THE BASIC PROBLEMS OF ATTRACTING FOREIGN INVESTMENT TO UKRAINE - Scientific conference
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Рік заснування видання - 2014

THE BASIC PROBLEMS OF ATTRACTING FOREIGN INVESTMENT TO UKRAINE

13.05.2014 14:18

[Section 10. World economy and international economic relations]

Author: Seden Vladislav, student, Dnipropetrovsk national university Oles Honchar


Attracting foreign investment to our country is especially pertinent today because it is impossible to strengthen Ukraine’s economy without increasing investment, including foreign investment, without finding reliable and stable sources of capital and, ultimately, without establishing a favorable investment climate. 

Certain reform-based transformations and positive practical improvements can be seen in Ukraine’s economy currently. These positive results include the growth of GDP in recent years, rising average wages and pensions, a well-provided consumer market, diversified exports, a relatively stable national currency, and steadily growing annual investment.

Indeed, effective investment activity by any and all business entities will foster the growth of the country’s economy because, no matter what, it generates material resources for the society and makes it possible for the overall well-being of the population to improve.

Today, the quality of investment policy affects many things: industrial output, the condition and technical level of fixed assets at Ukrainian enterprises, the options for restructuring the economy, and the solutions to social and environmental problems. Investment is the basis for developing individual businesses, specific sectors and the economy as a whole. The modern economic environment demands an active policy for attracting foreign direct investment. In Ukraine, investment activity is regulated by legislation that is in the process of being updated and improved, in order to draw greater inflows of FDI and to improve their effectiveness.

The study focuses on the problems involved in attracting investment to Ukraine and some suggestions for how to solve them, based on the country’s economic potential.

For the purpose of this study, the works of domestic and foreign scientists and community organizations on investment management and effectiveness were used as a theoretical and methodological base, as well as Ukrainian investment legislation and regulations. This paper is based on materials used by the State Agency for Investment and Innovation (SAII) in the related Green Paper prepared by the Agency’s specialists over May–June 2013 and incorporates the results of public debates organized at the International Centre for Policy Studies and involving specialists from many related government and non-government organizations. 

In broad terms, investment is the foundation of a modern economy: it brings together the interests and resources of private individuals, legal entities and the state to generate real socio-economic development. Global experience shows that transition economies are not capable of developing their economies properly without attracting and effectively using investment, including foreign investment. By accumulating business, public and mixed capital and providing access to modern technologies and management, investments not only help form national investment markets, but also bring new life to markets for goods and services. In addition, investments generally support efforts at macroeconomic stabilization and makes it possible to ease social pressures during the transformation period.

The investment potential of any country—frequently, the term “investment appeal” is characterized by a combination of macroeconomic indicators, such as: economic growth, the ratio between consumption and savings, lending rates, profit rates, inflation levels and dynamics, consumer demand, the presence and proportion of production factors, infrastructure development, and so on.

Ukraine could potentially become one of the leading countries in terms of direct and portfolio foreign investment. This is supported by Ukraine’s large domestic market, comparatively skilled yet inexpensive labor, major scientific and technological potential, abundant natural resources, and its available, if underdeveloped, infrastructure. Yet, private domestic and foreign capital investment is hampered by political instability, inflation, ambiguous legislation, under-developed industrial and social infrastructure, and inadequate information flows. The interconnectedness of these problems reinforces their negative impact on the country’s investment appeal. 

The risk of investing in any country is essentially the level of uncertainty in forecasting return on investment (ROI) and it includes political, economic and social components.

In our work, we showed that it is possible to invest foreign capital in Ukraine by:

 • setting up companies with the share-based participation of foreign capital—joint ventures;

 • setting up companies that fully belong to foreign investors and their branches; 

• purchasing rights to use land and other natural resources, as well as other property rights; 

The state regulates investment activity in order to support its economic, scientific, technological, and social policies. This regulation is determined by socio-economic indicators, national and regional economic development programs, and the State and local Budgets, which allocate public funding for investment activity.

At the same time, favorable conditions need to be established for investors who put their money into those areas Ukrainian society needs the most. First of all, this is the social sphere, upgrading production, creating new jobs for citizens who need social security, implementing innovation and hi-tech projects, applying discoveries and inventions, developing the agro-industrial complex, implementing programs to eliminate the aftereffects of the Chornobyl disaster, manufacturing building materials, and investing in education, culture, environmental protection, and healthcare.

Foreign investors can bring in scientific and technological know-how and cutting-edge management practice. In addition, attracting foreign capital to actual production is much more useful than borrowing to purchase the same goods, which only increases the country’s debt burden.

At the moment, the flow of foreign capital is already vitally important to achieve mediumterm goals, such finding a way out of the current crisis and reviving economic growth. At the same time, Ukraine’s national interests do not always coincide with interests of foreign investors. This makes it important to attract foreign capital in such a way that investors can satisfy their own needs while simultaneously helping the country reach is social goals. 

The Government’s immediate objective must be to stimulate investment and to spur significant growth in investment volumes. Increasing investment flows was and continues to be a priority for executive bodies. 

To spur investment, including foreign investment, a number of measures need to be taken at the national level: 

• reduce the level of state regulation of commercial activity and ensure the stability of relevant legislation;

 • eliminate ambiguities in legislation and regulations and finish judicial reform; 

• improve regulations regarding the exercise of property rights; 

• complete administrative reform, make the policy-making process both public  

• ensure a stable political environment; 

• increase efforts to establish a positive image for Ukraine. 

The key policy objective regarding investment is to establish equal conditions for doing business and investing in Ukraine’s economy for business entities of various forms of ownership, to ensure that investment happens in a transparent and civilized manner, and to improve the distribution of investment sources.

The country’s economic policy must aim at establishing a favorable environment for the development of business, eliminating red tape and corruption, and reducing the shadow economy. This would, in turn, establish the conditions for:

 • implementing a unified business regulation policy to achieve the optimal level of state regulation of commercial activity, defining the legal principles for state support for small enterprises, and regulating licensing procedures; 

• revising legislation regulating business activity in specific sectors of the economy with the aim of increasing the effectiveness and competitiveness of businesses; 

• improving and simplifying the system for registering a business;

• improving the procedure for launching investment projects;

• expanding international cooperation in competition policy to prevent restrictions due to actions taken outside of the country’s territory.

There are some important factors for improving Ukrain’s investment:

1)Forming a legal base 

• further tax reforms; 

• a legal base to facilitate a working stock market; 

• the protection of individual contributions to life and health insurance programs, and to non-state pensions. 

2)Reforming the tax system 

3)Attracting investment to science, technology and innovation 

We expect the implementation of these program elements to help establish a normal investment climate in Ukraine and improve the country’s appeal to foreign investors. 

The introduction of joint investment vehicles should provide suitable conditions for investing. By improving the system of corporate governance, a transparent system for protecting the rights of all investors will develop.

Investment resources should grow with the effective use of public investment and increased long-term lending volumes for the real economy, at the same time as the possibilities of foreign investment are used in more traditional ways.

The institution of concessions should help attract investors to upgrading infrastructure, while investment in science, technology and innovations should generate new jobs.

Government support for high technologies and the development of an innovation infrastructure in the country should help attract investment into innovations and bring the Treasury revenues from the use of this know-how. 

By implementing the strategy for long-term economic development, Ukraine should see State Budget and local budgets investments on industrial and social projects grow, while the specific volumes are determined at the appropriate level of government.




List of references:

1. Yermoshenko N. N. Actual Problems of Regulation of Co-Investment Market (p. 45 - 48)

2. Petriv M. V., Rudenko D. M., Sulyk Y. A. Assessment of Risks of Investment Activity of Enterprises (p. 36 - 38)

3. Momot T. V., Velychko K. Y., Yakovliev P. O. Investment Attractiveness of Subjects of Economic Management in the Process of Mergers and Acquisitions: Improvement of Instruments of Evaluation (p. 32 - 36)

4. Balaka I. M. Analysis of the State and Prospects of Development of Real Estate Market of Ukraine (p. 16 - 20)

5. Sablina N. V., Lymar D. A. Analysis of Attraction of Direct Foreign Investments Into Economy of Ukraine at Present Stage of Development (p. 12 - 14)

_______________________

Research supervisor: O.G. Myhaylenko, E.V. Nezhenets



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