CC BY
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Lytvyn R.I., (lytvynr@ukr.net) senior laboratory assistant, researcher © Lviv national university of veterinary medicine and biotechnologies named after S.Z.Gzhytskyj
EFFICIENCY OF FDI IN AGRICULTURE IN THE ERA OF GLOBALISATION
Dynamics of FDI in developed, developing economies and South-East Europe and the CIS was analysed, efficiency of foreign capital in Ukraine, SWOT analysis of transnational corporations influence upon Ukraine's agriculture was conducted in research paper.
Key words: efficiency, foreign direct investment (FDI), agriculture, dynamics, transnational corporations, SWOT analysis
Introduction. The states that can increase the economic potential of using foreign investment, in most cases, pay attention and prefer one of such its forms, as foreign direct investment (FDI). The entity of FDI, besides foreign aid and financial assistance in terms of food products [1, p.49] is that, accordingly to their nature they are directly involved in the production sphere of the economy, i.e. creation of new enterprises, modernisation and expansion of existing businesses [2, p.129], stimulate export activity of the host country [3, p.410]. Direct foreign capital in the country plays substantial role for its prosperity [4, p.221]. This kind of capital provides it with advanced modern technologies [5, p.3], modern management methods, promotes in economic growth and sustainable development, improves and updates infrastructure [6, p. 235], creates new working places for the population, increases the quality and range of products and services that are in demand at the domestic and foreign markets [7, p.28].
Application of such investment resources in a national economy of the country is more vital in the era of development of globalisation processes in the world.
Material and methods. To issues of researching of foreign direct investment and its impact on economic development have devoted their research papers many foreign scientists, among them: Y. Zheng, G. Ritzer, E. Hutson, R.R. Sinkovics, J. Berrill, X. Fu, C. Taylor, K. Head, J. Ries, A. Standar, G. Niewçglowska, P. Chechelski, J. NargieHo and other outstanding scientists that work in this field of research.
From the other hand the research of foreign direct investment requires more elaborations in the light of different industries of the economy and its efficiency, such as agricultural sector. So while taking into one's consideration the importance of the above mentioned issues in this scientific research the dynamics of FDI in developed, developing economies and South-East Europe and the CIS was analysed. SWOT
© Lytvyn R.I., 2012
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analysis of transnational corporations influence upon Ukraine's agriculture, efficiency of foreign capital usage in Ukraine also was investigated.
Results and discussion.
Table 1
Dynamics of FDI in the world in 2005 - 2010, (mln.USD)_
Years Developed economies Developing economies South-East Europe and the CIS Total
FDI inflows FDI outflows FDI inflows FDI outflows FDI inflows FDI outflows FDI inflows FDI outflows
2005 619134 745679 332343 122143 31116 14310 982593 882132
2006 977888 1154983 429459 226683 54516 23723 1461863 1405389
2007 1306818 1829044 573032 294177 91090 51581 1970940 2174802
2008 965113 1541232 658002 308891 120986 60386 1744101 1910509
2009 602835 850975 510578 270750 71618 48802 1185031 1170527
2010 601906 935190 573568 327564 68197 60584 1243671 1323338
Compiled by the source: [8, P.187- 190].
Foreign direct investment through creation of joint ventures involves into activities of the national investors, which promotes entrepreneurship and increase revenues to the state budget of the country. Attracting FDI to state makes it possible to improve the economic situation in a whole society, improve social welfare of the population [9, p.240], and in the final case, strengthen the authority of the state at international level.
In order to obtain such results in the host country one's should ensure effective functioning of the acting regulatory framework, coordinated activities of all state agencies and services, stable tax legislation with an optimal level of taxes, the development of national enterprises, the strategic development of international economic relations.
Accordingly to the data of table 1 the world amount of FDI inflow in 2010 totally amounted 1243671 millions of U.S. dollars, i.e. in comparison with 2005 the specified indicator increased in more than 1,2 times and consisted of 982593 millions of U.S. dollars. FDI outflow in the world in 2010 totally amounted 1323337 millions of U.S. dollars, i.e. in comparison with 2005 the specified indicator increased in more than 1,5 times and consisted of 882132 millions of U.S. dollars. As for Ukraine FDI inflow in 2010 amounted 6495 millions of U.S. dollars, and in 2005 this indicator was 7808 millions of U.S. dollars respectively and was larger in 1,2 times than in year 2010. The level of FDI outflow in Ukraine in 2010 was 736 millions of U.S. dollars, and in 2005 was 275 millions of U.S. dollars respectively. With this data one's can make a statement on FDI outflow processes in the world economy and Ukraine as well regarding financial economic crisis at global level. World experience claims that FDI is primarily invested in banking, finance, telecommunications, trade and other areas of service. The volume of foreign direct investment in the agricultural sector in relation to the total amount of FDI in the world is only 2%. It is known that agriculture is not as cost-effective and profitable
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sector of the economy as finance and other spheres of the economy. On the other hand there is another reason that explains such a small amount of FDI in this sector of the economy.
Table 2
Value of cross-border M&As, in the world by seller/purchaser in 2005 - 2011, __(mln.USD)__
Years Developed economies Developing economies South-East Europe and the CIS Total
Net sales Net purchases Net sales Net purchases Net sales Net purchases Net sales Net purchases
2005 403731 359551 63801 68680 -5279 6188 462253 434419
2006 527152 497324 89163 114922 9005 2940 625320 615186
2007 891896 841714 100381 144830 30448 21729 1022725 1008273
2008 581394 568041 104812 105849 20337 20167 706543 694057
2009 203530 160785 39077 73975 7125 7432 249732 242192
2010 251705 215654 82813 96947 4321 9698 338839 322299
2011 189614 135369 25473 25395 9076 2352 224163 163116
Compiled by the source: [8, P. 195- 198].
Table 3
Number of cross-border M&As, in the world by seller/purchaser in 2005 - 2011,
Years Developed economies Developing economies South-East Europe and the CIS Total
Net sales Net purchases Net sales Net purchases Net sales Net purchases Net sales Net purchases
2005 3805 3741 1062 765 137 51 5004 4557
2006 4326 4446 1219 839 202 62 5747 5347
2007 5187 5443 1552 1047 279 102 7018 6592
2008 4603 4732 1501 1011 321 123 6425 5866
2009 2920 2666 975 746 343 70 4238 3482
2010 3638 3644 1290 1061 477 83 5405 4788
2011 1420 1484 501 360 115 31 2036 1875
Compi
ed by the source: [8, P. 199- 202].
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Table 4
Value of greenfield FDI projects, in the world by source/ destination in 2005 -
Developed Developing South-East Europe Total
Years economies economies and the CIS
By source By By By By By By source By
destination source destination source destination destination
2005 530218 225107 152844 421460 26702 63197 709764 709764
2006 598448 286272 267768 540760 17871 57056 884087 884088
2007 650301 298350 268353 559778 21446 81972 940100 940100
2008 1027741 462450 404054 883917 29988 115416 1461783 1461783
2009 685086 305231 248451 593041 18663 53928 952200 952200
2010 569081 263509 218697 491622 19190 51838 806968 806969
2011 203876 74017 87154 200740 4837 21111 295867 295868
Compi led by the source: [8, P. 206-208].
The value of greenfield FDI projects in the world by source in 2011 amounted 904267 millions of U.S. dollars and in 2005 this indicator totally amounted 754910 millions of U.S. dollars. For Ukraine's economy the value of these greenfield FDI projects in 2011 was 954 millions of U.S. dollars, and 284 millions of U.S. dollars in year 2005 respectively [10, p.189,192].
The leading foreign experience states that the most countries financing agricultural sector through its own sources of funding and existing programmes, not attracting foreign capital at all. The governments of these countries create appropriate conditions to increase the export potential of agricultural production and limit its import. With this purpose, they introduced subsidies to their agricultural producers, which contribute to a more profit than from investing outside the country. In developing countries operates many large TNCs (transnational corporations) that have a monopoly position and prevent effective development of the new foreign companies. Respectively to some research data about 80 % of FDI are directly connected with activities of TNCs [11, P.45]. Africa and Latin America are the major continents of transnational corporations. Well known in Latin America "Bunge y Born" [12] which today is one of the five largest companies in the grain market, thanks to its monopoly position affects the economic and political situation in Argentina.
Therefore, in order to prevent the negative consequences the host governments strive to restrict the activities of transnational corporations through the creation of new economic activities in the form of joint ventures (JV). Such form of cooperation satisfies not only Latin America countries but foreign investors as well. Last receive the benefits from the state and guarantees the safety of investments. On the other hand, there is no need for new enterprises to be built and the production process to be established. Under these mentioned conditions, simplify the process of recruiting of the qualified staff and adaptation to local conditions of implemented technologies.
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Table 5
Number of greenfield FDI projects, in the world by source/ destination in 2005 -
Years Developed economies Developing economies South-East Europe and the CIS Total
By source By destination By source By destination By source By destination By source By destination
2005 9057 5145 1321 4509 182 906 10560 10560
2006 10291 6163 1779 5337 207 777 12277 12277
2007 10356 6355 1700 5110 189 780 12245 12245
2008 13474 7526 2650 7728 298 1168 16422 16422
2009 11651 6618 2297 6731 244 843 14192 14192
2010 11574 6766 2302 6470 266 906 14142 14142
2011 4022 2216 781 2379 71 279 4874 4874
Compi ed by the source: [8, P.210-212].
As was reported by the State Statistics Committee of Ukraine the volume of foreign direct investment in agriculture in Ukraine as of 1st July 2012 amounted to 739 million U.S. dollars. The amount of foreign investments into the Ukrainian agricultural sphere as of 1st January of the current year was 685.3 million U.S. dollars. The share of investment into agricultural sector of our country is 1.4% of the total foreign investments in Ukraine's economy.
Accordingly to the data of the State Statistics Committee, the largest investor in Ukraine's agriculture is Cyprus - 360.7 million U.S. dollars, followed by the United Kingdom - 42.8 million U.S. dollars, the Virgin Islands - 27.3 million U.S. dollars (82% more than at the beginning of this year).
Interesting fact is that foreign investors are showing the largest interest in the Ukrainian agribusiness and manufacturing areas. Agricultural products processing and manufacturing are interesting on the first place. Several new factors have emerged recently: the expected accession of Ukraine to the FTA with the EU, and the positive dynamics in taxation (reduction of value added tax and income). Favorable economic location and cheap labour force create a unique perspective for Ukraine to become a manufacturing and processing hub, focused on the European market. Also very vital role is attracted for "One-Stop-Shop" - a system of personal support of strategic investors in the Ukrainian market, which was introduced recently. This system would promote in boosting of investment activities of all potential foreign investors [13].
The agricultural sector and the entire economy of Ukraine to some extent depend on the development of global processes. It is known that the main carriers of that kind processes are transnational corporations (TNCs) with rapid growth of FDI attraction [14, p.15] engaged in both manufacturing and sales. This is actually their activities occur significant changes in global agriculture, which is to change the existing technologies to new one, modernizing the industry. Similar changes occur also in Ukrainian agriculture. The significant economic potential of transnational corporations (compared with many other countries), their role in the world economy
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will continue to grow increasingly in larger scale. It undergoes its development economic policy in many countries, including the agricultural sector. TNCs in most cases come from the richest countries in the world.
The world market for agricultural products and their processing is quite saturated at the moment, causing in its turn a strong competition. In economically highly developed countries such as the U.S. or the Member States of the EU and OPEC organisation (the dominant role of Japan) agriculture and agricultural exports are sectors protected from unfair competition and maintained by these countries.
Conducted SWOT and efficiency analysis in the research of foreign investment in the agricultural sector of Ukraine provides an opportunity to affirm the positive and negative aspects of foreign investment in this sector and their impact on the overall state of the economy in our country (Table 6 and 7).
Table 6
Efficiency of usage of foreign capital in agriculture of Ukraine*
Positive side Negative side
Growth of investment attraction in enterprises (not only the efficiency of capital inflows from abroad, but also the possibility of a loan attraction) High share of import, including import of the firms with part of foreign capital
Involvement of the financial resources to budget of state Evasion from payment of taxes in Ukraine
Increasing of the qualification of Ukrainian employees through internship and traineeship programmes in abroad Low predisposition for profits reinvestment of the companies with foreign capital
Possibility of privatization of the national enterprises by foreign investors Frequent reduction of employment after completion of investment projects implementation
Increase of cooperation with national firms (growth of foreign investments is highly adjusted with increasing of production in the food industry) Quite slow development of cooperation between Ukrainian and foreign partners, as evidenced by the low participation of Ukrainian components (ingredients) used in the production of foreign commodities
Dynamic export growth of the firms with foreign capital Reduction of population in employment of "research and development" activities in foreign business bodies
Providing Ukrainian enterprises with equipment in the form of new technologies
Competition of the firms, especially in the food industry and agricultural production sectors (increasing of competition of Ukrainian commodities taking into account copying) Weakening or liquidation of Ukrainian enterprises by large foreign companies competitive pressing
Notice: Developed on the basis of personal research
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Table 7
SWOT analysis of influence of transnational corporations (TNC) on agriculture
of Ukraine*
OPPORTUNITY THREATS
AT MACRO LEVEL
Acceleration of the modernization of agriculture connected with the possibility of access to new production technologies, genetic material, labour organisation and credits of TNC Disappearance from commodity production very large number of agricultural enterprises that would lead to rise of unemployment level and severe division of rural population on layers
Growth of export of Ukrainian food and agricultural products (livestock and crop production) through TNC and processing enterprises, the global trade networks Growth of import of food and agricultural products (in general agricultural prices on world markets are lower than Ukrainian agricultural sector offers)
Improvement of agricultural structure and infrastructure in Ukraine Potentially great opportunity to influence demand increasing (popularity of products from another part of the world, not only from Ukraine)
Participation of Ukrainian agricultural products and processed products in the global market (chance still exists) Achieving sustainable cost reduction of raw materials
Increase of the competition of Ukrainian agriculture, based on specialisation and concentration of production (lower prices) Possibility of application of transfer pricing in consumer chain
Potentially great opportunities to influence the increase in demand (popularity of products from our country, for example: organic and ecologically friendly) Introduction or usage of cheap genetically modified products
Relatively cheap work force (which arises from the high level of unemployment in the economy of Ukraine in overall) Increase of risk of agricultural production. In case of trade liberalisation, development of cooling technology, logistics, and etc., lower prices of raw material procurement in developing countries can be useful solution for transnational corporations
Methods of contracting and cooperation of TNC with agricultural producers arising from copying (example) through other national agribusiness enterprises
AT MICRO LEVEL
Providing the stable procurement of raw materials contracted by the minimum guarantee prices. Possibility of access to new production technologies, credit, genetic material, thereby increasing product quality and decreasing their Strong competition, sustainable fallout of the weakest producers, low prices. Low position of agricultural producers regarding negotiations with global companies (weak connections in Ukraine, a small number of manufacturing
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cost. groups, as well as production and marketing groups)
Rising of enterprise profitability that arises from specialisation and concentration of production. Dependence of the agricultural worker on global firms that emerge from specialisation and concentration of production, long-term loans, etc.
Growth of companies' production that belong to global enterprises in Ukraine (production cost is lower there, accordingly to the latest production technology and management)
Notice: Developed on the basis of personal research
Below is provided some data with key ranking indicators on Ukraine and its business environment from Doing business 2012 World Bank's report. These indicators directly influence upon investment climate and activities of the foreign investors in our country.
Table 8
Doing business in Ukraine, some indicators
Name of ranking 2012 rank 2011 rank Change in rank
Starting a Business 112 118 + 6
Dealing with Construction Permits 180 182 + 2
Registering Property 166 165 - 1
Getting Credit 24 21 - 3
Protecting Investors 111 108 - 3
Paying Taxes 181 181 No change
Trading Across Borders 140 136 - 4
Enforcing Contracts 44 44 No change
Resolving Insolvency 156 158 + 2
Source: [15].
Conclusions. In the era of globalisation the capital plays a very important role in our lives, leading us a completely different way than it was at the dawn of independence of our country, as well as deepen its influence in the following decades. The central place in the economy has the investment activity - that is a tool to achieve economic growth and development. Among the other various forms of investments foreign capital and FDI seem to be most dynamic and have advantages for the countries of Central and Eastern Europe, including Ukraine for two partners, investor and the recipient. Conducting this research and analysis of the evolution of the Ukrainian business environment in recent years, the influence of legislation and the new tax code, the role of FDI in the economy and the agricultural sector it enables to elaborate efficiency and SWOT analysis of foreign capital's influence upon Ukrainian agricultural sector.
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Summary Lytvyn R.I.
Dynamics of FDI in developed, developing economies and South-East Europe and the CIS was analysed, efficiency of foreign capital in Ukraine, SWOT analysis of transnational corporations influence upon Ukraine's agriculture was conducted in this research paper.
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