FDI ATTRACTIVENESS IN GREECE
Pantelis Pantelidis
University of Piraeus
Piraeus, Greece
Efthymios Nikolopoulos
London School of Economics
London, United Kingdom
Pantelis Pantelidis, Associate Professor, Department of Economics, University of Piraeus, 80 Karaoli and Dimitriou str., GR-18534, Piraeus, Greece.
Tel: 30-210-4142293, fax: 30-210-4142328, e-mail:
Efthymios Nikolopoulos, e-mail:
Key Words: FDI, Greece, EU.
Abstract
This paper investigates the Foreign Direct Investment (FDI) attractiveness for Greece as a host country compared with the rest EU countries. The main objective of this work is to identify the factors that improved or worsened Greece’s attractiveness during the last few years. An econometric model and a comparative index of FDI attractiveness have been constructed in order to identify the differences in the attractiveness of the countries. The results obtained prove that during the last few years Greece’s attractiveness as a host country for FDI has not only improved, but it also has a downward trend. The factors identified as crucial for the low FDI attractiveness in Greece are inefficient public governance, high taxation, inefficient infrastructure and general macroeconomic conditions.
1. Introduction
During the last decades, the global Foreign Direct Investment (FDI) inflows have increased substantially from $25 bn in 1973 to $1271 bn in 2000, (UNCTAD, 2003). 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). 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. According to Clegg and Scott-Green (1999), the multinationals have constraints both globally and in regions. This means that a flow of a FDI in one part of the E.U. might have as a result a reduction somewhere else and this is how the race for the attraction of FDI among the countries of the EU and especially among the 10 new members can be explained. The progress of the economic integration of the countries of the EU had as a result some members to become more attractive for FDI compared to how they were in the past (Oxelheim et al., 2004).
The eclectic paradigm of international production created by Dunning (1977, 1988) has melded 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 the foreign owned production. The first set is the ownership specific advantages. These are ownership advantages, which are hold exclusively by the multinational like expertise or patents, and allow the multinational to compete with the other enterprises despite the disadvantages that might occur by the fact that it is a foreign company. The second set is the location-specific advantages, which include factors specific to a place that must also be used in that particular place. These include labour advantages, natural resources, trade barriers that restrict imports, etc. According to Yoshitomi, the location-specific advantages are largely exogenous at the time that the decisions for the FDI are made (Yoshitomi and Graham, 1996). The elimination of trade barriers between the countries of the union and the easement of the transactions are some of the reasons that could affect the decision on the extent of FDI and make one country more or less attractive. Finally, the third set is the internalisation advantages. These advantages refer to the gains that a multinational has by using its ownership internally instead of buying or selling from third parties.
Dunning (1993) identified four categories of motives for FDI: resource seeking, market seeking, efficiency seeking and strategically motivated seeking. The resource seeking FDI has as a target to acquire specific resources less costly than if purchased in the home country or in another place in which the multinational operates. The basic types of resources that the multinational enterprises are investing for are the natural resources, the raw materials and the technologically or created assets (e.g. patents). The market seeking FDI has as a main target to gain access to the market of the host country, to provide the goods and services of the company and possibly to expand to adjacent countries. The main reasons that multinationals could prefer to invest to a foreign country rather to export are the possible trade barriers imposed by the host country (e.g. tariffs) and the high transport costs. Furthermore, the main factors of the attractiveness of market seeking FDI are the size of the market-population and the rate of the market growth. The efficiency seeking FDI seeks to gain from scope and scale economies from common governance. One of the main forms of this FDI has as a target to increase the efficiency of the company by transferring part of the activities of the multinational to countries with lower labour costs. Finally, the strategically motivated seeking FDI has as a main target to sustain, establish or advance the position and the advantages of the multinational over a long-term period.
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 and 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 and, additionally, 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.
2. 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 log-linear form with quarterly data (with seasonal adjustment) for period 1976-20041. The expected signs are shown below the relevant coefficients. The equation has a loglinear form because under this specification elasticities given by the estimated coefficients are constant.
The stationarity of all used data series has been tested by applying the Phillips-Perron unit root test. It was found that all series are of level zero2. The results of this test are reported in Table 3. There is also no strong indication of multicollinearity, since all the statistically significant coefficients have the expected signs. The Durbin-Watson statistic indicates the absence of autocorrelation.
The estimated equation is also presented in Table 3. The constant term, market size, economic activity, technological capabilities, human capital and labour cost are the statistically significant variables and they all have the expected sign3.
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.
Overall, it seems that the most influential host country determinants are market characteristics, the availability of human capital and technological inputs and labour cost. Market size along with differentiated demand patterns, allowed by the increase of personal incomes as the country develops motivates FDI that requires local inputs in the form of skilled labour and ability to transfer and adapt technology, which complement the MNEs' ownership advantages and make their deployment via FDI more efficient than other modes of exploitation. At same time the relative small absolute domestic market size and the rather low rate of improving local technological capabilities may be responsible for the relatively low level of FDI inflows, that Greece has been experiencing since the mid 70's.
3. FDI Attractiveness Index
In order to construct the comparative index of attractiveness of FDI for Greece we will apply the methodology used by Ayalp et al., (2004). In our case, in order to analyse the advantages and disadvantages of Greece in terms of attracting FDI, a comparative index of attractiveness of FDI will be constructed for each year under investigation namely 2000, 2002 and 2004. The countries are the 15 of the EU that were members before 2004 (Belgium, France, Federal Republic of Germany, Italy, Luxembourg, the Netherlands, the United Kingdom, Ireland, Denmark, Greece, Spain, Portugal, Sweden, Finland, Austria) and six (Czech Republic, Estonia, Hungary, Poland, Slovak Republic and Slovenia) from the ten countries that entered into the EU in 2004. Unfortunately, it was not possible to find all the necessary data for the rest four countries that entered into the EU in order to include them in our research. The index will be constructed using 31 indicators, which will be separated in seven broader categories. It should be stated that the indicators used agree with Balasubramanyam et al. (2003).
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. More specifically, these are the cases of: labour cost, energy cost, average corporate tax rate on profit, collected corporate tax, collected indirect tax revenues, taxes on international trade, collected personal income tax, local telephone cost, international fixed telephone costs. We calculate each indicator, by substituting the data to the formula, obtaining the results and then multiplying them with the appropriate weight. Each category’s final results and FDI attractiveness score can be found by adding the results obtained by each indicator, or each category, respectively.
The weights for each factor and each category will be the same that were used by Ayalp, et al., (2004). We assume that the weights used are representative for the case of Greece due to some similar characteristics that Greece and Turkey have. First, the FDI attracted by both Greece (Georganta, et al., 1986) and Turkey (Loewendahl and Ertugal-Loewendahl, 2001, Demirbag, et al., 1995) is mainly market - seeking. The fact that the FDI attracted by both countries is market-seeking means that foreign investors are interested in investing in these countries in order, mainly, to sell their products and services in the domestic market. Hence, it is reasonable to argue that the foreign investors, which are market-seekers, will be looking for the same characteristics in every country in which they are interested to invest. Thus, it can be concluded that the weight of each factor, which is specified by the foreign investors in one country, is plausible to be, more or less, identical with the weight of each factor in another country, which attracts investors with similar targets. Furthermore, according to the research of Loewendahl and Ertugal-Loewendahl, (2001), Greece is one of the competitors of Turkey in terms of FDI inflows. Greece and Turkey are neighbour countries that they have similar advantages or disadvantages in terms of their geographical position and in terms of easiness of transporting goods to other markets. Finally, the weights used by Ayalp, et al., (2004) agree in general with the empirical research of Pantelidis and Kyrkilis (1997) and also the econometric model estimated in this paper.
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%