Foreign Direct Investments in Croatia: Trends, Structure and Effects Vedran Šošić, Vicegovernor September 2015
Foreign Direct Investments in Croatia: Trends, Structure and Effects
Vedran Šošić, VicegovernorSeptember 2015
Recent changes in FDI statistics
Note: Net FDI is calculated as the difference between liabilities (inward FDI) and assets (outward FDI). Source: HNB
Assets/liability vs.directional approach
Net FDI according to BPM5 and BPM6
Note: Net FDI according to both BPM5 and BPM6 is expressed as % of GDP according to ESA2010 methodology. Source: HNB
0
1
2
3
4
5
6
7
8
9
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
% of G
DP
BPM5 BPM6
‐1
0
1
2
3
4
5
6
7
8
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
% of GDP
Assets Outward FDI Liabilities
Inward FDI Net
3
1. Trends and structure of FDIs in Croatia and international comparison
FDI dynamics in Croatia
Note: Negative sign indicates net capital inflow.Source: HNB
In addition to foreign borrowing, FDIs were important source of financing
CAD in the pre-crisis period...
... but net FDI inflow declined since the onset of the crisis, with strong impact of round-tripping in 2014
‐6
‐4
‐2
0
2
4
6
8
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
% of GDP
RT, assets RT, liabilities Assets excl. RT
Liabilities excl. RT Net liabilities growth
Note: In BoP statistics, round-tripping (RT) was recorded in 2008 (0.8EUR bn), 2009 (0.7 EUR bn), 2010 (-0.6 EUR bn) and 2014 (1.5 EURbn). The signs follow analytical approach; acquisition of assets ispresented with negative and incurrence of liabilities with positive sign.Source: HNB
‐15
‐12
‐9
‐6
‐3
0
3
6
9
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
% of GDP
Direct inv. Portfolio inv. Fin. derivativesOther inv. Reserve assets Current account
Relatively strong FDI inflow in Croatia compared to other CEE countries
Note: Average values for Bulgaria are obtained using 2010-2014 data and for Slovakia using 2008-2014. Net liabilities are calculated as difference between liabilities and assets. Therefore, positive sign refers to net investment inflow.
Sources: Eurostat; HNB
Average in 2004 – 2014 period Net FDI, average in the pre-crisis and post-crisis period
0
2
4
6
8
10
12
14
EE RO HR LV CZ BG PL LT SK HU SI
% of G
DP
Assets Liabilities Net liabilities
‐1
0
1
2
3
4
5
6
7
EE BG HR LV RO CZ PL SK HU LT SI
% of G
DP2004‐2008 2009‐2014
Structure of FDI flows and stocks in Croatia
Note: Data doesn’t include round-trippingSource: HNB
FDI inflow dominated by equity investment, with strong growth of reinvested earnings in 2014
Source: HNB
‐3‐2‐1012345678
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
% of G
DP
Equity Reinvested earningsDebt instruments Liabilities
‐75
‐50
‐25
0
25
50
75
100
0
10
20
30
40
50
60
70
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
%
% of G
DPEquity and reinvested earningsDebt instrumentsNet FDI liabilities, annual growth rate (right)
BoP, net incurrence of liabilities IIP, stock of net FDI liabilities
Relatively strong equity investment in Croatia
Note: Data includes round-tripping.Sources: Eurostat; HNB
2004 – 2008 average 2009 – 2014 average
0
2
4
6
8
10
12
14
CZ EE HR LV LT HU PL SI
% of G
DP
Equity Reinvested earnings Debt instruments
‐2‐1012345678
CZ EE HR LV LT HU PL SI
% of G
DP
Equity Reinvested earnings Debt instruments
Most of investment in Croatia...
Note: Data doesn’t include round-tripping. IFI refers to international financial institutions.Source: HNB
... from Austria, Netherlands, Germany, Hungary
... in financial intermediation, trade, real estate, telecommunication
Note: Data doesn’t include round-tripping. Source: HNB
‐0,4
‐0,2
0,0
0,2
0,4
0,6
0,8
1,0
1,2
AT
NL
DE
HU LU IT FR SI CH
NA BE SE UK IFI
SAD
Other
%of GDP
2000‐2008 2009‐2014
‐0,20,00,20,40,60,81,01,21,41,61,82,0
Fin. interm
ediation
Other business act.
Wholesale trade
Real estate act.
Post and telecomm.
Retail trade
Man. of chemicals
Man. of coke, ref. petr.
Man. of other non‐
metallic min. products
Hotels and restaurants
Other
% of GDP
2000‐2008 2009‐2014
Real estate and trade boost equity investments;financial intermediation dominates in reinvested earnings
Note: Data doesn’t include round-tripping. Source: HNB
Equity investment Reinvested earnings
‐0,2‐0,10,00,10,20,30,40,50,60,7
Fin. interm
ediation
Man. of chem
icals
Construction
Extr. of crude petr., nat. gas
Other mining
Recreational act.
Retail trade
Real estate act.
Man. of basic metals
Hotels and restaurants
Man. of coke, ref. petr.
Wholesale trade
Post and
telecom
m.
Other
%of GDP
2000‐2008 2009‐2014
‐0,20,00,20,40,60,81,01,21,4
Real estate act.
Wholesale trade
Other business act.
Man. of chem
icals
Retail trade
Hotels and restaurants
Recreational act.
Extr. of crude petroleum,
nat. gas
Man. of coke, ref. petr.
Fin. interm
ediation
Man. of food
and
beverages Other
%of GDP
2000‐2008 2009‐2014
Retained profits declined while dividends remain stable
Source: HNB
Profit of FDI firms Utilisation of profit earned
Source: HNB
‐0,4‐0,2
00,20,40,60,81
1,21,4
Fin. interm
ediation
Man. of chemicals
Post and telecomm.
Construction
Extr. of crude
petroleum, nat. gas
Man. of food and
beverages
Man. of basic m
etals
Retail trade
Man. of coke, ref.
petroleum prod.
Other
% of GDP
2011 2012 2013 2014
‐120
‐90
‐60
‐30
0
30
60
90
‐1,0
‐0,5
0,0
0,5
1,0
1,5
2,0
2,5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
in%
% of GDP
DividendsReinvested earningsReinvested earnings/Profit (right)
The importance of financial intermediation in the structure of reinvested earnings and dividends
Source: HNB
‐100
‐50
0
50
100
150
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
%
Reinvested earnings (as % of total) Dividends (as % of total)
In the post-crisis period the share of financial intermediation in total realization of reinvested earnings increased
Approximately 90% of total reinvested earnings were realized in financial intermediation in 2009-2014 period
High net FDI liabilities, but modest greenfieldinvestments in Croatia
Sources: Eurostat; HNB
Stock of net FDI liabilities Value of greenfield investment projects
Note: Data for a specified period refers to an average annual value during this period. In case of Lithuania, calculated averages don’t include 2003.Source: UNCTAD, World Investment Report 2015
0
10
20
30
40
50
60
70
80
90
BG EE SK CZ HR LV HU
RO PL LT SI
% of G
DP
Net liabilities
2004 2008 2014
0
5
10
15
20
25
BG
RO SK LV EE HU LT PL
CZ
HR SI
% of GDP
2003‐2008 2009‐2014 2003‐2014
13
2. Effects of FDIs in Croatia
banking & manufacturing
Croatian banking sector today predominantly foreign-owned ...
Note: Charts show the share of foreign-owned banks in total banking sector assets (left) and in total number of banks in a country (right).Source: ECB (Consolidated banking data), June 2014
Assets No of banks
0
10
20
30
40
50
60
70
80
90
100
EECZLT
HRSK
ROBG PL
LV
HU SI
LU
MT FI
BE IE CY
UK
AT
PT
DK IT ES
NLSE
DE
GRFR
%
0
10
20
30
40
50
60
70
80
90
100
CZ
SK
RO EE LT
BG SI
LV
HR
HU PL
LU CY IE GR
NLESSEPT
MT
UKBE FIIT FR
AT
DE
DK
%
... and well-placed in European rank tables
EE
MT
IELT SE HRBGLU
LV CZ SKGRDKBERO FI DE SI NL PLHUCYUK FRAT IT ES PT
8
16
24
32
40
SE FI UKEE DEMT NL
DK SK FR LV BE AT PLLT ES PT
HR IT HU
RO SI IE BG
GR
CY
0
5
10
15
20
25
30
35
40
45
HU
PT
AT
RO IT DE FR NL GR FI UK SI IE BE DK ES CY LU SE MT BGHR
SK PL LT LV CZ
EE
‐2,5
‐2
‐1,5
‐1
‐0,5
0
0,5
1
1,5
2
DK
SELU
FIIT
AT NL DE FRIE HR
LT PTMT ES BE CY EE GR SI PL
LV UK HU SK BGRO
CZ
80
140
200
260
Tier 1 ratio Loan to deposits*
NPL ratio
Return on assets
*Loan to deposit ratio is calculated as total loans and advances to non-financial institutions deposits.Source: ECB (Consolidated banking data), June 2014
Foreign banks in Croatia - early evidence Early evidence supportive of positive impact of foreign banks:
“foreign-owned banks are on average the most efficient” (Jemrić&Vujčić, 2002)
“de novo foreign banks are substantially the most cost efficient ... foreign banks as a group are more efficient than domestic private or state banks” (Kraft et al, 2002)
“arrival of foreign-owned banks has contributed to a higher level of competition, improved efficiency and better quality of products and services”; “foreign banks have been more profitable, had lower operating costs, and maintained better asset quality than domestic banks” (Kraft, 2002)
16
Efficiency indicators
Note: X-efficiency can only be calculated for six-year periods because residuals from bank cost equation have to be averaged for longer periods to dismantle random factor from efficiency factor.Source: HNB
Traditional indicators Bank x-efficiency
50
100
150
200
250
300
350
0
20
40
60
80
100
120
199
4199
5199
6199
7199
8199
9200
0200
1200
2200
3200
4200
5200
6200
7200
8200
9201
0201
1201
2201
3201
4
%%
Foreign banks share (%) Cost to income ratio (%)
C5 - assets (%) Labour to deposit ratio - right
0
20
40
60
80
100
1994
-199
9
1995
-200
0
1996
-200
1
1997
-200
2
1998
-200
3
1999
-200
4
2000
-200
5
2001
-200
6
2002
-200
7
2003
-200
8
2004
-200
9
2005
-201
0
2006
-201
1
2007
-201
2
2008
-201
3
2009
-201
4
%
Average x-efficiency Weighted average X-efficiency
Evolution of bank efficiency in Croatia Significant efficiency gains in the last 18 years. Mostly the result of market consolidation - traditional efficiency indicators are
heavily influenced by the economies of scale, as average bank is becoming larger. X-efficiency (managerial efficiency not infected with economies of scales or risk
management) scores of banks have stabilized (Turk-Arisis, 2002 and Huljak 2015). Foreign banks in Croatia - far larger and more challenging to run (more products,
wide presence, potential agency problems, ...), but managerial efficiency scores are similar to domestic banks. However, operational efficiency is no guarantee for success.
Early evidence (Kraft 2002) suggests that the transfer of skills and knowledge regarding risk management from foreign owners to newly acquired banks was an important channel of technology transfer.
Foreign banks were more conservative in their risk management and provisioning policies (higher provisioning expenses, higher risk-based capital, and higher level of recoveries).
18
FDIs in industry in the pre-crisis period
FDI manufacturing firms more successful than domestic in terms of faster growth in revenues, capital and productivity but positive effects on employment can not be confirmed (Škudar, 2002)
Positive effects of FDIs on productivity (Marić, 2008): Own-firm effects: FDI firms are on average by one-third more
productive than domestic firms in the same sector Spillover effects: FDIs had positive effect on other domestic firms in
different sectors of the economy Positive effects in the 1999-2002 period stronger compared to 2003-
2005 period
19
Impact of global crisis on performance of non-financial corporations
Global crisis had asymmetric impact on Croatian non-financial corporations (HNB, 2012):
State-owned and export-oriented firms were less affected
Evidence on whether FDI firms were affected less or more not clear
FDI firms made much sharper cuts in the workforce, as a way to cope with the crisis – they are more flexible and respond more promptly to the requirements of their owners
20
FDIs and Croatian exports
FDIs had relatively mild positive impact on manufacturing exports (Vukšić, 2005)
Foreign sector is more export-oriented than domestic but FDIpenetration in manufacturing is relatively low (Hunya and Škudar, 2006)
Increase in NFC’s export intensity is closely related to the presence of foreign capital, favourable financing conditions and economic environment conducive to enterprise growth (HNB, 2013)
21
Share of FDI firms in Croatian exports
0
10
20
30
40
50
60
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
%
Sources: FINA for data until 2010, later CBS and HNB
FDIs and exports
Share of FDI and domestic firms exporting at least 1% of their sale, 2013
Share of foreign controlled enterprises in merchandise exports, 2011
Source: World Bank, Business Environment and Enterprise PerformanceSurveys (BEEPS)
0
10
20
30
40
50
60
70
80
90
SI LV BG EE HR
HU
RO CZ
PL
SK LT
%
Percent of FDI firms exporting directly (at least 1% of sales)
Percent of domestic firms exporting directly (at least 1% of sales)
Note: Foreign controlled enterprises refer to companies were share of foreign ownership exceeds 50% . Data for Slovenia refers to 2012.Sources: Eurostat; HNB (for Croatia)
0
10
20
30
40
50
60
70
80
RO SK HU BG EE PL
LT HR LV SI CZ
% of total exports
FDIs in tradable sector and exports
Notes: Tradable sector is defined as mining and quarrying, manufacturing, electricity, gas and water supply. Economic activities for Bulgaria and Croatia are based on NACE Rev.1 and for other countries on NACE Rev. 2 classification. Data for Czech R., Poland, Romania and Slovakia refer to 2012 and for other countries to 2013.
Sources: WiiW; HNB calculations
Positive correlation between FDI in tradable sector and exports of goods and services
20
30
40
50
60
70
80
90
100
5 10 15 20 25 30
Expo
rts of goo
ds an
d service
s, GD
P, 201
3
Stock of FDI in tradable sector / GDP, 2013
HR
LV
SKHU
CZ
BG
ROPL
EELT
SI
Conclusion
Relatively strong FDI inflow, but its structure not “optimal”
Effects of FDIs are positive, but of lesser magnitude compared to peers – particularly on exports.
Attracting new FDI into the tradable sector important
Providing investment-friendly institutional environment key precondition for FDI growth
Product and labour market reforms promoting higher labour force participation, education and innovation
24
Thank you!