Investments represent one of the most important factors of the economic growth as well as of the exit from crisis and economic re-launching. The paper analyzes the investments evolution (foreign and domestic) in Romania under the crisis circumstances, taking into account the main factors of influence. Based on the analysis of Romania’s investment process, in the period 2005-2010, several proposals are made aiming at the improvement of investment mechanisms and their sources of funding, including the increase in Romania’s absorption capacity of EU structural and cohesion funds in the period 2007-2013.investment; economic growth; foreign and domestic investments; economic crisis; sources of funding

GEAMĂNU, Marinela

ZAMAN, Gheorghe

English

Research Papers in Economics

107
FOREIGN DIRECT INVESTMENTS AND DOMESTIC INVESTMENTS
 IN ROMANIA IN THE ECONOMIC CRISIS PERIOD
Gheorghe ZAMAN, Professor Ph.D.
Marinela GEAMĂNU, Assistant lecturer Ph.D. Cd.
Faculty of Finance and Banks, Bucharest
Spiru Haret University
Abstract
Investments  represent  one  of  the  most  important  factors  of  the 
economic  growth  as  well  as  of  the  exit  from  crisis  and  economic  re-
launching.  The  paper  analyses  the  investments  evolution  (foreign  and 
domestic) in Romania under the crisis circumstances, taking into account the 
main factors of influence. Based on the analysis of Romania’s investment 
process, in the period 2005-2010, several proposals are made aiming at the 
improvement  of  investment  mechanisms  and  their  sources  of  funding, 
including the increase in Romania’s absorption capacity of EU structural 
and cohesion funds in the period 2007-2013.
Key-words:  investment,  economic  growth,  foreign  and  domestic 
investments, economic crisis, sources of funding
JEL Classification: G11, E22
Introduction
Economic and financial crisis triggered in September 2008 by the U.S. bank 
Lehman Brothers bankruptcy was a first evident signal of financial system crisis 
with implications at both international and national levels. Contagion phenomenon 
was rapidly diffused since U.S. investment bank has international relations with 
other countries in the global economy. Directly or indirectly, the effect of the crisis 
has spread to the European countries including Romania.
In this paper we present the impact of current economic and financial crisis 
on the investment process in Romania during 2008-2010 as regards the features of 
volume, structure and dynamics of FDI and domestic investment.
I. Macroeconomic Developments
We will try to present a first approach of the impact of economic crisis in 
Romania based on analysis of the main macroeconomic developments in the period 
2008-2010  in  the  detachment  to  draw  conclusions  about  the  causal  correlation 
between the effect of some indicators (GDP, industrial production, trade, services) 
and  effort  indicators  (domestic  investment,  foreign  direct  investment, 
employment).108
Table 1 
Main macroeconomic indicators
Gross domestic 
product
Unemployment Period
Nominal
(million 
lei)
Real 
annual 
rate of 
growth 
(%)
Investments 
in national 
economy 
Annual rate 
of growth 
%
Services 
provided 
to the 
population
Annual 
rate of 
growth %
Current 
account 
balance
(million 
euros)
Foreign 
Direct 
Investment 
(million 
euros)
No. Total 
registered 
unemployed 
(thousand 
persons)
Registered 
unemployment 
rate (%)
2005
2006
2007
2008
2009
  2009 
      Q1
     Q2
     Q3
     Q4 
2010 
Jan.
Febr.  
288954,6
344650.6
416006.8
514654.0
491273,0
96616,7
112073,0
130288,7
152295,3
x
x
4.2
7.9
6.3
7.3
-7.1
-6.2
-8.7
-7.1
-6.5
x
x
10.8
19.7
20.9
17.1
-29.1
2.7
-29.7
-30.6
-39.9
x
x
11.9
28.2
9.6
2.3
-15.6
-6.1
-19.2
-20.4
-14.6
8.8
8.0
-6888
-10156
-16714
-16157
-5168
-910
-2431
-3493
-5168
-144
-754
5237
8723
7047
9308
4400
1471
2593
3669
4400
274
445
523.0
460.5
367.8
403,4
709,4
513,6
548,9
625,1
709,4
741,0
762,4
5.9
5.2
4.1
4,4
7,8
5,6
6,0
6,9
7,8
8,1
8,3
Source:  National  Institute  of  Statistics,  Ministry  of  Finance,  National  Bank  of 
Romania.
Main conclusions residing in the macroeconomic analysis presented in table 1
are:
– in 2009 the volume of investment dropped by – 29.1 in comparison with 
2008; this is the most severe decline among macroeconomic indicators;
– the economic crisis had a powerful negative impact on services provided to 
the population from 6% in the quarter to 20% in the third quarter;
– FDI share in GDP in 2009 was 3.78% versus 6.6% in 2008, which shows a 
decrease  of  almost  50%  of  foreign  direct  investment  to  economic  growth  in 
Romania;
– more worrying is the situation of FDI in the first two months of 2010, when 
net FDI volume was 274 million euros, 445 million euros respectively, compared 
with  a  monthly  current  account  balance  of  –  144  million  euros,  respectively  –
754 million euros; this discrepancy between FDI and current account balance raises 
a very serious problem  for sources  of financing the  current account  deficit and 
external debt because some of funding resources declined, particularly, a foreign 
inflows of remittances from Romanian workers abroad (free currency transfer) and 
the proceedings from state-owned assets privatization;
– the  number  of  unemployed  increased  from  403,400  persons  in  2008  to 
709,400 persons in 2009 (unemployment rate increased from 4.4% in 2008 to 8.3% 
in  February  2010),  as  a  consequence  of  the  large  number  of  insolvencies  and 
bankruptcy of enterprises.109
II. Volume and gross total investment growth
Part II examines dynamic volume and gross total investment in Romania in 
2005-2009, with forecasts for 2010 and 2011 compared with the EU-countries.
Table 2
Gross capital formation in Romania and other EU countries in 2005-2011
(million euro)
Country 2005 2006 2007 2008 2009 2010 2011
EU-27 2210746,9 2416051,, 2633239,3 2633918,8 2262853,6 2239639,8 2331916,9
Bulgaria 5278,8 6533,3 8588,0 11354,0 8377,6 7757,1 :
Germany 390080,0 422800,0 455530,0 474710,0 430640,0 440715,7 461277,1
France 344370,0 373205,0 408776,0 427208,5 399942,6 400215,6 415306,9
Hungary 20422,8 19531,1 21406,6 22102,9 18639,7 20783,1 22484,4
Poland 44572,1 53412,3 67124,1 80038,5 65171,1 73204,2 77762,2
România 18930,0 25006,2 37618,4 44637,1 29675,8 32425,9 35797,9
Source: Eurostat.
In 2008 compared to 2005, total EU-27 investments increased by 1.2 times. 
In 2009 over 2008 the increase of investments was only 15.0 %.
Table 3 
Indices of gross capital formation (investment) in Romania compared 
to EU-27 and some EU members (%)
Country 2008/2005 2009/2008 2010/2009 2011/2009
România 235 66 109 121
EU-27 119 86 99 103
Bulgaria 215 73 93 :
Germany 112 90 102 107
France 124 94 100 104
Hungary 108 84 111 120
Poland 179 81 112 119
Source: own calculations based on Eurostat.
From table 3 states we point out the following conclusions:
– in  2005-2008  the  volume  of  investments  at  the  macroeconomic  level 
increased  in  all  analyzed  countries,  Romania  registering  the  largest  increase,               
2.4  times;  substantial  increases  were  also  found  in  other  transition  countries 
(Bulgaria, Poland), but also in developed countries such as France and Germany;
– the crisis has affected most of the investment processes in Romania, 34% 
decrease in 2009 compared to 2008, in other countries examined the decline of 
investments ranged from – 19% (in Poland) to – 6% in France; it can thus be noted 
that  relatively  less  developed  countries  had  suffered  a  stronger  shock  from the 
crisis than developed ones;
– according to forecasts in the years 2010-2011, the investment process will 
be resumed in all EU countries.110
It can be concluded that EU countries with lower levels of economic and 
social development than the average EU level of vulnerability showed significantly 
higher  than  that  of  developed  countries,  and  also  were  characterized  by  the 
development  of  investments  more  variable  from  year  to  year,  which  aimed  at 
finding  supports  for  the  relative  fragility  of  economic  development  in  these 
countries.
III. Causes of the drastic decline in FDI and domestic investment
It is obvious that under stress conditions, investment risk increases due to the 
combined influence of several factors, such as: inflation, exchange rates, interest 
rates, external debt and medium and long term budget deficit.
Table 4
Macroeconomic explanatory factors of investments
The interest 
rate charged by 
credit 
institutions
Period
Loan On 
deposits
Consumer 
prices 
(CPI)
Foreign 
exchange 
market 
rate 
(RON/ 
EUR)
International 
Reserves 
(million)
External 
debt 
(million)
External 
debt 
service 
(mil. 
Euro)
Consolidate 
budget 
balance 
(mil. Euro)
2005
2006
2007
2008
2009
2009  
     T1
     T2
     T3
     T4 
2010 
ian.
febr.
mar.  
21.04
14.83
13.32
15,07
17,30
18,05
17,76
16,73
16,58
16,30
15,60
...
8.34
6.51
6.70
9,55
11,89
14,33
13,45
10,65
9,52
9,13
8,60
...
9.00
6.56
4.84
7,85
5,46
6,77
6,09
4,99
4,56
5,20
4,49
4,20
3.6234
3.5245
3.3373
3,6827
4,2373
4,2662
4,1923
4,2247
4,2659
4,1409
4,1179
4,0879
18259.2
22935.2
27186.8
28269,9
30858,6
27426,4
28689,9
30615,6
30858,6
30623,0
32465,8
34784,2
24641.5
28622.2
38711.2
54761,9
65465,2
52497,3
59020,1
64635,1
65465,2
65839,4
67736,6
...
5306.1
6499.7
8466.0
13056,1
11958,2
2416,9
5679,6
7649,3
11958,2
720,3
2312,8
...
-2268.4
-5651.0
-9448.3
-24654-9
-36400,6
-7925,1
-14383,1
-25563,2
-36400,6
+15,3
-5818,8
...
Source:  National  Institute  of  Statistics,  Ministry  of  Finance,  National  Bank  of 
Romania.
In the period 2008-2010, we mention the following main aspects concerning 
the impact of financial crisis:
– is the first period that the crisis inflation did not register jumps very high 
compared  to  other  periods,  however  the  inflation  level  varying  between  4-5% 
annually is relatively high;
– increase  of  taxes  on  income,  salaries  and  pensions  as  suggested  by 
Romanian officials is likely to generate a price spike in goods and services which 
could affect unfavorably the consumption in the next period;111
– another factor likely to influence the resumption of investments in Romania 
is the relatively high interest rate. As shown in table 4, 2008-2010 interest rate 
credit institutions increased from 15.07% in 2008 to 17.30% in 2009, ending in 
February 2010 with a decrease to 15.60%
*;
– measures to further reduce interest of monetary policy is an instrument to 
encourage investment by bank loans. Unfortunately, the present level of interest 
rates charged by  commercial banks  in Romania  is still  very  high, a substantial 
investment  based  on  the  use  of  bank  loans  on  long-term  not  being  a  reliable 
solution;
– if the interest rate on loans for investments projects will be compared with 
the  rate  of  profits  generated  by  these  investments  continue  banking  system  is 
favored  to  the  detriment  of  real  economic  expansion,  situation  conducive  to  a 
continued  split  between  real  and  nominal  economy  to  scale  unacceptable, 
counterproductive;
– the  relatively  large  gap  of  7-8  per  centage  points  between  active  and 
passive interest practiced by commercial banks does not encourage savings;
– while Romania’s international reserves increased by 2009 to 30.8 billion 
Euro, Romania’s foreign debt on medium and long terms increased to 67.7 billion 
Euro;
– increasing  external  debt  on  medium  and  long  term,  is  another  factor 
hampering investment in Romania, as an important part of development through 
investment financing has to be devoted to foreign debt payment;
– the  budget  deficit  is  another  parameter  with  impact  on  investment, 
especially public ones. Increasing the budget deficit as a proportion of GDP in the 
period under review has seen higher levels since 2009 under pressure to reduce 
budget revenues due to decreased production of goods and services and a relatively 
high level of spending.
Budget  deficit  targets  agreed  with  IMF  Executive  by  Romania,  as  a 
conditionality  of  loan,  impose  budgetary  austerity  which  reduce  the  future 
investment volume.
A  particular  issue  that  deserves  special  consideration  in  terms  of  foreign 
direct investment is aimed at foreign-owned investment profitability. It is generally 
known that foreign-owned firms have higher profitability and higher productivity 
than the Romanian ones.
IV. Some conclusions and final remarks
It is widely recognized both with methodology and practice that the end of 
the crisis in Romania cannot be achieved without a revival of investment process.
Sources of financing medium and long term investments in Romania could 
be improved by increasing absorption capacity of EU structural and cohesion funds 
                                                
* In comparison with the inflation rate of only 5-6 per cent, in this period, the interest 
rate seems to be too “really positive” and detrimental to economic relanunching.112
in  accordance  with  the  provisions  of  Sectoral  Operational  Programmes  in  the 
period 2007-2013.
Currently,  Romania  has  failed  to  receive  EU  payments  of  contributions 
during 2007-April 2010, only a proportion  of 8.76% compared to the total EU 
allocation for Romania.
This rate Medea low absorption capacity was assigned to various operational 
programs as: transport 1.19% Average 9.94% 16.36% Regional, Human Resources 
6.89% 11.23% competitiveness, administrative capacity 2.02%, 2.22% technical 
assistance. Compared to other new EU member countries, Romania is on a very 
low position.
Given the high degree of external openness of the Romanian economy and 
the  essential  share  of  enterprises  with  foreign  direct  investment  (73%  of  total 
Romanian exports, and 62.6% of total imports), the foreign capital in Romania play 
a particularly important role in surpassing the crisis and the economic recovery in 
the coming years. This more so since some companies with foreign capital even 
during  the  crisis  have  been  relatively  high  profit  making.  In  this  regard,  we 
mention  Renault  Dacia  Company  which  in  2009  contributed  with  10%  to  the 
Romanian  exports  and  over  15%  of GDP,  OMV  and  Sidex  Mittal.  In  order  to 
contribute to Romania’s exit from the crisis these foreign companies must reinvest 
in our country a large part of their profits.
At  the  same  time,  we  consider  that  the  revigoration  of  the  domestic 
investments  in  both  public  and  private  sectors  is  one  of  the  most  powerful 
determinants of the economic recovery and growth in parallel with FDI.
REFERENCES
• Bonciu, F., Attracting Foreign Direct Investment and Monitoring, Scientific Publishing 
House, Bucharest, 1997.
• Rusu, M., Foreign Direct Investment, Paideia Publishing House, 2000.
• Stoian, M., Investment management, ASE Publishing House, Bucharest, 2003.
• Vasilescu,  I.,  Romanu,  I.  (Coordinators),  Investment  Dictionary,  Publishing  House 
Lumina Lex, Bucharest, 2003.
• Vasilescu,  I.,  Cicea,  C.,  Gheorghe,  Al.,  Dobrea,  C.,  Efficiency  and  Investment 
Evaluation, EfiCon Press, Bucharest, 2004.
• Voinea,  L.,  Transnational  Corporations  and  Global  Capitalism,  Polirom,  Bucharest, 
2007.
• Zaman, G., Valceanu, G., Investments in Romanian Economy, Education and Economic 
Research, vol. 25, INCE, CIDE, Bucharest, 1998.
• Zaman,  Gh.,  Vasile,  V.,  Theoretic  and  Practical  Approaches  to  the  FDI  Role  and 
Sustainable  Development  of  Romania,  Romanian  Academy  Publishing  House, 
Bucharest, 2005.
• www.eurostat.ro.
• www.bnr.ro.

Attracting Foreign Direct Investment and Monitoring, Scientific Publishing House,

Efficiency and Investment Evaluation,

Foreign Direct Investment,

Theoretic and Practical Approaches to the FDI Role and Sustainable Development of Romania, Romanian Academy Publishing House,

Transnational Corporations and Global Capitalism,

FOREIGN DIRECT INVESTMENTS AND DOMESTIC INVESTMENTS IN ROMANIA IN THE ECONOMIC CRISIS PERIOD

http://www.manecognitiva.ro/jurnals/spiru-haret-economics/2010/vol1/issue1/zaman-geamanu.pdf

FOREIGN DIRECT INVESTMENTS AND DOMESTIC INVESTMENTS IN ROMANIA IN THE ECONOMIC CRISIS PERIOD

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics