Romania’s advantages over other CEE countries as an FDI destination

2023 started well for the Romanian economy, especially in terms of the regional competition to attract foreign investors. The International Monetary Fund (IMF) expected the Romanian economy to grow by 3.1 percent this year, aided by European Union funding, currency stability, and foreign investment, allowing it to outpace stagnating neighbors like Poland and Hungary.

By Claudiu Vrinceanu

But what’s happening in the economy after the first four months of 2023, and how can Romania gain an edge over neighbouring countries to attract more foreign investors? Let's take a look at four categories of competitiveness: the potential relocation of multinational companies, which could be the key driver of foreign direct investment (FDI), followed by the labour market, monetary stability, and digitalization.

New Relocation Opportunities

The current regional context could generate many investment opportunities in Romania. One of them is the relocation of multinational companies from Ukraine and Russia. Romania is in pole position at the European level regarding executives' plans to relocate their business support services and supply chain functions into Europe (re-shoring and near-shoring) to minimise future disruptions, according to EY. The first moves from Russia to Romania are still expected. Nokian Tyres, a company looking to invest in a new tire factory in Romania, has given the first signal. Nokian produced 80 percent of its annual production of approximately 20 million tires in Russia before the war in Ukraine. According to a report by the Polish Economic Institute, Ukrainians accounted for 45 percent of all new foreign companies that set up shop in Poland last year. Meanwhile, only 20 firms from Ukraine moved to Romania or increased their investments on the local market.

Labour Force Still A Challenge For Investors

Finding suitable workers is increasingly difficult for foreign investors, particularly in the manufacturing sector. At the moment, Romania has the most permissive legislation for economic immigrants among the countries in the region. This is an advantage over countries like Hungary, Poland, and Bulgaria, but this should be supplemented by a strong initiative to reintegrate able-bodied people who are not working into the labour force. The acute need for foreign workers in Romania was evident last year, when companies hired a total of 100,000 foreign workers, reaching the ceiling set by the government. In 2023, Romania will accept the same maximum number of foreign workers. By comparison, Hungary, a much smaller country, needs 500,000 additional workers, based on data from its Economic Development Ministry.

GROWTH POTENTIAL: FROM ECONOMIC STABILITY TO THE BOON OF DIGITALIZATION

The record demand for Romania Government Bonds has positively impacted the Romanian currency, which has remained below the central bank’s intervention level since the beginning of the year. The leu’s (RON) stability is another one of the country’s advantages, especially when compared to Hungary's forint, which hit multiple record lows last year. Massive inflows into bonds have helped the RON to reach levels below 4.90 EUR/ RON several times. The development of the digital economy accelerates companies’ digital transformation, which has an important impact on business outcomes, including foreign investment decisions. Romania is the third-largest digital economy in CEE, with a value of EUR 14.8 billion—or about 6 percent of GDP—last year, ranking below Poland (EUR 44 billion) and the Czech Republic (EUR 18 billion) and the second-largest digital commerce market. According to McKinsey, Romania's digital economy could grow 3.5 times to about EUR 52 billion by 2030, with ICT and digital commerce as its main growth drivers. However, the country needs to catch up in terms of attracting significant investments in IT&C. A comparative example is Microsoft’s opening of a data centre in Poland, the type of asset that can only be described as an unattainable dream for the local economy.