Geographical dynamics of FDI in Romania

After the change of its political and economic system in 1989, Romania opened its market to foreign investment. However, for most of the 1990s annual foreign direct investment (FDI) flows remained rather modest. They started to increase significantly only after 2003.;This study has several objectives. Firstly, it examines the major characteristics of FDI in Romania (size, mode of entry and industry preference). Secondly, it analyzes the evolution of FDI flows since 1990 in the context of economic and political transition. Thirdly, it analyzes the spatial distribution of FDI within Romania. Fourthly, it examines the geographical origins of foreign investors and the different patterns of investment they generate in Romania. Fifthly, it investigates the main determinants of FDI. And, sixthly, it examines the impact of FDI on the local and national economies.;In order to answer these questions, the study uses a combination of research methods that include archival research, questionnaires and interviews. The study has found that foreign investments in Romania are polarized into very small and large enterprises, a common characteristic for all transition countries. Almost 40 percent of all foreign-owned companies are in the wholesale and retail industries, but investments in the manufacturing sector represent about 50 percent of the FDI stock.;The study also found that FDI is very unevenly distributed within Romania. More than half of all foreign-owned companies and over 50 percent of the FDI stock is concentrated in Bucharest, the capital of Romania. Other regions preferred by foreign investors are the Northwest, the West and the Center while the Southwest and Northeast have attracted the least foreign investment. Two important conclusions could be derived from these findings. Firstly, physical and cultural distance remain important in influencing the geographical dynamics of FDI. Secondly, those regions that were already more developed have attracted more FDI and/or more foreign investors. This has contributed significantly to the widening development gap between regions. Characteristics and distribution pattern of FDI are also influenced by the investors nationalities, reflecting characteristics from the economic, political, cultural and social environment of their home countries.;In order to understand the main determinants and impact of FDI in Romania, a questionnaire was sent to foreign investors in two industries: the automotive industry and the textile, clothing and footwear (TCF) industry. The questionnaire was followed up by in-depth interviews. The results of this analysis show that, in these two industries, low operating costs and the presence of highly educated and skilled labor are the most important factors in attracting FDI. Proximity to the European Union is also considered important by foreign investors in both industries. On the other hand, the size, strength and potential of the Romanian market shows only limited importance for foreign investors confirming the efficiency-seeking rather than market-seeking character of foreign investments in these two sectors. The impact of foreign automotive and TCF companies on local economies is in general limited to providing employment. These foreign-owned companies have developed limited forward and backward linkages with Romanian companies.;The findings of this research show many similarities to results from other studies in Central and Eastern Europe but also some major differences. The dynamics of FDI in Romania and other Central and Eastern European countries illustrate the importance of history (path dependence). Characteristics and patterns of FDI in Central and Eastern Europe during the transition years were determined by the different legacies of state socialism together with specific relations between state, economy and society. Another important conclusion of this study is that, in the absence of significant political and economic reforms, FDI is not a solution for jump-starting economic development in a transition country. Rather than foreign investments determining economic transformation, political and economic transformation motivates foreign companies to invest in that country.;In the future, the study would benefit considerably from broadening the scope of the research to include other economic sectors. Also, on January 1, 2007, Romania joined the European Union as its 27th member state. Another study may be necessary in the near future to capture changes in the characteristics and patterns of FDI in Romania following accession to the European Union.