The Profitability of Austrian Foreign
Direct Investment:
Reinvestment or Repatriation?
4th FIW Workshop:
„Foreign Direct InvestmentDeterminants and Home Market Effects”
March 7th, 2008
Wilfried Altzinger
University of Economics and Business Administration, Vienna
[email protected]
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)
Purpose of the Study
Figure 1: Austrian FDI by Host Country Groups, 1992-2005
60.000
50.000
40.000
30.000
20.000
10.000
0
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
I.
Others
CEEC
EU-15
I.
Purpose of the Study
Figure 4: Austrian Outw ard FDI in CEE, 1990-2004 (in EUR m illion)
20000
CEE-14
15000
Hungary
Czech Republic
10000
Slovenia
5000
Slovac Republic
Poland
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
0
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
12,0
10,0
6,0
EU-15
4,0
CEE-14
2,0
0,0
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
in %
8,0
-2,0
-4,0
CEE-5
RoW
Profitability and Maturity
Figure 5: Return on Equity by Age of Investment,
1992-2005
25,0
20,0
EU-15
in %
15,0
CEE-14
CEE-5
10,0
RoW
5,0
0,0
1
2
3
4
5
6
7
8
9
10+
Profitability of Greenfield
Investments and M&As
Figure 6: RoE by Age of Investments (all observations for 1992-2005)
M&As versus Greenfield
12,0
10,0
in %
8,0
M&As
6,0
Greenfield
4,0
2,0
0,0
1
2
3
4
5
6
7
8
9
10+
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)
Greenfield
Mergers & Acquisitions
Profitability of Greenfield Investments and
M&As (for EU only)
Greenfield
Mergers & Acquisitions
Repatriation or Reinvestment?
Figure 7: Repatriation Rate, 1992-2005
50,0%
45,0%
35,0%
30,0%
EU-15
25,0%
CEE-14
20,0%
15,0%
CEE-5
10,0%
5,0%
0,0%
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
in %
40,0%
RoW
Repatriation or Reinvestment?
Figure 8: Repatriation Rate by Vintages and Regions,
1992-2005
30,0%
25,0%
in %
20,0%
EU-15
CEE-14
15,0%
CEE-5
RoW
10,0%
5,0%
0,0%
0
1
2
3
4
5
6
7
8
9
10+
Different Repatriation Rates for
M&As and Greenfield Investments
Table 3: Differences of Repatriation-Shares between M&A and Greenfield by Vintages
0
1
2
3
4
5
6
7
8
9
10 +
EU-15
-0,8%
3,5%
2,3%
1,8%
0,7%
3,1%
6,3%
4,2%
1,0%
5,9%
5,7%
CEE-14
4,6%
10,9%
10,5%
4,5%
1,8%
14,7%
10,7%
8,9%
9,9%
5,3%
7,5%
CEE-5
5,1%
4,1%
4,0%
1,4%
9,2%
6,4%
3,3%
0,2%
3,8%
-2,0%
-1,9%
RoW
1,3%
-2,0%
7,8%
13,0%
1,8%
5,7%
8,7%
6,0%
-9,5%
-0,6%
4,5%
Total
2,9%
4,3%
5,4%
4,4%
5,0%
6,8%
6,7%
3,8%
1,2%
2,3%
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:


Age of investment is most important!



CEE-14 > CEE-5 >> EU-15
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 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
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
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)
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
Structural Features and Profitability (mean values) of Austrian
FDI, 2003
Equity
Net
Earnings
RoE (Mean)
Employees
Capital/LabourRatio
(in million
EUR)
(in million
EUR)
Net Earnings/
Equity
(in 1.000)
(in 1.000 EUR per
employee)
800
14.476
644
4,4%
64,0
226,188
1.305
15.207
1.852
12,2%
233,4
65,154
Poland
143
1.886
93
4,9%
26,3
71,711
Slovenia
84
892
77
8,6%
8,0
111,500
Hungary
369
3.221
364
11,3%
55,3
58,246
Slovak Republic
129
1.353
172
12,7%
28,5
47,474
Czech Republic
300
3.371
452
13,4%
61,1
55,172
Croatia
85
1.084
172
15,9%
12,0
90,333
2.586
41.634
3.275
7,9%
327,7
127,049
Number
EU-14
CEE-19
Total