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UDC 330.322 (477)
M. M. Medentseva,
Donetsk National Technical University
DEPENDENCE OF THE UKRAINIAN ECONOMY ON THE FOREIGN CAPITAL
Introduction. World experience shows that economies in transition are not able to overcome the economic crisis without attracting and making effective use of foreign capital. Accumulating the capital, providing access to modern technology and management, foreign investment has not only resulted in national investment markets, but also make other economic factors more dynamic in the development of markets of goods and services. In addition, foreign capital contributes to the macroeconomic stabilization measures.
The relevance of the topic chosen is that foreign capital plays a major role in the development of any state regardless of the economic potential of the country as well as foreign direct investment promotes economic growth in the recipient country intensifying the competition. Foreign capital has contributed to the development of Ukraine's economy as foreign capital is a source of capital investment in production, development and implementation of advanced management and marketing techniques. Ukraine deserves special attention as a country in transition which was able to increase FDI inflows by 35 % in 2010 after declining 56 % in 2009 year [1]. In terms of economic potential, as shown in expert estimates, Ukraine is among the top five countries in Europe, and in case of the efficiency of the use of foreign capital Ukraine is among the top two hundred countries.
Analysis of recent research and publications. Empirical evidence on the dependence between FDI and the economic growth is still inconclusive. Recent studies have examined some factors that could influence this relationship but have not extensively addressed the role of the characteristics of foreign direct investment (FDI) and how strong the dependence of the economy on the foreign capital is.
The latter issue has fuelled passionate debates amongst economists, policymakers, and in civil society. According to Eswar S. Prasad, it has gained importance in recent years because of the curious, even seemingly perverse, pattern of global imbalances, whereby capital seems to be flowing "uphill" from poorer to richer countries. But it has economic relevance beyond the current conjuncture because it goes to the heart of the process of development and the role that foreign capital plays in it. It also has enduring policy relevance as developing countries try to decide whether to open themselves up more to the process of financial globalization, and as they attempt to figure out in what form, and to what degree, they should do so [2, p. 2].
The importance of the presence of foreign capital in the economy of host countries was proved on the "flying geese" or "catching up" paradigm which was developed in the late 1930s by the Japanese scientist K.Akamatsu. As a generalized theory of economic development it explain how the foreign capital permits for developing countries to catch up and even overtake the advanced countries, but a recipient country should remain open to direct investment from foreign companies. One economy, like the first goose in a V-shaped formation, can lead other economies toward industrialization, passing older technologies down to the followers as its own incomes rise and it moves into newer technologies [3, p.12].
Developing the research of foreign capital influence on a host country credit should be given to the studies of foreign authors (B.Sharma, D.Willem, R. Barrell, M.Todaro, S.Smith and others) on the assessment the investments effectiveness in market conditions. Significant contribution to economic theory also made by Ukrainian scientists: Dyachuk V.D., Grishae-va J.G., Lazebnyk L.V., Anshyn V.M., Blank I.A. and others. The major part of their researches is dedicated to the relation between foreign capital and economic growth.
The purpose of the article is to analyze foreign direct investments in the national economy, to estimate the level of Ukrainian economy's dependence on the foreign capital, to found out the factors of influence on FDI inflow to Ukraine.
The main material. The history of investing processes in the world gave to the seven main types of the foreign capital. The most popular of these types nowadays is foreign direct investment (FDI), as FDI have a great number of advantages for both investors and recipients.
Foreign direct investment has a lot of definitions. According to Todaro and Smith (2006) FDI is the investment by corporations like transnational and multinational in foreign countries having their head office in a developed country [6]. Another definition for FDI according to Wang (2005) FDI is the management and control of a company, or an enterprise or a facility with interest lasting for a long term in a foreign country [4]. According to Kumya and Wakasugi (1991) FDI is the process of acquiring and investing in a new or existing industry or business and expanding and managing it in a foreign country [5, p.48]. Foreign direct investment is the direct investment through governments or government agencies, or through enterprises either private or public ones [4].
To estimate the Ukrainian dependence on the foreign capital the picture of foreign capital operation in Ukraine should be drawn. Let us begin from identifying the level of investment attractiveness of Ukraine.
The index of investment attractiveness (IAI) of Ukraine in January-September 2013 declined by 0.95 points - to the level of 2.56 on a scale, falling to a level of performance of the IlIrd quarter of 2009. Falling trajectory of of investment attractiveness index of Ukraine is from 3.39 in the second quarter 2013 to 2.56 in the third quarter. In the first quarter of 2014 the index of investment attractiveness of Ukraine increased to 2.72 points out of five. This is the highest rate since 2011, Tomas Fiala, the president of the European Business Association (EBA), said. According to the EBA research the estimate investment attractiveness of Ukraine has increased since the lowest in the history of the study of the index in IV'2013, when it fell to 1.81. This is an alarm, which indicates the lack of investor's confidence in the economy and the market. Causes of decline can be divided into external (global market instability) and internal factors. The condition of the U.S. and European markets cannot but impact on the economy of Ukraine. The internal causes comprise corruption, increased pressure on business and the inadequate reforms [6].
Investigating the impact of FDI on the economy is also important to analyze the geographic structure of investment and spheres of the national economy in which these investments are made. The largest share in the FDI structure is taken by Cyprus (31.7%). This is explained by the fact that under the guise of FDI the previously taken capital returns to Ukraine, but now is legalized. Cyprus is followed by Germany (12%), the Netherlands (9%), Russia (7 %), Austria (6 %), United Kingdom (5%) [1].
Further analysis of the structural transformation in the field of foreign direct investment and GDP by economic activity in Ukraine shows that the largest share of foreign investment was attracted to the following economic activities:
- manufacturing industry (27.93 % of total fdi in 2013);
- financial activities (33.68 % of total fdi in 2013);
- real estate, renting and business activities (10.63 % of total fdi in 2013).
The structure of economic activities represented in Table 1 is associated with a high rate of return on funds invested and with a significant return on investment.
To estimate the level of the Ukrainian economy dependence on foreign capital it is appropriate to use elasticity analysis.
Let us take a calculation of the elasticity with respect to GDP dynamics in terms of the dynamics of foreign investment in certain sectors (table 1).
Table 1
The elasticity of structural transformations in the economy of Ukraine
Economic activity Elasticity coefficient AGDPi AFDI,
Agriculture, hunting and forestry 0.976
Mining 1.004
Manufacturing 0.891
Production and distribution of electricity, gas and water 0.772
Construction 0.825
Trade; repair of motor vehicles, household appliances and personal and household goods, hotels and restaurants 1.085
Transport and communications 1.065
Education 1.691
Health care and social service 1.497
Financing activities 0.587
Real estate, renting and business activities 1.051
Note: The table designed by the author based on the State Statistics Committee data [8].
Calculation shows that the current practice of priority investment is of greater importance not only for the recipient country (Ukraine), but for the donor investing country. Examining the value of the coefficient of elasticity of changes in gross domestic product for the change in the volume of foreign direct investment, it is easy to come to the conclusion that with the same size of investment the funds in education and health make the largest contribution to GDP. Development of human capital and FDI reinforce each other through complementary effects: increased qualification of the workforce (training, new skills and special education for workers of transnational corporations and enterprises with foreign capital) - the direct effect; social stability and improving the nation's health - indirect effect [8]. Relatively high coefficient of elasticity belongs to the mining (1.004), transport and communication activities (1,065), trade and tourism (1,085).
To determine the degree of communication FDI and GDP there was used a popular method of economic phenomena, correlation and regression analysis (table 3).
The formula chosen to calculate a correlation coefficient is [4]:
nï,xy-(£x)(Zy)
(1)
In our case FDI was chosen as the one of two variables (x) (million USD) to calculate the correlation coefficient to evaluate the relation between the second variable GDP (y) (billion UAH). It goes without saying that FDI does have influence on Ukrainian economy,
Calculation of tl
buy now we will have the numbers (the correlation coefficient) to prove this fact. We have made the following calculations of the correlation coefficient (table 2).
Table 2
correlation ratio
Years FDI (x) GDP (y) x*y x2 y2
2002 4555.3 225.81 1028632.3 20750758.09 50990.16
2003 5471.8 267.344 1462852.9 29940595.24 71472.81
2004 6794.4 345.113 2344835.8 46163871.36 119103
2005 9047 441.452 3993816.2 81848209 194879.9
2006 16890 544.153 9190744.2 285272100 296102.5
2007 21607.3 720.731 15573051 466875413.3 519453.2
2008 29542.7 948,056 28008134 872771123.3 898810.2
2009 35616.4 913.345 32530061 1268527949 834199.1
2010 40053 1082.569 43360136 1604242809 1171956
2011 44806 1316.6 58991580 2007577636 1733436
2012 50333.9 1408.889 70914878 2533501489 1984968
2013 55296.8 1454.931 80453029 3057736090 2116824
Sum 320014.6 9668.993 347851749 12275208044 9992194
Average 26667.88 805.7494
After substituting in the formula 1 we have got the correlation coefficient:
The correlation coefficient = 0,99
The calculations let us reach the following conclusions:
— because the correlation coefficient rxy = 0,99, applying the Chaddock scale of the determination coefficient, FDI and GDP are very strongly interrelated and are directly related (because rxy > 0);
— coefficient of determination R2 = 0,199, and it means that the variation in GDP depends on changes in the volume of investment by 19.9%.
There is strong dependence between Ukrainian economic growth (GDP) and FDI. It means that the more FDI will be attracted to Ukraine , the more resources for economic growth Ukraine will have. So, it
would be useful to find out what are the main factors which have influence on the FDI amount in Ukraine.
Let us use the correlation and regression analysis to estimate the dependence of FDI inflow on the several factors. FDI (million dollars) were selected as the result factor. The factor variables are such indicators: X1 - GDP, billion UAH. X2 - the average wage, UAH. X3 - the amount of public debt, billion UAH. X4 - level of the tax burden, %; X5 - profitability of domestic enterprises %; X6 - average interest rate on deposits, %; X7 - the official rate of UAH to the USD, for $
100;
X8 - inflation, %.
The data for correlation and regression analysis of the impact of factor variables on direct investments is shown in the table 3 [8, 9].
Table 3
Summary data for correlation and regression analysis of the impact factor values X1, X2, X3, X4, X5, X6, X7, X8 on FDI
Years Y X1 X2 X3 X4 X5 X6 X7 X8
2002 4555.3 225.81 311 63.2923 18 4.8 11.2 537.21 6.1
2003 5471.8 267.344 376 64.4687 20.1 3.7 7.8 532.66 -0.6
2004 6794.4 345.113 462 66.1332 20.32 2.6 7.1 533.27 8.2
2005 9047 441.452 590 67.6823 18.3 6.4 7.8 531.92 12.3
2006 16890 544.153 806 63.1446 22.21 7 8 512.47 10.3
2007 21607.3 720.731 1041 66.1137 23.11 6.6 6.8 505 11.6
2008 29542.7 948.056 1351 71.2943 22.62 6.8 7.2 505 16.6
2009 35616.4 913.345 1806 130.6896 23.92 3.9 8.3 526.72 22.3
2010 40053 1082.569 1906 301.4284 22.78 3.3 11.8 779.12 12.3
2011 44806 1316.6 2239 434.32 21.42 4 9.4 793.56 9.1
2012 50333.9 1408.889 2633 473.1216 25.5 5.9 7.3 796.76 4.6
2013 55296.8 1454.931 3337 516.405 24.6 5 11.3 799.1 -0.2
94-
EKOHOMÎHHHH BÎCHHK ^OHÔacy № 4(38), 2014
According to the eight-factor regression analysis the economic and mathematical model was constructed:
Y = -29408.57 + 26.15Xi + 1.88X2 + 21.2X + i243.75X4-229.88X5 + 990.22X6-13.45X7 + 195.25X8
This equation shows that the greatest impact on FDI inflow to Ukraine results from such factors as:
1. The level of tax burden. If this factor changes by 1%, the volume of direct investments will change to 1243.75 million;
2. Profitability of domestic enterprises. An increase of this factor by 1% will cause the increase of direct investment to 733.99 million;
3. Average interest rate on deposits. If this factor changes by 1%, the volume of direct investments will change to 990.22 million.
4. Inflation rate. An increase of this factor by 1% leads to the increase of direct investment to 195.25 million.
The input data are transformed to the correlation matrix calculated on the basis of table 2.4, which is used to measure the strength of the relationship between selected variables and the factorial scoring index (Table 4).
Let us transform the numerical values of the correlation coefficient obtained in the correlation matrix (table 4), into their text semantic equivalents (table 5).
Table 4
n matrix
Y X1 X2 X3 X4 X5 X6 X7 X8
Y 1
X1 -0.99173 1
X2 0.984085 0.971122 1
X3 0.88831 0.888197 0.919931 1
X4 0.826347 0.8029 0.796882 0.596927 1
X5 0.010071 0.060651 -0.01347 -0.15235 0.145779 1
X6 0.315873 0.253296 0.353908 0.44016 -0.05108 -0.35612 1
X7 0.81588 0.816116 0.83115 0.965242 0.482772 -0.25918 0.539638 1
X8 0.01422 0.009548 -0.1009 -0.36328 0.094452 0.145001 -0.23322 -0.3714 1
Table 5
Transformed correlation matrix
Y X1 X2 X3 X4 X5 X6 X7 X8
Y 1
X1 Very strong 1
X2 Very strong Very strong 1
X3 Strong Strong Very strong 1
X4 Strong Strong Strong Appreciable 1
X5 No connection No connection No connection Weak Weak 1
X6 Moderate Weak Moderate Moderate No connection Moderate 1
X7 Strong Strong Strong Very strong Moderate Weak Appreciable 1
X8 No connection No connection Weak Moderate No connection Weak Weak Moderate 1
Calculation of the correlation matrix leads to the conclusion that there is a significant relation between Y and X factors, except the X5 (profitability of domestic enterprises) and X8 (inflation rate).
Conclusion. Thus, the calculations carried out give a clear picture of the Ukrainian economy's dependence on the foreign capital. The Ukrainian economic growth very strongly depends on the FDI in-
flows. This fact was proved with the help of two methods: Elasticity Analysis and Correlation and Regression Analysis. Calculation of elasticity shows that the current practice of priority investment is of greater importance not only for the recipient country (Ukraine), but for the donor investing country as well. Examining the value of the coefficient of elasticity of changes in gross domestic product for the change in the
volume of foreign direct investment, it is easy to come to the conclusion that with the same size of investment the funds in education and health make the largest contribution to GDP.
The result of regression analysis of the relation between the direct investment in Ukraine and the selected factors shows that it is necessary to create and maintain a favorable tax climate and increase the profitability of domestic enterprises to ensure a stable increase in investments as the main indicator of investment attractiveness of the country. The clear proof of such suggestions are the results of the regression analysis summaised above, according to which the level of the tax burden, the level of profitability of the enterprises have greatest impact on the volume of direct investments. In this subsection we use multifactorial correlation analysis unlike the previous subsection where there were only two variables (FDI and GDP). We have found out the main factors on influence on FDI inflow to Ukraine they are the profitability of domestic enterprises, the tax burden.
References
1. The official website of the State Agency for Investment and National Projects of Ukraine [Electronic resource]. - Mode of access: http://www.ukrpro.ject. gov.ua/investment. 2. Foreign Capital and Economic Growth [Electronic resource]. - Mode of access: http://www.iie.com/publications/papers/subramanian04
07.pdf. 3. Terutomo Ozawa The (Japan-Born) "Flying-Geese" Theory of Economic Development Revisit-ed-and Reformulated from a Structuralist Perspective 2010. 4. Wang, Peijie (2005). The Economics of foreign exchange and global finance, Springer. 5. Komi-ya, Ryutaro; Wakasugi, Ryuhei (1991), Japan's Foreign Direct Investment. Annals for the American Academy of political and social science, Vol. 513, 48-61. 6. European Business Association [Electronic resource]. - Mode of access: www.eba.com.ua. 7. Report Investment Company "NIKO" of FDI in Ukraine, 2011 [electronic resource]. - Mode of access: http://www.kua.niko.ua/ wpcontent/uploads/2010/07/ Sector Review Macro-c-FDI 2011 full-v RU.pdf.
8. State Statistics Committee [Electronic resource]. -Mode of access: http://www.ukrstat.gov.ua/. 9. Official site of the Ministry of Economic Development and Trade of Ukraine [Electronic resource]. - Mode of access: http://www.me.gov.ua/.
Меденцева М. М. Залежшсть украТнськоТ економжи вщ шоземного кашталу
У статп розглянуто функщонування шоземного катталу в Украшг Дана оцшка швестицшно! привабливост Украши. Проведено аналiз еластич-ност i кореляцшно-регресшний аналiз для визна-чення ступеня залежноси украшсько! економiки ввд шоземного катталу. Проведено багатофактор-ний кореляцшний аналiз для визначення факторiв впливу на обсяги прямих шоземний швестицш в Украшу.
Ключовi слова: шоземний каттал, прямi шо-земнi iнвестицii (П11), iнвестицiйна привабливiсть, еластичнiсть, кореляцiйно-регресiйний аналiз.
Меденцева М. М. Зависимость украинской экономики от иностранного капитала
В статье рассмотрено функционирование иностранного капитала в Украине. Дана оценка инвестиционной привлекательности Украины. Проведен анализ эластичности и корреляционно-регрессионный анализ для определения степени зависимости украинской экономики от иностранного капитала. Проведен многофакторный корреляционный анализ для определения факторов влияния на объемы прямых иностранный инвестиций в Украину.
Ключевые слова: иностранный капитал, прямые иностранные инвестиции (ПИИ), инвестиционная привлекательность, эластичность, корреляционно-регрессионный анализ.
Medentseva M. M. Dependence of the Ukrainian Economy on Foreign Capital
The article gives a clear picture of the foreign capital operation in Ukraine. The investment attractiveness of Ukraine was defined. The analysis of elasticity and correlation and regression analysis were carried out to determine the level of Ukrainian economy's dependence on the foreign capital. The multivariate correlation analysis was carried out to find out the factors of influence on foreign direct investment inflow in Ukraine.
Keywords: foreign capital, foreign direct investment (FDI), investment attraction, elasticity, correlation and regression analysis.
Received by the editors: 14.10.2014
and final form 23.12.2014
