WESTERN INVESTMENT IN EASTERN EUROPE: RELUCTANCE ON BOTH SIDES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700070008-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: November 16, 2016
• Document Release Date: January 7, 2000
• Sequence Number: 8
• Publication Date: June 1, 1974
• Content Type: IM

CIAOER
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V\/~ tern I noes ment: ire ~a~stern E~~u~r'o'~~:e: Reluctance on, Both Sides ~~une~~
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confidential
Intelligence 1Vlemora.ndum
1-Yfestern Investment in Eastern Europe
Reluctance on Both Sides
Confidential
ER IM 74.8
June 1974
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NATIONAL SECURITY INFORMATION
Unauthorized Disclosure S~rflject to Cr!minal Sanctions
f:lessllled by 015818
Exempt Irom gonorel declasslflcetion schodula
al E.O. 11852, oxamptlon cetegory:
5 5D(t), (2), and (J)
Aulomollcally declesslfle~l on:
Dale Imposslblo to Determine
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Western Inveshyient
in iEastern Europe:
Reluctance on Both Sides
KEY JUDGMENTS
Large-scale Wcstcrn investment in Eastern Europe seems unlikely because of
the reluctance shown by both sides.
Most countries remain off limits to investors:
? Only Yugoslavia and Romania arc energetically seeking foreign
invcstmcnts;
? 1-lungary has adopted an investment law but considers investment
to be an "exccptiona; and marginal recourse;"
? Poland remains equivocal on the equ,~ty i~.ue;
? 3ulgaria, Fast Germany, and Czechoslovakia continue to prohibit
equity invcstmcnt.
[n countries with invcstmcnt laws, investors:
? Are often deterred by the export promotion provisions of tlic laws;
? rind the negotiating process frustrating;
e Arc confused by Communist terminology and concepts;
? Make invcstmcnts mainly to promote their own exports rather than
to earn equity profits.
25X1A
Note: Comments and queries regarding this memorandum are welcomed. They
may be directed to of the Office of Economic Research,
25X1A
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1. Eastern Europe's heavy reliance on the industrial West for key
technological inputs to sustain growth has put an increasing strain on the countries'
balances of payments. Since the early 1960s, East Euroriean policymakers have
sought better ways to harnes.; Western technology and, at the same time, to lower
the hard-currency cost of the acquired know-how. Their experiments have now
brought them to the point of allowing Western equity investment in joint ventures
with domestic firms. In 1967 Yugoslavia was the first socialist country to legalize
foreign investment, and komania in 1971 and Hungary in 1972 have followed
suit. Early in 1974 Poland reportedly was readying a foreign investment law, perhaps
in time for the five-year plan beginning in 1976. East Germany, Bulgaria, and
Czechoslovakia have made no moves to relax their bans on foreign ownerships
Wiry Foreign Investment?
2. In the early 19~SOs Eastern Europe began going deeper in debt to purchase
Western equipment and technology to accelerate growth in leading sectors such
as chemicals, petrochemicals, machincbuilding, electronics, and transport
equipment. As a first ,top, the countries purchased licenses and processes from
Western firms in addition to much of the C(]U1p171el1t needed to produce the
products. This arrangement was not altt>gether satisfactory. The price of the licenses
was high and the documentation frequently carried restrictive marketing covenants
prolubiting sales outside the purchasing country. And by the time the licenses could
be put to use, the technology was often out-of--date, yielding products which had
limited hard-currency export prospects.
3. The balanrc-of-payments pinch -first felt by the countries least tied
to trade with the Comecon area, Yugoslavia and Romania -provided an impetus
for experimentation. Beginning in the early 1960s, these countries, along with the
forward-looking Hungarians, led the search for alternatives to outright purchases
of industrial assets,. Hoping to nrake Western technology more productive and to
offset the hard-currency cost by promoting exports, policymakers turned to
caoperative ventures and coproduction arrangements. The East Europeans expected
these ventures would lead to jointly-produced good;; that could be sold in the
West through the Western partner's marketing channels. The deals actually brought
to fruition varied from simple subcontracting arrangements in which the domestic
partner added s!,nall parts to an almost completed product to more complex
situations where the Westcra partner provided capital, entrepreneurship, and
markets while the Eastern firm was supplying plant, .labor, and raw materials.
1. ror a description of the Yugoslav case, sec CR IR 73-25, IVestern /nvestnreut !~i YuBostavra: 147!! it
bhke a Ihjjerence?, December 1973, CONFIDTNTIAL.
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4. Although some cooperative arrangements worked well in terms of
acquirinf~ new technology and establishing new export outlets, the results often
disappointed the East Europeans. The Yugoslavs, in particular, complained that
they were unable to obtain the most advanced technology and that Western firms
used the guise of cooperation ventures to take advantage of liberal customs
treatment and thus promote their exports in Yugoslavia. The more advanced
Hungarians have had somewhat better success -about 20~I? (some $20 million)
of their machinery exports to rite :~'rsi were attributed to cooperation deals in
1973.
5. To in.?rease their exports, the East Europeans also set up cooperative
ventures and even permitted equity deals with Western firms outside their
boundaries. IN.any of these ventures were located in Vienna so that the jointly-owned
firms could take advantage of the city's vast financial and switchtrading facilities.2
Again, the main objective was to use the Wcskern partner's marketing channels
to promote Ea4~. European exports in third countries.
6. The Yugoslavs were the first to decide that cooperation ventures -either
in or out of the country -were not enough to make a major contribution to
economic development. Already heavily in debt to the West, Belgrade singled out
foreign investment as a new means for securing new technology and cutting import
costs. But the Yugoslavs stopped short of permitting direct Western ownership of
socialized enterprises. Instead, investment up to 4910 was to be permitted, within
the socialized sector of the economy only. After several years of watching the
Yugoslav experiment from the sidelines, the Romanians in 1971 and the Hungarians
in 1972 have also moved to allow equity investment.
7. Basically all of the rou.ntries v;ith investment laws - Yugoslavia,
Romania, and Hungary -have sirrlilar ot;jectives. The countries want to acquire
state-of--the-art technology in key sectors, management skills, and access to
hard-currency export markets. While ?.he~~ are willing to accept marketing of a share
of a joint venture's output iti their home markets, all expect exports to be the
source of funds for the foreign partner's profits and equity repatriation.
8. At the same time, the countries seek to procure these benefits with as
little disruption to the political landscape as possible. None of the countries has
ever permitted the foreig;i partner to ?ssume more than 49?I~ of the equity in
2. Vienna is the center for intermediaries (switchtraders) who find third party buyers for products swapped
between two fums. For instance, u joint ven:urc involving a Western machinery manufacturer is set up to
produce shoes in which the foreign partner is paid partly in kind. The foreign partner, not interested in
marketing shoes, may employ a switchtrader to sell the output or switch the shoes for a product Itc can
use.
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any venture, even though it is theoretically possible in Hungary, Yugoslavia, and
Romania. Foreigners are neither permitted to set up wholly-owned subsidiaries nor
arc they allowed to set up ventures with private citizens, All investments must
be made in conjunction with ongoing socialist enterprises and must be approved
in advance by the government.
9. Standard requirements for equity ventures are that they promise to
promote "exports, expansion of markets, modernization and rcequipm~nt of
existing capacity, the introduction of modern technologies, and high labor
productivity." Since the inveshncnt laws in all of the countries have a bareboncs
generalized approach, most of the approved contracts arc extremely det4iled.
Management prerogatives are expressed in the contract as arc export plans,
bookkeeping procedures to be followed, default and damage claims settlement, and
arbitration proceedings to be implemented if disputes arise. Some contracts, such
as that for the Control Data venture in Romania, even go so far as to detail financial
and living conditions for personnel assigned to the project.
10. Control of joint enterprises is exercised by a management board.
Composition of the board need not reflect the equity position of the partners --
in Yugoslavia Western partners have often obtained parity on management boards
even when relatively little was invested. In Romania, the domestic side thus far
has had a majority on the board although key decisions apparently arc taken only
with the unanimous vote of the board. Romania and Yugoslavia both will accept
the rulings of the International Chamber of Commerce in Paris in the event of
cGsputes. Hungary is a signatory to the convention and presum:ably would also
accept decisions of the tribunal.
11. The major East European motive for consenting to equity ventures --
promoting hard-currency exports - represents the key obstacle for potential
investors. `JJestern firms are not particularly interested in setting up export industries
for the East Europeans, and they clearly do not want to create potential competitors
iii t}teir own markets or those already served by subsidiaries.
12. Some Western firms arc willing to enter into equity ventures to promote
exports in areas like the Middle East where, for political reasons, the market is
denied them. But few deals fall into this category. Instead most West European
firms will be looking at equity ventures primarily as a means of maintaining their
presence in Eastern Europe. In Yugoslavia, for instance, i~rvcstors leave preferred
small-scale consumer industries with good domestic sales opportunities, a high
import content, and a limited export potential.
1?. Geiting around the rules can be a costly, time consuming, and risky
process. Switchtrading avenues can be used to find buyers for hard to sell products,
but trading fees are often prohibitive. Many firms which have entered into switch
deals with the East Europeans have found themselves stuck with a product that
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is virtually unsaleable or that can be dispuscd of only at a large discount. The
safest approach seems to be to find a product that the venture can produce and
then export fora "downstream" operation of the Western partner such as basic
chemicals for a sophisticated compound, or simple parts or ~,omronents used i~~
a finished product. Over time, the East Europeans can be expected to lobby for
new technolo~ry as it becomes available illld t0 push the Western partner toward
a1lOWlllg the j0111t venture to manufacture virtually all of the final product;,
14. Moreover, Western investors face all of the traditional barriers to doing
business in Communist cowitrics. The notoriously slow negotiations that accompany
straight sales contracts are only a prelude to frustrations a Western firm can expect
to encounter if it decides to negotiate an equity venture on East European soil.
Contract discussions for most of the ventures approved in Yugoslavia and Romania
dragged on for one to two years. To many firms, the prospect of tying up key
personnel for extended periods is simply not worth it. Other firms arc not inclined
to enter into agreements in which they hold less than 51%~ of the equity. Anil
some remain LU1W1Ihllg to enter into anything but arms-length agreements --
licensing and barter agreements -- with socialist enterprises.
15. In the absence of East European concessions, Western investors probably
wot-ld not get enough of a cost break to offset these hurdles. L'astern Europe
does enjoy an advantage in labor costs when compared with most West European
countries, but its costs probably are on a par with the area in southern Europe.
In any case, the East Europeans have made it clear that they are far less interested
in investment in labor intensive sectors like textiles than in capital intensive
industries such as chemicals, steel and aluminum, and machinebuilding.
Where the Countries Stand --
Romania: Pushing Ahead
16. Aside from Yugoslavia, Romania is the only East European country which
has actively sought Western equity investment. Like the Yugoslavs, the Romanians
have looked to the West for technology and credit. And like Yugoslavia, the
Romatlians under Ceausescu have cut an independent niche within the international
Communist movement.
17. Filthottgh the Ceausescu regime has had its successes -- the national
product climbed at an average annual rate of 7~/o in 1966-73 -high-pressure gro~vtli
palicies have left behind a legacy of heavy debt to the W~~st.3 itomanian hopes
of cashing in on Western financial circles were a major moti?;ution for seeking
3. l~or a rundo?.;m of Qomanian and other Past European debt, see ER i.A 7';?.''~, h/ore Growllr a~ the
Installment Plan, December 197'1, SECR);T.
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membership in the International Monetary Fund (IMF) and the International Bank
for Reronstruction and Development (IBRD) in late 1972. In early 1971 the
Romanians even permitted the US based Manufacturers' tlanovcr Trust to open
a Bucharest branch bank -- an unprecedented step for a Communist country. The
decision to allow equity investment in one oi' Eastern Europe's most tightly
controlled and centrally directed economics was obviously taken to aid the regime
i
n continuing its grov/th without incurring mom debt.
18. The Romanians have actually permitted equity investment since 11~arch
1971. But their original law was so vague that no deals were concluded under
it, and the Romanians were forced to proclaim a more complete decree in Novemb~,r
i972. The second law -although still quite general - at least sets a framewe~~k
for establishment, control, and dissolution cf tltc joint ventures. The law specifies
that mixed corr,panies are limited to the fields od' industry, agriculture, construction,
tourism, trap; port, and scientific and technological research.
19. The Romanians have made a greater effort tha-~ the Yugoslavs to integrate
equity ventures with their domestic economy. "M.ixed companies" set up under
the investment law arc required to draw up five-year and annual economic plans
for the financial and economic activities of the venture. To guarantee that the
venture conforms with Romanian economic objectives, proposed contracts are
revi.~a;red by the Slate Planning Committee, the Ministries of Finance, Foreign Trade,
and Lsbor, and the Romanian Foreign Trade Bank. After signing, the agreement
is then rechecked by the Ministry of Foreign. Trade for corrr~;ance with Romanian
law and forwarded for final approval by the Council of Ministers.
20. Although there is no reinvestment provision in the Romanian law, a joint
company is required to contribute 5% of its annual profits up to a maximum
of 25%n of the invested capital to a "reserve fund." Profits remaining after the
reserve fund contribution: are then taxed at an annual rate of 30%. If a portion
of the profi~ is reinvested for at least five years, the tax rate is reduced by 20Io.
In a~3dition, the Council of Ministers is empowered to grant a limited tax holiday
extending through ttte year in which taxable profits arise and may reduce the tax
rate by 50% during the next two years. These provisions, however, do not seem
overly generous when compared with those of many developing countries. which
offer full tax holidays of five to tern years.
21. Romanian law is very sketchy in defining profit. "Taxable profit" is
i
l
"
s
mp
y the
difference between total revenues collected and total outlays made
to realize tltase revenues." The relevant tax decree does not specify such important
matters as allowable deductions. Although the foreign investment law permits
del;r~eciation of assets as a joint expense, the tax legislation provides neither guidance
on methods for computing depreciation, nor does it make clear whether losses
may be carried forward or backward to offset taxable income. To cover these
contingencies, Control Data included a 38-page appendix in its agreement to
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establis}t accounting procedures and to outline the method of asset depreciation.
The agreement specifies that fi;iancial records shall be kept in US dollar. and that
US general accounting methods be used.
22. ~ The response to Romania's investment law has been modest thus far.
Only four agreements involving some $12 million in foreign invested capital have
been registered to date. Total equity investment for the four projects signed in
1973 amounts to about $25 million. The results are roughly comparable with those
achieved by the Yugoslavs in 1968 -the first full year after equity investment
was permitted. A total of five investments were apprcvcd by the Yugoslav
government in l 968, with a foreign equity of only $17 million compared with
a total equity value of $71.8 million. The Romanians apparently hope to induce
Western firms into making sizable investment outlays by informally requiring that
the firms invest at least 5% of projected total sales volume.
23. The Romanians also are attempting to avoid es~ablishing joint companies
that rely heavily on imported components -- a major failing of the Yugoslav
experience. Apparently the government expects that within three years, 75%-80~/~
of the output of a joint company should be domestically produced. As the head
of a Western firm put it, the Romanian government hardly expects "a mixed
company to ... provide work for wrappers of imported parts and components."
24. The four approved ageements involving the Italian firm, Falco di Bietta,
the US firm, Control Data, Zahnrad~rfabrik of West Germ any, and Dai Nippon
of Japan dovetail nicely with the regime's efforts to promote a bala~ZCed Western
trade policy. As might be expected, all of the ventures are export oriented. They
are also linked closely with priority industrial efforts of the government. The Falco
di Biella Pquity investment -- the first approved by Bucharest - involves a foreign
outlay of more than $1 million in the production of acrylic fiber. Some 3,000
metric tons are to be manufach~red with most of the output pegged for exports.
2~. The widely publicized Control Data ageement with the Industrial Central
for Electronics and Vacuum Technology (CIETV) was signed in April 1973 after
two years of negotiation. The contract, which establishes the jointly-owned firm
of Romcontro} Data SRL, is considered by Romanian officials to be "a model
for joint ven'iure agreements." Control Data, with 45% ownership, will contribute
$1.8 million in the form of manufacturing and technological know-how and highly
sopliisticuted test equipment; CIETV will provide $2.2 million in plant facilities,
tools, and operating capital. The venture will produce peripheral products for
computers such as keypunches and cardreaders, which wi1D interface with the Felix
computer system built by the Romanians under French licensing. lniti~l plans call
for the sale of 55% of production in Romania with the rest marketed abroad by
Control Data. Saps efforts will be directed a! Western Europe although Control
Data eventually hopes to market the peripherals in Eastern Europe on a
hard-currerny only basis.
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26. There is less information on Romania's other two ventures. Renk
Zaluirader's investment with the Rcsita 1~lachine Building group involves an outlay
of $4.0 million out of a total capital of abuut $8.1 million. Renk-R~~sita will produce
machine gear units for medium.-speed marine engines. Half of the output will
support Romania's nascent shipbuilding industry -- a priority effort of the regime;
25?Io will be sold to the West, the remainder to other CEMA countries. The most
? recent joint venture approved by the Romanians involves the Japanese firm, Dai
Nippon, in a project to produce petroleum-derived protein for use in animal feed.
A 60,000 ton plant is scheduled to be constructed by 1975 with an investment
` of about $5 rrtillion by Nippon. Export plans have not yet been announced.
27. Bucliares~ is taking dead aim on attracting US firms for future joint
ventures. Romanian officials have discussed potential projects with U5 firms such
as General Tire, Pfizer, and Warner-Lambert in priority sectors like the chemical
industry and machine tools. Advanced discussions apparently have i;cen reached
with the Cummins Company for the joint production of diesel engines, and
"memoranda of intent" to enter into equity arrangements have been signed by
ITT in tei~. communications equipment and Singer in business machines.
hIwrgary: A Law Without Ventures
28. The Hungarian approach to equity ventures is perhaps the most curious
in Eastern Europe. h~ a 1970 decree, Hungary ;n theory became the first CEM~~
cowttry to permit equity investment. However, enabling legislation to implement
the 1970 decree was not completed until October 1972. The Hungarian law mirrors
those in effect in Yugoslavia and Romania; the share of the foreign partner is
limited "in general" to 49"/o and transferability of profits and equity abroad is
guaranteed. Like the Romanians, the Hungarians require that the joint venture set
up a risk fund -- in this case equal to 10% of the venture's capital. Furthermore,
Hungary requires that the annual profit fund -after the risk fund contribution
has been deducted -- may not exceed 15`/0 of the total wage fund. I-Iungary's tax
rite is set higher than in either Romania or Yugoslavia. Profits are taxed at 40?Io
if the profit rate is less than 2G% of the venture's capitalization; 60% if profits
are above that level.
29. The or'ficial government position on equity participation, as stated in
Noti?ember 1972 by Odon Kallos, President of the Hungarian Chamber of Commerce,
is that it is "a marginal and exceptional recourse." In Marclt 1974 talks with a
- US Commerce delegation, Foreign Trade Mini:;ter Birn was also negative on the
investment issue, stating that a large number of joint ventures was unlikely until
the Hungarian forint was convertible and the internal price system was revised
to reflect world prices. Neither seems imminent.
30. Four years of Hungarian reticence has not prevented negotiations. A
number of Western ani'l US firms have been talking about joint ventures -including
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Control Data, Corning Glass, Ford, and i/sso. None has been given a green light,
although the Hungarian government rcpnrtedly was close to approving an equity
investment by the West German firm, Siemens, in .lone 1974. Nonetheless, Budapest
still seems largely content ?with the standard forms of cooperatia~ in which it has
been the CFMA pacesetter. In view of their interest in Western and US agricultural
and food processing equipment, chemicals, pharmaceuticals, medical instruments,
and electronics, the Hungarians selectively may approve equity participation by
Western firms if there is no other way to consummate critical deals.
Poland: Still Ambivalent
31. The Polish position on foreign investmc~it has vacillated from statements
that a law v/as oeing acti~?~ly discussed to criticisms ,~f the laws adopted by Hungary
and Romania. As early as ~~etober 1972, the Polish Vice Minister of Finance stated
that the Poles were st~..ayi~tg ~i:c joint venture con;;ept, but nearly two years later
no investment law seems to b~ ~n ;he horizon. The Deputy Foreign Trade Minister
said in early 1974 that while enabsng iCgislation was still being considered, the
Poles thought the Hungarian and Romanian laws were "not of key importance."
32. On the other hand, a number of Polish officials appear to be keeping
the door open by maintaining that existing laws already provide the necessary
framework for joint equity ventures. Accoreiing to the deputy chairman of the
Polish Planning Commission, the fact that a decree on joint ventures has not been
published does not constitute a legal prohibition since a basic policy decision to
allow equity ventures was contained in a i 971 resolution of the Polish Council
of MinistP*S, In a similar vein, a senior advisor in the Ministry of Foreign Trade
asserted i~, February 1974 that the necessary legal authority still exists from the
pre-Communist period, and tl~~:,t interested companies should not wait for new
regulations. If a new law does eventually emerge, the odds are that it will be
patterned after the existing legislation in Hungary, Romania, acid Yugoslavia.
33. The issue may well be brought to a head if current Polish trade trends
continue. Under Gierek, Warsaw has become Irastern Europe's most eager custnmer
for Wester.. technology. Imports from the Developed West leave jumped from about
25% of all imports in 1970 to more than 4nlo in 1973, while the West takes
just over 30% of total Polish exports. The result lias been a soaring hard-currency
trade deficit that reached $ i .2 billion in 1973. And the 1974 plan calls for more
of the same, with another hefty boost in imports from the West. Like the leaders
in Romania and Yugoslavia, Gierek may eventually decide that the country's 200
odd cooperation and licensing arrangements with Western firms are not generating
sufficient exports to offset the country's mounting credit obligations.
34. In the meantime, Western businessmen are stuck with the thorny problem
of trying to negotiate a deal in the absence; cif clear-cut directives. Recent Western
and US offers from firms such as Dow Chemical, Colgate, Scientific Design, and
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Anaconda Copper hnwe drawn a blank from Polish F,oreien Trade Organizations.
Although Polish ambivalence may deter other Western firms from exploring the
equity avenue tuttil legal issues are clarified, Poland is a good prospect for Lecoming
tla~ next CEMA country to allow equity investment, especially if purchases of
Western technology continue at their recent high level. And from the investor's
standpoint, Poland offers the largest East European market, a sound raw materials
base, and a better than average rate of economic growth.
The Rest: Equity Still Illegal
35. The other East; European countries -- Czechoslovakia, Bulgaria, and East
Germany -are even further away from permitting any kind of equity participation.
The Czechs and Bulgarians even go so far as to prohibit foreign investment.
Althought the East Germans have no formal ban, they have hardly encouraged
c;.,operation ventures let alone equity venture;;. Except for vague hints, none of
the three ]tas indicated that equity investment is even being co~tsidc:red. For
instance, according to the Bulgarian ~'ic;C Minister of Trade, the concept of equity
is considered to be "outmoded" in Bulgaria.
36. Unlike the Czechs and .he East Germans, however, the Bulgarians arc
moving ahead with some ~f the largest coproduction ventures ever seen in Eastern
Europe. A memorandum of understanding signed with Kaiser Industries carries a
potential Project value of as much as $17 billion to $z0 billion over aten-year
period. If the projects envisioned in the Kaiser agreement are to be realized, the
Bulgarians expect that Kaiser will provide most of the machinery, technology,
marketing expertise, and financing needed. Bulgarian labor and materials will be
used. as much as possible in local constructio;t. As in equity ventures, proceeds
from sales abroad will be the source of Kaiser's earnings.
Lessons fro~y~ the Yugoslav Experiment
37. Romania, Hungary, snd ,presumably Poland have essentially emulated the
Yugoslav forn;at t'or investment. Nonetheless, they present the investor with a
considerably different investment environment. First, their ecatomies are more
stable than is Yugoslavia's; second, the enterprises in all these countries are subject
to more central control and red tape. It may prove to be just as hard to insulate
investors in these countries from bureaucratic rrustrations as it has been iv isolate
them from the impact of inflation and confusing policy changes in Yugoslavia.
Aside from these basic obstacles, however, the future of foreign investme~~t in
Eastern Europe will depend to a large extent on how these countries react to
thr lessons of the Yugoslav experience.
38. At a minimum, the limited response of Western firms to the opportttnity
of operating in the relatively open environment in Yugoslavia ought to have made
the East Europeans more realistic about foreign investment. They now shou.l
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expect that most Wcstcrn firms will be intent on making sales, investing a minimum
of equity, and marketing as little of the venture: output in the West as practicable.
39. To counter this problem and attract more productive and rational
investment, the CEMA countries -- and Yugoslavia -might well recast their
investment laws in the light of import substitution rather than export p-emotion.
After carefully determi.aing industrial priorities, governments could all,~w iorcih~i
companies to set up joint ventures that rest on an adequate raw mater.~uls base
and use loca~:y produced inputs to make products for domestic c~nsumptiw~. This
might prove more efficient -- and cheaper - in the long ru~i than indirectly
promoting ventures that rely heavily on imported cormponcnts to produ ~e high
cost products with a limited export market. In Yugoslavia, domestic political
considerations probably preclude the federal government from relaxing export
provisions in the near future. Regional pressures for competing ventures would
be great, and it would be politically difficult for the federal government to set
unambiguous industrial priorities. The governments of tlz~ more closely controlled
CEMA countries, on the outer hand, are less attuned to regitmal interests.
40. Removing the onus of export promotion and establishing clearcut
procedures from the outset for the repatriation of profits and equity would go
along way toward improving the operating climate for Western firms without ,Hoch
harm to the East Europeans. In retrospect, Yugoslavia could have landed far more
investments if its law had been clearer and less insistent about promoting exports.
if they changed the focus of their laws, the East Europeans might find that they
could pick and choose among a greater number of Western offers. Carefully worked
out deals involving large equity investments by Western firms might make a greater
contribution to domestic output and efficiency than have the classic credit
purchases of machinery and equipment of the past.
41. The operating environment obviously would also be enhanced if t}ie
CEMA countries gave special treatment to joint investment ventures. Indeed,
Romania has already done t:-is in a limited way. Joint ventures are given priority
access to raw materials and services anc! a,e charged at the noncommercial exchange
rate (about 14 lei per $1) rather than the official rate (5 lei per $1). The East
Europeans could also consider giving the ventures tax Holidays as do most
developing and even Borne developed countries that arc seeking investment.
42. But concessions are of course no substitute for a promising profit risk
r-ario. As the Yugoslav experience suggests, Western firms need substantiiil profit
opportunities before they will make long-range commitments artd tie up key
rrranagement personnel. Moderate profit prospects may elicit interest in small
investments with a short payout period, but large-scale projects in priority sectors
will require something more in the way of profitability. If the East Europeans
really want to reap the benefits of foreign investment, they must be prepared to
pay for it.
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