Michael Dolezal guest lecturer 551@mail.muni.cz Topics to cover * Introduction - importance of FDI * The nature of attitudes towards FDI * FDI in the Czech Republic * Future development Foreign direct investment as an engine of globalisation: some facts * Dynamic increase in FDI flows (1999: $840 bill.) * Number of TNCs in 1992: 36.660; in 1998: 59.902 * Employment in all TNCs: 34.4 million (1998) * FDI flows grow faster than world exports or global GDP FDI into developing countries * FDI most important source of external finance * Since 1990, 30 countries abandoned CPE, 80 liberalized invest. regulations FDI flows into developing regions Who is going to involve in FDI? OLI model by Dunning H. (1993, 1998, 2000) ownership (O) specific advantages over competitors: portfolio of resources and capabilities (production management, organizational and marketing systém, innovatory capacity, human capital experience, finance) - sustainable over time (Peteraf, 1993) Who is going to involve in FDI? Internationalisation incentives (I) = circumvent or exploit market failures (avoidance of costs of moral hazard, avoidance of cost of broken contracts and ensuing litigation, potential to engage practices - predatory pricing, ... Who is going to involve in FDI? Location (L) specific variables = spatial distribution of resource endowements, input prices, transportation and communication costs, incentives, societal and infrastructure provisions, cross-country differeces, existence/non-existence of artificial barriers Who is going to involve in FDI? Dunning (2000): "... foreign production undertaken by TNCs is determined by the interaction of the three sets of interdependent variables". Does the theory work? Yes, if... Political and economic environments are "complementary" assets, which are essential to the efficient use of the "core" assets possessed by foreign investors. Quality and availability is becoming an important determinant of the locational decisions of firms. (obvious for advanced industrial countries) The changing world of FDI (1) In 1990´s FDI viewed as "good news" after the 70´s and 80´s which were critical/hostile Reasons for this "change of heart": * renewed faith of countries in market econ. (CEE & China, etc.) * increasing globalization of economic activity/integration of international production/dynamic competitiveness The changing world of FDI (2) * "key ingredients" - technology, intellectual capital, learning experience, organizational competence e more mobile across borders and increasingly housed in TNC * governments are modifying their attitudes (direct contribution vs wider impact) * economic structures of major industrialized nations are converging Improved competitive position through * Political stability * Liberalization and privatization * Reduction of red-tape and corruption * Strengthening of government institutions e Capacity building in investment promotion * Improvement of the physical infrastructure Improved competitive position through * Strengthening of the finance and banking sector * Improvement of the domestic labour force * Development of the local private sector * A focused investment promotion strategy e Investor targeting * Regional integration and international co-operation in investment promotion GDP in the Czech Republic FDI in the Czech Republic FDI in the Czech Republic FDI data (CZ, H, PL, Sl) Investors divided by countries Structure of FDI Structure of FDI The 1989 - 1997 development No incentive schemes, only "good conditions" "In the process ...... the decision is based on price, business plan, sufficient financial funds a reliability of investors. I see no need to involve any unfair criteria while assessing ..... to make the decisions impartial" (Mr. Vl. Dlouhý) Special conditions negotiatied on an individual bases - Skoda to VW, Rakona to Procter and Gamble The crucial role of the "human factor" / "power of reference" (Panasonic) 1998 and onwards development Since April 1998 - Act on Investment Incentives Clear investment incentives and eligibility criteria Additional changes in 2002 Strategic service projects (customer contact centers, high-tech repair centers,...) * high proportion of added value * high proportion of skilled label * closeness with IT & Telcom Technology centers * innovation centers close to manufacturing (changes to product, production facilities...) Year 2003: on the way to Europe * Treaty of Accession (Athens April 2003) * Refferendum (June 2003), YES: 77,3% * CZ joined EU on May 1, 2004 * almost 80% of Czech laws harmonized * 100% of EU technical standards adopted * investment incentives compliant with EU * challenges? "brain drain" & SF (1,5 mld €) Who do we have? * The "BIG NAMES" - Toyota, Philips LG Displays, Panasonic, Honeywell (however, we could have had others e.g. Mercedes Benz, etc.) * The "MIDFIELDERS" * The "COST SAVERS" CzechInvest - a helping hand Selected barriers * Highway newtork not fully developed, some regions are not connected * Lenghty administration & lots of paperwork * Bill No. 326/1999 Coll. -- long term residence * living standars not yet on European level (schools teaching fully in English only in Prague) * Drop in number of graduates with technical background (on all levels of education system), tight cooperation with technical universities Future trends Future trends