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Substantive obstacles stall foreign investment

In competition, there are winners and losers. Attracting foreign direct investment is a distinct competition, where the post-communist countries of central and eastern Europe are pitted against each other to coax some of the world's biggest companies to invest huge sums of money on their soil. In this game for now, Slovakia is losing out. Statistics released by the Vienna Institute for International Economic Comparisons (WIIW) show that Slovakia lured only $25 million in the first quarter of 1996, fifth out of six in the region. Since 1989, Slovakia's share of direct investments places it far below its Visegrád comrades against whom it is frequently measured - Poland, Hungary and the Czech Republic - and only higher than Slovenia (see table, page 4).


"Mečiar never says no to investors."

Peter Martinek, Marketing Director of SNAZIR


In competition, there are winners and losers. Attracting foreign direct investment is a distinct competition, where the post-communist countries of central and eastern Europe are pitted against each other to coax some of the world's biggest companies to invest huge sums of money on their soil. In this game for now, Slovakia is losing out.

Statistics released by the Vienna Institute for International Economic Comparisons (WIIW) show that Slovakia lured only $25 million in the first quarter of 1996, fifth out of six in the region. Since 1989, Slovakia's share of direct investments places it far below its Visegrád comrades against whom it is frequently measured - Poland, Hungary and the Czech Republic - and only higher than Slovenia.

Austria, for example, is the country leading among investors in Slovakia, having plugged $43.8 million in 1995. But that amount pales in comparison to the country's appetite in Hungary, Poland, the Czech Republic and Slovenia.

"Our investments in Slovakia are small compared to investments in the region," said Philipp Marboe, the commercial counselor at the Austrian Embassy in Bratislava, "but it's enough to make us number 1 from Slovaks' point of view."

There are natural factors hindering Slovakia in becoming an investment haven, such as its domestic market of only 5.3 million, its mountainous terrain and its lack of a seaport. There are less natural reasons as well.

In June 1995, the government changed the privatization process, unabashedly gearing it to favor domestic investors and more or less shutting foreign parties out. Also, there is a lack of political stability, real or perceived, which has shaken investors' confidence that they will get a fair return on what they put in.

The government maintains that despite the small stream, it wants and needs more direct foreign investment. "Of course, our investment is small," said Peter Martinek, the marketing director at the Slovak National Agency for Foreign Investment and Development (SNAZIR). "But the government doesn't stand in the way of foreign investment. [Prime Minister Vladimír] Mečiar never says no to investors."

The advantages

Slovakia has plenty to offer. As Martinek pointed out, it boasts cheap, skilled labor, a geographic position advantageous to penetrating markets of the former USSR, and stellar macroeconomic figures, such as a low budget deficit, fairly robust GDP growth, decreasing unemployment and inflation lower than even a few European Union (EU) countries.

But what surprises many is that three years after gaining independence, Mečiar's government has no pro-active policy to attract foreign capital and no effective public relations to let investors know this country exists.

Martinek conceded this, saying that embassies are ill-equipped to tout Slovakia to interested parties. "If a Washington, D.C., investor is interested, the Slovak Embassy [in the U.S.] has nothing to show him except a piece of paper."

Erecting walls

In more tangible ways, though, the government may actually be erecting walls to potential investors rather than tearing them down. Taxes are an example. Slovakia offers "very little investment benefits" in this area, said Felix Mayrhofer, the tax manager at Deloitte & Touche in Bratislava.

As an example, he said the Ministry of Finance slashed the tax "carry loss forward" provision from five years to one year, the least attractive carry loss forward of any country in the region.

Comparatively, it's seven years in the Czech Republic, three in Hungary and Poland and five in Slovenia. Moreover, Mayrhofer said that while the difficulty in interpreting tax statutes is essentially no different than in other countries, the amount of fines and the penalty interest of 100 percent per year levied on businesses in Slovakia "make those uncertainties very expensive."

As an example, Mayrhofer referred to one case where his firm's client erroneously deducted VAT inputs for one month in 1995. The Central Tax Office caught the error and lavished a penalty for that month's amount, though the error was unintentional. "There was clearly no damage to the state, no evidence of any intentional wrongdoing," Mayrhofer said. "It was simply an error, but they had to pay the penalty."

Privatization freeze-out

Long-known to many investors interested in Slovakia, privatization has been a non-option to foreign businesses and has been the greatest contributor to a stunting of direct investment in the country. "It's the policy of this government in power not to sell Slovak companies to foreign investors," said Ulrike Knotz, a commercial counselor at the German Embassy in Bratislava. "That's the main reason."

While this plan may prove beneficial in the long-run for building a middle class in young Slovakia, it may also delay the infusion of foreign capital that one economic analyst said is instrumental to the country's future economic vitality. "Higher foreign direct investment means greater speed in structural changes in the economy" and higher GDP growth, said Juraj Renčko, an analyst at the Economic Forecasting Institute of the Slovak Academy of Sciences.

A silver lining for investors to the grey privatization cloud is that most believe that once privatization is completed - possibly at the end of this year but few are confident of that date - domestic owners who snapped up former state-owned property at bargain-basement prices will sell them off to get needed capital, technology and know-how. In this so-called third-wave of privatization, foreign investors figure to be prominent players.

But the question is how many will show up at the ballpark. While Knotz believes the opportunities will be there, she said she doesn't know of any German business waiting for an opportunity.

Shaky stability

Compounding that possibility is the reality that political turbulence has put investors into a holding pattern. "When I speak to companies, they say, 'What are my goals? Can I produce goods that I'm interested in at cost? Then they look at how they can lower their costs," said Frans Witpeerd, the office manager at the Netherlands Chamber of Commerce in Amsterdam. "But these are not the principles. What will influence [Dutch] companies is stability, economically and politically, and that's what makes them decide on where to go."

Dutch companies interested in state-owned or private Slovak firms are "not sure who's in charge," Witpeerd reported. "In the Czech Republic, where 98 percent of all companies are privatized, transparency is still a problem, but not on the level as in Slovakia."

Slovakia's shaky stability, whether perceived or true, will find its reckoning when the EU gives out invitations to its membership dance. If Slovakia is not on the guest list, all agree, its potential as a boon to investors will be set back several years, causing irrevocable damage to its economy. "The big difference is if Slovakia's neighbors and competitors become EU members and Slovakia isn't," said Marboe. "I think Slovakia would have four, five, six years [to catch up] and economically that's a long time."

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