The Romanian economy is marked by great micro and macroeconomic instability generated by the transition to a functional market economy. The direct foreign investments play an extremely important role among others in the formation of fixed capital necessarForeign investments, economic development, transnational corporations

Popa Lucia Ramona

English

Research Papers in Economics

236 
 
THE EFFECTS OF FOREIGN INVESTMENTS ON ROMANIAN ECONOMY 
 
Popa Lucia Ramona 
Universitatea ‚”Constantin Brâncoveanu” Pite ti Facultatea Management, Marketing în Afaceri 
Economice  Brăila,  Str.Târgovi tei  nr.  3,  Bl  E2,  Sc.3,  Ap.  53  lucia_ramona10@yahoo.com 
0766237311 
 
The  Romanian  economy  is  marked  by  great  micro  and  macroeconomic  instability  generated  by  the 
transition to a functional market economy. The direct foreign investments play an extremely important role 
among others in the formation of fixed capital necessary for the optimum operation in the framework of 
organizations, retehnologization and innovation by which the production costs are lowered and implicitly 
the improvement of their quality, the stability of balance of trade through the increase of exports, in 
attracting the workforce and also in the improvement of their professional skills. In the same time the FDI 
may have negative effects on the budget in the implementation stage owing to some tax facilities granted, 
to  the  rise  of  imports  through  the  invested  equipments  but  also  the  increase  of  unemployment  by 
reorganization of private companies. 
Keywords:Foreign investments, economic development, transnational corporations 
Cod JEL lucrare: F 39 
 
The effects of foreign investments on Romanian economy 
In the context of the transition from a centralized system to a functional market economy based 
on competition, on the relation between supply and demand, an important role has the flow of 
foreign capital. 
The effect caused by the foreign capital on the economy has two dimensions. On the one hand 
this  plays  a  complementary  role  in  the  context  of  transition,  as  it  supplements  the  limited 
financial resources of the country and reduces the effects generated by the unstrained state of 
economy,  and  on  the  other  hand  they  have  an  important  structural  role  in  overcoming 
inefficiency and difficulties by using modern technological flows, managerial experience and 
economic administration. 
By means of direct foreign investments it can be achieved: 
- making of capital, as FDI contribute to a certain extent to the formation of fixed capital. Thus 
only the FDI flows out of which are subtracted FDI for the acquisition of production means 
already  existing  contribute  to  the  formation  of  fixed  capital  that  is  new  investments, 
reorganization investments, made in order to make some previous acquisitions profitable ( assets 
or corporate stock) and the rise of stock capital in the existing companies. 
Therefore for estimating FDI which contribute to the formation of capital, the value of FDI made 
for acquisitions must be known. 
- technological transfer and innovation activity. The specialists consider that one of the most 
important contribution of the direct foreign investments is represented by technology transfer, a 
special  role  in  this  way  belonging  to  transnational  societies.  They  can  make  the  technology 
transfer  either  through  internalization  (transfer  to  branches)  or  externalization  (franchise, 
licensing,  technical  assistance,  etc).  As  compared  to  externalization,  the  technology 
internalization, by means of FDI is faster and cheaper, assuring in the same time the access to all 
technical assets, organizational company. The problem which arises is the way the access to 
technology  is  made  as  transnational  offer  already  obsolete  technology  and  if  there  are  local 
capabilities to work with the new technology and to get profit. 
The access to technology and advanced knowledge is more important than the invested amount 
and the technology import determines quite often a research activity for adapting them to the 
conditions of the host country. From technological perspective FDI determine the introduction of 
new technology which entails the manufacture and commercialization of a new product or price 237 
 
reduction  of  an already  made  product,  the introduction  and  development  of  new  abilities  of 
working with the new technology in the case of FDI which also imply the technology flows. 
This advantage is very important for the host companies as these make use of depreciated and 
obsolete  technology  which  may  lead  to  the  production  of  low  quality  goods  having  weak 
performances. Since direct investment presupposes the transfer of advanced technology, modern 
production techniques and know-how, the receiving company will register superior performances 
as regard productivity and products quality, which will determine the increase of their export 
competitiveness. Furthermore, the technology infusion may cause local undertaking effects by 
stimulating innovation in organizations, others than those in which the investment was made; 
- the improvement of products quality which are competitive on the external market due to the 
fact that the Romanian products do not tally from qualitative point of view, not corresponding to 
the needs, requirements, changes on the wide world, many Romanian firms lost contracts with 
strategic partners; 
- substantial price and production costs reduction, enlarging the external productivity of local 
producers and of exports; 
- impact on competition, on resources, ownership relations and of economic policy. Sometimes 
the impact may also have a negative influence because transnational corporations use the superior 
market force to annihilate competition. That is why a series of laws as that of bankruptcy, com 
petition, capital market have the role of avoiding such situations; 
- influences on political, social, cultural field through a direct exposition of the economy of the 
host country to the political and economic system of other countries, attitude towards work, 
industrial  relations  and  foreign  workers,  customs  and  behavior  norms  different  from  foreign 
societies; 
- introduction of a new type of management in which the employees are directly interested in the 
good  development  of  the  organization  which  makes  investments  in  the  qualification  and 
specialization of the staff and motivates them professionally and financially. 
- attraction of redundant workforce because of reorganization of large companies, of bankruptcy 
of other societies or from the students attending schools. The impact of FDI on the workforce is 
influenced  by  great  investors  who  generate  new  working  places  and  pay  higher  wages  than 
national companies, engaging young well-trained specialists, who contribute to the increase of 
labor productivity. The creation of new working places represents one of the positive  effects 
generated  by  “greenfield”  type  investments.  The  number  of  new  working  places  created  by 
foreign  investors  represents  the  indicator  of  special  importance  for  the  governments  of  the 
receiving countries but considering the economic effects on a long term, it is more important the 
quality of the created working places than their number. The creation of working places which 
need qualified workforce presupposes transfer of knowledge and the permanent preoccupation 
for  professional  training,  with  favorable  effects  on  the  quality  of  human  factor  in  the  host 
country. 
-the  improvement  of  the  level  of  workforce  training  when  the  foreign  companies  make 
investments in activities which presuppose a raised qualification of the employees, the foreign 
investors will pay an increased and permanent attention to the improvement of the staff of the 
organization receiving them. Furthermore, it may appear the phenomenon of knowledge diffusion 
acquired like that, if the employees of such companies direct to other sectors or start developing 
activities on their own. 
-decentralization of activities and the development of market economy in which the competition 
is  regarded  as  a  positive  factor  of  companies  in  attracting  customers  with  quality  goods  at 
competitive prices; 
- the use of external market segments proper to those who make investments, balancing imports 
with exports but also the commercial deficit. 238 
 
-the  increase  of  local  firm  efficiency  and  competitiveness  that  will  be  able  to  improve 
qualitatively the management level and that of production, and if they became the suppliers of 
foreign  investors  companies,  they  have  access  to  new  technologies  or  diversify  their  own 
production to face the competition caused by the presence of new economic agents on market. 
- export promotion, the improvement of foreign trade structure. In a first stage of transnational 
expansion, the commercial balance of the host country might be negative because of the massive 
imports made by the branches- machines, equipments, raw materials, but once the export started, 
the balance also improves. 
-decrease of the loan values to which Romania must resort to balance the budget deficit and the 
commercial  one  by  adding  to  the  GDP  of  the  host  county  and  by  supplying  supplementary 
income to the sate budget by taxes and fees; 
- the appreciation of the exchange rate and of payment balance. In case of FDI it must be made a 
comparison between the entrance flow of the project and the present value of the future income 
flows, using as an updating factor the rate of interest on the international market from which the 
respective country may borrow funds. 
Usually the future flows updated are higher than the invested capital, because the rate of return in 
the developing countries is lower than the rate of interest on the international market accessible to 
these countries. Furthermore by means of FDI, currency is saved by substituting imports and also 
takes place the appreciation of the exchange rate. 
- the support of privatization and restructuring process. In case of large public companies offered 
to  be  sold,  when  the  local  companies  do  not  have  enough  funds  for  their  acquisition  and 
becoming profitable, FDI are the only solution. By privatization they benefit from financial flow, 
technology, know-how and from the quality of local workforce. Reorganization can be attained 
on three levels: 
1. intersectorial restructure starting from the primary sector, passing from industry to services, the 
tendency being that of raising importance of the tertiary sector; 
2. intrasectorial restructure from industries having a poor productivity, intensive in workforce, to 
intensive industries in knowledge and technology which register increase productivity. 
3. company restructuring by utilizing a modern technology and by achieving some great value 
added activities; 
-  international  economic  integration,  as  it  determines  a  better  connection  to  international 
economy and an amplification of economic growth owing to a more efficient work division. 
The  role  of  foreign  direct  investments  is  to  produce  a  sustainable  development  within  the 
economy of the host country through the contributions brought to the increase of the level of 
work force engagement, of the standard of living and of GDP. 
On the other hand the investments can generate negative effects which are sometimes inherent 
and generally become manifest on a short term, their appearance being closely related to the 
investment implementation or their becoming efficient: 
- negative impact on the budget owed, on the one hand, to tax facilities given to foreign investors 
by the incentive policy, which has as an immediate effect the decrease of budgetary income. In 
the same time the increase of the number of the unemployed as a result of privatization and 
reorganization of public companies generate supplementary budget expenses, as the redundant 
workforce is not immediately absorbed by developing activities. On the long term, once the 
investments become mature, an increase of the state budget income can be registered owing to 
the taxes and fees paid by the newly set-up companies and their employees. It is to be noted that 
in the maturity stage of the investment, it is likely to appear unfavorable effects in case in which 
the transnational companies use specific mechanisms, especially that of transfer prices, with the 
aim to reduce the taxation burden by artificial decrease of fees and taxes owed to the host state 
budget. 239 
 
- increase of imports, negatively reflected on the balance of trade is caused by the import of 
machines and equipments financed by the foreign investor, without which the implementation of 
the investment could not be possible. When the retechnologisation activity becomes evident in 
the growth of productivity and competitiveness, a decrease of the trade deficit can be registered 
especially when the foreign investor is export oriented or substitution of imports. 
Negative effects on the payment balance appear when the foreign companies make loans abroad 
and then concentrate on a rapid recovery of the investment by using some techniques of tax 
evasion (transfer prices on high royalties). 
- the increase of unemployment because of private companies reorganization with the aim of a 
rapid  activity  efficiency.  A  reduction  of  the  working  places  in  private  companies  can  be 
registered  but  this  disadvantage  is  insignificant  in  case  in  which  the  restructured  companies 
benefit from the raise of efficiency and competitiveness, a situation in which, through training 
effects,  may  generate  new  working  places  through  developing  new  activities  which  are  in 
increase or decrease. 
Beside there negative effects inherent on a short term, FDI may have a negative impact on a long 
term, especially in those countries which do not have a clear and coherent economic policy. For 
example, in an economy in which a number of transnational societies made investments it is 
unlikely  that  the  optimum  of  each  should  coincide  with  the  optimum  of  the  host  country 
economy,  and,  especially  that  the  result  of  these  decisions  taken  by  societies  from  different 
domains should correspond to the optimum of aggregate of host country economy. In the lack of 
a clear economic policy even if all the players are reliable, the country in dispute may confront 
with economic unbalance owed to actions of foreign investors. When also the foreign investors 
held the monopol, in most cases they generate more negative social and economic effects than 
those registered in the situation of state monopol, but when the monopol position is competed by 
the existence of protectionist measures, then the negative effects on the social, economic level on 
the environment are amplified. 
The direct foreign investment have become the most important external finance source for the 
world  states,  no  matter  the  level  of  development,  because  unlike  the  bank  borrowings  and 
portfolio of investments are affected in a smaller extent by the financial crisis.  
Romania’s  economy  needs  a  substantial  volume  of  foreign  investments  in  order  to  balance 
economy and reduce the differences it has as compared to most European states.  
 
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THE EFFECTS OF FOREIGN INVESTMENTS ON ROMANIAN ECONOMY

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THE EFFECTS OF FOREIGN INVESTMENTS ON ROMANIAN ECONOMY

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