Table of Contents
Business environment refers to a set ranging from legal, political, societal, institutional as well as economic conditions that affects the operation of an organization but outside the scope of the individual control (Neuhaus 2006). On account of this, the world is said to have various components of the business environments that basically refer to specific country or regional environments that makes up the world’s aggregate business environment (Seymour-Smith 2003). Indeed, businesses are investment packages, which are incurred by individuals or nations with a view to establish profits. Consequently, entrepreneurs from one country can invest in another, depending on various factors that determine the suitability of such investments.
When an individual or a company from one country invests in another company or entity in another country, such form of investment is known as Foreign Direct Investment (FDI). For this reason, FDI is different from indirect investments such as the portfolio flows that involve the purchase of securities from different countries by individual or lobby groups from different countries. This essay will, therefore, incorporate FDI in its scope in explaining the business environment. The company investing may do so in a number of ways such as: through joint ventures; buying shares in the investee company; or mergers among others. According to the OECD, the legally abiding threshold by the company entering a foreign direct investment agreement is that the foreign investor must acquire at least 10% of the total ordinary shares or the existing voting stock of the investee company (Worthington & Britton 2008).
The level of FDI in different countries varies due to various factors. Indeed, the level of foreign direct investments does not necessarily rise with the increase in the levels of economic performance of a country. However, the two are interlinked as they occur as the FDI boosts the economic performance of the recipient country. The world records of FDI ranging between 1990-2011 indicates that Foreign Direct investments has been on the rise in virtually all countries in the world but at different margins. This indicates how the business environment has been changing over time. Examples of FDI includes: a company in America taking bulk shares in a company from China and the Canadian company that sets up a joint ventures to grow a mineral deposit in the country of Chile. Foreign investments increase the volume of productive capacity of a country and helps in the exploitation of resources endowment. Additionally, this aspect also encourages further improvement in the level and quality of production as it results in a rising competition and within and without the local market economy (Surridge 2009).
The countries with the highest FDI are Brazil, India and Russia and have sustained this performance since 1990 while the European Union continues to experience the lowest level of Foreign Direct Investments since 1990 to date. However, the level of these investments was below $500 billion in the 1990. However, these investments rose gradually in all economies until the period between 1999 and 2000 when the investments began to drop consistently in all economies of the world. This trend continued until the period between mid-2002 and 2004 when the world economy began a steady recovery. At this particular duration (2002-2004), the world experienced a period of global recession while the general economic situation was overwhelmingly, negatively affected by the economic crisis. Favorable economic conditions encouraged more investor to establish increased investments between 2004 and year-end 2006 when the world economy was further attacked by a formidable financial crisis in 2008.
Conversely, the initial symptoms of severe crisis began in the late 2007. In particular, this crisis in Germany and UK resulted from default in payment of mortgages among other factors. In a bid to mitigate the effects of the crisis, the United States, European Union, Canada and Switzerland promised to offer $90 billion as a temporary funding to banks. Later, European Central bank injected yet another whopping $500 into the financial system. In September 2008, the crisis was full-blown. The collapse of the Lehman Brothers, for instance, was record-breaking. The fall of Lehman led to decline of credit between the financial institutions, as the unpredictability of their financial position made borrowing between them a little bit risky. The dramatic decline in intra-bank lending induced the liquidity crisis. Furthermore, this resulted in the poor functioning in the economies. Additionally, this led to a poor face of the business environment across the globe.
As a result of the financial crisis of 2008, the global economy in general declined. Consequently, the levels of investments were greatly reduced and so the FDI not exempted. According to the statistical inferences of 2007 from the International Monetary Fund (IMF), the world economy was noted to be at its extreme recession point. The widening in global imbalances prior to the crisis and optimism about the world economy came from confidence in the United States’ financial and political systems. However, the global business environment continued to deteriorate as a result. This was further purported by the fact that the US economy embodied the largest portion of the global capital market. The world imbalances were seen as unsustainable, given that fast growing developing economies required a secure position to invest (Canada 2009). Moreover, US were taken to have insurmountable monetary policy institutions and experts. Indeed, only a handful of economists failed to share this view and went ahead to express their sentiment about rising global imbalances. The strength of the US currency further escalated the indifferences in the world economy due to the resultant financial crisis.
FDI Inflows Analysis of Central and Eastern Europe
Recently, the European Union is going through a series of economic exposure to fortified integration dynamics. However, it has been a mystery in the manner in which the total implication of such dynamics within the context of the region and beyond. Consequently, the full allusion from these dynamics with respect to the placement of the Foreign Direct Investments in both the European Union and bordering regions remains a mystery. Indeed, there has been a panel consisting more than 3500 multinationals of the European origin that ends up investing in the Central and Eastern Europe (CEE) as well as the Mediterranean (MED) between the year 1990 and 1997. The major investments have been based on 48 NACE 3 industries. The ability to curb industrial development and the subsequent time-specific effects, it has been observed that this has enabled the CEE to show bigger potential in attracting more FDI inflows than its counterpart, Mediterranean zone.
According to the new-fangled economic geography literature, with regard to the disaggregated Foreign Direct Investments in the Central and Eastern Europe, 0,1 increase in the accessibility to purveyors based in the respective FDI recipient nations or accessibility to EU15 trade points of intermediate commodities, results to a rise in the level of FDI of approximately 2% in the CEE countries and a 1% rise by FDI in the Eastern Europe. Indeed, it has been identified that an enabling environment has been created in the central regions of the Europe with respect to the above and a consequent specialization in upstream industries as well as re-exporting of intermediate commodities within the sector and towards the FDI-origin nations. Consequently, the Eastern countries of Europe have also been on the forefront in the spearheading of the same business activities. However, the Central European countries remains predominantly placed with regard to the trade.
There are certain factors that determine the level of FDI in various regions or countries and thus the level of business activities in the region and beyond. Indeed, the labor cost is one of the factors that determine the suitability of investments in one country and not in the other. This factor is paramount in the decision on the location of Multinational Enterprises (MNEs). In order to determine this influence, a panel-gravity model is used. This model empirically evaluates the effect of the market and cost-related factors with regard to the suitability of the FDI in a given country. According to the report from the above, it is suggested that higher per unit cost of labor coupled with high levels of aggregate costs of labor adversely affects the FDI. Consequently, high labor productivity results in the growth of FDI in a given region or country. This results from the favorable terms and also good business environment created by the business stakeholders both internally and externally. Indeed, a unit labor cost is the best measure of the aggregate cost of labor.
Indeed, the European membership has been a major contributor in the shaping up of the main aspects of the policies with regard to the economic performances as well as new laws and regulations that has acted so actively to shape up the business environment within the region and beyond. Additionally, Poland has emerged as the super economy of the region (CEE countries). According to the records of Polish Information and Foreign Investment Agency (PAIiIZ), the country has a total population of 38,6 million. This forms a strong market base within the local settings. On the other hand, Czech Republic follows with a total population of 10,244 million. Indeed, Poland emerged the fifth most likened location for the Foreign Direct Investments worldwide, in the year 2005. This result marked a rise from the 2000, 12th position index. The result was arrived at from increased interests arising from the US as well as European foreign investors. This also symbolized an improvement in the business environment with regard to the policies and labor cost, which are major determinants of an increase in the FDI (Maitland 2004).
Besides other factors, the GDP per capita is one of the preferred indicators that show improved living standards of the natives in the CEE countries (Marinov & Marinova 2008). Indeed, it indicates variance in the output and the general performance of the business sector that dominates the economy of the region and the world in general. However, there has been a long span of transition of the CEE region into the new economic system through the active deregulation of the prices and the subsequent liberalization of trading activities of the region and beyond. Furthermore, the business environment has been surrounded by other aspects that have been aimed at boosting the productivity of the various sectors and the consequent raising of the economic performance through privatization and capital market development. However, the aggregate GDP of the region (CEE) has been on the dynamic rise since the year 1992 (Palmer & Hartley 2006). On the contrary, despite Poland having the highest FDI inflows in the region, it has the lowest GDP per capital owing to its overwhelmingly high population among the current transforming Central and Eastern Countries of Europe. Besides this, Slovenia has the highest GDP per capital owing to the fact that it has the lowest population in the region. Consequently, Slovenia has virtually the lowest level of FDI inflows in the region. Indeed, many countries and prospective investors shy off from investing in this country owing to the high susceptibility to high labor cost due to its small population level, while at the same time, experienced a low local market base. This among other factors results to low inflows of capital investments into the country as opposed to Poland.
Comparisons in the Openness of the Economy of the CEE Region
The business environments of the CEE regions has been a major factor that has contributed in the steady, positive growth in the economy of the region as far as the individual economies are concerned. Indeed, this has resulted in the expansion of the export base in the region and the subsequent generation of high level of production in virtually all sector but dominated by the industrial sector (Kaplan & Norton, 2001). As a matter of fact, Poland has had been the leading exporting country in the region compared to the Czech Republic and Hungary. Poland has had been exporting a lot of products outside the region ranging between 1990 and 2005.
Indeed, the production of bumper products in the Poland has been further boosted by the insurgence of multi-manufacturers of foreign origin who supplement the local manufacturers. Therefore, this signifies that foreign direct investments play a vital role in the development and advances in the production front of the Poland state as well as the related nations. Indeed, high quality of products has led to major advances in the business world with respect to Poland. Consequently, Poland’s products have been selling quite well in the global markets due to the sustained high quality. Furthermore, Poland has been the chief leader in the Foreign Direct Investment in the region in terms inward FDI (Burtscher 2005). Indeed, the level of inward FDI has been increasing at a fast-rate pace for the past couple of decades.
Certainly, the government of the FDI has been further encouraged by the governments of the CEE countries, which have officially introduced policies that encourage through incentives, the foreign investors to rule over the country through investment packages (Arnold 2008). To achieve this, the government has been on the fore front in the development of the FDI development programs that has subsequently provided sufficient incentives of foreign companies to invest in the CEE countries. Undoubtedly, the most attractive countries for the FDI in the CEE regions have emerged to be Poland, Czech Republic and Hungary. In fact, Poland has been the chief FDI destination in the region owing to its suitable business environment with minimal costs of laying down business structures and trade. This has also been further enhanced by the huge population that acts as a strong souk for the products in the local souk and beyond.
Moreover, the level of FDI in Poland rose from three million in the 1990s to ten million in 2000. However, in the year 2002, there was a sharp decline in the level of FDI in the region (CEE) as a result of termination of privatization. The substitution of the privatization with the green field venture would not adequately compensate the vacuum that resulted since there was an acute decline in the level of privatization oriented FDI. However, with the catch up of the Green field investments, the FDI inflows further rejuvenated and increased in the CEE within the period 2003 and 2004, basically, attributable to the EU membership of the CEE countries. The FDI inflow in terms of percentages with respect to the country GDP in the region has been highest in the Czech Republic recording at 11,87% in 2002 from 10,3% in the year 1999 while it experience an FDI inflows of 8,49 in the year 2005. On the other hand, Hungary had a percentage rise of 12,98% in the 1993 while in the 1995 it was at 11,12%. These statistical inferences indicate a high affinity of business friendlier environment encroachment in the named countries above.
Account of Business Environment and the Current Trend in Poland
Poland is one of the most democratic countries in the Central and Eastern Europe. Consequently, this aspect acts as a driver to economic balance and stable market within its economy. The country is also a substantial member of the EU as well as the Organization of Economic Cooperation and Development (OECD). Indeed, Poland business environment enjoys a contributive environment due to strategized policies that supports the business operation both at the local and the international echelons. One of the most important regulations that supports business activities in the country through regulation and procedures of operations is the famous Economic Freedom Act passed on 2nd July, 2004. This Act focuses mostly on the local investors. However, it also allows foreigners from European Free Trade Agreement and the EU to partake and conduct businesses similar to the local investors. Consequently, this provides the prospective investors with the requisite incentives to invest in the region.
In addition, Poland’s central location amidst rich European nations makes it an optimal base for the investors from other countries in the region and beyond as they look to diversify their market scope (Phelps & Raines 2003). Indeed, the eastern region of Europe continues to expand dynamically, thus providing a favorable market for the commodities produced in Poland. Market for products is vital in the consideration of viability of a region for the location of a business entity and therefore, the former acts as an incentive for the prospective investors from abroad to invest. In addition to this, the country has modernized infrastructure that supports the various transportation from the industrial sector to the market as well as the relay of raw materials from their focal point of origin to the industrial ground. Indeed, the artificial endowment with excellent air, rail, sea and roads transport is the main factor that that has positively influenced of the multinational business of the country. As a result, the polish economy of the country has been a strong indicator of a formidable economic base of the country due to coherence in the business sector that has harmonized the business world of the country and the region in general. However, the presence of a polish economy, which has been probably the fastest growing economy, is a major aspect that heralds impending retarded growth of the economy of Poland.
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The labor costs in Poland are on an improvement platform in line with the development of a stable political economy. Indeed, the success of a business is pegged on the state of the political alignment in the location under which the business coexists in. Indeed, the presence of a formidable polish economy in the country has been paramount incentive in the attraction of foreign investors into the country. This has, therefore, led to the high level of FDI inflows within the recent past and time immemorial. One of the most significant factors in the measuring of attractive feature of an investment based in a foreign location is the costs of labor. Indeed, Poland boasts of one of the cheapest labor costs in the region (CEE). Consequently, this aspect attracts most foreign investors to install productive enterprises in the country since there is stronger labor efficiency than other countries in the region. Therefore, this indicates that the success of any business enterprises is pegged on the availability of the factors of production, ranging from the labor, land, human resource and the capital availability. Consequently, a business cannot flourish as well without other invaluable support values and services such as good policies regarding the business operations and the restrictions therefore governing the different ventures. As a matter of fact, the government among other entities is vital in the success of the business with regard to the development of policies and regulations that undermines further investment on unit capital or else supports further investments.