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Factors Influencing Foreign Direct Investments in Romania

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Factors Influencing Foreign Direct Investments in Romania in Romania 2010 Factors Influencing Foreign Direct Investments in Romania The Case of Danish FDI in Romania Antoanela Simina Receanu Copenhagen Business School MSc in Business Language and Culture (Cand. Merc. Int.) Supervisor: Nicolai Pogrebnyakov June 2010 Taps: 163,247 0 Summary This thesis is about Danish foreign direct investments (FDI) in Romania. Its purpose is to study the key factors influencing Danish FDI in Romania. To discover the factors that hinder or enhance the Danish foreign investments in Romania a macro and micro economical approach are discussed. For a more comprehensive image over the economic situation of Romania and Denmark a macro and micro perspective of their business climate is presented. The institutional based theory and the transaction cost theory are used to provide an adequate theoretical basis for this research. After the theoretical part is debated, analytical frameworks based on six main factors that influence the way of doing business in Romania are explained. Consequently four hypotheses are formed that link the FDI with the main factors that influence its flow. For reaching valuable and accurate results, an empirical research was done. The empirical research is built from interviews conducted with Danish investors in Romania. Table of Contents 1 Introduction .......................................................................................................... 1 1.1 Importance of the study ................................................................................... 2 2 Problem statement ................................................................................................. 3 2.1 Economy in transition - background of the problem .............................................. 4 3 Theoretical Framework- literature review .................................................................. 6 3.1 Macro perspective ............................................................................................ 7 3.1.1 Entry Modes and Institutions ...................................................................... 7 3.2 Institutional Theory .......................................................................................... 8 3.2.1 Institutional based theories (IB) at a macro level .......................................... 9 3.2.2 Transactional Cost Theory (TCT) ............................................................... 12 3.3 Theoretical Framework from a Micro Economical View ........................................ 14 3.3.1 Institutional Based Theory from a micro view ............................................. 14 3.3.2 Criticism & Conclusion ............................................................................. 15 4 Analytical framework ............................................................................................ 17 5 Methodology ........................................................................................................ 21 5.1 Research Strategy ......................................................................................... 21 5.2 Research Design ............................................................................................ 22 5.2.1 Research method .................................................................................... 22 5.2.2 Data collection ........................................................................................ 23 5.2.3 Interview method .................................................................................... 25 5.2.4 Cases selection ....................................................................................... 26 5.2.5 Delimitation of paper ............................................................................... 26 5.2.6 Structure of the paper ............................................................................. 26 5.3 Assessment ................................................................................................... 27 5.3.1 Reliability of the Study ............................................................................. 27 5.3.2 External Validity ...................................................................................... 28 5.3.3 Internal Validity ...................................................................................... 29 6 Romania – background information and key facts .................................................... 30 6.1 Legal framework with impact on direct investment ............................................. 30 6.1.1 Changes regarding FDI ............................................................................ 30 6.2 Economic Risk Factors .................................................................................... 32 6.2.1 Competitive advantage of location for Romania in EU business ..................... 33 6.2.2 Competitive Disadvantages for Romania being in EU ................................... 34 6.3 Corruption .................................................................................................... 35 6.4 The global financial crisis ................................................................................ 38 6.5 Social factors influencing FDI in Romania .......................................................... 40 6.6 Migration of labor force ................................................................................... 41 6.7 Sub conclusion .............................................................................................. 41 7 FDI in Romania and in the region ........................................................................... 43 7.1.1 Evolution of FDI in Romania between 1990 to Present ................................. 46 8 Danish FDI in Romania ......................................................................................... 48 8.1 Danish Investment Profile ............................................................................... 48 8.2 The Economic relations Denmark-Romania ........................................................ 49 8.3 Trade exchanges between Denmark and Romania .............................................. 52 8.3.1 Micro level ............................................................................................. 53 8.3.2 Value chain configuration ......................................................................... 53 8.4 Companies Profile .......................................................................................... 54 8.4.1 FirstFarms .............................................................................................. 54 8.4.2 Kuma .................................................................................................... 55 8.4.3 Lundbeck ............................................................................................... 55 8.4.4 Scheiber Tour ......................................................................................... 56 8.4.5 Rambøll ................................................................................................. 56 9 Analysis .............................................................................................................. 57 9.1 Discussion .................................................................................................... 63 9.2 Other Results. Report on Process and Solutions ................................................. 68 10 Conclusions ......................................................................................................... 71 Bibliography ..................................................................... Error! Bookmark not defined. Apendix 1 – The transcripts of interviews Abbreviations ARIS Romanian Agency for Foreign Investments CEE Central and Eastern Europe CIS Commonwealth of Independent States CCIB Bucharest Chamber of Commerce and Industry GCR Global Corruption Report IBW Institutional Based View IJV International Joint Ventures M&A Mergers and Acquisitions SEE South Eastern Europe TCT Transaction Cost Theory TI Transparency International WB World Bank UNCTAD United Nations Conference on Trade and Development Factors Influencing Foreign Direct Investments in Romania 1 Introduction Multinational companies through their foreign direct investments (FDI) influence and are influenced by a number of factors in the countries they operate. This research focuses on Romania‘s economy after the 1990 and how the business environment in the Romanian economy changed after the fall of the communist regime. More specifically, how the foreign direct investment works in Romania and which are the factors that are influencing it. For determining that the empirical research is constructed on the Danish FDI flow in Romania, intending to find out what are the reasons of these investors to approach this market, what are their entry modes, and what were the factors that enhanced or hindered their investment in the second largest country of the CEE (Central and Eastern Europe). The world economy tends to be more and more global; in this case a relevant example of globalization is the enlargement of the European Union (EU), where Romania is also a member since the last EU extension wave on the 1st of January 2007. Here FDI plays a major role, especially in Central and Easter European (CEE) markets, because the foreign capital through FDI has been an important factor in the process of privatization and restructuring of the CEE economies. FDI is today a crucial factor that stimulates sustained economic growth, expansion of capital stock, increase in productivity,
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