Contents

Introduction21.Legal framework for Foreign Direct Investment31.1Foreign Direct Investment Background (General aspects)31.2Legislative framework41.2.1 General principles41.2.2 Compliance Conditions51.2.3 Rules and governmental ordinances on FDI62. The influence of foreign direct investment on economic growth in Romania82.1. Introduction82.2 Types and opinions about FDI82.3. Dynamics of FDI and GDP in Romania during 2003-2011103. Investment of Orange Group in Romania133.1 Orange Group Romania: general aspects133.2 Financial information13Conclusion15References16

Introduction

Nowadays, when technology is more advanced and the need for expansion always increases, when businesses thrive, when territorial boundaries are no longer an obstacle, we can speak of a growing increase in foreign investment. They became, in time, an important factor in the economic growth of both the receiving state and the state investor.In this paper I will present the issue of Foreign Direct Investment in Romania. In the first chapter I will talk about the FDI legislation of all obligations and rights that must be respected. In the second chapter I will treat the problem, from economic point of view, and I will present the influence of FDI on economic growth in Romania. In the third chapter I will bring the Orange Romania SA as an example and I will present briefly some data on the evolution of investment in Romania.Now, I will briefly outline the FDI as being the action in which a company or individual from one nation invests in assets or ownership stakes of a company based in another nation. As increased globalization in business has occurred, it's become very common for big companies to branch out and invest money in companies located in other countries. These companies may be opening up new manufacturing plants and attracted to cheaper labor, production and fewer taxes in another country. They may make a foreign investment in another firm outside their country because the firm being purchased has specific technology, products, or access to additional customers that the purchasing firm wants. Overall, foreign investment in a country is a good sign that often leads to growth of jobs and income. As more foreign investment comes into a country it can lead to even greater investments because others see the country as economically stable.

1. Legal framework for Foreign Direct Investment

1.1 Foreign Direct Investment Background (General aspects)

In broad terms, foreign investments are flows of capital from one nation to another in exchange for significant ownership stakes in domestic companies or other domestic assets. Typically, foreign investment denotes that foreigners take a somewhat active role in management as a part of their investment. Foreign investment typically works both ways, especially between countries of relatively equal economic stature. The present economic situation from the medium developed countries requires attracting as many funds as possible from different sources: grants provided by international and European organizations and programs, structural funds, foreign loans, foreign investment.Foreign investments are the most popular because it is a reliable source of growth in the medium and long term. Investors know this acute need of foreign capital that developing countries display by attempts to attract them.Foreign investments meet the following forms: foreign portfolio investments involve buying securities on international capital markets, and do not target participation in the management of the issuing companies, but getting the win by purchasing shares, dividend or speculative activities ( favorable differences between the sale price and the purchaseprice ); they are made especially by individuals or institutions they involve obtaining short-term profit foreign direct investments- represent expenditures for the acquisition or creation of economic units, upgrading and expanding existing ones in order to obtain future income by foreign investors. They are buying power to exercise control over the management of the investment, which requires management skills, techniques and knowledge of marketing. They are made especially for individuals or companies They are considering incomes from medium or long termRegarding foreign direct investment, it is a long-term investment relationship between a resident entity and a non-resident entity, which implies that the investor exerts a significant influence in the management of the investee company.

1.2 Legislative framework Starting with 1991, the Romanian legislation had in view to attract foreign capital in the economy. Therefore, in order to stimulate the interest of foreign and local investors for developing new investment projects in Romania, the legal framework was changed several times, aiming to identify the most suitable and efficient incentives to be granted to investors for stimulating the development of the economy. The changes in the specific rules are representative for a dynamic and flexible legal frame which adapts easily to the market demands and to the current needs of the business environment. The maximum amount of incentives granted by the Romanian law for each investment project should not exceed the maximum allowed state financial aid, in accordance with the EU provisions on state financial aid. Foreign investors have to obey national rules. Non-resident investors have the same rights as any resident investor. There is no limit on the foreign share in companies; a foreign investor may establish or acquire a 100 percent enterprise in Romania. The capital of a foreign investor can take many forms, including foreign currency, equipment, services, rights of intellectual property, know-how and management expertise and the proceeds and profits resulting from other businesses in Romania.Romanian rules also provide investment guarantees against measures of ownership appropriation by state and expropriation, and other similar measures.1.2.1 General principlesAt this time specific rules are based upon general principles, according to which any investor, either foreign or local, benefits from: freedom in deciding on the investment forms and methods; possibility of investing in any field and under any juridical form provided by law; equal treatment - fair, equal and non-discrimination- for Romanian or foreign investors, resident or non-resident in Romania; guarantees against ownership appropriation by state, expropriation or any other measures with similar effect; the right to benefit from customs and fiscal incentives set forth by law; the right to obtain assistance in filing administrative formalities; the right to own fixed and current assets, except for land which may be acquired by Romanian natural or legal persons; the right to elect the competent court or arbitration authorities to settle potential investment-related disputes.1.2.2 Compliance ConditionsIn order to enjoy the incentives provided by Law, investments have to meet the following conditions: investments should to be done after law has come into force, by natural or legal persons, both subjected to private law the contribution to direct investments with significant impact on economy consists only of liquidities in lei or convertible foreign currency investments should not infringe the environmental protection rules investments should not infringe the interests of security and national defense in Romania investment should not harm public order, health or morality.In order to benefit from the incentives provided by law, investors should make a registration of their investment project, only from the statistical point of view at the corresponding Regional Development Agency.1.2.3 Rules and governmental ordinances on FDIThe legal framework for foreign investments in Romania is represented by the following rules and governmental ordinances:A. Law no.3/1997 of the National Bank of Romania: "New Foreign Currency Regulation".B. Emergency Ordinance No. 92/30.12.1997 as amended by Law No. 241/14.12.1998, referring to guarantees and facilities granted for non-resident investors.C. Law no. 20/1999 for disadvantaged country areasD. Law no. 143/1999 regarding the state financial aid,E. Ordinance no. 73/1999 regarding the tax on income, see Fiscal Code, 12F. Ordinance no. 215/1999 regarding VAT, see Fiscal Code,G. Urgency Governmental Ordinance 217/1999 on the modification and completion of the Government ordinance no. 70/1994 regarding tax on profit, see Fiscal Code.H. Law no. 332/2001 with reference to promoting direct investments with significant impact on the economy.I. Law no. 490/2002 regarding the approval of the Government Ordinance no. 65/2001 on the establishment and operation of industrial parks.J. Governmental Ordinance no. 14/2002 on the establishment and operation of scientific and technological parksK. Fiscal CodeIn Romania repatriation of profits is free and is regulated by the National Bank of Romania Rules No.3/1997:"New Foreign Currency Regulation". In case of both foreign direct investment and portfolio investment there are two situations: repatriation of dividends after the end of financial year; repatriation of capital in case of investment liquidation (closing down a company or selling portfolio investment)Foreign investors may engage in business activities in Romania by any of the following methods: Setting up new commercial companies, subsidiaries or branches, either wholly-owned or in partnership with Romanian natural or legal persons; Participating in the increase of capital of an existing company or the acquisition of shares, bonds, or other securities of such companies; Acquiring concessions, leases or agreements to manage economic activities, public services, or the production of subsidiaries belonging to commercial companies or state-owned public corporations; Acquiring ownership rights over non-residential real estate improvements, including land, via establishment of a Romanian company; Acquiring industrial or other intellectual property rights; Concluding exploration and production-sharing agreements related to the development of natural resources.Foreign investor participation can take the form of: foreign capital, equipment, means of transport, spare parts and other goods, services, intellectual property rights, technical know-how and management expertise, or proceeds and profits from other businesses carried out in Romania. Foreign investment must comply with environmental protection, national security, defense, public order, and public health interests and regulations.

2. The influence of foreign direct investment on economic growth in Romania2.1. Introduction

Discussion on foreign direct investments in academia, but also in political and public environment associates capital flows with a number of favorable results for welcoming countries. Thus, foreign investment becomes the essential engine of economic development strategy and modernization, of income growth and employment, especially for developing countries, emerging and in transition economies. Increased attention to foreign direct investment is justified by the fact that they are seen as the main factor of stimulating the economic growth. They are part of the financial flows class that do not generate external debt and are considered as a complement to domestic investment, and also a significant funder of the current account deficit. Thus, it is clear that foreign direct investment is preferable to other sources of capital, taking into account that capital outflows involved in repatriation of profits depend on the economic results achieved by answering the specific interests of the investor and the state interested in growth. Worth mentioning are the indirect effects that FDI manifest in the local economy, for example, boosting human capital formation, technological externalities, access to foreign markets. These are listed in the new growth theory as a driver of economic growth in the long term. Researchers turned their attention to the link between FDI and economic growth, a number of empirical studies aiming if investments positively influence growth. They suggested that the positive relationship is influenced by certain economic conjuncture.

2.2 Types and opinions about FDI

Types of FDI according to their contribution to the development and renewal of economic assets in the country receiving FDI: greenfield: investments in companies established and developed by or together with foreign investors starting from scratch. brownfield: investments in companies wholly or partially taken over by foreign investors from residents, more than 50% of tangible and intangible assets were made after taking over; integral or partial takeovers of businesses: investments in companies wholly or partially taken over by foreign investors from residents, more than 50% of tangible and intangible assets were made before taking over;Foreign direct investments offer a series of advantages for the receiving country: the important role in rebuilding and restructuring of the economy by introducing high technology and modern management; the increasing of production and product quality in accordance with the standards of European countries economically advanced; achieving the required amount of potential foreign and domestic markets; creation of new jobs; access to new markets; stimulate local entrepreneurship and competition; developing "back" connections (related to supply from local suppliers) and links "forward" (related to marketing)International Monetary Fund considers the following as being direct investments: share capital and reserves accruing to an investor who owns at least 10% of the share capital of a company, credits between the investor and the enterprise in which he invested and reinvested profit.According to the authors Bird, Rajan (2002), foreign direct investment have horizon for a long time and they are more stable and have a limited mobility, representing more than simply a transfer of capital. Over the years, there have been a number of empirical studies which have shown that between high levels of GDP and FDI flows there is a positive link, but this link is not available in all regions. It is necessary to remember that the impact of FDI depends to a large extent on economic conditions in the host country, the level of saving and investing in the receiving country, how that investment enter in the economy whether in the form of new investment greenfield type or form of mergers or acquisitions, but also country's ability to govern foreign direct investment. In the neoclassical model, FDI contributes to economic growth by increasing investment volume and increase their efficiency, while in the endogenous model foreign direct investment improves the dispersion technologies from developed economies towards recipient countries (Borensztein et al., 1998).The following table represents the opinions of some important authors about the importance of foreign direct investment in economic growth:

According to Roman (2012), the research done for Romania found that FDI and capital endowments are positively correlated with GDP, but what was not expected was the fact that the human capital was negatively correlated with GDP evolution. As the author states the last fact is explained by the reduction of Romanian population in 1995-2004. Another paper by Pelinescu et al. (2009) found that direct FDI influence is still at a low level, but the indirect influence, through the increase in productivity and competitiveness is more valuable for Romania.

2.3. Dynamics of FDI and GDP in Romania during 2003-2011

Romanian business environment requires economic freedom and friendly taxation to entrepreneurs and especially for foreign investors. Among countries of the world was developed a fierce competition to create favorable conditions for attracting foreign direct investment. Thus, international experience has shown that the main condition for attracting foreign investors is improving the investment climate. When referring to the dynamics of FDI in Romania, we can say that since 2003 they recorded a positive trend. This is explained primarily due to increased FDI flows from the EU to Romania (Romania was approaching the adherence moment), but also due to the economic performance of our country. This increase can be explained by the fact that foreign investors viewed profit opportunities, relatively large, in the Romanian economy, either as greenfield investment or through acquisitions mergers. In the chart below it is shown the evolution of FDI flows during 2003-2011:

Source: own processing based on data provided by NBR

Evolution of annual FDI flows (capital participation and loans) in Romania between 2003-2011 can be divided into the following subcategories: 2003-2006: during this period the total flows of FDI registered a steady growth from 9,059 million Euros to 1.946 billion Euros, increased by 78.51%. The positive trend was due to large privatizations registered in Romania in banking and industrial sectors (oil and petrochemical, metallurgy, machine building); 2007-2008: privatization in the banking sector continued, and 2008 marks the maximum amount of FDI attracted in Romania, their value being 9,496 million Euros; 2009-2011: FDI volume has known a dramatic drop compared to previous years, reaching 1,815 million Euros at the end of 2011, this decrease being due to the impact of economic and financial crisis. In the next graph it is shown the evolution of FDI balance during 2003- 2011 ( millions):

Source: own processing based on data provided by NBR

Throughout the period under review, 2003-2011, there is a continuous increase in foreign direct investment balance, but since 2008, when economic and financial crisis was felt on the Romanian economy, we can notice that the balance of cumulative FDI increases very slow. Also, it can be seen that loans increased during the period, indicating a negative situation, leading to the idea that foreign companies have significantly reduced or even suspended their net investment income realized, since some of these companies were significantly affected by losses. At the end of 2011, the balance of foreign direct investment reached 55.139 million Euros, 4.9% more than the balance of the previous year. According to information provided by the National Bank of Romania, foreign direct investment has been directed towards areas such as manufacturing (31.5% of total), financial intermediation and insurance (18.2%), trade (11.4%), construction and real estate (10.7%), information technology and communications (5.4%). In terms of countrys origin, first four positions are occupied by the Netherlands (21.7% of total FDI stock at the end of 2011), Austria (17.5%), Germany (11.4%) and France (9, 1%), unchanged positions since 2009.Thus, although the number of statistical observations is relatively small, we appreciate that the model constructed is representative to illustrate, at the macroeconomic level, the link between foreign direct investment and economic growth. 3. Investment of Orange Group in Romania

3.1 Orange Group Romania: general aspectsOrange RomaniaisRomania's largestGSMnetwork operatorwhich is majority owned byOrange S.A., the biggest initial investor, who gradually increased its ownership.Between 1997 and April 2002, they operated under two brand names Dialog (for monthly subscription plans, in Romanian means "dialogue") and Alo (for prepay services). In April 2002, after France Tlcom gained a majority stake it was re-branded to comply with the group's global strategy. As of December 2012, Orange Romania has 10.3 million mobile subscribers.Orange is in head-to-head competition with Vodafone Romania for one of the most dynamic mobile telephony markets in south-eastern Europe. Currently the mobile penetration is at about 115% (active users only). Orange edged ahead of Vodafone (formerly Connex) in terms of number of subscribers in September 2004. They are the main mobile telephony operators, with Orange having a market share of almost 38% of the total market (active and inactive users). Orange Romania also controls 4.33% of the Moldovan operator Orange Moldova.3.2 Financial informationYearSocial capitalTurnoverNet profitEmployees

200593.596.7333.117.581.646999.847.5941.955

200693.596.7333.761.050.7861.414.360.0642.238

200793.596.7334.044.743.9211.218.798.4902.627

200893.596.7334.711.286.3061.611.787.7682.953

200993.596.7334.425.242.0361.146.846.7342.907

201093.596.7334.161.195.667933.958.4772.708

201193.596.7333.981.959.733805.637.8992.757

201293.596.7334.119.424.689517.785.6382.798

201393.596.7334.337.177.113500.809.8642.855

Source: based on the table aboveThe table and chart above represents the evolution of turnover and net profit. It can be seen continued growth in turnover until 2008, where it reaches its peak. We cannot talk about continued growth regarding net profit which is decreasing in the year 2007 but then increase again in 2008 with nearly half a billion lei. The highest turnover recorded in recent years was reached in 2008 with about 4.71 billion lei, while the lowest value was 3.98 billion lei in 2005. An interesting fact is the evolution of both turnover and net profit from 2006 to 2007. While turnover increase net profit decreases.This information is provided by the Ministry of Finance.

Conclusion

In the last years, Romania has become a more appealing target for an increasing number of foreign investors. Romania offers to the foreign investors many major reasons to invest in Romania: great market potential, strategic location, significant natural resources, high skilled labor force, high potential for economic growth, new EU member, infrastructure growing steadily, friendly business environment, access to European funds, competitive taxation. The UNCTAD Matrix of inward FDI performance and potential in 2005, consider that Romanian economy has a low potential FDI, but above performance FDI, comparing the judgments of the foreign investors. But much remains to be done. Efforts to ensure a stable and more transparent regulatory system must be increased. Reform of the public administration must advance more quickly and judicial reforms must be implemented more effectively. Efforts to increase accountability must be intensified. The environment is another major challenge the country continues to face. This includes air, water, and soil pollution; the non-efficient use of energy in domestic and industrial sectors. As large-scale privatizations near completion, efforts must be made to attract more Greenfield foreign investment. The success of such efforts will depend on Romanias ability to improve its investment climate and supply a skilled and competitive labor force within the tight framework of EU market rules.

References

http://www.rasfoiesc.com/business/economie/finante-banci/Politici-privind-atragerea-inv61.php http://www.ccfiscali.ro/content/editoriale/nr13.pdf http://feaa.ucv.ro/AUCSSE/0036v2-012.pdf http://iab.worldbank.org/~/media/FPDKM/IAB/Documents/IAB-report.pdf http://gradworks.umi.com/33/07/3307967.html http://www.kpmg.com/RO/en/IssuesAndInsights/ArticlesPublications/news/Documents/Investment-in-Romania-2014.pdf http://www.state.gov/e/eb/rls/othr/ics/2013/204719.htm http://businessperspectives.org/journals_free/ppm/2014/PPM_2014_1_Melnyk.pdf http://store.ectap.ro/articole/866.pdf

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