Determinants of Effects of Foreign Direct Investment in Terms of Slovak Republic and Wood-Processing Industry of Slovakia

The presence of foreign direct investment in certain sectors or country determines several factors the determinants of foreign direct investment. The article analyzes the selected factors of FDI infl ows to the Slovak Republic and to the wood-processing industry in SR; it focuses primarily on assessing the contemporary situation of the business environment in Slovakia and investment incentives provided to foreign investors. The article also presents the development of foreign direct investment in Slovakia, in the branch of wood processing, analyzing the effects of FDI in specifi c conditions of the Slovak Republic and wood-processing industry.


INTRODUCTION 1. UVOD
The infl ow of foreign direct investments (FDI) into the country affects a number of factors described in literature or published annually for example in UN-CTAD surveys.Major factors in terms of savings are low labor costs, availability of resources (material, energy, fi nancial).On the other hand, factors that infl uence revenues are usually market size and market growth (World Investment Prospect Survey, 2009).However, it is also important to evaluate factors that affect the business environment and the presence of foreign investors in the country.These factors are condition and quality of business environment, the level of corruption, but also the rate of assistance from the stateinvestment incentives (Ferenčíková et al, 2010).
The results of analysis of rating institutions show that the attractiveness of some country for foreign direct investment is crucially dependent on favorable business environment, the quality of institutional environment, as well as the relative price and cost competitiveness (Drábek and Polách, 2008).However, the dynamics of FDI fl ow is signifi cantly infl uenced by the targeted state policy to promote foreign investments (Drábek and Jelačić, 2007).Results of the global economic crisis, as well as the acceptance of a comprehensive system of measures to reduce them, may affect not only the long-term macroeconomic stability, but also the policy towards FDI, and hence foreign direct investment infl ows to Slovakia both in the short and long term.
It can be concluded that maintaining long-term political stability in Slovakia is also refl ected positively on the real economy, which is impacted in the continuity of macroeconomic stability and keeping up the suitable business environment.The evaluation of the International Monetary Fund (IMF, 2009) shows that long term positive economic development in the SR is manifested in the rapid GDP growth, which was based on health macroeconomic and structural policies and helped to speed up the convergence process of the Slovak economy.Since the Slovak economy is an open and export-oriented economy, its development is signifi cantly infl uenced by development in the external economic environment.This is confi rmed by time-coordinated course of the economic crisis in the external environment and in Slovakia, which also shows that the Slovak economy is tightly integrated into European and world economy (Okáli et al, 2009).Simultaneously, the imported recession also causes many negative consequences on the domestic economy.Such close connection with the external environment is also refl ected in forecasts of economic development for the years 2012-2015, which can be evaluated as positive in comparison with other EU countries.
The government defi cit exceeding 3 % of GDP is not the cause for investors concerns in the current situation.However, the expected economic recovery will be refl ected in the re-tightening of the fi scal policy, and it will be a positive signal to encourage the investor confi dence, underlining the government's responsible approach to meeting the commitments under the Stability and Growth Pact (SGP).
The main objective of each company is an effi cient and successful business.There is a general economic principle: to achieve the maximum result with the minimum of means (Oblak et al, 2008, Stasiak-Betlejewska et al, 2007).The objective of this research was to evaluate the impact of investment and foreign direct investment in the Slovak Republic with the focus on the woodprocessing industry in SR all based on the analysis of time series of selected economic indicators, business and investment environment and investment incentives.
To achieve this objective partial objectives were formulated: the analysis of foreign direct investment in the Slo-vak Republic as well as in individual sectors of the wood-processing industry, analysis of the business and investment environment, investment incentives in Slovakia, the evaluation of selected economic indicators in -SR and wood-processing industry of SR with the application of selected statistical methods (correlation and regression analysis), the interpretation of the solution and obtained results.

METODA ISTRAŽIVANJA
Statistical methods were used to analyze and evaluate the effects of investment in SR and in wood-processing industry of SR.Correlation analysis describes the relationship between two quantitative variables.This analysis does not imply cause and effect relationship between two variables.Linear regression allows to examine the cause and the subsequent relationship between two variables x and y.The regression line determines the dependence.The chart of correlation and linear regression analysis shows the values of independent and dependent variables in each year and the regression line.Values closer to the regression line mean stronger impact on the examined variable.
Correlation and regression analysis of research focuses on foreign direct investment in Slovakia, the GDP growth of Slovakia, investment and selected variables in the wood-processing branch.These are indicators that characterize the economic situation in the mentioned sector, focusing on indicators that have a positive impact on the economic development of the wood-processing industry.
The selected economic indicators are evaluated over a period of 10 years in the 1999-2008 time series.Software products STATISTICA 9 of the company StatSoft and the application Excel from Microsoft Offi ce 2003 from Microsoft, as well as spreadsheet and graphics tools of applications were used for data processing.

Poslovno okruženje u Slovačkoj
Generally, it can be stated that the business environment in Slovakia is not quite good.According to the Slovak Chamber of Commerce and Industry (SCCI), it is getting gradually worse.The survey of SCCI shows that 71 % of the 170 surveyed companies consider the business environment as adverse.Only 2 % of surveyed companies identifi ed the Slovak business environment as favorable.Based on the survey, it follows that 59 % of surveyed companies expect no change in the business environment.Only 6 % of respondents expect improving of the business environment and 35 % its further deterioration.
Slovakia had its economic growth based on the quality of business environment, of course using the comparative advantages which the country still has, but their strength in relation to other countries gradually weakens (Merková and Drábek, 2010).Justice and legislation are among the worst areas of business environment in Slovakia.Worse legislative environment according to the SCCI survey is particularly evident in the rapid adoption of amendments and laws (Merková, 2010).
The situation of the business environment in Slovakia and other countries was analyzed on the basis of fi ve ratings -indexes and rankings compiled by various world expert organizations and institutions.Ratings are not only supported by statistical data of the economic development of countries; they are the result of experts' opinions and independent assessors' perceptions of the development of each country in comparison with the development in other economies.Although rankings are not scientifi c facts, the mentioned institutions that compiled the rankings are considered as independent, objective and credible.The ratings refl ect the perceptions of the situation in the country from the perspective of the business sector.

Indeks ekonomske slobode
According to the Index of Economic Freedom1 in 2010, Slovakia improved by 0.3 points and was ranked 35 th with the overall assessment of 69.7 points (in 2009 it was 69.4 points, 36 th place).The overall score is higher than the world average.The Czech Republic took the highest position among V4 countries after fi ve years, and was ranked 34 th (37 th in 2009).Hungary was ranked 51 st (44 th in 2009) and Poland 71 st (82 nd step in 2009).However, Poland is included among top ten countries with the best annual improvement in the ranking.According to the European region, Slovakia ranked 18 th out of 43 countries (in 2009 it was ranked 20 th ).The former British colony of Hong Kong has been declared the freest economy in the world for 16 times.
The Index of Economic Freedom contains ten subcriteria: [8] Property Rights [4] Government [9] Freedom from Spending Corruption [5] Monetary Freedom [10] Labor Freedom Experts in evaluation of Slovakia show a significant deterioration in the category of freedom in the labor market, but offset by improvements in other areas.Slovakia is still limited by two institutional weaknesses -the judicial system is ineffi cient and slow, and in recent years efforts to eliminate the corruption have shown only limited progress; in the long-term perspective, investors consider these weaknesses to be a serious factor in locating the foreign enterprises.
3.1.2Ease of Doing Business 3.1.2.Lakoća poslovanja In the Ease of Doing Business2 Slovakia was ranked worse in 2010 than in previous years.Among all countries, Slovakia fell from 32 nd place in 2008 to 35 th in 2009 and 42 nd in 2010.Although Slovakia has maintained its leading position among the V4 countries (Czech Republic is 74 th , Hungary 47 th and Poland 72 nd ), Slovakia is lagging behind faster reformers of Eastern Europe such as Georgia, Estonia, Latvia and Lithuania.Despite this, however, Slovakia overtook fi ve industrially more developed economies of Europe (Portugal 48 th , Spain 62 nd , Luxembourg 64 th , Italy 78 th , Greece 109 th ).Unexpectedly, Slovakia as the largest manufacturer of automobiles per capita in the world, belongs to the countries in the EU with the lowest "trading across borders".The Slovak government needs to reduce requirements and shorten the time required for exports and imports, and to optimize this process through competitiveness and transparency.
Slovakia can support the entrepreneurial spirit by simplifying the procedures for starting business and by providing steps aimed at simplifying business registration and making it more acceptable for enterprises.In addition, the report of Doing Business indicates that Slovakia needs to shorten the time needed for the enforcement of contracts and decrease costs associated with enforcement.Slovakia has one of the longest waiting times among European countries for obtaining a building permit (287 days), followed only by Poland (308 days) and Cyprus (677 days).This is especially troubling when compared with countries such as Finland or Denmark, where the same may be carried out in 38 or 69 days according to the World Bank.
Slovakia has a poor rating in the category of closing the business, particularly in two areas: the duration of the bankruptcy settlement -about 4 years (followed only by the Czech Republic with a period of 6.5 years) and bankruptcy costs as a percentage of assets, which is 18 % in Slovakia as well as in Austria (followed by Poland with only 20 % and Italy with 22 %).Slovakia has a better score than most EU countries in the cost of obtaining a building permit (the second lowest in the EU, 13.8 multiple of the average wage).Building permits in Hungary is 9.8 times higher than the average wage, while in Bulgaria it is an overwhelming factor -436.5 times more than the average wage.Investors may obtain a building permit in Slovakia completing 13 treatments, which is less than most other EU countries require (Report on the state of business environment in SR, Ministry of Economy, 2010).
What makes Slovakia particularly attractive is the process of acquiring ownership.Slovakia is the country with the lowest costs for this process, which is very fast and effi cient.Slovakia is among the top six countries in the strength of their legal rights in obtaining the loan.This index measures the protection rules in relation to the possession of movable property.However, Slovakia was ranked between 18 th and 23 rd place in terms of quality and availability of debt information obtained from public and private debt registries (rokovania.sk).In EU Slovakia is ranked between the 7 th and 10 th place according to the employment index, which evaluates the rules for hiring people, working time, number of leave days and statutory requirements for dismissal of employees for economic reasons (spectator.sk).

Indeks globalne kompetitivnosti
According to the Global Competitiveness Index 3 Slovakia was ranked in the group of developed countri- Slovakia was gradually decreasing from the 36 th place in 2006 to 37 th , 41 st , 46 th and fi nally 47 th place in 2010.The Czech Republic annually rose by 2 positions, Poland's position improved by 7 places and Hungary also moved upward.Slovakia is, thus, the only country from the V4 group, rating decreases.
According to the Executive Director of the Business Alliance of Slovakia, which is a partner institution of the World Economic Forum, the global economic crisis means that most countries assessed lower competitiveness index score this year.However, due to the strong  interdependence of economies, there was no pronounced movement in the ranking.Regarding the ranking of Slovakia he says: "Poor government's ability to improve the business environment, reform and eliminate the major barriers of business were the cause for Slovakia to fall in the ranking for the third time in a raw." (alianciapas.sk).
The basic disadvantage of Slovakia is that most foreign companies have their innovative potential organized in the home country, so the share of R&D capacities is gradually reduced, and thus it fails to engage the capacities into innovative projects.

Smanjenje globalne kompetitivnosti
According to Global Competitiveness Breakdown 4 Slovakia results in 33rd position in year 2010, occupies second position among V4 countries in longterm situation.The Global Competitiveness Breakdown is compiled on the base of four indicators as economic performance, government effi ciency, business effi ciency and infrastructure.Each one consists from next fi ve subcriteria.In 2009 Slovakia became one of the 9 countries with the worst decline in scores.According to the Corruption Perceptions Index, Slovakia set back four years ago.According to the Corruption Perceptions Index 5 in 2009, the score of Slovakia dropped the most in the history of measurements since 1998, from the level of 5.0 to 4.5.Slovakia also worsened annually in the countries ranking: it dropped from the 52 nd -53 rd to the 56 th -60 th place.For the fi rst time since 2001 Slovakia is ranked worst of the V4 countries (Transparency International).
Finally, in connection with the presented ratings, it should be noted that the evaluation does not always refl ect the real and actual situation of the country's economy.Can the Index of Economic Freedom be considered as objective, if in 2010 Ireland was ranked 5th, and in   2009 it nearly declared the state bankruptcy due to extreme indebtedness?Can this country be considered economically free in these conditions?The same applies to the USA (8 th place).Can its Quality of Business Environment be assessed as reliable, if the best ranked countries are those most indebted in the world such as the USA (4 th place), Great Britain (5 th place) and the abovementioned Ireland (7 th place)?Even less credible are the results of the Global Competitiveness Index.According to this indicator the USA are excellent (2 nd place), and the objectively the most competitive China is ranked 29 th place.However, experts' rankings are accepted by investors, of course in terms of their insights into this issue (Drábek and Merková, 2010).

Investment incentives for the development of investing 3.2. Ulagački poticaji za razvoj investiranja
The analyzed data show that Slovakia still has signifi cant comparative advantages (high correlation between wage and labor productivity, low cost of release, index of rights of creditors and debtors, a healthy banking sector, relatively good availability of fi nancing by loans, low duty barriers, support of the FDI, good conditions for technology transfer and FDI), which should be used, while the negative factors that foreign investors analyze with the location of their business activities should be removed (Merková and     Drábek, 2011).In connection with the FDI infl ow and encouragement of foreign companies to invest, it is necessary to present the investment incentives -all the measurable economic benefi ts provided by the host government to foreign investors for the purpose of motivation in business activities.The primary role of the investment incentives should be to motivate the investors to place their new projects in the so called disadvantages areas, which means in the regions with higher unemployment, lower infrastructure quality, etc.The positive impact of a new investment shall be proved by job creation, by chances for the graduates to be used as well as by creation of new entrepreneurial opportunities for local companies (Ministry of Economy, 2010).
Investment aid is a form of state aid targeted at promoting economic development of the most disadvantaged regions and at mitigating regional disparities.Granting of investment should stimulate the creation of new jobs.
Investment aid benefi ciary can be a legal person or a natural person-entrepreneur with a registered offi ce in the Slovak Republic, incorporated in the Commercial Register or the Trade License Register, ready to implement an investment plan in the Slovak Republic; the benefi ciary must be 100 % owned by the applicant, or the applicant must be a controlling person of the benefi ciary.The benefi ciaries' investment activities and projects have to be in compliance with the Act 565/2007 Coll. the "Act on Investment Aid".
One of the factors affecting the investor's decision on its investment placement is also the amount and the structure of the investment incentives that may be obtained.The so-called intensity of the aid means the maxi-mum proportion of the eligible costs that may be approved for the investor in the form of particular in ves tment incentives.The maximum intensity differs depending on the district.The limit in Bratislava region is 0 %, Western Slovakia 20-40 %, Central Slovakia 25-50 % and Eastern Slovakia 25-50 % (Ministry of Economy, 2010).
The Act on Investment Aid 565/2007 Coll.divides the projects that may be supported into four categories: Industrial Investment incentives mean the price or cost that the country must cover to some extent in connection with the infl ow of foreign capital (in periods of defi cit in domestic fi nancial resources) considering the positive effects that FDI will bring (in the past it was the solution of two serious problems in the SR -employment growth, improved trade balance) (Drábek and Merková, 2010).

Foreign direct investment fl ows in the SR and WPI SR 3.3. Izravna strana ulaganja u Slovačku i u slovačku preradu drva
Data of the United Nation Conference for Trade and Development (UNCTAD) held in 2008 show that Slovakia was most highly ranked among 27 EU countries according to the indicator of FDI infl ows per capita -16 th place with the value of 632 USD/capita.The evaluation of the total FDI infl ows in millions of USD, as well as the percentage of FDI in GDP of the country (17 th place) show similar results.
At the beginning of transformation, Slovakia had similar comparative advantages as other countries in Central and Eastern Europe, particularly qualifi ed and cheap labor, cheap raw material and energy inputs, good location and close relations with the EU.Until

Forms of investment incentives in the Slovak Republic Oblici poticaja investicijama u Slovačkoj Republici Direct support for: Izravna potpora za:
Indirect support for: Neizravna potpora za: construction / izgradnju technology / tehnologije research and development / istraživanje i razvoj job creation, retraining of the workforce / nova radna mjesta, izobrazbu kadrova allowance for staff training / pozajmice za obuku kadrova land acquisition and implementation of infrastructure / kupnju zemljišta i uvođenje infrastrukture loan policy, lower interest, longer repayment period, the state guarantee / zajmove s nižom kamatom, duljim rokovima povrata, državna jamstva income tax relief / oslobađanje od poreza na dohodak transfer of real estate or exchange of real estate for the price lower than the general value / prijenos nekretnina ili za iznajmljivanje nekretnina za manji iznos od uobičajenoga providing advisory services free of charge or for a partial payment or deferred tax payment / davanje savjetodavnih usluga bez naknade, za djelomično plaćanje ili za plaćanje pojedinih poreznih davanja Source: data of the Ministry of Economy in SR / Izvor: podaci Ministarstva gospodarstva Slovačke 2000, FDI infl ows had risen, but its volume lagged behind the volume of FDI infl ows in the other V4 countries (The concept of management of FDI, Ministry of Economy, 2009).
FDI infl ows into the wood-processing industry (WPI) in the presented period of 5 years reached the largest volume in 2005, amounting to 1.557 billion SKK, and however 90 % of these resources was absorbed by the furniture industry.In other years, less than half of this value was achieved.The second largest infl ow was in 2006, when 835 million SKK were invested into WPI.Pulp and paper industry dominated in 2006 and 2007 with the infl ows of 608 million SKK and 606 million SKK of FDI, respectively.
The smallest amount of foreign investment fl owed into the sector of wood industry (annually and totally) with the exception of 2004, when the wood industry recorded FDI infl ows of 556 million EUR.The opposite trend was recorded in the industrial production of the Slovak Republic, with the lowest FDI infl ows, amounting to 10.901 billion EUR, in 2005.
Stagnation of investment in sawmilling, construction and carpentry was reported in the period 1999-2002, and in the period 2003-2006 an increase was recorded amounting to nearly 1.7 to 2.6 billion Slovak crowns (SKK) per year (NLC, 2009).A significant increase of investment to the level of 6.07 billion SKK occurred in 2007, but this growth was followed by a drop to the level of 2.25 billion SKK.The sector of furniture production has seen better investment in the years 2000,2001,[2004][2005][2006] and this fact caused the growth of labor productivity.The investment was in the range of 1.5 to 2.8 billion SKK in the years mentioned above.Similarly as in the sector of wood industry (WI), in furniture industry (FI) an equally sharp increase was recorded in 2006-2008, from 2.8 billion SKK to 4.5 billion SKK in 2007 and then a fall to 1.6 billion SKK in 2008.
Rapid changes of investment in the pulp and paper industry (PPI) were reported following the realization of signifi cant business actions during the whole period.Major modernizations in this sector were made in 1999 and 2003-2005, but the overall trends suggest that the highest volume of investment of all three sectors of wood processing industry were made into the pulp and paper sector ranging between 1.6 and 6.6 billion SKK per year (Merková et al, 2011).Effects of investment and FDI were analyzed through correlation and regression analysis, which was applied to detect dependencies between investment and other economic indicators.Selected analytical results, which demonstrate the positive impact, are presented in Table 15.
The fi rst signifi cant dependence is between foreign direct investment stock in the SR and GDP growth of SR with the correlation coeffi cient r = 0.94, which demonstrates that the growth of FDI causes GDP growth.Regression coeffi cient b = 0.000009 means that the growth of FDI in 100 billion SKK causes the GDP growth of 0.9 % on average.
Subsequent correlation and regression analysis examined the correlation between variables in the wo-    as to the negative trend caused by unsolved problems for a long time, as shown by the annual decline in sales, value added and profi t.Development of selected indicators is shown in Tables 15 to 17.The employment dropped in all sectors of the WPI and it can be assumed that a smaller number of employees has an impact on labor productivity growth, resulting in wage increases, as correlation and regression analysis showed a high dependence (correlation coeffi cient 0.95) between labor productivity growth and wage growth.to the decline in reinvested earnings (World Invesment Report, 2009).In the period of restructuring of parent companies, foreign subsidiary units were often involved in balancing the outstanding debt.
All economies have been affected by the global crisis in terms of decrease in exports and industrial production, the slowdown of FDI infl ows and rising unemployment.
FDI infl ows into the region of the V4 countries affect various factors in crisis.In relation to individual V4 countries, however, expectations are primarily the highest average GDP growth over the long term (Slovakia), a large domestic market (Poland) and a relatively stable service sector (Czech Republic, Hungary).The V4 countries in crisis and uncertain investors have the advantage of a predictable and well known environment, in the case of Slovakia even strengthened by the membership in the monetary union.
There is a review of the perception of prices, as investors will certainly not decide for the lowest current price -meaning low production costs and cheap labor or low tax cost -but primarily for the lowest cost throughout the life cycle of the investment (Jelačić et al, 2010).Apart from the quality of infrastructure, size of the domestic market or access to regional and international markets, foreign investors will particularly take into account the factors such as energy costs, availability of suppliers and customers, suffi cient qualifi ed and skilled workforce, predictability of economic development, stability of legislative conditions, security of companies and others.One of the biggest challenges of the Slovak economy is the ambition to remain an attractive country for foreign direct investment.
This paper is the result of a partial solution of the Ministry of Education grant project VEGA Nr. 1/0089/11 -Measurement and performance management of the wood industry companies in SR.
affecting the acquisition of investment aid are(Ministry of Foreign Affairs, 2009): the investor meets all the requirements of the investment aid in individual areas, it can apply for the following forms of investment incentives (Slovak Investment and Trade Development Agency, SARIO): a) subsidy for the acquisition of material assets and immaterial assets, b) an income tax relief, for new jobs created, d) transfer of immovable property or exchange of immovable property at a price lower than a general asset value.

3. 4
Effects of investment and FDI in the SR and WPI SR 3.4.Učinci investicija i FDI-a u Slovačku i slovačku preradu drva

Figure 8
Figure 8Correlation in the WPI: Investment ~ Labor productivity (period 1999-2008) Slika 8. Korelacija investicija i produktivnosti radaWPI-a (razdoblje 1999WPI-a (razdoblje   -2008)   ) The global fi nancial crisis also had a negative impact on the development of the foreign direct investment fl ows.Since the end of 2008, global FDI infl ows have decreased in all three forms.Equity shares, reinvested earnings and other capital fl ows (especially inside-corporate loans) fell mainly in developed economies.Investments in equity shares have been reduced due to the weakening of foreign mergers and acquisitions.Lower profi ts of subsidiary units contributed Productivity of sales in the WPI (thousand SKK) = 1100,6 + ,16209 * Investment in the WPI (million SKK

5
Corruption Perceptions Index is compiled by the Transparency International, covers 180 countries worldwide.A composite index, the CPI is based on 13 different expert and business surveys.Eight surveys are made for Slovakia every year.Transparency International makes neither of them, and they are made by different institutions.For Slovakia, the last time they were as follows: the World Economic Forum, Freedom House, The Economist Intelligence Unit, International Institute for Management Development, IHS Global Insight and Bertelsmann Foundation.Source of data: http:// www.transparency.sk/vystupy/rebricky/
Source: data of Global Competitiveness Report / Izvor: podaci s Global Competitiveness Reporta
Source: data of the World Competitiveness Yearbook / Izvor: podaci iz World Competitiveness Yearbooka

Table 13
Investment in the WPI and industrial production of the Slovak Republic (mill.SKK) Tablica 13.Investicije u WPI i industrijsku proizvodnju Slovačke Republike (u mil.SKK)