The Profitability of Austrian Foreign Direct Investment: Reinvestment or Repatriation?

1. 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, Vienna altzing@wu-wien.ac.at

2. Profitability of Austrian Foreign Direct Investment • Purpose of the Study • Determinants of Profitability • Empirical Evidence • Conclusions

3. Purpose of the Study • Austrian Outward FDI increased tremendously since 1990 • in particular in new and acceding EU members (CEECs)

4. Purpose of the Study

5. Purpose of the Study

6. 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!

7. Purpose of the Study • What are the implications on competitiveness, employment and income distribution? • Profitability • Repatriation (advantageous for home country) or Reinvestment (advantageous for host country)

8. 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

9. II. Time-Specific Determinants of Profitability, Reinvestment and Repatriation Source: Brada and Tomšík, 2003

10. III. Empirical Evidence -What can be observed? • Profitability: • time patterns • by countries • by age of investment • differences between M&As and Greenfield • Reinvestments/Repatriations

11. 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)

12. 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

13. Profitability – All Regions

14. Profitability and Maturity

15. Profitability of Greenfield Investments and M&As

16. Differences of Profitability between M&As and Greenfield Investments- M&As > Greenfield- Greenfield > M&As

17. Profitability of Greenfield Investments and M&As (for CEECs only) Greenfield Mergers & Acquisitions

18. Profitability of Greenfield Investments and M&As (for EU only) Greenfield Mergers & Acquisitions

19. Repatriation or Reinvestment?

20. Repatriation or Reinvestment?

21. Different Repatriation Rates for M&As and Greenfield Investments

22. 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!

23. IV. Conclusions • Higher reinvestment in CEECs • Higher repatriation by older vintages • Higher 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

24. 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 ...

25. Appendix I: Empirical Evidence for Austria 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)

26. Appendix II: Empirical Evidence for Austria 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