Former U.S. Ambassador Heather M. Hodges Speeches

Attracting International Investment

Speech delivered by Ambassador Heather M. Hodges
at the Academy for Economic Studies
October 4, 2004; 11:00am
(as prepared)

Rector Belostecinic, distinguished professors and students, ladies and gentlemen:

It is a pleasure to be with you today at the Academy of Economic Studies and to be speaking to a room full of such bright, enthusiastic economic scholars. The American Embassy takes a profound interest in higher education in Moldova, and we appreciate the fruitful collaboration we have had with this Academy. We also look forward to many more opportunities to work together with you.

Most of you are studying economics so you know how complex the world economy is. Over the last several years, industries and businesses across the globe have become connected in a way that was unimaginable even a decade ago.

One of the questions I am most frequently asked as Ambassador is, "Why don't more American companies invest in Moldova?" While it is not an easy question to answer, this is the topic that I would like to discuss today - what are international investors looking for? Often it seems that foreign investors want things that are contradictory. Companies want something familiar, a set of standards and ways of conducting business that they already know. But, at the same time, they are looking for the unexpected; the unique conditions that make a particular nation different from others and can provide an advantage over other companies and countries. It is this combination of the expected and the unexpected that entices a business to invest in a new country.

Attracting international investors is critical for any developing economy, because foreign investment is one of the surest ways to fuel economic growth. Through the end of last year, Moldova had attracted almost $800 million of foreign investment. This may sound like a lot, but to put things in perspective, last year American companies invested $834 million in Romania -- this figure, which only includes investment from American companies and only for one year, is more than the total foreign investment in Moldova to date. Investment in Romania from all international sources for 2003 was over $10 billion. Now of course, Romania is a larger country than Moldova, but if we look at the statistics per capita the difference is still alarming. At the end of 2003, foreign direct investment per capita was $219. In Romania it was $586, nearly triple.

Many Moldovan industries require significant investment in order to compete effectively in the global arena. Let's take the agricultural industry for example. A recent study concluded that it will take $2 billion in investment for agriculture in Moldova to remain competitive. Obviously, not all of this money can come from domestic sources, although Moldovan citizens certainly could invest more in their national industries. International capital is critical for the Moldovan economy to grow and succeed.

How will Moldova attract these investors? What are the unique factors that will draw them here? And, on the other hand, what will dissuade them from coming?

Three Critical Factors

Let us first look at what I called earlier the "unexpected" -- that is to say the advantages that Moldova has to offer. There are three characteristics of the Moldovan economy that are likely to lure international investors. The first factor is location. We have a saying in the U.S. that when buying or selling a home, the three most important things are location, location, and location. The same can be said for Moldova. Your country occupies a distinct position between East and West. You have strong ties -- politically and economically -- to both. Moldova's location can attract investors interested in both the dynamic markets of the former Soviet Union and the larger and more traditional economies of Western Europe.

Second, Moldova is blessed with natural resources that make the country an incredibly fertile agricultural area. Moldova already exploits these advantages, producing wine, fruit, and meat that are exported both to the East and the West. Yet, agricultural production in Moldova declined steadily from the late 1980s and dropped significantly more after independence. As private agricultural enterprises have grown, production has increased over the past few years. It has been a pleasure for me to travel throughout this country meeting private Moldovan farmers and agribusiness owners who are investing in this field and are receiving assistance through the various agriculture-related programs funded through USAID. The increase in productivity since privatization has been encouraging; but foreign investors could provide the capital and equipment necessary to build back capacity in the agricultural sector much more quickly.

Finally, and most importantly, Moldova has a highly educated, multi-lingual, and skilled workforce, which is available at a lower cost than most other places in Europe. The educational system here has largely escaped the devastation suffered by many other social institutions after the collapse of the Soviet Union. In Moldova, you receive an excellent education in institutions such as this one, and you can provide top quality work for any organization you choose to join.

One good example of how these three factors can attract international investment is the case of walnuts. During Soviet times, walnuts were not considered a crop worth harvesting, so they were cultivated only sporadically. More often, farmers used walnut trees as a windbreak around their fields. But, since the fall of the Soviet Union, companies such as Foodpro International, have invested $1.3 million in walnut growing, processing, and export facilities here in Moldova. Ten years ago, walnut exports were zero. Last year, they totaled more than $22 million. The unique combination of ideal agricultural conditions, proximity to major markets, and a skilled labor force made foreign investment in the walnut sector extremely attractive.

Problems with Rule of Law

We have looked at how the unexpected factors -- the things unique to Moldova -- can make this country attractive to international investors. Let's move on to the expected. What are the familiar conditions, the standards that companies want to be assured of before they will invest in a location? First and foremost, investors want to be treated fairly, with laws applied equally to both international companies and domestic firms. A strong legal framework, respect for the rule of law, and efficient institutions provide stability and equal opportunity, ideally with a minimum amount of bureaucratic interference. Companies also want to be assured of strong democratic institutions and values. Governments that know they are accountable to their people, including through free and fair elections, are less likely to take capricious action that can threaten investor confidence.

How does Moldova fare in this regard? Certainly there have been laws established that help provide stability for international investors, such as the Law on Foreign Investments and the Law on Investment in Entrepreneurship. These laws place international investment in Moldova firmly within a European legal framework that international companies can understand. The U.S. government has been pleased to support the work of the American Bar Association's Commercial Law Development Program in this arena.

However, it is not enough just to have these laws on the books; they must also be equitably and universally applied. Unfortunately, in this regard the investment climate in Moldova is not as welcoming. There have been too many cases where, despite the established laws, foreign companies have had their assets taken away without due compensation. For example, the experiences of the American company Europharm's investment in Farmaco and Germany's Unistar Ventures in the case of Air Moldova seem to contradict the laws. In order to attract investors, Moldova cannot just pass the needed regulations; it must enforce them as well.

Agriculture remains the second largest sector of the Moldovan economy and is one of the areas that could be of most interest to foreign investors. But talk of returning to large collectivized farms or prohibiting foreign ownership of agricultural land will quickly discourage investment in this area. Moldova was a leader in privatizing agricultural land after the fall of the Soviet Union and we have seen clearly over the past few years that private farmers are more productive and more effective. Foreign companies, however, will be wary of investing in Moldovan agriculture unless the Government of Moldova demonstrates a consistent and firm commitment to private agricultural enterprises, guaranteeing that private property will remain private.

The re-nationalization of privatized companies and property illustrates the underdeveloped structural support for a true market economy in Moldova. The Government of Moldova has repeatedly expressed its desire to join the European Union. A look at countries in the region that have been successful in this goal shows us that one of the most important steps they took was creating a stable economic framework based on the rule of law and applied fairly to everyone. Now, Moldova does not need to start from a blank slate. Brussels has made available the complete set of laws governing the EU -- the Acquis Communautaire -- which Moldova can use as a guide. In addition, the Government of Moldova and the EU have recently completed a detailed Action Plan to strengthen relations between the EU and Moldova. Bringing the Moldovan system in line with European standards will take time and strenuous effort, but we have already seen three former Soviet republics proceed down this path successfully. Were Moldova to start enacting and enforcing EU standards, I am confident that foreign investment would increase -- and Moldova's case for accession to the EU would be greatly strengthened.

I understand that the Minister of Economy has launched a working group to explore ways of improving Moldova's image abroad. In my opinion, these are just the kind of problems that group should address, because they are issues which have a direct impact on Moldova's image in the eyes of international investors.

Bureaucracy and Transparency

Hand in hand with a strong legal framework for business are the concepts of transparency and bureaucratic expediency. Investors will not invest in a country if they feel they will be treated unfairly, slowed by government inefficiency, or harassed for bribes and kickbacks. The need for transparency and the need to limit bureaucracy are intrinsically linked. The more red tape, over-regulation, and government interference, the more likely that corruption and bribery will thrive as an expedient means to circumvent the system. Pay-offs and graft signify a non-level playing field to the international investor, and will prevent capital from flowing into a country.

While the Government of Moldova and organizations like Transparency International are working to combat corruption, unnecessary bureaucracy and the blight of bribery are still serious impediments to doing business in this country. The 2004 Cost of Doing Business survey concluded that managers in Moldova spend almost 19% of their time trying to meet mandatory requirements. I spoke earlier of Moldova's location, serving as a bridge between East and West, as one of the country's three main potential advantages. Yet, this is squandered when it takes an average of three and a half days and $223 just to get a shipment through customs. Foreign and domestic investors complain that bureaucratic requirements are needlessly lengthy, costly, and burdensome.

Bribery is an illegal way around these oppressive regulations. And unfortunately, it is clear that this scourge is still rampant in Moldova. According to a recent poll only about 10% of Moldovans believe it is possible to do business in this country without paying bribes. And again, while Moldova has good anti-bribery and anti-corruption legislation on the books, the laws must be uniformly and vigorously enforced. For the past eighteen months the U.S. Embassy has funded an American legal advisor who is working with the Center for Combating Economic Crime and Corruption to strengthen Moldova's capacity to enforce these laws. While we have seen some progress, there is room for more action. Prosecuting corruption is important, but until Moldovan citizens stand up and say, "No, I will not accept graft as a fact of life" and refuse to offer bribes as a normal business practice, this scourge will continue. And until these laws are enforced and attitudes toward corruption change, international businesses will be wary of setting up shop here.

Regrettably, adding to the perception of instability and illegality is the unresolved situation with Transnistria, which remains a potential source of political volatility and is viewed as a safe haven for criminal activity and graft. Solving the Transnistrian conflict is more than just a political issue; it directly affects the economic development of this country. And only when the laws of Moldova can be applied universally throughout its territory will this situation begin to improve. My government believes that resolving the Transnistrian conflict is important to the future of Moldovan citizens on both banks of the river and we continue to support the efforts of the OSCE and the other mediators to find a solution.

Moldova's Shadow Economy

The issue of having laws apply universally to all entities also defines the problem with the shadow economy here in Moldova. If someone challenged you to a game of soccer but your team only got to have five players on the field while the other person's team had eleven, would you think the game was fair? Of course not. Now imagine you own a business. How would you feel about establishing that business in a country where you had to pay taxes but half of the other companies did not? Would you feel you were competing in a fair market?

This is exactly the situation in Moldova, where some 60% of small and medium-sized businesses are not officially registered and do not pay any taxes. Operating in the shadow economy, these organizations have an advantage over any company coming in from abroad. For foreign investors, it's hard to compete against a company that can charge a much lower price because it is not paying taxes on its income. There are many reasons for these companies not registering, but I am told that one of the biggest reasons is the sheer complexity of the registration process. The number of state agencies from which a business owner must acquire signatures, permissions, permits, licenses, authorizations, and notaries is simply overwhelming.

Amazingly, even the American Chamber of Commerce has been unable to get registered. What sort of signal does that send to American firms looking to do business in Moldova?

The Government of Moldova has recognized that excessive administrative regulations are hampering the development of the business sector. I understand that a national working group created this summer has made a number of recommendations to streamline the registration process for new businesses and to simplify statistical and fiscal reporting requirements for small enterprises. Some of the steps in the registration process have already been eliminated. Moreover, I am told that several pilot "one-stop shops" will be established in the coming months. These "one-stop shops" will bring together in one location many of the remaining steps in the registration process. Thus, it appears that there may be some real progress towards reforming the regulatory process, but there is still more to be done.

Speeding up the registration process and getting more businesses on a sound legal footing is crucial. One of the economic sectors in Moldova with the greatest potential currently operates largely in the shadow economy. With the large number of skilled professionals in physics, mathematics, and engineering and its long history of technical innovation, Moldova has the ability to become a center for information and communications technology. There is a huge demand for high tech services across the EU, the United States, and Russia -- and several companies in Moldova are already providing technological services to these markets. These companies have grown rapidly, indicating that there is a strong demand for these services.

However, over 70% of the Moldovan information and communications technology companies conduct their business in the shadow economy. This hinders the further growth of this sector and provides little incentive for local innovation or foreign investment. Domestic software manufacturers see no reason to produce new titles when pirated software drives the price so low that they are unlikely to recover their development costs, much less make a profit.

Several things need to be done to allow this possibly powerful sector to reach its full potential and for foreign investment to flow into this arena. Intellectual property rights need to be enforced and piracy needs to be stamped out. Regular citizens and business owners need to work together to create and strengthen independent industry associations. Such institutions allow companies to act together, share information, and establish norms and quality controls. Without such non-governmental organizations in the information and communications sector, the chance for technology to become a leader in Moldovan economic development goes unfulfilled.

A final problem with the shadow economy is the issue of remittances. There are hundreds of thousands of Moldovans living and working abroad -- and each one sends back an average of $1,000 each year to Moldova. While these remittances have helped fuel a buoyant market for consumer goods, their influx has had unexpected consequences for the economy. The National Bank of Moldova is forced to buy up the excess pool of foreign currency that enters the country. This strengthens the leu artificially and puts inflationary pressure on prices. Foreign investors looking to export goods produced in Moldova fear the strong leu will prevent their products from being competitive outside the country. Additionally, little of the money from remittances is actually invested in Moldovan industry. Rather than splurging on imported consumer goods, Moldovans would be better served in the long term by investing in local businesses. As long as remittances play such a large role in the Moldovan economy, these problems will remain.

Conclusion

Let me get back to the question we started out with -- how do you attract investors to Moldova? They want the unexpected and the familiar, potential and stability. In the unexpected, Moldova clearly has plenty of advantages to offer that others may have missed or overlooked -- an excellent location with easy access to both the CIS and the EU, superb agricultural conditions for growing a variety of crops, and, most importantly, a population of well-educated, highly-skilled, multi-lingual professionals.

However, the expected -- the robust rule of law that is so vital for a prosperous market economy -- is still underdeveloped. Corporations will be wary of investing time, money, and equipment if they don't believe they will be treated fairly or if they have to pay bribes to get things done. Passing laws is not enough; these laws must be vigorously enforced and applied to everyone equally. For both the sake of foreign investment and Moldova's EU aspirations, I hope this happens.

It will not be easy. But let me assure you that you are not going down this path alone -- many have gone before you. I would encourage you to take a look at the report released by the World Bank last week entitled "A Better Investment Climate for Everyone." The report is available on their website -- www.worldbank.org -- and outlines some of the practices that have worked to attract foreign investment in other countries. You can study the experiences of those nations and apply them here in Moldova. You can also be assured that the United States and other Western countries want you to succeed, and we will help as much as we can.

Still, only Moldovans can make the decisions necessary for this country to succeed. The road will be difficult, but I am confident that it will be worth it -- not just for you personally, but for all Moldovans and the generations that come after you.

Thank you.