The Profitability of Austrian Foreign Direct Investment: Reinvestment or Repatriation? 4th FIW Workshop: „Foreign Direct Investment- Determinants and Home Market Effects” March 7th, 2008 Wilfried Altzinger University of Economics and Business Administration, Vienna

Profitability of Austrian Foreign Direct Investment I. Purpose of the Study II. Determinants of Profitability III. Empirical Evidence IV. Conclusions

I.Purpose of the Study Austrian Outward FDI increased tremendously since 1990 in particular in new and acceding EU members (CEECs)

I.Purpose of the Study

Austrian Outward FDI increased tremendously  Mainly due to the opening-up of CEE  2005: 43.6% of FDI stock is located in CEE-19; EU-15 (33.8%)  Strong increase in CEE-14 (mainly in Croatia, Romania, Bulgaria and Russia; mainly finance, trade and oil)  First-mover advantages!

I.Purpose of the Study What are the implications on competitiveness, employment and income distribution? 1. Profitability 2. Repatriation (advantageous for home country) or Reinvestment (advantageous for host country)

II. Determinants of Profitability Macroeconomic factors: (Locational advantages) Growth of host and export countries Growth of export markets Factor costs Infrastructure and Taxes Country risk Competition policy and regulations Firm-level: (Ownership advantages) Technological know-how Managerial know-how Advertising, marketing and distribution Size; Market power (CEEC/privatisation); costs of acquisitions; Experiences (learning process) => Productivity

II. Time-Specific Determinants of Profitability, Reinvestment and Repatriation Source: Brada and Tomšík, 2003

III. Empirical Evidence - What can be observed? 1. Profitability: time patterns by countries by age of investment differences between M&As and Greenfield 2. Reinvestments/Repatriations

III. Empirical Evidence for Austria Data source: Austrian Central Bank Firm data for the period 1992 to 2005 no direct access to data (due to confidentiality) 2815 affiliates (2005) / 760 affiliates (1989) observations (989 parent firms with more than EUR investment) Indicator of Profitability: Net Earnings per Equity Capital Invested (Mean and Median)  Return on Equity (RoE)

III. Empirical Evidence for Austria Mean of RoE: can be strongly biased by a few large (loss or profit) making firms Median of RoE: can be calculated with firm level data only provides a more general pattern of the development

Profitability – All Regions

Profitability and Maturity

Profitability of Greenfield Investments and M&As

Differences of Profitability between M&As and Greenfield Investments - M&As > Greenfield - Greenfield > M&As

Profitability of Greenfield Investments and M&As (for CEECs only) Greenfield Mergers & Acquisitions

Profitability of Greenfield Investments and M&As (for EU only) Greenfield Mergers & Acquisitions

Repatriation or Reinvestment?

Different Repatriation Rates for M&As and Greenfield Investments

IV. Conclusions Total profitability has increased substantially over the period 1992 – 2005 Profitability of affiliates differ strongly between regions: CEE-14 > CEE-5 >> EU-15 Age of investment is most important! most investments became profitable after three to four years of investment development for affiliates in CEE-14 seems to be favourable since they are young! Different patterns of profitability between M&As and Greenfield investments by regions: EU-14: always higher profits for M&As CEE: Lower (higher) profits for Greenfield for younger (older) vintages => longer starting-up problems but afterwards superior!

IV. Conclusions Higher reinvestment in CEECs Higher repatriation by older vintages Higher repatriation of M&As Possible explanations: to (re-)build and (re-)equip a production facility is more urgent in CEECs better investment opportunities in CEECs stronger financial needs for Greenfield investments

IV. Open Questions We can offer a reasonable explanation on time-specific determinants of profitability, reinvestment and repatriation. However, specific determinants of profitability are still missing superior efficiency market power issues unit labour costs differences by sectors competition policies of host countries...

Appendix I: Empirical Evidence for Austria Return on equity (RoE): Net profit (excluding profits and losses carried forward by the year) divided by equity (minus profit or loss for that year)

Appendix II: Empirical Evidence for Austria CEE-5: Poland, Hungary, Slovenia, Slovak Republic and Czech Republic CEE-14: Albania, Bosnia and Herzegovina, Bulgaria, Estonia, Croatia, Latvia, Lithuania, Moldavia, Romania, Russia, Serbia and Montenegro, Ukraine and Belarus

Structural Features and Profitability (mean values) of Austrian FDI, 2003 NumberEquity Net Earnings RoE (Mean) Employees Capital/Labour- Ratio (in million EUR) Net Earnings/ Equity (in 1.000) (in EUR per employee) EU ,4%64,0226,188 CEE ,2%233,465,154 Poland ,9%26,371,711 Slovenia ,6%8,0111,500 Hungary ,3%55,358,246 Slovak Republic ,7%28,547,474 Czech Republic ,4%61,155,172 Croatia ,9%12,090,333 Total ,9%327,7127,049