the profitability of austrian foreign direct investment: reinvestment or repatriation? 4th fiw...
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The Profitability of Austrian Foreign Direct Investment:
Reinvestment or Repatriation?
4th FIW Workshop:„Foreign Direct Investment-
Determinants and Home Market Effects”March 7th, 2008
Wilfried Altzinger
University of Economics and Business Administration, [email protected]
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Profitability of Austrian Foreign Direct Investment
I. Purpose of the Study
II. Determinants of Profitability
III. Empirical Evidence
IV. Conclusions
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I. Purpose of the Study
Austrian Outward FDI increased
tremendously since 1990
in particular in new and acceding EU
members (CEECs)
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I. Purpose of the Study
Figure 1: Austrian FDI by Host Country Groups, 1992-2005
0
10.000
20.000
30.000
40.000
50.000
60.000
Others
CEEC
EU-15
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I. Purpose of the Study
Figure 4: Austrian Outward FDI in CEE, 1990-2004 (in EUR million)
0
5000
10000
15000
20000
1990
1992
1994
1996
1998
2000
2002
2004
CEE-14
Hungary
Czech Republic
Slovenia
Slovac Republic
Poland
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Austrian Outward FDI increased tremendously
Mainly due to the opening-up of CEE 2005: 43.6% of FDI stock is located in
CEE-19; EU-15 (33.8%) Strong increase in CEE-14 (mainly in
Croatia, Romania, Bulgaria and Russia; mainly finance, trade and oil)
First-mover advantages!
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I. Purpose of the Study
What are the implications on
competitiveness, employment and
income distribution?
1. Profitability
2. Repatriation (advantageous for home
country) or Reinvestment (advantageous for
host country)
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II. Determinants of Profitability
Macroeconomic factors: (Locational advantages) Growth of host and export countries Growth of export markets Factor costs Infrastructure and Taxes Country risk Competition policy and regulations
Firm-level: (Ownership advantages) Technological know-how Managerial know-how Advertising, marketing and distribution Size; Market power (CEEC/privatisation); costs of acquisitions; Experiences (learning process)
=> Productivity
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II. Time-Specific Determinants of Profitability, Reinvestment and Repatriation
Source: Brada and Tomšík, 2003
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III. Empirical Evidence -What can be observed?
1. Profitability:
time patterns by countries by age of investment differences between M&As and Greenfield
2. Reinvestments/Repatriations
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III. Empirical Evidence for Austria
Data source: Austrian Central Bank
Firm data for the period 1992 to 2005 no direct access to data (due to confidentiality)
2815 affiliates (2005) / 760 affiliates (1989) 27 275 observations (989 parent firms with more than 70.000 EUR
investment)
Indicator of Profitability: Net Earnings per Equity Capital Invested (Mean and Median) Return on Equity (RoE)
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III. Empirical Evidence for Austria
Mean of RoE: can be strongly biased by a few large (loss or
profit) making firms
Median of RoE: can be calculated with firm level data only provides a more general pattern of the
development
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Profitability – All Regions
Figure 4: Return on Equity (RoE) be Regions (Median), 1992-2005
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
12,0
in %
EU-15
CEE-14
CEE-5
RoW
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Profitability and Maturity
Figure 5: Return on Equity by Age of Investment, 1992-2005
0,0
5,0
10,0
15,0
20,0
25,0
1 2 3 4 5 6 7 8 9 10+
in %
EU-15
CEE-14
CEE-5
RoW
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Profitability of Greenfield Investments and M&As
Figure 6: RoE by Age of Investments (all observations for 1992-2005)M&As versus Greenfield
0,0
2,0
4,0
6,0
8,0
10,0
12,0
1 2 3 4 5 6 7 8 9 10+
in %
M&As
Green-field
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Differences of Profitability between M&As and Greenfield Investments- M&As > Greenfield- Greenfield > M&As
Table 2: Difference of Profitability between M&A and Greenfield by Vintages, 1992-2005 (N=27275)
EU-15 CEE-14 CEE-5 RoW Total
1 0,4 3,8 0,9 3,2 0,9
2 1,8 6,5 2,8 3,9 2,6
3 1,3 0,9 4,0 4,3 2,7
4 1,6 1,1 3,8 4,7 3,0
5 0,8 0,3 2,0 2,9 1,5
6 0,7 -6,8 0,5 0,7 -0,3
7 1,2 -13,3 -2,1 -0,2 -1,7
8 4,6 -13,0 -4,2 -5,6 -3,0
9 1,0 -12,6 -5,4 -6,3 -4,2
10 + 1,1 -6,8 -4,2 -0,7 -1,4
Total 0,9 -1,0 -0,5 1,3 0,1
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Profitability of Greenfield Investments and M&As (for CEECs only)
GreenfieldMergers & Acquisitions
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Profitability of Greenfield Investments and M&As (for EU only)
GreenfieldMergers & Acquisitions
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Repatriation or Reinvestment?
Figure 7: Repatriation Rate, 1992-2005
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
35,0%
40,0%
45,0%
50,0%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
in %
EU-15
CEE-14
CEE-5
RoW
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Repatriation or Reinvestment?
Figure 8: Repatriation Rate by Vintages and Regions, 1992-2005
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
0 1 2 3 4 5 6 7 8 9 10+
in %
EU-15
CEE-14
CEE-5
RoW
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Different Repatriation Rates for M&As and Greenfield Investments
Table 3: Differences of Repatriation-Shares between M&A and Greenfield by Vintages EU-15 CEE-14 CEE-5 RoW Total
0 -0,8% 4,6% 5,1% 1,3% 2,9%
1 3,5% 10,9% 4,1% -2,0% 4,3%
2 2,3% 10,5% 4,0% 7,8% 5,4%
3 1,8% 4,5% 1,4% 13,0% 4,4%
4 0,7% 1,8% 9,2% 1,8% 5,0%
5 3,1% 14,7% 6,4% 5,7% 6,8%
6 6,3% 10,7% 3,3% 8,7% 6,7%
7 4,2% 8,9% 0,2% 6,0% 3,8%
8 1,0% 9,9% 3,8% -9,5% 1,2%
9 5,9% 5,3% -2,0% -0,6% 2,3%
10 + 5,7% 7,5% -1,9% 4,5% 3,4%
Total 3,1% 6,9% 1,7% 2,9% 3,2%
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IV. Conclusions
Total profitability has increased substantially over the period 1992 – 2005
Profitability of affiliates differ strongly between regions: CEE-14 > CEE-5 >> EU-15
Age of investment is most important! most investments became profitable after three to four years of
investment development for affiliates in CEE-14 seems to be favourable since
they are young! Different patterns of profitability between M&As and
Greenfield investments by regions: EU-14: always higher profits for M&As CEE: Lower (higher) profits for Greenfield for younger (older)
vintages => longer starting-up problems but afterwards superior!
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IV. Conclusions
Higher reinvestment in CEECsHigher repatriation by older vintagesHigher repatriation of M&As
Possible explanations: to (re-)build and (re-)equip a production facility is
more urgent in CEECs better investment opportunities in CEECs stronger financial needs for Greenfield investments
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IV. Open Questions
We can offer a reasonable explanation on time-specific determinants of profitability, reinvestment and repatriation.
However, specific determinants of profitability are still missing superior efficiency market power issues unit labour costs differences by sectors competition policies of host countries ...
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Appendix I: Empirical Evidence for Appendix I: Empirical Evidence for AustriaAustria
Return on equity (RoE): Net profit (excluding profits and losses
carried forward by the year) divided by equity (minus profit or loss for that year)
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Appendix II: Empirical Evidence for Appendix II: Empirical Evidence for AustriaAustria
CEE-5: Poland, Hungary, Slovenia, Slovak Republic and Czech Republic
CEE-14: Albania, Bosnia and Herzegovina, Bulgaria, Estonia, Croatia, Latvia, Lithuania, Moldavia, Romania, Russia, Serbia and Montenegro, Ukraine and Belarus
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Structural Features and Profitability (Structural Features and Profitability (mean valuesmean values) of Austrian ) of Austrian FDI, 2003FDI, 2003
NumberNumber EquityEquityNet Net
EarningsEarningsRoE RoE (Mean)(Mean) EmployeesEmployees
Capital/Labour-Capital/Labour-RatioRatio
(in million (in million
EUR)EUR)(in million (in million
EUR)EUR)Net Earnings/ Net Earnings/
EquityEquity(in 1.000)(in 1.000)
(in 1.000 EUR per (in 1.000 EUR per employee)employee)
EU-14 EU-14 800800 14.47614.476 644644 4,4%4,4% 64,064,0 226,188226,188
CEE-19CEE-19 1.3051.305 15.20715.207 1.8521.852 12,2%12,2% 233,4233,4 65,15465,154
PolandPoland 143143 1.8861.886 9393 4,9%4,9% 26,326,3 71,71171,711
SloveniaSlovenia 8484 892892 7777 8,6%8,6% 8,08,0 111,500111,500
HungaryHungary 369369 3.2213.221 364364 11,3%11,3% 55,355,3 58,24658,246
Slovak RepublicSlovak Republic 129129 1.3531.353 172172 12,7%12,7% 28,528,5 47,47447,474
Czech RepublicCzech Republic 300300 3.3713.371 452452 13,4%13,4% 61,161,1 55,17255,172
CroatiaCroatia 8585 1.0841.084 172172 15,9%15,9% 12,012,0 90,33390,333
TotalTotal 2.5862.586 41.63441.634 3.2753.275 7,9%7,9% 327,7327,7 127,049127,049