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Gregory T. Papanikos
How to Attract Foreign Investments in
Greece and the Role of Public
Administration
Note: This paper was prepared for the International Meeting on “The modern State:
What reforms?” of The European Public Law Organization (EPLO) and the
Global Network of Greek Lawyers working abroad (GNGL), in cooperation
with the Institute for Studies in Competition Law and Policy (IMEDIPA) and
the Gutenberg chair and the CERA at the ENA, France, Friday, 27 July 2012,
Legraina/Sounion, Athens, Greece.
Athens, 27 July 2012
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Contents
1. Introduction
2. The Investment Scenario
3. The Greek Investment Scenario
4. The Stories
5. The Need to Rewrite the Greek Investment Scenario
6. Conclusions
References
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1. Introduction
This paper is based on an eclectic use of the literature on Foreign Direct
Investments (FDI)1. The selection criteria are subjective and serve the author's
predetermined views on how private investments, part of which are FDI, could be
promoted in Greece. The author's long and analytical experience of the Greek case
has predetermined the conclusions on how it can be done. This paper looks at the
international literature to support his conclusions and rectify them any
inconsistencies that might exist. The first step was to look at how the idiosyncratic
characteristics of a country affects foreign capital formation. Idiosyncrasies are
either natural (e.g. geographical distance) or manmade (e.g. cultural, language, legal
system etc).
A PEST analysis and a SWOT analysis will illustrate both the natural and
manmade characteristics which make a country an attractive place to invest.
However, such analysis is beyond the scope of this note2. There is though a
fundamental question: what are the determinants of investment? This issue is
discussed in the next section of this paper. Selected papers are reviewed which are
considered relevant and applicable to the current Greek investment environment.
This relevance is illustrated in the third section of the paper. The next section is a
story telling to demonstrate some of the aspects of Greece's inability to attract
foreign investment. As all stories, the mythical and the real are interwoven. The
moral of the story is more important than the narrative itself. Based on all these
(pertinent literature, relevance to Greece and stories), I attempt to propose some
policy interventions which are deemed necessary to attract foreign direct investment
to Greece. It is the author's belief that there is huge latent international investment
demand for Greece. One way to realize this demand is proposed in section IV.
A word of caution is at stake here. I am not dealing with investment which
require agreements between two nations such as the Greek Government and
Chinese Government. My analysis is relevant for investments of small international
private business because Greece cannot accommodate big investments. For
example, no car company will come and produce in Greece. Also, FDI has been the
subject of great skepticism for both the home and the host country. The host
country is concerned with foreign control of domestic assets which might undermine
1 I do not review the literature at all but I select those papers which fit my predetermined and most
probably biased views on Greece. Helpman (2006), among others, provides an excellent review of the
theoretical literature, providing empirical evidence when necessary because as he mentions (p. 591-
592) "[T]he interplay between theory and empirics is particularly important here because many of
these theoretical studies have been motivated by evidence".
2 I have in mind not so much analyses of consulting firms and banks as studies of the type produced
by Dunning (1998) examining the environment of international business activity in the 1970s up to
1990s.
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national security and sovereignty. It might also aggravate macroeconomic instability
since foreign capital tends to move faster in cases of global and national economic
crises. On the other hand, the home country worries that its national capital is going
abroad depleting the home country of important capital resources. In Greece it is a
recent phenomenon the capital export to neighboring countries, which has been
blamed for the recent economic crisis and unemployment rise, particularly in the
Northern Regions of Greece. However, as Desai et al (2005, p. 37) have reported:
"[N]ew evidence from analyses of American multinational firms suggests
instead that greater foreign investment is associated with higher levels of
domestic investment. This estimated complementarity implies that firms
combine home production with foreign production to generate final output
at lower cost than would be possible with production in just one country,
making each stage of the production process more profitable, and
therefore, in equilibrium, more abundant. It is clear that the simple story, in
which the world has a fixed stock of investment capital that can either go to
one place or another, is due for rethinking. The growing prominence of
multinational firms, their reliance on their internal product and capital
markets, and this evidence on the complementarity of their investment
worldwide suggest the importance and possible contours of such a
reconsideration".
And in a more recent study by the same authors Desai et al (2009, p. 37), they
found that "10 percent greater FDI is associated with 2.6 percent greater domestic
investment, and 10 percent greater foreign employee compensation is associated
with 3.7 percent greater domestic employee compensation".
This story explains very well what happened in Germany during the heydays of
the euro years (up to 2009). The strong euro permitted German production to
benefit from outsourcing part of its input production to neighboring noneuro and
cheap labor countries. Germany's exports increased dramatically at the expense of
south European countries trade deficit.
Similar evidence for the impact of outward FDI on domestic investment is
reported by Herzer (2008) for Italy. He found that outward FDI has had negative
short run impact on domestic investment but the long run impact was positive.
Javorcik (2004) has found evidence of positive impact of FDI on the productivity of
domestic firms in Lithuania.
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2. The Investment Scenario
In widely cited paper, Davidson (1980) stated the country specific variables
which influence foreign investment location decisions. In his words these variables
are:
1. Market size and growth are widely associated with investment patterns.
2. Tariff and non-tariff barriers to trade, input costs and geographic proximity
affect the economics of direct investment.
3. Legal, political and economic conditions are considered important factors in
investment decisions.
4. The host country's similarity to the investing firm's home country has also
been hypothesized to affect location decisions.
Davidson (1980, p. 18) concludes "The effect of corporate experience on
location patterns is twofold. Firms prefer nations in which they are already active to
those in which they are not. In addition, firms with extensive experience exhibit less
preference for near, similar and familiar markets. Markets that others may perceive
as less attractive because of high uncertainty levels are given increased priority as
the firm's experience rises. As firms gain experience, the location of foreign
investment activity will increasingly represent an efficient response to global
economic opportunities and conditions".
These four variables are very vital and it should be taken into consideration by
all those who are responsible in writing the Greek investment scenario. Other
studies have supported Davidson's conclusion. In a study of FDI within the United
States (Coughlin et al, 1991), the authors concluded that variables which measure
the market size (demand) such as per capita income and manufacturing density
(agglomeration economies). Factor costs such as wage rates, labour-management
environment and the availability of labour. Lastly, government plays an important
role through taxes and building the transportation and other infrastructure facilities.
This study keeps one important variable constant, namely the cultural affinity
between the home and host regions of FDI. In the case of the various states of USA,
the host regions culture is the same. Other studies have found that FDI goes to
similar countries with common cultural characteristics such as language. Actually,
most of this FDI is of intra-industry nature and between subsidiaries and parent
companies (see Alfaro & Charlton, 2009).
Geographical proximity has been also investigated. In a very recent study
(Bodman & Le, 2013), the authors found that geographical proximity (measured by
physical distances) is an important determinant of FDI. In addition to geographical
distance, the authors examine the impact of FDI in building human capital through
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the transfer of knowledge embodied in the new investment. The results enable the
authors to recommend two basic policies:
countries that have embraced a relatively more open international
investment regime have usually grown significantly faster than others who
have not. The fact that FDI transmits technological knowledge, as well as
contributing to the physical capital stock, suggests that openness to direct
physical investment, as well as to trade and financial flows, provides an
important driver of economic growth.
Human capital is not only necessary for the direct general enhancement of
the technological level itself, but is also essential for the ability to learn from
foreign technological sources. This has important implications for the ability
of education enhancement policies to raise living standards through multiple
channels.
Almost all studies find the role of government very important. This is the third
category of variables in Davidson's lest above. The Legal, political and economic
conditions include the tax and economic environment of the host country. Country
compete for FDIs offering favorable tax and regulatory environment with a very
flexible and effective public administration. At the extreme, there are some
countries which are considered tax havens or treasure islands as a recent study has
called them (Hines, 2010). This list includes many small islands and relatively poor
countries but it also includes countries members of the eurozone such as Cyprus,
Ireland, Malta and Luxembourg) as well as other rich countries such as Singapore
and Switzerland. Greece's islands range from 1600 to 6000 and the number of
inhabited ranging from 166 to 2273. It is really a pity that some of them have not
been used as treasure islands.
3. The Greek Investment Scenario
The previous eclectic review of some FDI studies has certain implications for the
Greek FDI scenario and I sketch them very briefly below.
First, Greece's size is small both its population and its land. It is also located far
away from the center of Europe and her neighboring countries, similar in culture, but
belong to a different international economic cluster. The most important of them is
Turkey.
Second, the factor cost relative to its neighboring countries is high, especially
when the productivity of labor is taken into account. It should be mentioned that the
3 See http://en.wikipedia.org/wiki/List_of_islands_of_Greece.
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average productivity of labor does not depend only on human capital but on the
quality of physical capital, the quality of Greek capitalists (entrepreneurs) and the
quality of public administration.
Third, the cultural proximity with other countries is problematic. Greece's
culture proximity countries (apart from Cyprus) are the countries in the region such
as Turkey. However, there is a tremendous and unexploited potential of foreign
direct investors with very strong cultural ties with Greece. These are successful
entrepreneurs in USA, Canada, Australia and in other countries of Greek descent.
Greece's future should be based on these two areas: Turkey and the other Balkan
nations and the Greek Diaspora of entrepreneurs. The latter also includes the Greek
tycoons of the international shipping industry.
Fourth, the Greek public administration, along with the Greek trade Unions and
the state nurtured capitalists are the most important impediment to any private
investment in Greece. For very rational reasons all three groups do not want any
healthy foreign direct investment to come to Greece. By rationality I mean that if
Greece becomes a modern economy, then these three groups will be in a worse off
position. It is for this reason that any attempt to "modernize" the existing Greek
public administration is doomed to fail. The solution must come from the political
process and a correct reading of the recent election results might show the way
towards a healthy long waited capitalist development of Greece. Once this is
achieved, then we Greeks can debate whether the next stage of development will
be: socialist, communist, anarchist or even Plato's utopia.
After I tell some stories in the next section, I will come back to what I think it
should be done for a capitalist development in Greece.
4. The Stories
The following stories whether were told to me by some of the participants of the
stories and/or I was one of them.
A. State Nurtured Capitalists and Trade Unions
In the 1960s, a large mining company used the trade unions to prevent a large
multinational company to invest in Greece. They were striking against the
multinational company and providing Greek resources to be exploited by
international capitalists who by the way pay higher wages than local state nurtured
capitalists. Local state nurtured Greek "capitalists" collaborated with left and
communist trade unions to keep FDI out of Greece. The first benefit because their
inefficiency and ineffectiveness can survive only under protection. The latter
because FDI pays higher wages postponing the inevitable immiserisation of the
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working class. Both groups have reached a dynamic equilibrium keeping away good
Greek and non-Greek capitalists. No wonder what happened to Greek economy in
the decades that followed the 1960s.
B. The Joke of Chinese and Russian FDI
China and Russia do not have the private investors Greece needs. During the
beginning of the current crisis many people thought China can help. During an
official visit of a political economic delegation from China we discussed the potential
of collaborations. The Chinese leaders of the mission were repeating all the time
how China can help Greece to get out of the crisis either through direct investment,
portfolio investment and Chinese imports of Greek products and services. The
services included Chinese tourists. At the end of the meeting, I was approached by a
high ranking official from the Chinese delegation whom I knew for years and with a
smile told me that the meeting was very good and he invited me to China (the Greek
tax payers would have paid for the trip) to continue this fruitful discussion. I told him
in my cynical way that nothing would happen and the whole meeting was to justify
the trip. If he really wanted to help Greece, we would have a private meeting. This
meeting was arranged and I had with me three people (personal consultants) with
long experience in small business, including tourism. I also had a Greek who spoke
Chinese. Straight from the beginning I told him that I wanted his help in two things.
First, to have one private Chinese investor who will invest in Greece at least 1 million
euro employing 5 people and most of the production will be exported. Second, to
make an arrangement so every month we have a group of 20 Chinese who will come
as tourists. If these two small projects were successful, then we can for further. Both
projects needed no government assistance. After one week he sent me forms to fill
in and I told him that I ma not going to fill any forms and the idea was dropped. I
have another similar experience with Russian investors but not as high as the one
with China.
C. The Myth of Structural Funds and Other Subsidies
The Community Structural Funds and any State Aid to the State-Nourished
Greek Capitalists Operate according to Gresham's law "When a government
supports (bad) "capitalists", the (good) capitalists will leave the country or disappear,
while the state nourished "capitalists" will mushroom". Any state aid to such
"capitalists" should stop immediately. Then the good ones might return. All subsidies
and structural funds crowd out good and sustainable investments. The case of a
luxury hotel in Northern Aegean Island is good example. The cost was 1 billion
drachmae and the effective subsidies were 1.2 billion drachmae. The owner made
200 million drachmae and the hotel never opened. The nominal subsidy was 80% of
the total budget; the effective 120%.
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D. The Tragedy of Elliniko
In 2003 a group of economists prepared a study (cost-benefit analyses) of the
post Olympic use of the various venues, including the Elliniko of 6000 stremmata.
After estimating the cost of building (1-2 billion euro) and maintaining the park (300
million per year), the group of economists suggested unofficially the following: 1000
strematta should be sold for one million euro each generating one billion euro.
These will be used for private dwellings with 20% coverage (200 square meters and
two floors) with the rest an open landscape maintained by the owners according to
some specified guidelines. This would have generated a garden-park of 800
stremmata. Another 1000 stremmata that face the sea will be auctioned off without
any predetermined guidelines. Potential investors will suggest how to build, what to
build and how much they would be willing to pay. All will be under the law of any
eurozone country. Legality will be determined ex post and morality will be ignored.
Future generations will determine the ethical use of the place. This would have
generated additional funds of 5 billion euro and an annual revenue of 300 million
euro which would have been used to maintain a metropolitan park of 4000
stremmata. After these suggestions, the team of economists received a letter to
restrict itself what the Presidential Decree determined for the Elliniko. The team
responded that nothing would happen. Nine years after nothing has happened which
is translated in huge financial losses, output decline and unemployment.
5. The Need to Rewrite the Greek Investment Scenario
The new investment scenario should take into consideration the following
factors. First, actual private investments can come to Greece only from those with
cultural proximity with the Greek proximity. Greek-Americans, Turkish and Israeli's
are good examples of people with a cultural proximity. All our efforts should be
aiming at attracting investments from these international cohorts of investors.
However, there is the big impediment of the international economic environment.
For the case of Turkey, it is in Greece's vested economic and I would argue national
security interest to play a leading role in promoting Turkey's entry into the eurozone.
This is necessary but not sufficient which brings me to the next point.
Second, there is a need for one investment law. A potential foreign or domestic
must have the freedom to choose any legal and institutional framework from the
eurozone countries. This will apply to all aspects including industrial relations, wage
compensation and environment protection.
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Third, abolish all subsidies and agencies which promote investments. Not only
they do not bring more investments but they are the main barriers for the types of
investments Greece has an advantage on.
Fourth, Greece's size is small. The optimal (economically, socially and politically)
level of foreign investments is the one that generates a turnover of 1 million to 10
million euro. In other words, this does not include the fixed and sunk cost of
investment and excludes all investment which require land and other concessions
from the Greek government such as mining.
Fifth, the Greek public administration, the trade unions and the state nurtured
capitalists cannot change. The only solution is political. A potential investor must
have the right to choose the legal and the institutional framework of any eurozone
country. This includes taxes, the level of wages and insurance coverage to be paid to
the Greek government. This will be particularly beneficial for the private islands and
other private properties which cannot be developed because of the coalition of the
troika: public administration, state nourished capitalists and trade unions. This troika
has been able to exploit the rest of Greek people for two centuries now. These are
the sons and daughters of those who killed Kapodistria.
Sixth, all nonpublic institutions should not be financed by the state and they
should not participate in state committees and boards of state enterprises. In
particular the following organizations are the great impediments to Greek Progress:
the three professional associations of Doctors, Lawyers and Engineers; the two trade
unions and the three employees' organizations. They should return to their role:
advisory and protect the interest of their members.
Seventh, reform the tax system in a way that minimizes corruption and weakens
both politically and physically the number Greek public employees. Income tax and
VAT should be abolished and in the long run the Greek Tax Revenue (Efories) should
be closed down. Government revenue will come from three sources which make up
what economists define as wealth: property tax, tax on savings' interest and various
excise taxes with inelastic demand. But the most important source of revenue is
from fully and an unashamedly exploitation of all public resources which is my next
point. Private land not used should be heavily taxed. The same applies to all private
buildings.
Eighth, all public capital, physical and cultural, must fully be exploited by private
agents by the use of the tool to Build Operate and Never Transfer (BONT) and all
proceeds should equally to support (a) low pensions (b) health (c) education and (d)
building up public savings. A good start is PARTHENON and ACROPOLIS. Then all the
uninhabited public islands must follow. As said the investor will have the choice to
select the law system of one the eurozone countries. The process will be very simple.
The government passes a law that says we are open for business. If you want to
exploit some public properties that you know of, please send in one page what you
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want to do and how much you want to give as down payment, how much every year
and which legal system you want to apply. The government makes it public and asks
others to outbid the offer primarily on the down payment. My rough calculations
shows that this revenue can reach 100 billion euro per year when everything has
been fully exploited.
I am not naïve to believe that this can be implemented without a countervailing
political force that can bring down the most devastating troika of the last 200 years
of public employees, trade unions and state nourished capitalists. However, the
recent election results leave room for hope. All we need is to let Greek people
decide through referendum what they want. Let people vote how many times they
want their ports to be blocked by any group of people. Let people vote if they want
the 6000 stremmata of Elliniko to become a metropolitan park and of course let
them know how much there are going to pay as taxes to build such a park and
maintain it. Let the Greek people vote if they want Parthenon to be open 24 hours a
day and so on. After all it is in this city that direct democracy was invented and
ostracism was a kind of a referendum. Ostracism can be used to decided when an
investment should be turned down or accepted it.
On the eight issues I will come back with separate papers for each one. The
approach will be similar as this one. International and theoretical literature will be
used to develop a practical guide on how these eight issues could be implemented
taken into consideration my predetermined and biased views on the subject. After
all the ultimate criterion of success is its effectiveness (obtaining results) and
efficiency. In our case what it means immediate higher economic growth and
employment creation in Greece.
6. Conclusions
Greece can attract a considerable amount of foreign direct investment which is
small and it will come from investors with a cultural proximity. The Greek Diaspora is
number one in the list but other people such us Turkish and Israelis can jump in.
The most important barrier is the troika that has ruled Greece for the last 200
years. It can be destroyed only through the political process. It is a very difficult but
noble task. If it is successful, Greece can give rise to a new type of civilization such as
the one of the 5th century B.C.
References
Alfaro, L. & Charlton, A. (2009) "Intra-Industry Foreign Direct Investment" The
American Economic Review, 99 (5): 2096–2119.
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Bodman, P., & Thanh Le, T. (2013). Assessing the roles that absorptive capacity and
economic distance play in the foreign direct investment-productivity growth
nexus" Applied Economics, 45 (8): 1027-1039.
Coughlin, C.C., Terza, J.V. & Arromdee, V. (1991) "State Characteristics and the
Location of Foreign Direct Investment within the United States" The Review of
Economics and Statistics, 73 (4): 675-683.
Davidson, W.H. (1980) "The Location of Foreign Direct Investment Activity: Country
Characteristics and Experience" Journal of International Business Studies, 11 (2):
9-22.
Desai, M.A., Foley, C.F. & Hines Jr., J.R. (2009) "Domestic Effects of the Foreign
Activities of US Multinationals" The American Economic Review: Economic Policy,
1 (1): 181-203.
Desai, M.A., Foley, C.F. & Hines Jr., J.R. (2005) "Foreign Direct Investment and the
Domestic Capital Stock" The American Economic Review, 95 (2): 33-38.
Dunning, J.H. (1998) "Location and the Multinational Enterprise: A Neglected
Factor?" Journal of International Business Studies, 29 (1): 45-66.
Helpman, E., (2006) "Trade, FDI, and the Organization of Firms" Journal of Economic
Literature, XLIV (3): 589-630.
Herzer, D. (2008) "The causal relationship between domestic and outward foreign
investment: evidence for Italy" Applied Financial Economics Letters, 4 (5): 307-
310.
Hines Jr., J.R. (2010) "Treasure Islands" Journal of Economic Perspectives, 24 (4):
103–126.
Javorcik, B.S. (2004) "Does Foreign Direct Investment Increase the Productivity of
Domestic Firms? In Search of Spillovers Through Backward Linkages" The
American Economic Review, 94 (3): 605-627.
