Great Britain, Canada and Japan.
Asia – Pacific Region –improved FDI influx in this region; more than 60% feel that China will be the leader in the most important FDI through M&A investments, while India will take the second place.
Latin America Region – has the most uncertain prognosis, 43% of the TNC’s don’t expect FDI increase in this region, while 46% expect FDI increase in this region.
Africa Region– as many as 67% of TNC’s expect that FDI in this region will remain the same, emphasizing the fact that this region is still not on the TNC strategic map of investments.
Region of Central and Eastern Europe as a whole - the most interesting location for TNC investments for the period 2005-07, as many as 70% of TNC’s find this region profitable for investments. The first position is occupied by Poland, before Russia, third and fourth place are shared by Hungary and the CzechRepublic, while the fifth one is occupied by Romania, with a very high percentage of “Greenfield” investments of 3.6%.
Region of Southeast Europe separately - a very attractive region according to TNC projections; in 2003 FDI increase in this region was 60% (improvement in political stability, increase in education and efficiency of labor force and efforts to establish a common free trade agreement for the market with approximately 55 million inhabitants).
Picture 2: Prospects of sector distribution of FDI, 2006 – 2009
Primary sector / Mining and oilAgriculture and other
Production / Food and beverage
Motor vehicles
Publishing and media
Other industries
Electricity & electronics
Machinery
Metal
Chemical
Textile and clothing
Rubber and plastic
Services / Non-metal products
Civil works
Retail sale and wholesale
Transport
Education and health
Business services
Computer services
Banking and insurance
Other services
Hotels and restaurants
Tourism
Energy services
Source: UNCTAD WIR 05
According to the above-mentioned research, the most attractive sectors for investments in SEE region, within the service sector, are transportation, infrastructure, trade, IT sector, tourism and energy, while in the production sector, the most important investments are expected in the field of food and beverage production, as well as the production of automobile spare parts (Picture 2). In the primary sector a smaller FDI influx is expected. FDI increase in this region is connected with the pace of EU accession, competitive price of labor, gradual increase in productivity and increase in competitiveness of the investment environment in general, as compared to the other developing countries.
1.3 International movement of capital – position of Montenegro[11]
Montenegro represents a country that follows the FDI movement trends, characteristic for the region of Southeast Europe. After a significant FDI influx in CEE countries, which due to the size of their market became top destinations for FDI (especially through the privatization process), the FDI wave that occurred after the privatization «expanded» to include the region of Southeast Europe.