Thanks to a level of growth in foreign investment, the gap is narrowing between Romania and other East European countries like the Czech Republic, Poland and Hungary, countries normally considered the preferred choice of foreign investors. In the last years, Romania has become a more appealing target for an increasing number of foreign investors. After its accession in NATO in 2004 and in European Union in 2007, Romania positioned itself very firmly within the Euro - Atlantic zone, with all political, economical and military consequences deriving from it.foreign direct investment, economic growth, economic integration

Ciobanu, George

English

Research Papers in Economics

Romania and Foreign Direct Investment 
 
Lect. Phd. Ciobanu George 
University of Craiova 
Faculty of Economics and Business Administration 
Craiova, Romania 
 
 
 
Abstract 
 
Thanks to a level of growth in foreign investment, the gap is narrowing between 
Romania  and  other  East  European  countries  like  the  Czech  Republic,  Poland  and 
Hungary, countries normally considered the preferred choice of foreign investors. In the 
last years, Romania has become a more appealing target for an increasing number of 
foreign investors. After its accession in NATO in 2004 and in European Union in 2007, 
Romania positioned itself very firmly within the Euro - Atlantic zone, with all political, 
economical and military consequences deriving from it.  
 
Keywords: foreign direct investment, economic growth, economic integration 
 
JEL: F15, F21, F22 
 
For a better integration within the international economy, the restructuring and 
reform process of the Romanian economy requires significant foreign investment flows 
driven by the increasingly global character of production processes. This aspect, together 
with the already global character of trade, requires a new approach to the identification 
and  distribution  of  resources.  For  all  countries,  a  component  of  the  development 
strategies and an essential instrument in the development of a strong and dynamic private 
sector is to attract foreign direct investment (FDI). 
The  FDI  facilitates  the  indirect  access  to  foreign  markets  through  the 
complementary  effect  of  the  related  technology  and  know-how  implementation. 
According to a survey by UNCTAD and data from national central banks, Romania has 
attracted most of the FDI in the South East Europe region. However, countries in Central 
Europe  that  have  implemented  faster  reforms  and  have  created  earlier  a  stimulating 
investment climate, such as Czech Republic, Poland and Hungary, have absorbed about 
80% of the total FDI in the wider CEE area. 
 
Evolution of the foreign direct investment in Romania 
 
The  year 2006 was the sixth  year of sustained economic  growth, after a long 
period  of  hesitating  transition  towards  the  market  economy.  The  GDP  registered  a 
significant growth of 7.7% in 2006, a better performance compared to the 4.1% growth in 
2005.  This  positioned  the  country  on  a  top  place  among  EU  countries  in  terms  of 
economic performance. The inflation significantly decreased from 9.0% in 2005 to 6.6% at the end of 2006, and the monetary policy of the National Bank will lead to reaching 
mid-single digit inflation rates by 2007 and 2008. 
The economic growth was sustained, among others, by the increase in foreign 
direct investment. According to the statistics provided by the National Trade Registry 
Office,  the  total  stock  of  FDI  at  the  end  of  2006  was  USD  22.7  billion  (EUR  17.4 
billion). 
Having in view that FDI in a country is facilitated, inter alia, by the development 
of  the  infrastructure,  the  efficiency  of  administration,  and  by  an  adequate  legislative 
system, the  International Financial  Institutions are  actively supporting  Romania in its 
efforts to meet these criteria, and surpass the difficulties of the transition. 
  Romania  is  actively  integrated  into  the  European  economical  environment,  as 
reflected  by  the  distribution  of  FDI  per  countries  of  origin.  The  top  ten  countries’ 
classification on foreign capital registered between December 1989 and November 2007 
esented as follows: 
 
No.  Country  Value of the registered capital 
brought in foreign currency 
(million EUR) 
 
% in total 
capital subscribed 
in foreign currency 
 
1  Netherland  3,208  18,41 
2  Austria  2,194  12,60 
3  Germany  1,783  10,23 
4  France  1.747  10,03 
5  Cyprus  0,870  4,99 
6  Italy  0,808  4,64 
7  U.S.A.  0,662  3,80 
8  Great Britain  0,608  3,49 
9  Greece  0,571  3,28 
10  Dutch Antiles  0,521  2,99 
TOTAL  registered  capital  in 
foreign  currency  for  top  10 
countries 
12,972  74,46 
Source: National Trade Registry Office 
 
The origin of FDI reveals a strong integration of the Romanian economy into the 
European  economy:  97.9%  of  total  invested  capital  in  November  2007  comes  from 
Europe, while, North America accounts 0.3% and Asia 1.8%.  
The majority of FDI was heavily concentrated in Bucharest with over half of the 
registered equity contributions, while the smallest inflow of FDI was registered in the 
region of Moldova (Eastern Romania). 
Among  the  factors  that  are  deemed  to  support  higher  FDI  in  the  future  the 
following are the most important: 
• Romania is a politically and socially stable country, firmly engaged towards EU 
accession; 
• Romania is Eueopean Union’s member and has already gained full membership 
of NATO; 
• Pro-reformist government, determined to continue privatization, restructuring, 
and administration reform; • Romania represents the second largest market in the CEE region; 
• The privatization program still includes some very interesting companies; 
• The crucial geographical positioning of the country, a gateway between East and 
West of Europe; 
• The commitment of investment funds present in the country to develop their 
business and the association of the government with international financial institutions, 
such as IMF, EBRD, World Bank, and the EU Commission; 
• The high qualification of labor force and its low costs, below the levels of other 
countries in the CEE region; 
• Existence of important natural resources and proximity to energy suppliers; 
• As the market is growing, there are increasing business opportunities, while the 
entry barriers remain low. 
Most of the investors present in CE countries were initially attracted by the low 
labor  and  production  costs,  and  by  fiscal  incentives.  As  the  investment  increased, 
however, so did the living standards, getting very close to EU standards. After these 
countries joined EU at the beginning of May 2004, the fiscal incentives became no longer 
available for the investors. 
Thus, this initial low cost advantage is becoming less and less decisive. Already, 
labor  intensive  industries,  such  as  manufacturing,  and  textiles  have  invested  or  are 
looking for investment opportunities in countries such as Romania, Bulgaria or Ukraine. 
However,  these  countries  have  still  to  make  significant  changes  in  the  business 
environment, as investors are beginning to stress in their investment decision factors such 
as availability of local raw materials and quality of infrastructure. 
Romania is ready to accommodate a higher inflow of FDI in industries such as 
agriculture,  construction  materials,  automotive  industry,  oil  and  gas,  petrochemical, 
energy, metallurgy, telecommunications, transportation, air transport, railways, shipping 
and  shipbuilding,  food  industry,  retail,  tourism,  IT,  financial  sector,  and  distribution. 
Among these sectors, the most appealing for foreign investors are automotive, software, 
electronics, telecom, pharmaceutical, and chemical industries. 
 
References: 
[1] Antras, P., Firms, Contracts and Trade Structure, Quarterly Journal of Economics, 
2003 
[2]  Helpman,  E.,  A  Simple  Theory  of  International  Trade  with  Multinational 
Corporations, Journal of Political Economy, 1984 
[3] Markusen, J., Multinational Firms and the Theory of International Trade, Cambridge, 
2002 
[4]  Samuelson,  P.,  Where  Ricardo  and  Mill  Rebut  and  Confirm  Arguments  of  
Mainstream Economists Supporting  Globalization, Journal of Economic Perspectives, 
2004 
[5] Yi, K., Can Vertical Specialization Explain the Growth of World Trade?,  Journal of 
Political Economy, 2003 
 
 

A Simple Theory of International Trade with Multinational Corporations,

Romania and foreign direct investment

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