Author: Iabanji EcaterinaScientific director:Ph.D. Bunu Mariana

GRADUATION PAPER Specialty 364.1 „Finance and Banking”

ANALYSIS OF FOREIGN DIRECT INVESTMENT FLOWS INTO

THE REPUBLIC OF MOLDOVA

Actuality of research In the present development stage, regardless of

the country’s economic development condition, progress cannot be seen without foreign direct investments.

Foreign direct investments are important for a number of reasons. Firstly, they constitute import of capital – a scarce resource in any country, but in particular in transition and developing countries.

Secondly, foreign direct investments allow knowledge transfer from the source country to the investment destination.

Furthermore, foreign direct investments enable access to foreign markets and business networks.

The purpose of the research Is studying the economic role of the foreign

direct investment flows in the national economy, and study of the amount and structure of the FDI into the Republic of Moldova, in order to determine the specific of the foreign investments in the process of the economic development. Making the analysis of the FDI flows enable to determine the efforts and measures of the government in the field of attracting foreign direct investment, and to make conclusions about the improvement of the process of attracting FDI into the economy of the Republic of Moldova.

New economic development paradigm based on investments

and export

Positive effects of

FDI

Negative effects of

FDI

environmental degradation

public protest

market dominance by MNC

damaging competition for local

firms

improvement of production process, technology transfer

Stimulation of export orientation

increases the competiveness of local industries

realization of externalities

FDI Inflows to Selected Countries, 2001-11

Balance of payments and international investment position,

Types of investment

  2007 2008 2009 2010 2011

Direct investment in the national economy

541,26 711,46 145,33 197,41 274,0

equity capital 227,38 441,7 161,56 156,98 143,9

reinvested earnings 112,81 98,7 -11,56 14,55 94,42

other capital 201,07 171,06 -4,67 25,88 35,68

Foreign direct investment / GDP (%)

12,29 11,75 2,67 3,40 3,91

Major investors

0

500

1000

1500

2000

2500

140

812

267 381206 380

1256

61

918 897

65 62

669

2017

1685.1

944.4813.9

545.7475.5

392.4 378.3 315.9 256.6 209.8 192.3 189.3172.3

1296

number of enterprises foreign investments (mil. MLD)

Reason 1 to invest in RM

Fiscal incentivesIncentives when starting a business VAT refund for capital expenses on long-term investments, except for housing and vehicles (not applicable in Chisinau and Balti) VAT and customs tax exemption for assets to be included in the share capital of the company

B. Benefits when operating 12% Corporate Income Tax – since 2012, with

incentives for investors Double Taxation Avoidance Agreements (DTAA )

with 39 countries

Existence of Industrial Parks

The Law on Industrial Parks (№ 182 from 15 July 2010):

30-year term for the industrial park; Free change of land use; Free transfer of state land to the company administrator; Opportunity to lease state land with a 30% discount; State contribution to the infrastructural and

technological development; Limited by and controlled Government inspections; Assistance from local authorities and the Council to

promote investment projects of national significance;

Agribusiness

Wine producti

onEquipment and

technology

Organic farming

Livestock farms

Milk processing plants

New orchards

Alternative

energy

BiogasStraw-fired

heating

Energy efficien

cySolar

energy

Hydro Power

Wind power

Business

Software

Support

Mobile telepho

ny

FEZ

Successful Investors of the RM

State actionsIn 2012 was adopted the National

Development Strategy "Moldova 2020" aims at orientating the country towards a dynamic model based on local and foreign investments and development of export-oriented industries.

An Association Agreement with the European Union is currently under negotiation

Steady implementation of structural reforms has raised Moldova’s competitiveness

As a result, Moldova was ranked nr. 81 in 2012 by Doing Business Rank

The Most Problematic Factors for Doing Business in Moldova

Improvements needed to attract more foreign investment in the

economy of the Republic of Moldova

Regional trade integration

Privatization of public property

Development of Free Economic Zones and of industrial parks

Improving of labour and land regulation

Realigning obsolete pieces of legislation to reality

Conclusions• Competition for foreign direct investment (FDI) is tough as

many potential investment locations try to attract scarce and increasingly footloose foreign capital. The data on Moldova’s FDI inflows and stock suggest that the country has only been partly successful in attracting foreign investors.

• Trade integration with EU and CIS countries, improvements in the business climate, privatization, and healthy growth prospects are the factors that would further improve Moldova’s potential for attracting FDI.

• Potential new investors frequently point out to severe problems which clearly outweigh the positive factors such as good access to foreign markets, the well-educated population, language skills, low wages and good agricultural land

• Investors reveals that there are a number of issues that inflate the cost and/or increase the risk of investing in Moldova, such as volatility of the political environment, the uncertainty of the economic situation, the ambiguity of the legal system, and the high level of corruption.

Recomendations

• improve the investment climate and legislation• a strategy for higher FDI into agro-food industries

should be developed and implemented• improve the quality of labor force• to improve the existing problematic relationship

between government and business, which is a major barrier for FDI

• to improve the activity of MIEPO as the investment promotion agency according to best international practice