Journal number 1 ∘ Vakhtang Charaia ∘
FDI MOTIVATION AND BENEFITS FOR GEORGIA[1]

Summary

 Article is devoted to the FDI motivations of foreign investors and the benefits brought by them. Based on the research goals study was based on well known Scott-Kennel’s model of local industry upgrading, which draws on the Investment Development Path (IDP) and OLI paradigm. The model applies the framework of the IDP at the micro level by proposing a typical process of local asset augmentation, as well as the contribution of inward FDI to industrial development as a continuum from enclave to full integration. Research was done based on deep interviews with the top management of companies listed in top 200 FDI making companies in Georgia.

Keywords: Investments, MNE, FDI Motivations, Georgian Economy. 

INTRODUCTION

Attractive investment climate is a key instrument for countries economic development, especially in developing and poor countries which are not able to develop their economy with the local resources. However, not always foreign investments are unilaterally leading to prosperity of local economies as it is expected. Employment, technologies, tax generation, import substitution and competition, these are the most important aspects of FDIs, which are expected to be brought by foreign companies, as well as development and support of local businesses, including local industry upgrading [Scott-Kennel, 1998]. One of the most important aspects is also competitive salary generation [Krugman, 2008: 103-137].

During last 20 years FDIs has played a tremendous role in the process of Georgian economic transformation. However, many questions still exist about what are the motivations and what is the impact of those FDIs for the host economy? Are FDIs promoting development and modernization of local industries and at what extent? How deeply they are integrated into the different fields of Georgian economy? Or on the other hand are the rights of those investors protected [Sachs, Johnson, 2017] and what is the real case for business making in Georgia? Is there a manipulation of interests, from the business side or is there manipulation with businesses from the government side? 

Motivations and Benefits of FDI

At the best possible scenario, investments of those Multinational Enterprises (MNEs) and even individual investments can significantly contribute to sustainable and inclusive economic development of the host country [OECD, 2010: 10]. Especially in developing ones, it is up to the local governments to build a healthy business environment through responsible business practices.

Unlikely the past, in the beginning of XXI century international business environment has significantly modernized, especially in the last years and faced real structural changes worldwide, as well as in Georgia. Different states in all continents started to open their markets, businesses embraced new opportunities, FDIs are welcomed and supported (until the particular government has intention to control some sectors of the economy). However do they really bring the benefits expected by host economies? Are businesses manipulating with their position? [Akerlof, 2015]. That is a question which is more important than just the number and amount of foreign investments.

Foreign Direct Investments by MNEs, as well as investments by smaller organization, through job creation, human capital development, efficient capital distribution, knowledge, technology, skills transfers and many other – have significantly contributed to global development and economic growth of both home and host countries [Corrado, 2006: 331-360], though increasing global economy and bringing closer geographical proximity for the most distant places.

Dividing investments by local market seeking and efficiency seeking ones is one of the most important aspects of FDI evaluation [dunning, 1993], since there is a huge difference in their motivations and benefits the host economy can get. One can say that Georgia has already proved its top positions in different aspects and foreign investors should be looking after Georgia not just for cheap labor force and availability of local natural resources, but for the possibility of transparent business making process with stable economic and political environment. However, let’s see what the results are showing.

MNE motivations and the driving force could be different in different countries, as well as they could be different even in the separate sectors of the same economy. Relatively higher added value production (such as: electronics and engineering) is characterized by geographic concentration, proximity to the customers and high quality control demand. These fields are attracting Efficiency oriented FDIs. While, areas as: textile, food processing and other relatively low-tech service oriented fields.

FDI’s has the possibility to improve the competitiveness of the host economy, but its impacts are different based on local countries potential, such as: a) In host economies with unfavourable characteristics, such as lower GDP per capita or low educational skills, higher total FDI stocks tend to be associated with lower subsequent growth. Generally it seems to be much easier to attract FDI than to derive macroeconomic benefits from FDI; b) Countries with highly qualified human recourses will benefit more from transmitting MNE’s business related modern technologies; c) transfer of technologies is widely depended on the institutional development of the host economy.

Particular factors are closely related to the FDI motivations and have different growth effects on the host economy [Jensen, 2009]. For instance, Market-Seeking FDI is providing the host economy with technological assistance and staff trainings. Also modern technologies and import of intermediate products provide additional benefits for the local economy. Finally, rising competitiveness is pushing local firms to innovation. Otherwise the “crowed out” effect is expected, since foreign firms are highly competitive. Market-Seeking FDIs oriented on concurring local markets are less involved in export-oriented activities. In a long run it could result a crisis for balance of payments, since such FDIs cannot provide inflow of financial assets from the export-oriented activities. It should be interesting to mention that share of companies created with the foreign investments in total exports is equal to 66 percent, which is impressive and shows that foreign companies are playing important role not only in exports but the whole macroeconomic stability of the country (see table). These results could be further improved taking into a consideration the fact of free trade possibility with EU [Charaia, 2013: 95-110], which can bring relief not only for trade but also for new investments; the same goes for free trade regime with china [Papava, Charaia, 2017a: 122-137].

Source: GEOSTAT and Authors Own Calculations 

Before we go to more details, let’s have a look on Georgia and its progress for the last period. Georgia is the aspiring economic center of the Caucasus. It boasts years of robust economic growth, liberal tax and labor legislation, business friendly practices, low corruption, high security and openness to foreign investment [Deloitte, 2016]. Georgia signed the association agreement with the EU in 2014 [EU/Georgia, 2014: 1] and gets visa free regime starting from the first half of 2017 year [Secrieru, 2017: 2]. Georgia has state and private investment funds that welcome foreign investments to implement joint large scale projects. According to 2018 report The World Bank rated Georgia as the 9^th easiest place in the world for doing business [WB, 2018: 4] and also named it as a Top Global Improver [WB, 2016].

Heritage Foundation ranked Georgia 13^th (among 180 countries) for its economic freedom in 2017 year’s country ranking [Tradingeconomics, 2016]. Standard and Poor and Fitch Ratings has affirmed Georgia's Long-Term Foreign and Local Currency Issuer Default Ratings at 'BB-' with Stable Outlooks, for 2017 year [RIA, 2016: 45]. According to the Global Competitiveness Index Georgia is one of the best performers for the last decade. In addition to simplified tax code with only 5 taxes with one of the lowest rates in the world, the so called Estonian Model of Income Tax was introduced since January first 2017, thus corporate income tax is paid only in case of profit sharing. If a company reinvests its income no income tax is paid. According to the Frazer Institute’s Economic Freedom of the World 2016 Report, Georgia got 8th place [EFW, 2016].

These and many other achievements have contributed to Georgia’s leap to a dimension drastically different from that of the 1990s. Although, some indicators suggest that the problem also exists in Georgia mainly related to the conflict teritories [Charaia, 2016a: 1] which are not only hindering the economy, but also costs billions of USD [Charaia, 2016b: 46-51]. However, orientation is taken toward the the progress. Nevertheless the questions still exists, if it is enough for foreing investors to have motivations for investing in Georgia [Charaia, 2014a], not only for the sake of their own business, but for the sake of host country as well [Charaia, 2014b: 425-428].

 Case Study Results for Georgia

Research done with involvement of companies from the list of top 200 companies created with FDIs, shows some expectable, as well as unexpected results challenging Georgian economy and its progress. Here we offer some interesting details of the research.

The role of international rankings for investment. As we already read foregin investors should be proud of investing in such a progresive country as Georgia is, investors should value the transparency and openness of this economy. However, according to our research more then half of the top foreign investor company’s top managers say that they did not realy invested in this country because of just interesting international indexes, only 40 percent of respondents declare that - yes international ranking were inportant while concidering Georgia as a country for investment.

Three main problems of doing business in Georgia. Different answers where offered by different business representatives, but what was mutual problem for the 90% of respondents are related to the – lack of qualified labor force, expensive bank loans and instability of exchange rate. Expensive loans usually makes perspectives of any business dull [Ocampo, Stiglitz, 2008], but it should be noted that FDI companies we questioned are able to attract fund from the cheaper sources from abroad as well. Exchange rate instability ruins down all the progress business and individuals have achieved [Anguridze, Charaia, Doghonadze, 2015]. Also, it should be mentioned that the roots of exchange rate problem, are closely related to the policy of inflation targeting by the National Bank of Georgia  [Charaia, Papava, 2017b: 96-103], which (NBG) do not consider the exchange as an important element of financial stability of the country  [Charaia, Papava, 2017c].

Three main advantages of doing business in Georgia. As in case of main problems, main advantages of doing business in Georgia very based on business type, however main achievements of the country are equally important and appreciated by 9 investor out of ten and this factors are: Low criminal and corruption rate, transparency and easiness of cooperation with officials, Estonian model of income distribution which allows investors to reinvest their income without being taxed.

FDI policy influence on the way firms operates in Georgia. Based on international experience different countries tries to protect or in other words try to prevent foreign companies from investing in certain legal areas of business making, such as Telecommunications in France, Medicine in Japan, Oil industry in United Arab Emirates and other, but Georgia is one of the unique countries in the world where you don’t have any restrictions for investment in any legal industry [Lashkhi, Charaia, 2017]. Therefore foreign investors are more than happy with the local governments FDI policy, which do not make problems for the businesses as it can be seen in different fields in different countries [Crandall, 1981].

Parent company/foreign shareholder(s) main reason for operating in Georgia. Despite the fact that Georgia is on the crossroad of interests of global players and different companies could be possibly aiming to Georgia because of geostrategic interests, research shows that one and only motivation is - profit making (at least based on their declarations).

Innovation, any service, product, process technology, or any aspect of management considered to be a new development in the industry. According to Georgian statistics office country is receiving an outstanding amount of FDIs year after year. Only in last three years of 2015-2017 Georgia received around 5 billion of foreign direct investments, which is approximately the same amount of money country gets from its exports, excluding re-export. But no single company declared that they have invented any innovation to the country. In other words FDIs do not really help Georgian economy to progress, but on the other hand are providing foreign investors with the platform for operation and profit making. Consequently, Georgia still remains 118^th place in the world according to the Global Competitiveness report 2018 and that makes a negative look for innovation oriented companies to invest in Georgia [Charaia, 2017: 697-700].

Level of importance for Georgia, of those companies invested. Taking into consideration that FDI companies in Georgia do not participate in any kind of innovation implementation in Georgia they still declare that their presence on the market is of Major Importance for the country, because they bring: names, contacts, competition and confidence to the market.

Possibility of Georgian firms to supply standard and/or specialized inputs required by FDI firms. All companies with FDI are using services and products offered on the local market, however only few of them are satisfied with the quality, time frame and the price Georgian companies are offering for their standard input. On the other hand there almost no or in very rear cases only one supplier of specialized input for different fields of business, what makes it less attractive, because of high prices and low quality combination. Companies operating in Georgia willing to use local IT solutions for their businesses say that it is rather very expensive or very limited and undiversified. Globalization in the case is a problem solving instrument [Stiglitz, 2002], because companies are pushed to request such services from abroad.

Investment results with the scale from 1 to 5 with five the best. Study show that foreign investors are quite satisfied with their investments and say that they would evaluate their investment with 4 and 5 points, none of them said less. Taking into account the turbulence on exchange market in Georgia for last year’s this result is more than positive.

Number of foreign workers at the company. Unexpectedly low number of foreign employees has been declared to work at top companies with FDIs showing less than 5 percent of the total number of workers. Results given by selected companies’ shows absolutely opposite picture in comparison to FDI based companies out of top 200, where most of the workforce is imported from the investment making country [Charaia, 2016c: 57-66].

Conclusion

The goal of investors in Georgia is usually limited to profit making and are therefore have not yet transformed the country to another level, which would mean technological upgrade of Georgia, to obtain ownership advantage and to spread it throughout the world.

Study show that in most cases international progress of Georgia in terms of rankings are of less importance for foreign investors, while they do more often care about the freedom of doing business in Georgia.

There was no one company in last three years who has invented any innovation in Georgia. Consequently, country still remains 118^th place for Innovation, according to the Global Competitiveness Index 2018.

90% of businesses say that the lack of qualified labor force, expensive bank loans and instability of exchange rate is the most important problem for business making in Georgia.

Low criminal and corruption rate, transparency and innovative income distribution model are among the key aspects of easiness of doing business in Georgia.

FDI policy in Georgia is pro business oriented, motivations of foreign investment based companies are profit oriented and the benefit Georgia gets from this activity is still limited.

References 

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