the profitability of austrian foreign direct investment: reinvestment or repatriation? 4th fiw...

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, Viennaaltzing@wu-wien.ac.at

Profitability of Austrian Foreign Direct Investment

I. Purpose of the Study

II. Determinants of Profitability

III. Empirical Evidence

IV. Conclusions

I. Purpose of the Study

Austrian Outward FDI increased

tremendously since 1990

in particular in new and acceding EU

members (CEECs)

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

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

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!

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)

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

II. Time-Specific Determinants of Profitability, Reinvestment and Repatriation

Source: Brada and Tomšík, 2003

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

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)

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

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

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

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

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

Profitability of Greenfield Investments and M&As (for CEECs only)

GreenfieldMergers & Acquisitions

Profitability of Greenfield Investments and M&As (for EU only)

GreenfieldMergers & Acquisitions

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

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

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%

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!

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

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 ...

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)

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

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