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Seminar on
Promotion of Foreign Direct Investments in Southeast Europe
(Summary paper prepared by the Japan Institute of International Affairs)
15 December 2002
1. Overview of seminar
The "Seminar on Promotion of Foreign Direct Investments in Southeast Europe," co-sponsored by the Ministry of Foreign Affairs and the Japan Institute of International Affairs (JIIA), was held on 8 November 2002 at JIIA. About 60 persons attended this seminar, including delegations from the countries of Southeastern Europe - Albania, Croatia, Bulgaria, Bosnia-Herzegovina, Macedonia, Yugoslavia and Romania - and officials from their embassies in Tokyo as well as relevant personnel from Japanese companies and other well-informed specialists with an interest in Southeastern Europe. This seminar, chaired by Toshinori Shigeie, Senior Research Fellow, JIIA, was a follow-up meeting to the "Workshop on the Role of Governments in the Transition to Market Economies in the Countries of Southeastern Europe," also held jointly in Tokyo by the Ministry of Foreign Affairs and JIIA in March of this year.
2. Opening
The meeting opened with a speech by Tetsuro Yano, Senior Vice-Minister of Foreign Affairs, who noted (1) that Southeastern Europe on the whole is becoming more politically stable and economic growth is the most important task, (2) that efforts to establish better investment environments by the countries of the region will be the most important element in promoting FDI, and (3) that relations between Japan and Southeastern Europe are expected to develop in a multifaceted fashion, with Japanese support forthcoming not only in economic affairs but in political, cultural, and other matters as well.
3. Session 1 "Promising areas for foreign investment in individual countries"
| (1) |
Invited to participate as a guest speaker, Tonino Picula, Croatia's Foreign Minister, started off the session by remarking that Croatia has steadily achieved economic development; that national treatment is given to foreign investors in Croatia, where the freedom to transfer capital is also ensured; that FDI is in an uptrend; that Croatia has concluded free trade agreements (FTAs) with numerous countries; and that it had joined the WTO in 2001, expected soon to join the CEFTA, and hoped in future to apply for EU membership.
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| (2) |
Next, the representatives of each country offered presentations in which they emphasized the advantages of their respective countries:
| A) | The domestic political situation has stabilized, and the macro-economy is doing well overall. |
| B) | The governments of each country are stressing economic recovery and moves toward a market economy and, in anticipation of the expansion of FDI into the country, the governments have established a variety of investment incentives, including tax breaks and special economic zones. |
| C) | The unemployment rate is high, but cheap and high-quality labor is available. |
| D) | In addition to the country's convenient location in the central part of Europe, large markets inclusive of nearby countries are being formed through CEFTA, the conclusion of bilateral FTAs with neighboring countries, and future EU membership, which will make the country more attractive to foreign investors. |
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| (3) |
The discussions in the subsequent Q&A period can be summarized as follows:
| A) | Answering the question of a Japanese participant who asked if these countries thought it necessary in connection with FDI to establish recreational facilities such as tourist facilities and golf courses for resident foreigners, many of the participants from Southeastern Europe responded that these types of facilities had already been built or would be built in the near future. |
| B) | Remarking on these countries' efforts toward membership in the EU and CEFTA and the conclusion of FTAs with neighboring countries, another Japanese participant asked if these Southeastern European countries recognized that the creation of free economic/trade zones within special regions had not only a positive side but a negative one as well, in that this approach could in fact raise barriers to the participation of countries outside the zone. To this the participants from Southeastern Europe answered only that the huge market created would have positive results, and thus it was unclear whether they acknowledged the negative side. |
| C) | Another Japanese participant commented that the special free economic zones established by several Southeastern European countries could indeed serve to promote economic development, but that problems could arise in connection with the WTO and with EU membership requirements if preferential measures are granted only to foreign capital in these zones. The participant pointed out that China had been compelled to abolish its preferential treatment for foreign capital in special economic zones during WTO membership negotiations. The response from the Southeastern European countries was that there may very well be no choice but to eliminate such special free economic/trade zones and tariff-free zones/shops at the request of the EU in the course of EU membership negotiations, but that they were considered necessary for the time being as incentives for attracting FDI. |
| D) | When asked by still another Japanese participant if foreigners engaged in FDI were permitted to own land, the various statements by the Southeastern European countries indicated that a variety of controls remain in place: (1) foreigners are not permitted to own land at all (Albania), (2) foreigners can own land through a local company (Romania, Yugoslavia), and (3) foreigners from countries in which the said SEE nationals are permitted to own land in these foreigners' countries can themselves own land in the said SEE countries (Croatia). |
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Session 2 "The importance and elements of FDI for countries in economic transition"
In Session 2, Tatsuhiko Kasai, Senior Research Fellow, JIIA, gave a presentation on the topic of "the importance and elements of FDI for countries in transition to a market economy." The gist of his presentation is as follows:
| (1) | While FDI in transition economies have many benefits for foreign companies, there is also the risk of procedural problems due to inadequacies in the legal system when withdrawing from such economies. |
| (2) | In addition to this risk, there are country risks stemming from the destruction of infrastructure in past unrest/conflicts and the legal and social instability generated by changes in the state structure itself, and risks arising from the lack of appropriate economic policies and weak macroeconomic management. Minimizing these risks is an important issue for each government. |
Session 3 "Evaluation and case studies of the investment environment in Southeastern European countries"
| (1) |
The session began with a presentation by Masahiko Yoshii, Professor, Graduate School of Economics, Kobe University, who stated that, upon assessing the investment environment in each country, measures focusing on the future should be taken now to attract FDI because (a) the economies of these countries are growing but the fundamentals are still weak, and (b) the comparative advantage of low wages enjoyed by the countries of Southeastern Europe at present will sooner or later disappear.
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| (2) |
Next, Koichi Akatsu, Director, Overseas Investment Division, Investment Exchange Department, Japan External Trade Organization (JETRO), discussed "how to attract Japanese companies":
| A) | Because the remnants of socialism give these countries a negative image, establishing a suitable economic environment and projecting a positive image as an investment site is important in attracting FDI. |
| B) | Other elements stressed by Japanese companies when expanding overseas are (1) low costs, (2) a concentration of related industries, (3) proximity to major markets, (4) a high-quality labor force, and (5) investment incentives. |
| C) | Especially important in this regard are (1) the need to attract at least one company and create a success story, due to the tendency of Japanese companies to avoid high-risk/high-return ventures and to set up operations overseas only after determining that companies from other countries have experienced no problems with local operations, and (2) the importance of extending to Japanese companies a sincere and enthusiastic welcome in setting up local operations. |
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| (3) |
Following that, case studies of two Japanese companies that had expanded into the SEE countries were presented.
| A) | Daido Metal: In January 2002, the company began producing bearings at Kotor, Montenegro. The company's biggest complaint is the lack of infrastructure, with water supply, electric power, parts supply and banking services being particular problems. Areas in which the company has expressed satisfaction include a legal system established to EU standards, tax and currency policies that also conform to EU standards, and an excellent labor force. The workers are diligent, and the labor union supports the company. However, the legacy of the socialist era is still visible in electric power supply, garbage disposal, road maintenance, etc. |
| B) | Nissan Romania: Established in 1992 as a wholly owned subsidiary of Sumitomo Trading, the company sells Nissan automobiles in the Romanian market. It has been operating at a profit for the past few years and forecasts sales of 800 new vehicles in 2002, which would give it the top share among Japanese automobile manufacturers there. Areas of dissatisfaction include a frequently changing tax system, import procedures that are not 100% clear, and antiquated insurance/banking systems. Areas in which the company expressed satisfaction were the high quality of the labor force, better public peace and order than in surrounding countries, and low prices. If business management guidelines are clarified and continuity maintained, detailed operating regulations with regard to taxation are established and implemented locally, further reforms are made to education and public opinion, and greater privatization of state-owned enterprises is carried out, FDI in Romania will likely increase. |
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| (4) |
The Q&A and discussion period on the above matters went as follows.
| (rb) | The Southeastern European countries commented that Japanese companies are too cautious in their investments; that there are times they should choose high-risk/high-return investments; that the entire region should be seen as one large market; that there will be benefits to having access to an even larger market; and that this region offers not only a large potential market but low-wage labor as well, so now is the time for Japanese companies to establish a foothold. |
| (r,) | In response to this, a participant from the Japanese side asked, when viewing this region as one, if border controls and the free movement of people and goods had been established. The participants from Southeastern Europe countered that many countries have concluded FTAs; that there are no barriers to the movement of goods in the region; that it is almost as if the national borders had been erased; and that construction of infrastructure and communications networks is moving ahead. |
| (r» | Japanese participants commented that enthusiasm is important in attracting FDI; that on that point it was unclear what proposals or appeals the representatives of each country had intended in their presentations today, that if even one Japanese automotive manufacturer were to expand into the region, parts manufacturers would follow, and for that reason efforts are needed to attract and foster at least one Japanese company; that companies cannot remain in business without profits; that, though it has been asserted that the region is a single bloc, even if tariffs were to disappear through the conclusion of FTAs, these countries should recognize that FDI decisions are based on calculations of all costs, including waiting time at national borders during passage procedures and total logistics costs and other expenses beyond manufacturing costs; that both attracting investment and carrying out post-investment follow-up are essential, meaning that a single office is needed to which companies can turn to consult on problems that occur day-to-day. |
| (r³ | In response to these comments, the Southeast European participants remarked that image and mutual communication are important; that they would like to organize introduction tours in order to increase familiarity with their countries; that frequent changes in laws were related to the EU membership process, and that being made aware that a "success story" is the most important element in attracting FDI was a positive outcome of today's discussions. |
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6. Session 4 ("Chairman's summary")
The chairman wrapped up the seminar by noting that the countries of Southeastern Europe sufficiently recognized that establishing an environment for attracting foreign investment is an important issue for those countries undergoing economic transition and that these countries were making a variety of efforts in this regard; that economic growth in a political stable context is an important issue; that further utilization of FDI was expected; and that strengthening two-way communication and continuing dialogue would be beneficial.
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