Foreign Direct Investment in the Context of the Economic Recession in Slovakia

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Global foreign direct investment inflows rose 16 per cent in 2011, surpassing the 2005-2007 pre-crisis level for the first time, despite the continuing effects of the global financial and economic crisis of 2008-2009 and the ongoing sovereign debt crises. Global foreign direct investment flows exceeded the pre-crisis average in 2011, reaching $1.5 trillion despite turmoil in the global economy. However, they still remained some 23 per cent below their 2007 peak.

FDI inflows increased across all major economic groupings in 2011. Flows to developed countries increased by 21 per cent, to $748 billion. Developing countries continued to account for nearly half of global FDI in 2011 as their inflows reached a new record high of $684 billion. The rise in 2011 was driven mainly by investments in Asia and better than average growth in Latin America and the Caribbean. FDI flows to transition economies also continued to rise, to $92 billion, accounting for another 6 per cent of the global total. In contrast, Africa, the region with the highest number of least developed countries, and West Asia continued to experience a decline in FDI.

There are top 5 host economies of around the world in 2011: USA, China, Belgium, Hong Kong, Brazil. Top 5 home economies (investors) include USA, Japan, UK, France and Hong Kong.

Table 1. Top 5 host and home economies, 2011[5]

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During 2011, FDI in the primary sector rose gradually, due to an increase in investment in mining, quarrying and petroleum. The largest increases were observed in the food and chemicals industries. The food, beverages and tobacco industry was among those least affected by the crisis because it produces mainly basic consumption goods. The chemicals industry saw a 65 per cent rise in FDI, mainly as a result of large investments in pharmaceuticals. The automotive industry was strongly affected by the economic uncertainty in 2011. The value of FDI projects declined about 15 per cent. The decline was more pronounced in developed countries because of the effects of the financial debt crises. Financial services recorded a 13 per cent increase in the value of FDI projects, reaching $80 billion. However, they remained some 50 per cent below their pre-crisis average. The bulk of activity targeted the insurance industry. UNCTAD predicts slower FDI growth in 2012, with flows leveling off at about $1.6 trillion. ^[5]

However, the present business environment is still beset by uncertainties. Risk factors such as the unpredictability of global economic governance, a possible widespread debt crisis and fiscal and financial sector imbalances in some developed countries, may yet slow the FDI recovery. For FDI in the current period is characterized by several developmental tendencies. Most investment flows in the world economically strongest among the three regions, namely the USA, European Union and Japan. While in the recent past, dominated FDI oriented to the area of finance, is now interested in the energy, information technology and pharmaceuticals. Due to lack of natural resources and increase their prices, there is also a focus on sustainable growth and the related interest in alternative sources. For foreign investment in the world for the near future appears to be a very interesting area of renewable energy, waste treatment and water availability, leading to conversion even more attention to the factor of production land and natural resources.

4. Economic Recession and Foreign Direct Investment in V4 Countries and in Slovakia

Visegrad Four (V4) is a political community of the Central European countries of Hungary, Poland, the Czech Republic and Slovakia. These countries agreed to harmonize common practice join the European Union and NATO. To facilitate mutual foreign trade they established a free trade association without duties - Central European Free Trade Agreement (CEFTA) in 1992.

On the Slovak territory were scarcely any FDI by 1998. This situation was caused by the fact that the government had also made efforts to build so-called Slovak capital community and it refused to open the Slovak republic for foreign investment.

Figure 2. Inward FDI stock, by V4 countries: annual, 1993-2011, million US dollars [4]

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To illustrate, while on 31.12.1998 poured in to Poland $22.4 billion, $14.3 billion in the Czech Republic, in Slovakia it was only $2.9 billion foreign investment. Change occurred after the elections in 1998. At that time the new right-wing oriented government put into the practice such measures to halt the decline investment in relation to GDP, the openness for foreign countries and for create FDI inflows conditions.

In Poland, the stock of foreign direct investment culminated in 2007 ($178.4 billion), then with the first signs of economic recession occurred fall at the level of $164.3 billion in 2008. Nevertheless, the most of foreign direct investment of V4 flowed into Poland in 2010. Most projects were implemented by firms from Germany, France, the Netherlands, Luxembourg and USA. The largest investments were in the electronics and automotive industries, which absorbed the largest number of workers. The positive is FDI is concentrated in electronics, aerospace, and automotive industry with a lot of a high skilled labor in recent years.

In Hungary has reached the highest level of stock of FDI in 2007 ($95.5 billion). FDI fell to the level of $88 billion in 2008 and it grew in 2009, FDI has fallen since. This is due to the poor economic situation in the country and the world economic recession. The largest volume of FDI went to the automotive industry and in the area of electrical machines. More than 56 per cent of FDI goes to the service sector, 36 per cent in power generation and water supply. The largest investors come from Germany, the Netherlands, Austria, Luxembourg, France and the USA. FDI stock is $84.4 in 2011.

The sectional structure of investment flowing into the Czech Republic is long-term stability. The largest volume of FDI flows in the area of finance, then the industry of real estate and business services, trade and repair of motor vehicles. There are going up to the service sector goes up to 50 per cent of investments, in the manufacturing industry is 37 per cent. The key investors in terms of geography are those who come from the Netherlands, Germany, Austria and Luxembourg. While most investment flows into large enterprises in the Czech Republic FDI stagnated in 2007-2008 ($113billion), but since 2009 the FDI increased slightly. Stock of FDI is $125.2billion in 2011.

Like everywhere in the world, in Slovakia also there was a decline of foreign direct investment after 2008 due to the economic recession. This was reflected by a continuous increase in FDI, which had lasted since 2002. This situation was relieved by stagnation at around $50 billion in 2008. Current stock of FDI is $51.3 billion. The greatest interest in investing in Slovakia, have the investors from the Netherlands, Hungary, Austria, Germany, Italy, France, Sweden and South Korea. By 2006, FDI flows were mainly in traditional sectors. Important investment flowed in Slovakia in the area of banking as a result of the restructuring of the banking sector. At present, FDI is focused primarily in electrical, engineering, automotive, rubber, metal, wood, furniture and paper industries as well as wholesale. There is expected further investment in the energetics. Positive feature of FDI enterprises is the development of production with higher added value. ^[6]

When is comparing the status of FDI in selected countries, it should be recalled that the comparison was made in absolute values. To recalculate the status of FDI in 2011 to per capita, then we find that the order of the V4 countries is changed. In the first place is the Czech Republic ($11 928), followed by Slovakia ($9 326), Hungary ($8 445). Poland is last with $5 158 per capita of FDI. However, no matter what, it is important to evaluate the advantages and disadvantages of FDI for the host country.

The advantages of FDI include the introduction of new management techniques, new, more efficient technology transfer, increase of labor and capital productivity, competitiveness growth, easier access to foreign markets. All these factors contribute to the growth performance and, ultimately, in the long term to improve the standard of living of citizens. This is, of course, affected by the economic capacity of the recipient country, sector exposure, degree of saturation of foreign investment and the absorption capacity of the country. On the other hand, incorrectly positioned FDI can to contribute to the deepening economic problems of the host countries.

5. The Impact of FDI on Regional Development in Slovakia

When we talk about the positive impact of foreign direct investment at the macroeconomic level, these are these assertions significant in regional level, too. With the arrival of foreign investors coming into the region usually a new technologies that need to employ people with higher level qualifications. This promotes of the domestic competition and innovation activities in the region and the willingness of people to educate. When the domestic firms become the subcontractors for foreign investors, there is a possibility for them to expand into foreign markets, which is usually underpinned by foreign investor. Promote tourism in the region can attract tourists from the country of origin of foreign investors. This is opportunity for regions with lower economic level to boost production, employment and long term living standards of citizens of the region.

It is very convenient when a company of foreign investment is allocated in border regions. Then the positive impacts of FDI are multiplied. Great tool for monitoring of the conditions of the border business represent the social networks. Networks offer the options, which may to use small and large companies on their expansion. Built-in search network services provide the ability to search commercial and industrial information. There is possibility to search for specific companies from different sectors and look at the user's recommendations ^[7].

Figure 3. Regions of Slovakia

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As a support of FDI inflow, the Ministry of Economy established the organization Slovak Agency for Investment and Trade Development. It is organization for professional guidance, for foreign investors, for providing consulting services, for assistance about investment projects and the identification of suitable sites for the implementation of investment projects. ^[8]

In Slovakia, FDI flowed to 2006, mainly to the western part and around Bratislava, even though it's most developed region. This fact was mainly caused by territorial proximity and excellent transport links to the countries of Western Europe, built the highway, a high level of human capital and a large number of universities in the territory of Bratislava.

For the purposes of equitable economic and social development of Slovakia is necessary that the FDI coming into the less developed regions with high unemployment. In 2006 and 2007 there was a turn in the direction of investment and investors are oriented significantly to Košice, Nitra, Trenčín, Žilina and Banská Bystrica region.

Figure 4. FDI stock: 31.12.2010 by Slovakia regions, million US dollars [21]

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Although in recent years, foreign investment flowed into other regions than in Bratislava, FDI in the Bratislava region represents, 68 per cent of the total investment, cumulative to 31.12.2010 (this is the current latest available information). However, in the regions with the highest unemployment rate (e.g. Figure 5), with the lowest performance and efficiency of productive resources utilization, it is, paradoxically, the smallest shares. In Banská Bystrica it is 2 per cent and Prešov even only 1per cent of the total FDI inflows into Slovakia.

Figure 5. Unemployment rate: 31.12.2012 by Slovakia regions, per cent [19]

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FDI inflow to Slovakia since 1998 has grown at a higher pace than in the past. This grow is intensified after Slovakia's accession to the European Union. Turnover occurred in connection with signs of economic recession. It should be noted, that the number of completed projects does not inform about initial investor´s investment or about the number of new jobs, which are the important indicators of any investment coming into the country. However, just this is very important information about the impact of FDI on future development of the region.

6. The State Aid and Job Creation

One of temptation of FDI inflows to Slovakia is the provision of state aid for major investors. When investors decide on the location of investment, very motivating for them is a quality of infrastructure, human capital value, economic stability, legal and political environment in the host country.

The definition of state aid and the responsibilities associated with the provision are contained in Act no. 203/1999. The state aid is considered to aid in any form, which is provided for the enterprise or in connection with business service provider. The state aid may be granted to promote the economic development of regions with a low standard of living or high unemployment and the like. The main subject of state aid process is the Ministry of Finance in relation to the Government of the Slovak Republic and in relation to the European Union

One of the forms of state aid is the investment aid for regional development. Conditions of providing are described in Act no. 561/2007 about investment aid. The forms of investment aid are following: subsidies for the acquisition of tangible fixed assets and intangible assets, relief from income tax, contribution to create new jobs, the transfer of immovable property. The Act sets out conditions for granting investment aid for the four areas, namely industrial production, technology centers, shared services and tourism.

Figure 6. State aid granted to foreign investors by regions SR, 2001-2011, million EURO [18]

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During the years 2001-2010, the highest level of state aid was given to foreign investors in Trnava region (€346.4 million) and Žilina region (€315.2 million) and the smallest in the Prešov region, only about €16.4 million. Against expectation, the most of new jobs was created by investors with the state aid in Trenčín region (9753) and not in the Trnava region (7685). Žilina region with 5 945 jobs created was fourth in the regions of Slovakia.

Figure 7. Number of jobs created by foreign investors with state aid in the period 2001-2011 by regions of Slovakia [18]

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