Attracting Foreign Direct Investments

RECENT DEVELOPMENTS

FIC is a strong partner of the Romanian Government in identifying the most effective solutions and measures to attract Foreign Direct Investment (FDI). Attracting new FDI, as well as also stimulating investments already present in Romania, helps to stabilize and constantly grow the economy. Attracting and maintaining investment does not require significant financial resources from the public sector, and thus it is not a burden for the budget. Moreover, the economic activity resulting from these investments will generate additional revenue for the state budget in the future. The contribution of FDI to the Romanian economy has multiple ramifications: in addition to the direct impact consisting of the gross value added or the number of employees, there are also other effects, such as the impact of the transfer of know-how and technology on productivity.

At the FIC’s event to launch the Va Urma project, 2022 edition, economic leaders, together with the Prime Minister of Romania, members of the Government and Parliament, as well as representatives of international institutions, set some directions for the economic and social development of the country. The main measures included: defining a long-term strategy to attract foreign investors to Romania, focusing on sectors with high added value and competitive advantage (human capital, natural resources) and promoting foreign investment in Romania and Romanian investment outside the country by establishing an agency coordinated by the Prime Minister.

The FIC welcomes the measures taken by the Government to stimulate foreign investment: the establishment of the Romanian Agency for Investment and Foreign Trade (ARICE) under the authority of the Government and the development of the Economic Atlas – an extremely useful tool for Romanian and foreign investors who want to develop businesses in Romania. This is a platform where economic and social information relevant in identifying investment opportunities in a particular region of the country will be uploaded. Moreover, investments were an important component in the preparation of the 2023 budget, as the expenditure planned for investments is 112 billion Lei, i.e. 7.2% of GDP.

AREAS FOR IMPROVEMENT

AGENCY FOR FOREIGN INVESTMENT

The publication in the Official Journal of Romania of the legislation establishing the Romanian Agency for Investments and Foreign Trade under the authority of the Government and coordinated by the Prime Minister is a first step in aligning Romania with European best practice for attracting foreign investment by creating a dedicated body for promoting investment (“a one stop shop”) whose main objective is to encourage investment in Romania through foreign-capital companies, as well as to stimulate trade.

This type of institution, responsible for promoting and attracting FDI, can provide various advantages, such as attracting foreign companies, strengthening upstream connections between transnational companies and local firms, encouraging companies to develop subsidiaries and to bring segments of the production chain with higher added value into the host country, strengthening the connection between industry and universities, developing domestic human capital, using FDI to promote decentralized economic growth or the generation of sectoral industrial clusters. This entity needs to function as a partner in the relationship with potential investors, as well as with existing ones in order to help them establish or expand their operations and ensure a stronger presence of Romania on international markets.

FIC RECOMMENDATIONS

The efficiency of the agency will be maximized if it reports to a supervisory board that includes representatives from all institutions relevant to attracting foreign investment (Ministry of Finance, Ministry of the Economy, Ministry of Foreign Affairs, Presidential Administration) and even representatives of embassies and the private sector, who could bring more experience, contribute to its efficiency and hence enhance Romania’s image as a destination for investments. The direct reporting to the Prime Minister and the existence of a supervisory board with multi-institutional representation would be a signal that the entire government is orientated towards performance and reforms in the direction of attracting FDI, and this is not just a consequence of the efforts of one small unit or of the representatives of the private sector.

To maximize the efficiency of this institution, aspects related to the organization and functioning of the agency must be considered:

The agency should work with the government, local authorities and the industrial parks in Romania in order to identify the areas which should be supported, the tax facilities that can be offered, the available qualified labour, the future contribution of the educational system etc.
The agency should have a similar size and be staffed with people from similar backgrounds to those in other high-performance agencies in other comparable EU Member States (Hungary, Poland, Czech Republic, etc.). In OECD countries, almost 94% of the employees of investment promotion agencies have a university degree and only around 6% of them do not. Moreover, 41% of the employees have post-graduate studies (Master’s degree, PhD). The professional experience of most employees is based on activity in the private sector (36%) or mixed public-private sector (37%) and only 24% have worked in the public sector only. Based on the experience of other countries, an organizational chart of a typical Agency at central level can be proposed: approximately 40 operational employees (a number close to countries such as Greece, Spain, the Czech Republic). Depending on funding, capacity, the organizational chart and the responsibilities of each directorate, one unit should then be replicated regionally, in each of the other 7 regions.

The agency should also have an important role in the development of the local capacity to manage foreign investors who come to prospect a particular area in order to choose the location for investments. A minimum toolkit should be ensured, available for each municipality in Romania, which will be able to organise sector presentations, as well as provide information about opportunities, the industrial base, potential suppliers and the dynamics of the economy in recent years. Groups of relevant indicators can include: Labour, Supply Chain, Taxation and incentives, Infrastructure, Finance & Legal Aspects, Macroeconomics.
The agency should form partnerships with the main database providers in Romania in order to ensure a significant flow of data for investors interested in Romania in the prospective phase of the investment plan (for example, the Trade Registry, the National Institute for Statistics, the Romanian National Bank, city halls, as well as sectoral and professional associations from automotive, furniture and textile industries. Partnerships should also be formed with Chambers of Commerce, the Ministry of Finance, the Ministry of Labour and Social Solidarity, etc.

There is a need for data covering both local information (at least at county level, if not at locality level), and sectoral information (based on NACE code activity sectors) in order to have as much data granularity as possible and to be able to respond to enquiries with relevant information in terms of worker qualifications, cost of labour, local property taxes, number of companies operating in the sector, dynamics of a specific sector, profitability rate, competition, number of employable workers, etc.
The agency should identify foreign companies in Romania that can potentially attract foreign suppliers, whose production and supply chains may be concentrated over a smaller area, for example regionally and not globally.
The agency should maintain an ongoing dialogue with private investors, in particular the main groups of (foreign and domestic) investors in Romania, so as to facilitate connections between foreign and Romanian private companies and also with universities, as well as local and central public authorities. This could also contribute to reducing Romania’s trade deficit– the largest part of the deficit is generated by the import of intermediate goods and capital, and hence the deficit has a pronounced structural nature.
The agency should prepare and update sector presentations (for example for the automotive sector, IT, agriculture, the bioeconomy, aeronautics, as well as the creative industries) which will provide relevant information for investors based on the recurring data they request in the questionnaires sent to the agency, The information available should include the dynamics of these sectors in recent years, as well as highlighting post-pandemic opportunities, supportive government policies, competitive advantages in the region, etc.

ATTRACTING INVESTMENTS TO ROMANIA

Compared to the other countries in the region, the level of FDI stock attracted by Romania in relation to both GDP and the number of inhabitants is one of the lowest. Furthermore, the speed with which the per capita FDI stock is growing is much lower than in other countries in the region. This not only has direct effect in terms of missed opportunities for growth of the Romanian economy but also indirect effect in terms of sending a negative signal about Romania’s competitiveness as an investment destination, which could impede inflows of foreign capital.

FIC RECOMMENDATIONS

Similarly, the reduced competitiveness and structural problems (access to financing for companies, know-how, management, human resources that can be allocated, etc.) make exports per capita some of the lowest.

Even though, from some perspectives, there are also costs in attracting foreign investment (for example, providing state aid or providing facilities for large investments, greater exposure to the global business cycle and decreased power of automatic stabilisers), foreign investment has proven both globally, and in the case of Romania, the beneficial effects it brings and the way in which it can have positive effects on the domestic economy.

FIC RECOMMENDATIONS

FDI clearly brings numerous tangible benefits (“hard facts”) – which start with the inflow of capital, the creation of jobs, the increase in domestic consumption and exports, economic growth and an increase in budget revenue, as well as the opportunity for local suppliers to participate in global value chains. On the other hand, there are also numerous “soft” elements, such as the transfer of technology, enhancement of the skills of the labour force through the transfer of know-how, an improvement in the international competitiveness of local companies, increased domestic competition etc. These factors also contribute to the overall benefits of FDI and hence to economic growth.

Particular benefits are gained especially by the exposure of employees to foreign know-how and to high-performance management processes, and this knowledge is then integrated into the development of the business. Moreover, from a long-term perspective, for an emerging economy, such as Romania, attracting FDI can be an essential pillar in the country’s economic development strategy, as recommended by most World Bank studies.

Romania must shape a medium- and long-term strategy to attract and support investments in key areas and hence enhance economic growth to remain competitive with other countries in the region.

FIC RECOMMENDATIONS

The work of the Agency for Foreign Investment should be fully coordinated with and contribute to Romania's long-term development strategy.
Priority sectors for attracting investment should be defined, which are in line with the directions undertaken in the National Recovery and Resilience Plan (NRRP) as well as other sectors that have a significant traction potential and that can attract local suppliers.
The compatibility of local suppliers with the activity standards of foreign companies should be analysed.
Those foreign companies that are already operating in Romania and have the possibility/capacity to bring other segments of the value chain to the country should be identified. For example, if there are companies that have located their manufacturing segment in Romania (low added value), they should analyse the opportunity to locate their research-development or logistics/distribution segments, so that the added value produced in Romania is higher and consequently the income of workers would increase (exiting the middle income trap).

Strategic use should be made of sectoral state aid schemes, focusing on a selection of areas that (i) are competitive at local level or (ii) have high potential to bring high added value to the economy – increasing the value chain towards C-D segments, Design, and After-service.
Identifying measures to improve the non-fiscal indicators in the Global Competitiveness Index. Regional/local offices of the Agency for Foreign Investment should be set up, replicating the central model in terms of organisation, materials available to investors and the skill sets of staff, based on the specific needs of each region.
Industrial parks should be developed, and local authorities should be encouraged to make available the land and facilities needed to attract companies to them (with at least one industrial park in each county).
Some “after-care” services should be provided for investors, to encourage the expansion of investments and the localisation of other segments of the value chain in Romania (research and development, design, etc.)

COMPETITION RULES FOR FDI

The implementation into Romanian legislation of Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the European Union, set out in Government Emergency Ordinance (GEO) 46/2022, have raised some concerns among investors, as well as some uncertainties as to the application method. The application of this Regulation in Romania should ensure a legal framework that stimulates the attraction of FDI and avoids fiscal and bureaucratic burdens. Although Romania's net FDI flow reached 8.9 billion EUR in 2021, Romania continues to rank last among the ECE countries in terms of FDI stock per capita (470 EUR per capita).

FIC RECOMMENDATIONS

Romania must ensure a clear, balanced legal framework, free of bureaucratic blockages, in terms of FDI examination in order to remain competitive with other countries in the region.
In terms of the scope of GEO no. 46/2022, we consider it necessary to have a provision to update the list of areas in CSAT Decision no. 73/2012, which would have the effect of issuing a new CSAT decision that would bring clarity in terms of the sensitive areas that determine the scope of the Ordinance and harmonise the list of sensitive areas with the areas defined in Art. 4 of Regulation no. 452/2019. In relation to the expansion of the scope of GEO no. 46/2022 to cover investments made by investors from the European Union, and not only investments made by non-EU foreign investors, we consider that such a legislative amendment should be accompanied by clear conditions and criteria for application, as well as the restriction of the scope of the obligation to examine an investment made in Romania by an investor from the European Union to specific, clearly defined cases.

We recommend that the threshold for foreign direct investments and new investments subject to authorisation should be equal to that of the notification obligation set out the Competition Law (Law no. 21/1996): “a turnover higher than the Lei equivalent of 4,000,000 Euro.”