REGIONAL COOPERATION AND ECONOMIC INTEGRATION

FDI FLOWS IN SOUTH EASTERN EUROPE
- Market & Location Advantage: Romania is one of the largest markets in Central and
Eastern Europe (ranking 7th, with over 21 million inhabitants); a gateway between East
and West of Europe; EU market gateway (access to about 500 million consumers);
- Resource Advantage such as: highly skilled labor force at competitive prices (solid
knowledge in foreign languages, technology, IT, engineering, etc); existence of important
natural resources (surface and underground waters, fertile agricultural land, oil and gas)
and proximity to energy suppliers; high potential for tourism;
- Political Advantage: stability factor in the Area - NATO membership; stability Guarantee
in South Eastern Europe; EU membership;
- International relation advantage, such as: bilateral agreements between Romania and
other countries on investments promotion and protection; free trade agreements with EU,
EFTA and CEFTA countries; the association of the government with international financial
institutions, such as IMF, EBRD, World Bank and the EU Commission;
- Economical Advantage which consist on sustainable economic growth (at least till 2008);
increasing interest on behalf of Foreign Investors – leader destination for FDI in the region;
sound fiscal policy (16% flat tax);
- Social Advantage consisting of: agreement between Government and major unions; no
major union movements; labor relations regulated by the Romanian Labor Code;
- Legislative Advantage such as: similar legal provisions as in UE (Acquis Communautaire
implementation); fiscal policy regulated by the Fiscal Code.
So, fuelled by large privatization programs, foreign investors were attracted by Romania’s
relatively low unit labor cost, proximity to the euro area, sound macroeconomic
fundamentals (successful disinflation, high growth) and its increasing domestic market
potential. Also, an important moment was the integration of Romania to the European
Union at 1 st January 2007.
But in analyzing the FDI in Romania should be taken into consideration the recent changes
in the Romanian economic environment and also the international level ones.
At the national level, the boom of privatization-led FDI, which represented about half of
the FDI inflows in recent years, is now largely over. Furthermore, Romania’s low-cost
advantage is gradually eroding in certain sectors. While hourly labor costs remain low, even
by Eastern European standards, a tightening labor market and skill shortages, partly due to
large outward migration, have contributed to significant increases in private sector wages.
Another growing area of concern is that wage developments have outstripped productivity
growth in the last years. This has led to a sharp appreciation of the real effective exchange
rate, affecting Romania’s international competitiveness.
With gradually rising costs and increasing competition from Far East countries, substantial
differences emerge among products, even within the same sector. Where standard machinery
and the availability of a low/medium qualified labor force are required, competitive
pressures are taking shape and companies are starting to look at other attractive markets
with lower production costs. The fact that in these sectors the presence of foreign companies
is structured very much on contract-work systems represents one of the main weaknesses
in the country, as exit costs for a foreign investor or foreign contractor are extremely low.
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