In October 2015 in Zurich and yesterday at the Hilton in Bucharest, I attended two conferences about romanian/swiss business and investment relations.
Switzerland is currently the 7th largest foreign investor in Romania, according to Banca Naţională a României with over 2600 registered companies and almost 1 billion EUR in subscribed capital. Among the best known Swiss companies present in Romania are Nestle, Novartis, Roche, or Swisspor.
The event in Zurich last fall was titled ‘Romania is an Attractive Business Partner‘ and its objective was the promotion of Romania’s economic potential, business opportunities and investments.
Alexandru Năstase, State Secretary of the Department for Foreign Investment and Public-Private Partnership, made reference to the 2015/16 ‘Global Competitiveness Report’ released by the World Economic Forum which placed Romania 34th in the world in terms of macroeconomic environment and 53th among the most competitive economies worldwide (Switzerland is on the 1st position).
At the end of his speech, Alexandru Năstase invited Swiss companies to invest in Romania in sectors with a high potential that can generate a significant influx of capital, know-how and new technologies, like industrial manufacturing, automotive, ICT, energy and R&D.
Over the last years, I lost count how many times I heard from Romanian officials about the great opportunities their country has to offer for foreign companies/investors. It’s their job to promote Romania, I understand. But many promotions are made in a complete ‘romanian-centric’ view.
The basic line: ‘We are cheap, we have a well educated workforce, low taxes and a sizeable domestic market, so invest your money in Romania!’
It would be helpful for Romania to change its promotion script in two ways.
First rule: Product beats promotion. So first enhance the product, then promote it.
Second: Know your ‘customer’, respective your investor. Try to slip into his shoes when promote Romania. In the case of Switzerland, where each 16-year old apprentice in his first year of learning a job makes 2500 to 3000 RON monthly (the minimum salary for employees working full time is over 10’000 RON, average is over 20’000 RON), Romanian promotion with cheap labor advantages is not only less meaningful but always create the subtext in a foreigners mind ‘they are cheap and so will be the quality of their work.’ Not helpful to attract Foreign Direct Investors.
It’s the most important task for Romania to change this perception and attract investments that create highly qualified and well-paid jobs. One invaluable side effect of this strategy would be to motivate romanian specialists not to leave the country and create added-value here.
So it could be a good sign, that yesterday in Bucharest at the ‘Romania-Switzerland Investment Forum’, Costin Borc, deputy prime minister and minister of economy, commerce and business relations stated: I do not want Romania to remain a low-cost labor destination. I want to create centers of research, innovation and engineering, excellence centers. I want to attract investors, to stimulate start-ups,”
As posted on this site recently (see post Working Smarter, Not Harder) the only way to escape the low salary trap for Romania is advancing in labor productivity. It’s a measurement that potential investors in Romania clearly assess higher than ‘low salaries’ especially in game-changing sectors like pharma, ICT (information and communication technology) or automotive as the recent decision of Daimler (who picked Poland over Romania to invest half a billion EUR in a new plant) demonstrates.
According to Bogdan Ion of advisory company EY, in 2014, Romania succeeded in attracting 62 FDI projects, 19% more than in 2013.
To attract even more investments, Romania shouldn’t focus primarily on promotion, instead enhance the product first and then apply for foreign money. Here are some basic parameters international companies are examining before they answer the question ’To invest or not to invest in Romania?’
Some industries require higher skilled labor, for example pharmaceuticals and electronics. Therefore, multinationals will invest in those countries with a combination of low wages, but high labor productivity and skills. For example, India has attracted much investment in call centers, because a high percentage of the population speak English, but wages are low. This makes it an attractive place for outsourcing and therefore attracts investment.
Big multinationals, such as Apple, Google and Microsoft have sought to invest in countries with lower corporation tax rates. For example, Ireland has been successful in attracting investment from Google and Microsoft. In fact it has been controversial because Google has tried to funnel all profits through Ireland, despite having operations in all European countries.
Transport and infrastructure
A key factor in the desirability of investment is the transport costs and levels of infrastructure. A country may have low labor costs, but the high transport cost to get the goods into the world market is a drawback. Countries with access to the sea are at an advantage to landlocked countries, who will have higher costs to ship goods.
Size of economy / potential for growth.
Foreign direct investment is often targeted to selling goods directly to the country involved in attracting the investment. Therefore, the size of the population and scope for economic growth will be important for attracting investment. For example, Eastern European countries, with a large population, e.g. Poland offer scope for new markets. This may attract foreign car firms, e.g. Volkswagen, Daimler or Fiat to invest and build factories in Poland to sell to the growing consumer class. Small countries may be at a disadvantage because it is not worth investing for a small population. China will be a target for foreign investment as the new emerging Chinese middle class could have very strong demand for the goods and services of multinationals.
Political stability / property rights
Foreign direct investment has an element of risk. Countries like Romania with an uncertain political situation will be a major disincentive. Related to political stability is the level of corruption and trust in institutions, especially judiciary and the extent of law and order.
One reason for foreign investment is the existence of commodities. This has been a major reason for the growth in FDI within Africa – often by Chinese firms looking for a secure supply of commodities.
A weak exchange rate in the host country can attract more FDI because it will be cheaper for the multinational to purchase assets. However, exchange rate volatility could discourage investment.
Foreign firms often are attracted to invest in similar areas to existing FDI. The reason is that they can benefit from external economies of scale – growth of service industries and transport links. Also, there will be greater confidence to invest in areas with a good track record. Therefore, some countries can create a virtuous cycle of attracting investment and then these initial investments attracting more. It is also sometimes known as agglomeration effect based on supply channels, supply of trained workers and infrastructure built specifically for the industry.
Romania – a land of huge contrasts – needs to attract more foreign investments