A Comparative Study On FDI Utilization Ability Of Six South-East European Countries

Foreign direct investment (FDI) is an important way to enhance the international competitiveness of enterprises in host countries, especially for developing countries; it is important force for economic development, especially for economies in transition. Many developing countries, particularly countries with economies in transition, during the economic development process try to attract FDI to promote rapid economic growth because unlike hedge funds, or other international financial capitals which have a large speculative nature, FDI can promote technological progress and economic growth to the host country, so many countries especially developing countries use preferential policies to attract FDI.With increasing intensity of attracting FDI, it has become an important research topic how to scientifically and objectively assess the ability of countries to use FDI effectively and then formulate appropriate policies to further improve the ability of host countries in FDI utilization. However, research studies on FDI utilization ability are few and especially for South-East European (SEE) countries there is no such research based on comparative FDI utilization ability. Based on this and the realities on SEE countries, in this paper by building a set of indexes system and by using FDI theoretical and empirical analysis, we try to analyze these countries FDI utilization ability and at the same time using the successful experience of other countries in FDI utilization ability, we provide policy recommendations for SEE countries to further improve their FDI utilization ability. Therefore, this research has obvious practical significance and policy guidance.With transnational corporations as the main factors of foreign direct investments through the mobility and integration of financial, technical, personnel, management methods etc, and host country’s economy accelerated changes to the scientific and technological progress and industrial structure. On the other hand, in recent years of global financial crisis, transnational corporations based on profit maximization objectives, aiming to keep the technological monopoly, tax evasion business strategy, also seriously bring challenges to host country’s economic and social development and national economic safety.SEE countries at first have been state planned economies, their economic development is relatively low and after fall of communism in Europe these countries started economic reforms of opening up their economies, their political system also changed from one party system to democracy and have now become emerging economies that are attractive destinations in the world markets. With the implementation of liberalization of direct investment policy, SEE countries have now become one of the major absorption areas in the map of European Foreign Direct Investments. According to available statistics show that in 2008 FDI flows to SEE countries in size compared with 2000 has increased by more than 5 times.With increasing FDI inflow, SEE countries are gradually optimizing the industrial structure, at the same time enterprise competitiveness and strength has also greatly improved and because before no one else has used systematic study in order to measure the effects of FDI in these countries, how it influences country’s economic growth, enterprises competitiveness, technological innovations and other aspects On the other aspect, the answers to these questions are related to host country foreign direct investments policy in order to adjust investment directions in a away that it can better utilize foreign investment to promote domestic economic development. This is the main purpose of this research.We believe that a country’s or region’s FDI utilization ability is not only ability to attract foreign investment but also from the larger, broader perspective to think that the host country is considering FDI in promoting industrial restructuring, promotion of enterprise technology progress, and increase local employment and tax revenue, promoting the role of foreign trade and other aspects of the series. Based on this, we define FDI utilization ability as follows:The so-called FDI utilization ability shows how the host country’s legal and regulatory framework attracts foreign investment, how FDI effects the local economic growth, industrial restructuring and technological progress, residents’employment, how positive is the contribution to foreign trade developmentIn this paper, we first have analyze a variety of research literature on FDI, we divide our analysis in four parts; first we explain the concept of FDI utilization ability, second, by using this concept we make a classification of research literature on four aspects:(1) based on FDI effects to host countries economic growth; In economic history, many classical theories have tried to elaborate the relationship between economic growth and investment and also produced a large number of classical literatures such as neo-classical growth etc. Later scholars used these theories to represent FDI as a new independent variable of international capital flows and added it to the production function in the host country on FDI and made research on the relationship between economic growth system and FDI. (2) Based on FDI effects to host country’s technological progress; Many scholars have studied about FDI effect to host countries companies technological progress, the results of these studies is generally believed that FDI plays great role for the host country’s technological progress, particularly in developing countries, in which FDI has technological spillover effects. (3) Based on FDI effects to foreign trade expansion; Relationship between international trade and transnational investment can be seen as substitution model of trade and investment, in the case of existence of international trade barriers, if an enterprise involves in international direct investment, in basis of relatively high efficiency or low switching costs based on factors of production, it can achieve the complete replacement of the merchandise trade. Overall, the host country attracting FDI, to a certain extent, promoted the growth of its foreign trade. (4) Based on FDI effects to industrial structure adjustment and upgrade;We point out that multinational companies based at product stages take different strategies at different stages, through direct investment in developing countries will transfer to the host country certain products technical level, and thus will influence a certain impact on the structure of host country’s industry; at the same time, developing host countries can through attraction of FDI build a number of not yet formed industries, but still yet the host country shall find it difficult to cross and level the gap between its industry and investor country’s industry. After that, some theories came up such as:labor-intensive industrial structure, marginal industrial theory, flying geese model theory, growth stage theory etc., which all predict international transfer of industry where the host country uses FDI inflows to upgrade the industrial structure adjustment. These theories suggest that FDI can effectively enhance the comparative advantages of host countries, thus promoting industrial structure adjustment and upgrade host country industries.Third, foreign policies are a comprehensive set of related policies and measures for the countries to achieve their goal of using foreign capital, which is an important part of the economic policy in one country. From the perspective of FDI quality improvement, there are three categories of foreign policies:incentive policies, restrictive policies and neutral policies. Incentive policy means to absorb high quality FDI by financial tax concessions, financial incentives and other incentives; restrictive policy means to safeguard the national interests by the restrictions such as market access restrictions, ownership and control restrictions, in order to refuse low-quality FDI and improve the ability of FDI utilization; neutral policy means to take a national treatment to foreign investors, then let the foreign investors enjoy the same treatment as domestic in order to maximum the national interests. One thing to be noted is that host country’s FDI policy are not only one of these types, it also can be a combination of these three types, such as a mixed policy with incentive and restrictive policiesFourth, we introduce and compare some international experiences of FDI utilization ability. Countries (regions) usually regard foreign investment as an important means of promoting the economic development. They all take the maximizing national interests as the objective on the foreign policy orientation and pay a high attention to the FDI utilization quality improvement. But due to different conditions of the country, the policies on FDI regulations also differ greatly, the differences are especially distinctive between the developed and developing countries. Taking the experiences of FDI utilization in different countries as the reference undoubtedly will help the foreign investment policy setting of developing countries. So this part will analyze and generalize the FDI utilization policies and regulations of developed and developing countries, give a summary of international experiences on the FDI utilization quality improvement through foreign investment policies. In this analysis, we chosen America and Japan as the representative of developed country, and the developing countries include India and Brazil, which are the typical representative of the newly industrialized country.After, we focus on how FDI is reflected in major factors of socio-economic life of the SEE countries economies and the effects on economic development performance. Specifically, in this paper we first analyze in which aspects of host country’s macro- economy are FDI effects reflected and we try to find theoretical basis to base our research.. We divide this theoretical research in four aspects:First, as many scholars have concluded, investments are one of sources of promoting GDP growth. Investments are divided in domestic investments and FDI. Both of them play an important role in GDP growth. Furthermore, studies from different scholars show that FDI can stimulate domestic investment in the host country, thereby promoting local economic growth, FDI investment in the local investments has crowd into effect. FDI inflows inside the country lead to domestic investment increases; the total increased is greater than the increase in FDI amount, so FDI promotes domestic investment. Second, FDI utilization by host country increases foreign trade, and by analyzing Kojima’s complementary relationship model theory relationship between FDI and host country, we conclude that at certain level, FDI increased and promoted foreign trade. Third, analyzing host country’s FDI utilization ability relations to technological progress, in general FDI technology spillover effects to local enterprises mechanisms are summarized in the following four areas:demonstration and imitation effects, competition effects, linkages effects between companies and employees’mobility effect. (1)During the process of FDI inflows to the host country, in general, multinational corporations will enter the local market with more advanced production equipment, new products and service models, as well as more advanced technology into, but also may bring new management skills during production process, also bringing new ideas to product marketing process, and all these things make host country’s local companies to imitate and adapt these new things, so it brings more significant imitation and copying effects. (2) When foreign investment companies enter host country, it will strengthen the market competition in the market, foreign competition will force local firms to be more effective in using existing technology and resources, or seek new and more effective technologies to maintain its market share, so competition promotes technological upgrading in local firms, it also increases the social welfare level. FDI inflows to certain industries improve the efficiency of resource allocation.(3) Contact between firms generate spillover effects of industrial chain by the upstream and downstream relationship, which can be divided into the forward linkage and backward linkage where forward linkage is a relation between FDI enterprises and local enterprises, where local companies provide services such as marketing, semi-finished products or components or raw materials re-processing and other services for the foreign-funded enterprises; backward linkage is relation between FDI enterprises and local suppliers, which means that local enterprises provide raw materials for products needed for the production of foreign-funded enterprises.(4) Transnational companies effect host country’s productivity not only through the machinery, equipment, patents, foreign managers and technical staff to their offices of technology transfer, but also by training local employees employed by the local branch. Such training involves employees at all levels, both the quality supervisor of simple production and the more complex production quality, including senior technical experts and senior management experts. They use different form and variety of training, including on-site guidance, seminars, training assignment, even going to the investor country to receive systematic education. These employees while working in the foreign investor country accumulate a variety of relevant skills and when these employees leave the multinational companies go and work for local firms or start their own companies, so local companies also will learn the various techniques and production technologies, so it will bring technology spillover effect. After, In order to measure the host country’s FDI spillover effects to domestic enterprises technology, we take foreign investment as an independent factor of production into the domestic enterprise’s production function, and by testing FDI as independent variable in the host country’s production function; we try to measure its influence to domestic enterprises production function to assess the FDI spillover effects in host country’s technological upgrade.Fourth, we analyze host countries ability to use FDI in industrial structure upgrading. FDI inflows enhanced host country’s level of technological progress and management, which to some extent, changed the trend of production factors diminishing marginal returns, thus changing the input-output structure of the host country and promoting the development of related industries. The promoted technological progress and management level can lead labor force, labor tools to have productivity growth and can lead directly to changes in the structure of industrial technology. FDI inflows give the "package" of resources, technology and management skills needed not only to help the host country to establish new industries, but also to help host country to promote inter-industry structure within a structural optimization and industrial upgrading,In general, multinational companies have advantages of capital, technology or management-intensive elements, if there is no foreign direct investment, for the host country producing new industries or upgrading of the structure of traditional industries shall be more difficult.After theoretical analysis, we first introduce Albania’s political and economic situation and data statistics, and then, by using historical statistical data related to Albania and based on the theoretical research before, we respectively go on through empirical measurement methods to find out the impact Albania’s FDI ability on four aspects (economic growth, foreign trade, scientific and technological progress, industrial structure upgrade), and the result show that Albanian FDI’s impact on economic growth, foreign trade, scientific and technological progress, upgrading the industrial structure have a significant positive effect, FDI has clear impact on the country’s economic development, trade and it brings a catalytic role, helping transfer of scientific and technological progress and upgrading the industrial structure to improve the pace of development and progress.After the empirical analysis on Albania, in order to determine the factors which affect FDI utilization ability, based on the previous theoretical and empirical discussion, here we have to choose relative indicators from ability of promoting local economy growth, ability of improving the foreign trade, ability of promoting technological progress of local enterprise and the ability of upgrading the industrial structure. On the basis of these indicators, we conducted a comparative study on the FDI utilization ability of SEE countries. In order to give a complete and comprehensive evaluation on the FDI utilization ability, we should consider about many specific factors, and it is necessary to take the method of multi-factor evaluation. In order to give a complete and comprehensive evaluation on the FDI utilization ability, we should consider about many specific factors, and it is necessary to take the method of multi-factor evaluation. The multi-factor evaluation on FDI utilization ability in particularly, is to transfer a group of factors with different dimensions to relative comparable data without dimensions, with correspondent weights, and then synthesis these evaluation factors to a comprehensive evaluation value of the country or region, with the help of certain econometric model. Finally, for the evaluation results, we should conduct a statistically posterior test, to confirm the rationality of the evaluation model.There are many methods of multi-factor evaluation in current academia, these methods can be classified to two sorts by the way of weight determination:the first one is subjective weighting, like Delphi and AHP, the weight coefficient is determined mostly by comprehensive consultation ratings, and it depends on the knowledge, experience and preferences of the expert. With a distinctive subjectivity, there will be a probability of expanding or reducing the role of some indicators, that leads the sort results cannot reflect the reality of relationships between items. The other one is objective weighting, determining the weight by the relationship between the index and the variation of the indicators’value, also avoid the bias caused by subjective factors, such as mean square method, entropy and factor analysis. Here we choose the second method in order to avoid the subjective bias, and it needs handle the problems such as selection of evaluation model, the dimensionless variables, index weight distribution and tests after evaluation. The multi-factor evaluation on FDI utilization ability in particularly, is to transfer a group of factors with different dimensions to relative comparable data without dimensions, with correspondent weights, and then synthesis these evaluation factors to a comprehensive evaluation value of the country or region, with the help of certain econometric model. Finally, for the evaluation results, we should conduct a statistically posterior test, to confirm the rationality of the evaluation model, than we obtain comprehensive evaluation of the results, thus we complete assessment of the six SEE countries FDI utilization ability by using 2009 statistical data and we make an overall estimation of the results and after we indentify some problems which exists for these countries ability in using FDI, we propose policy recommendations for these six SEE countries to further improve their FDI utilization ability.In this research method, we combine qualitative analysis, quantitative analysis, principal component analysis and other evaluation methods. In a series of studies under the assumption of certain premises, authors draw these main conclusions upon empirical comparison:(1) host country’s FDI utilization ability promotes economic growth, technological progress, trade expansion, and upgrades the industrial structure; (2) there are obvious differences in 6 SEE countries in FDI utilization abilities, regions with better economic development have higher FDI utilization ability and regions with backward economic development have a lower FDI utilization ability. (3) The host country’s foreign investment policy on FDI have a significant role on improving FDI utilization ability. (4) By improving investment environment and promoting more FDI on R & D subjects of investments and developing reasonable guidance and other foreign policy measures for FDI, can improve the ability of South-East European countries in FDI utilization.We can see the innovations of this research in three aspects:(1) Most of existing research on FDI is done separately based on different aspects and angles of view, such as comparative advantages of location, largest multinational companies chasing profits, host country’s economic growth driven of foreign capital inflow, from the angle of technological progress studying various effects of FDI inflows etc. It is only lately that some researchers began to explore China’s FDI performance, FDI quality and other issues. For SEE countries, scholars till now have not made such a research on SEE countries FDI utilization ability or comparative Studies on the use of FDI ability have not appeared yet. Building a theoretical system in order to objectively assessing the ability of the host country FDI theory using, is of great challenge. On one hand, the current academic, from the outlook of the host country’s FDI utilization ability is also very limited; on the other hand, the economies in transition are having rapid economic growth and modernization process, so in order to use FDI to improve their participation in the international economy and expand the level of foreign trade, to use FDI to play a greater role in the context of economic globalization on the host country’s economic growth, technological progress, industrial upgrading, etc., we have to innovatively build a kind of theory to give a more scientific answer, this research is based on host country’s FDI ability to effect the economic growth, foreign trade, technological progress, industrial upgrading and by that trying to build theoretical system based on factor evaluation model which can scientifically assess of the host country FDI utilization ability.(2) Empirical model innovationsAs mentioned before, there are so many decisive factors which determine a region’s FDI utilization ability and there are very few scholars who have made research on this subject and till now it did not appear a more scientific research and reasonable indicators to assess the ability of region’s FDI utilization ability. This paper has been based on other research literature analysis; it has pioneered the establishment of a comprehensive multi-index evaluation method, using econometric method on the SEE countries FDI utilization ability. We build this model in FDI utilization ability for first time. I believe that with the rapid development of science and technology, changing from industrial economy to a knowledge-based economy, statistics and technology in economic management scientific research will have increasingly widespread applications. In this study we will adapt to changing trends, establish quantitative evaluation model. At the same time, by using SPSS 13.0 integrated descriptive statistical analysis, factor analysis, validity analysis, reliability analysis, correlation analysis, statistical analysis methods etc., we form the data needed for this study.(3) Remarks and discussionsIn order to decrease problems assessed from current FDI utilization ability of SEE countries and to further improve capacity utilization FDI policy, for first time in innovative way, we put forward our remarks and recommendations. From this point of view, we first examine these issues in these countries, so for the first time also made such a proposal.