Romania: Mobile Phone Investment

Oxford Business Group Latest Briefing

The relocation of a mobile telephone factory to Romania has highlighted the benefits to the country of foreign direct investment (FDI). The Finnish firm Nokia, the world's largest manufacturer of mobile handsets, is planning to open a new production line just outside the north-western city of Cluj-Napoca.

The Nokia plant is due to open on February 11 and is expected to have a final workforce of 3500. The company has been recruiting around 100 people a week recently, according to some reports. Nokia has invested around $88m in the factory, but according to local press reports, it may be extended further to make it the world's largest handset factory.

The factory will replace one in Bochum, Germany, where labour costs are ten times higher and mobile phone sales are growing much slower than in Central and Eastern Europe. When Nokia announced the move last spring, Raimo Puntala, senior vice president for Nokia's operations and logistics, said the reasons for the plant's location in Romania were the country's availability of skilled labour, its good inbound and outbound logistics connections, its overall efficiency and the long industrial tradition in the area. Cluj-Napoca has a well-regarded technical university and is located on the road between Bucharest and Western Europe via Hungary, which is currently being upgraded to a European-standard motorway, with links to Serbia as well.

The decision has caused considerable controversy in Germany, with Finance Minister Peer Steinbrueck accusing Nokia of caravan capitalism and other leading parliamentarians switching to other companies' handsets.

The benefits for the region, however, will be sizeable. The factory will be located in an industrial park where Nokia's suppliers will be encouraged to base their operations, further boosting local employment. An additional benefit is the expected effects of the transfer of skills and technology to other sectors as well as more interest and investment in Cluj-Napoca's university if it can effectively build links with Nokia and its partners. It is hoped the factory will encourage young people to stay in the area rather than seeking employment in Western Europe, as many Romanians have done in recent years, reducing the workforce in an already tight labour market. If successful, it will illustrate the benefits FDI can bring.

The National Bank of Romania (BNR) reported that Romania secured more than $9.7bn in FDI in the first eleven months of last year, comparing favourably to the rest of the region. Hungary, with roughly half the population of Romania, but a significantly larger economy attracted $4.4bn of FDI last year, according to the Hungarian finance ministry.

The launch therefore comes at a time when fears are rising that the global credit crunch and uncertainty about the Romanian economy may stem investment. FDI has been a driving force behind much of the country's growth in recent years and has contributed to offsetting its troubling current account deficit.

While the FDI inflow last year represents a drop from the $13.3bn received in 2006, it is largely because there were fewer big-ticket privatisations of government assets to bring in lump sums last year. These included tenders for infrastructure projects such as the Cernavoda nuclear power plant, as well as privatisations in the automotive sector. FDI covered 43% of Romania's $22.6bn current account deficit between January and November 2007, according to BNR data. FDI brings in foreign currency to Romania, offsetting the outgoings of purchases of foreign currency-denominated imports.

However, last year the current account deficit grew as FDI fell. While the deficit is likely to be smaller in 2008 due to the weakening of the Romanian currency and a slight shrinkage in consumer demand, FDI could well decline further. It should be noted however, that a fall in FDI may in fact cause a fall in imports, positively affecting the current account, as many investors, particularly in industry, import capital goods such as machinery and construction materials in large amounts.

Additionally, confidence in Romania's stability has weakened in recent months. Observing political squabbles, higher-than-expected inflation, the growing current account deficit, hikes in public spending and a weakening of GDP growth, ratings agencies have flagged warnings. In November, Standard & Poor's downgraded Romania's outlook, and on January 24, France-based credit insurance company Coface (Compagnie française d'assurance pour le commerce extérieur) kept the country's risk rating at A4-. Cristian Ionescu, Coface Romania's managing director, said, It is certain the recession now starting to become apparent in the US will influence European economies [...] Romania becomes a collateral victim of the international uncertainty-filled environment. He added that Romania's economy has been negatively affected by the US mortgage crisis.

Given these factors, Romania must consider how it can draw in more foreign investment in the long term. Nokia has noted Romania's current advantages in workforce, position and industrial tradition. However, as European Commission President Jose Manuel Barroso pointed out, if Nokia can move production from its home country to Germany, it also has the perfect right to move from there to Romania. Taking his logic to the next step, companies can of course move from Romania to a destination that offers them better value for their money. While this is of course unlikely in the next few years, given the scale of Nokia's investment, other industries have seen companies relocate from Romania as the conditions were no longer favourable - the textiles sector being one such example.

With wage growth in the country being the second-highest in the EU, Romania will not be able to capitalise on a relatively affordable workforce forever unless it works on other variables that draw in FDI. These include liberalising labour legislation, investing in and reforming education, reducing employment taxes and further developing infrastructure, which is currently insufficient. Finally, political stability and careful policy-making are a must.

Despite these macro-economic and policy concerns, Romania has managed to catch up with other Central and East European countries, becoming one of the hottest FDI destinations in Europe.