Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies Conference „Innovation: Engine for Economic Growth“ Sofia, 30-31, October 2014 Attracting High-Tech FDI Gábor Hunya, wiiw

 wiiw 2 Role of FDI in economic growth and competitiveness  Foreign direct investment (FDI) can transfer capital, knowledge, generate growth, fixed capital formation, exports and employment; increase competition, operate in islands or integrated  Investing companies have firm-specific advantages, superiour knowledge  Attractive countries have location-specific advantages (cost, agglomeration, market, resources, etc.)  Inward FDI policy (sequencing): attract FDI, generate spillover, support upgrading of production structures, motivate reinvestment of subsidiary profits, attract R&D  Generating spillovers to domestic economy to support growth, employment, knowledge, interaction between foreign and domestic firms, spin-offs  Since the 2008 crisis: low investments, meagre FDI inflow in the EU

 3 Source: Eurostat, wiiw calculations. Gross fixed capital formation, 4Q 2008 =100, seasonally adjusted and adjusted data by working days Investment activity: NMS levels remain below 2007

 wiiw 4 FDI-Inflow declined more than investments Inflow in % of gross fixed capital formation, Source: wiiw Database on Foreign Direct Investment in Central, East and Southeast Europe, 2013.

 wiiw 5 Less decline from low level after the crisis FDI inflow in % of gross fixed capital formation

 wiiw 6 Greenfield investments in the NMS, (fdimarkets.com) Number of projects, Capital investment in EUR 10 million, Job creation in 100 jobs

 wiiw 7 Number of Greenfield Projects, Quelle:

 wiiw 8 FDI-Inflow declined again in 2013 (deleveraging) in Euro million, *) SI 2012: -46, 2013: -511 Source: wiiw Database on Foreign Direct Investment in Central, East and Southeast Europe, 2013.

 wiiw 9 Distribution of FDI projects by main activities , %

 wiiw 10 Bulgaria and Sofia in international competition for high-tech FDI  Bulgaria got only 27 projects in five years in the activities: Design, Development & Testing; ICT & Internet Infrastructure; Shared Services Centre; Customer Contact Centre; Headquarters; Technical Support Centre; Research & Development  Bulgaria has only one Fast Growth Technology Firm (Deloitte, Fast 50 Central Europe 2014)  Sofia in Europe – lowest operating cost, worst environment for advanced services location (IBM-Plant Location International); among them best for shared service centres; de-coupled from manufacturing  Sofia: better position in terms of regulation and market access than in terms of infrastructure and living conditions – cost/quality trade-off

 wiiw 11 De-industrialization or re-industrialization? Industrial production, Sept 2008 =100 Seasonally adjusted data. Source: Eurostat.

INVESTMENT IS A RELATIONSHIP NOT A SINGLE TRANSACTION Investment policy is an ongoing process: Removing legal, regulatory, and administrative impediments to attracting and retaining FDI. Maximizing its integration and spillovers in the domestic economy. Using regional integration to foster FDI. Vision and StrategyInvestment Attraction Investment Establishment Retaining InvestmentLinkages & Spillovers

 wiiw 13 Spillovers occure when technology gap is small  The more subsidiaries are integrated into foreign parent companies – equity-, strategic management-, technology-, export-import flows-wise - the higher productivity growth they experience  Only few intra-industry spillovers from FDI, restricted to certain countries and categories of firms  Knowledge spillovers occur more frequently if the technology gap between domestic and foreign firms is not too large – increase human capital capacity  Generate spillovers by reducing the technology gap by  upgrading absorption capacity of local firms and by  stimulating linkages with local firms  supporting the development of technology SMEs, high-growth firms

 wiiw 14 Generate technology and R&D improving FDI  FDI incentive should help achieve qualitative goals (export propensity, transfer of technology, R&D activity, local suppliers etc.)  Stimulate technological activities in foreign subsidiaries & technological cooperation between domestic firms and foreign subsidiaries  Tools: technology and science parks, support/subsidy for interaction, support for inhouse training, impact assessment / best practice  Need for: realistic strategy, efficient and collaborative public governance, coordinated use of funds, interaction between government and business  BUT: high-tech and R&D subsidiaries do not perform domestic innovation – suppliers, spinn-offs may!