Foreign Direct Investments in Small Business of Transition Economies

Abstract

Public notion usually attributes superior qualities to foreign direct investments in transition economies. According to a common belief they are equipped with modern technology, possess up-to-date managerial capacities, use state-of-the-art management practices, are more effective than local companies and show better financial performances. These qualities clearly distinguish foreign ventures from domestic ones. There is an empirical evidence that proves existence of these differences. Still, what applies to foreign investments in general is not necessarily applicable to all ventures, to all types and groups of foreign-owned companies. Up till now little attention has been paid to FDI in small business. A question automatically rises: are small foreign ventures in the same advantageous position as their large multinational counterparts? Obviously, there must be substantial differences, since small companies do not possess those scale and scope advantages that multinational companies do. The single most important result of this research was the discovery of similarities between domestic and foreign-owned small and medium sized enterprises (SMEs) in five transition economies. General hypotheses (based on surveys of primarily big business) of FDIs operation were not supported. Performance measures, capitalization, the evaluation of obstacles of growth and business environment, possibilities of obtaining bank loans were in most cases very similar for domestic and foreign SMEs. A possible explanation of this is that foreign SMEs behave more like domestic SMEs than like big foreign (multinational) businesses. Registration and licensing as a barrier to entry affected domestic and foreign firms similarly, basically posing no serious problem for them. Those areas where business was negatively affected were identical for domestic and foreign firms: high taxes and social security payments, lack of transparency and frequent changes of economic regulations. Capitalization of foreign ventures was not usually higher than that of domestic ones. Major differences were found only in the source structure of capital. Not surprisingly, foreign suppliers' commercial credits as well as mother companies' capital transfers played a significant role in the case of FDIs. Interestingly, the share of bank credits was very low in all countries in the finance of all types of capital needs. Profitability and growth expectations of FDIs were not especially outstanding compared to expectations, either. Still, both the average employment and the average asset value increased substantially in all surveyed countries, indicating a vigorous growth of foreign companies.