Why Poland and other countries are attracting foreign direct investments (FDI)

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Why Poland and other countries are attracting foreign direct investments?
The collapse of a communist system resulted in significant changes that have taken place in range of former centrally planned economies including the CEE countries. These countries changed from socialist regimes to full market economies. This created whole variety of new challenges and influenced such sectors of life like economics, politics, social aspects, etc. In the beginning of transition, countries were experiencing a slowdown and worsening economic conditions because of that their economies were focused on heavy industry rather than on production of consumer goods and services. Furthermore, lack of domestic savings and inefficient financial markets caused serious problems for economic restructuring and competitive market creation. Thereupon, foreign direct investment has been perceived as an essential source of funds and accelerator for the economic and social transformation. FDI was acknowledged as source of capital, new workplaces, but also improves the level of activity in a given country. Moreover investments brings itself new technologies, management techniques, skills, also know-how and new habits. Governments has noticed that this aspects were vital for stable and fast development. They have introduced policies that had brought down barriers and preventions that had been inhibiting inflow of FDI during socialism reigns. Since then this attitude was continued and still these countries provides solutions to attract companies to invest there. Nowadays authorities tries to ascertain factors behind FDI, because of increasing significance and competition of it. They want to gain the facts of what determines the decision of firm to invest in a defined country. Foreign direct investments are an essential tool for development of Central and Eastern European countries. In the past twenty years this form of investments has significantly increased and became most common type of capital flow needed for stabilization and economic growth. Countries such as Poland, Hungary, Czech Republic and Slovakia attract foreign investors because of their localization. In this essay we are going to explain closely the reason of this process, by showing several examples of FDI. According to definition it is an investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies. Countries located in central and eastern Europe have a huge potential and are the perfect place to invest in. Referring to Ernst & Young European Attractiveness Survey international companies indicated Poland as the top potential investment destination for their FDI projects in Europe. In the last decade we have witnessed an outstanding development of Chinese economy, which became one of the most

influential economies in the world. At the moment, Chinese companies are expanding their business into European market and they need links such as Poland and earlier mentioned countries to connect China with Western Europe. "There will be more clients from China. We are seeing their great interest in investment in financial institutions, mining, manufacturing, and buying shares in existing companies," said Pawe Tynel, executive director of tax at Ernst & Young Sp. z o.o. , in an interview for China Daily. Such companies as Huawei Technologies Co Ltd, a leading global information and communications technology solutions provider, Nuctech, which has 60 per cent. of global market for technology at border crossings used for scanning vehicles and containers, or China National Electric Engineering Co. (CNEE) are willing to invest and build factories, power units etc. Another country where Chinese companies are locating their assets is Hungary. Its location attracts investors and changes this country into European logistic hub. Surrounded by seven neighbour countries and with one of the biggest populations among CEE countries, Hungary creates outstanding market for investors. Logistic center, rail express and factories that are beeing built by Chinese investors are only few examples of foreign interest into this country. The benefits of FDI for the host country can be significant, including knowledge and technology transfer to domestic companies and the labor force, improvement of management, productivity spillovers, rise of competition, and improved access for exports, notably in the source country. Foreign capital inflow was an important factor facilitating the privatization and reconstructing process in the CEE during beginning of the transition process. Currently, FDI is seen as an essential factor stimulating sustained economic growth.

Poland

The biggest country in central Eastern Europe. Situated between Germany and Russia. It has also access to the sea. With 38 501 000 population it is the largest economy among the CEE countries. In the 2011 the FDI inflow was estimated at EUR 9.93, and it will be unaffected by global slowdown. Poland is recognized as having an economy with significant development potential, overtaking the Netherlands in mid-2010 to become Europe's sixth largest economy. Foreign Direct Investment in Poland has remained strong ever since the country's re-democratization following the Round Table Agreement in 1989. 2011 Total Per capita GDP (PPP) $771.658 billion $20,334 GDP (nominal) $513.821 billion $13,540

Foreign direct investment in Poland has increased in the past twenty years, to become the most common type of capital flow needed for stabilization and economic growth. Foreign capital coming into the Polish economy has fulfilled a very important role in the process of privatization and restructuring. Poland seeks to attract and promote foreign investment and to liberalize its economy to ensure free movement of capital and profits. According to UNCTAD, the inflow of FDI to Poland increased by 46,7% in 2011, while the worldwide increase in FDI amounted to 17%.

Above we can easily see that Poland since 2000 has a stable inflow of FDI. It maintains on the same level as West.

Polands Attractiveness to FDI

A substantial improvement in the investment environment occurred in 90s. All factors that influence business activity may be divided into two groups: environmental factors that define the judicial, institutional, and macroeconomic conditions, and factors which reflect investors perception and decision making. Given these factors, Poland has successfully attracted large amount of FDI. Polands attractiveness is due in part to its political stability, continued political commitment to economic liberalization and favorable policies toward foreign investment. Additionally, Polands domestic market size and growth together with growing purchasing power and reduced inflation further encouraged FDI. Low labor costs are significant for foreign investors. The labor costs in Central Europe are four times lower than in western countries and Poland has an abundant supply of a well-qualified labor force. Additionally the integration process with the European Union has influenced the substantial inflow of foreign capital. Another contributing factor is the lack of fiscal discrimination between foreign investors and domestic companies in Poland, including the benefits derived from a sophisticated tax incentives.

The majority of resources came from Luxembourg (EUR 1 945 million), Germany (EUR 1 627 million), Italy (EUR 1 020 million), Cyprus (EUR 843 million), Switzerland (EUR 510 million), Great Britain (EUR 396 million), Sweden (EUR 343 million), Austria (EUR 327 million) and Spain together with Portugal ( EUR 252 million each of them).

Investments from specific countries and regions

The literature on the determinants of foreign investment has identified both policy and non-policy factors as drivers of FDI. Non-policy factors include market size, distance, factor proportions and political and economic stability. Policy factors include openness, product-market regulation, labour market arrangements, corporate tax rates and infrastructure. Non-policy related factors relevant to FDI fall into a number of categories. First, market size of the host country, usually measured by GDP, is considered an important determinant of horizontal FDI, because the returns from such investment depend on economies of scale at the firm level. Second, the effect of distance and transport costs on FDI is viewed as ambiguous. While they imply transaction costs for the investors, FDI may also carry advantages over trade when dealing with distant countries. Countries where domestic product-market regulations impose unnecessary costs on business and create barriers to entry discourage FDI. Labour market conditions that impose extra costs on investors will tend to curb the inward FDI position of a country.

We can clearly determine that taking into account arguments above CEE countries provides cheap and reliable workforce, its authorities introduced policies that attracts investments in their countries. There were made some tax concessions and taken measures to reduce red tape.

Hungary

The leader in FDI among CEE countries in 1990s, faced political problems which had an impact of its attractiveness. Hungary lost its leading position. In 2011, Hungarys stock of IFDI (inward FDI) was lower than that of Poland and the Czech Republic, and its per capita IFDI lower than that of the Czech Republic and Slovakia.1 In terms of IFDI stock relative to GDP, Bulgaria and Estonia outranks Hungary. However, in international comparison, the Hungarian economy can still be considered one in which IFDI plays a major role. FDI flows to Hungary were hit hard especially during the crisis years of 2009 and 2010. Data for 2011 indicate an increase in FDI inflows, however, as a press release of the Hungarian National Bank states: This is mainly due to a large capital in transit3 flow in the fourth quarter of 2011.

FDI as percent of GDP

The graph above shows the FDI as percent of GDP for Hungary and other countries on an annual basis. The pick level of almost 54% of Hungarian GDP was reached in 2007 and since then, the indicators were falling down to -27% in 2010. Even if there are still some political problems, the country attracts international investors. The labour force in Hungary comparatively to other CEE countries is cheap and it attracts investors, especially from automotive industry. The most significant investments in this industry in the year 2009 were: Bosal Group: Expanded its automotive components manufacturing plant in Kecskem, Harman-Becker: Automotive electronics, Szkesfehrvr, PATEC: Automotive components, Sziksz. Hungarian location in Central Europe is great opportunity. It attracts number of logistic companies. Foreign logistics service-providers present on the Hungarian market, for instance Austrian (Hdlmayr, Lagermax, Gebrder Weiss), German (DPWN, DB-Schenker, Logwin, Dachser), Dutch (TNT, Vos), French (Geodis, Giraud), Italian (Catone, Prioglio), American (Expeditors, UPS), British (Wincanton, Eurogate) and Swiss (Khne-Nagel) enterprises/groups. As a result of its location, Hungary enjoys natural advantages in the area of logistics. Four Pan-European and 2 ERTMS corridors transit the relatively small area of Hungary, permitting links between Western Europe and the Balkans as well as Southwest Europe and the CIS (Commonwealth of Independent States). In addition, in some areas there is already demand for Central-Eastern European north-south relations as well, primarily because of the producer companies established in the region.

As airports in Western Europe become increasingly clogged and the proportion of high value goods increases, there is ever greater demand for the formation of a Central-Eastern European cargo airport. Preparations for such an airport are underway at several potential sites (for example, Taszr). Players on the air transport market in Hungary use Budapest Ferenc Liszt International Airport to the greatest extent. In addition, there are two other airports of regional significance in Hungary that also conduct international air transport (Srmellk and Debrecen). Attractiveness of such countries is still increasing and in few years Central Europe will be huge European logistic center.

Summary
To summarize we are pointing the main factors which are the reason of attractiveness to FDI of Poland and other countries. Ongoing development of those countries is creating more and more reasons to invest. The first of them is location. International companies invest mainly in central and eastern Europe, because countries that are located in this region are kind of link which connects Asia with Europe. The second factor which is connected with the previous one is distance. Factories that are built for example in Poland, are in the perfect geographical position and the distance between producer and client is much closer than in the situation when factory is in China, in which case costs of transportation are much higher. This is also a reason of building logistic hubs and rebuilding infrastructure. The third factor influencing attractiveness for foreign direct investments is market size. Population of countries attracting FDI begins with about 1 million and ends at level over 45 million citizens. This shows that market potential is really high and new investments will surely need educated and skilled labour force which is easily to find in developing European countries. Another one is political and economic stability. The perfect example is Poland, where during financial crisis there was still economic growth and also the political situation is perfectly stable. The investments in Central and Eastern Europe are chance for developing countries to grow and implement new technologies, infrastructural solutions and to create thousands of needed workplaces. FDI has also impact on education. Universities are creating new study courses connected with changes in the economy and ongoing investments. Taking into account historical background we can say that FDI was one of the source of stabilizing the CEE countries after the transition from central economies to full market economies. Then after years of dynamic development FDI was treated as a

source of sustainable growth, but what also is very important for economy, it is a catalyst for new technologies and innovations. Through FDI we can have access to solutions from variety of countries that is why we can say that investments from abroad can provide dual success. First in terms of finance, money, second in science, life standard, therefore these two boosts up whole economy and development in a given country. Summarising we can say that FDI stimulates environment in a positive way. Moreover by taking the goodness from abroad we cannot forget that we have to stimulate our own entrepreneurs to origin their companies inside the country. This important because of the phenomenon thatmore FDI brings even more FDI.