Курсовая работа (т): Problems in creating a favorable investment climate in Ukraine

Problems in creating a favorable investment climate in Ukraine

MINISTRY OF EDUCATION AND SCIENCE OF UKRAINE

NATIONAL AVIATION UNIVERSITY

Management of Foreign Economic Activity of Enterprises Department

TERM PAPERthe subject “International Economic Relations”

Topic: “Problems in creating a favorable investment climate in Ukraine”

Performed by:

student of the 2^nd year of study, FML 203Alexander Alexandrovich

Direction 6.030601"Management"

Checked by: Ph.D. in Economics,professor Lytvynenko L.L.

Kyiv - 2016

CONTENT

INTRODUCTION1. THEORETICAL ASPECTS OF INVESMENT CLIMATE IN UKRAINE

.1 The essence of investment climate

.2 Factors that forming investment climate2. ANALYSIS OF CURRENT INVESTMENT CLIMATE IN UKRAINE AND WAYS OF SOLVING PROBLEMS

.1 Dynamics of foreign direct investment (FDI) in Ukraine

.2 Ways of improving the mechanism of attracting foreign investment in Ukraine

INTRODUCTION

It is not a secret that economy in our country, nowadays, is suffering from different factors, like aggressive policy of Russian Federation, Crimean occupation, corruption, military actions in eastern part of Ukraine etc. That’s why the problem of creating a favorable investment climate in Ukraine is rather actual. Due to such situation, investments - is one of the most important remedies in making our economy more prospective and stable, ‘cause international investments facilitate integration into world economy of receiving country by transfer of technologies, capital, management experience, innovations and so on., we have to admit the fact that Ukraine losses competition with other post-communist states not only in Europe but in Asia too. We can say that situation with investments in Ukraine is not obvious. Amount of investments is increasing, from one side. But we also should mention that Ukraine is still in the list of the most non-attractive states for foreign investors. Situation with foreign investments directly related to the internal economic situation in Ukraine. Ukraine is still exporting low cost goods and 70% of these goods are going to the former USSR countries. It means that internal transformation of Ukrainian economy has not happened. For this transformation we need foreign investments that will bring new technologies and will allow to produce goods competitive on the world market.purpose of this work is to determine the role of investment climate of Ukraine for the development of Ukrainian economy and to find ways for making this climate more favorable.achieve this goal, in this work I’ve tried to solve several tasks:

Ø  to define factors forming investment climate;

Ø  to analyze current features of investment climate in our country;

Ø  to investigate the role of foreign investments in forming favorable investment climate in Ukraine;

Ø  to find out the features of attractiveness of some industries in Ukraine;

Ø  identify possible areas of change in the investment climate of Ukraine in the near future.research is based on the use of methods of economic and historical analysis, systematization of theoretical approaches to the procedures and methods of forming the investment climate, statistical method, comparative and structural analysis of the volume of domestic and foreign investments.this work I have been analyzed the current status and trends in the investment sphere in Ukraine. Here shown particular areas of increased investment activity in Ukraine.today's dynamic world investments play an important role. They can take the role of core economy, the driving force of national production. However, internal resources of Ukraine for finance in the national economy lacks the proper amount. In this situation, the question arises about the attraction of investment from other sources, including from abroad. Ukraine's economy has significant resource potential, which many investors may want to invest their money. Instability, inconsistency and lack of transparency laws do not allow full use of existing investment potential. The problem of attracting foreign capital becomes more actual due to situation in our state [9].investments contribute to economic growth of the host economy and its integration into the global economy through the transfer of production capacity, transfer of technology, capital, management experience, skills and innovation. According to the Law of Ukraine "On investment activity" investments are all types of property and intellectual values invested in business and other activities, which resulted in creating profit achieved or social impact [8].are several classifications of investments, including;

Ø  property of investment;

Ø  nature of participation in investment;

Ø  period of investment;

Ø  investor ownership;

Ø  regional nature of investments;

Ø  level of the risk [13].

PART 1. THEORETICAL ASPECTS OF INVESMENT CLIMATE IN UKRAINE

.1 The essence of investment climate

investment climate foreign

In modern literature, definition of investment is often simplified, ‘cause of focusing attention only on some of its essential features. The term "investment" affects many meaningful concepts. Under the “investments”, they often mean the purchase of shares or bonds with the expectation of some financial results. In broad sense, investments provide a mechanism needed for the financial growth and for the development of economy. In a more narrower sense investment means the realization of long-term capital investment in their own country or abroad in companies of different industries, business, innovation projects, socio-economic programs; and the investor - is a depositor - a person, organization or state that investing. So, public investments can be formed from the state budget or state funding sources; foreign - invested by foreign investors in other countries, foreign banks, companies; private, which formed from private sources, corporate enterprises and organizations [4;22].

We can also mention industrial investments that are directed to new construction or reconstruction, expansion and modernization of existing enterprises; and intellectual investments that are invested to create intellectual products. There can be control package of investments (direct investments that provide ownership of more than 50% of shares) and non-control (less than 50%). [12]have a full understanding of the nature of the investment, first we should consider the basic concepts, the structure of the investment process, its members, types of investors.

▬   Securities - a tool of financial investments that ensure the right to participate in the company as the owner, the right to buy or sell stake in company;

▬   Property investment - an investment in real assets of real or own property. Real assets - land, buildings and so on;

▬   Actual own property - is a gold, antiques, works of art and other collectible items;

▬   Options - are securities that give investors the right to buy a security or other asset.[10]may be:

·        direct - a form of investment that provides direct ownership of the securities and property for the investor;

·        indirect - set of securities or property values. This form of investment doesn’t grant right to manage assets of the company.also differ by degrees of risk, namely high-risk and low-risk investments [23;3].above-mentioned types of investments and their volumes depend on the investment environment, i.e. the characteristics of the investment climate.term “investment climate” means the set of political, social, economic, organizational, legal and geographical factors inherent in a given country that attract or repel investors.main parameters that determine the investment climate in the country usually include political and social stability, the legal system, the economy, the system of receiving foreign capital, tax treatment, the value of customs duties and excise taxes, the procedure of registration of companies with foreign participation, etc.concept of "investment climate" reflects the degree of favorable situations, such as: [11]

Ø  natural resources and the economy situation of the state;

Ø  quality of the workforce;

Ø  political stability;

Ø  the level of development and infrastructure;

Ø  quality of state management;

Ø  property rights;

Ø  macroeconomic stability;

Ø  the level of monopoly in economy;

Ø  the quality of the tax system;

Ø  the level of compliance with the law and order;

Ø  the quality of the banking system, credit availability;

Ø  administrative, technical, informational and other barriers.most significant factors influencing the investment climate:

Ø  macroeconomics;

Ø  state debt;

Ø  crime and corruption;

Ø  taxes;

Ø  intellectual property;

Ø  bank system;

Ø  monetary and trade policy;

Ø  compliance with obligations mentioned in contracts.factors affect more negatively on the formation of the investment climate in Ukraine, so they require the development of complex measures for its improvement. Need a radical improvement of the investment climate, as long as it is not attractive nowadays., quick change of the situation is almost impossible. Many processes, such as ensuring reliable operation of the judiciary, fighting against corruption and other changes have long-term character.foreign investor with a large selection of countries where he has the opportunity to place capital, chooses the most favorable conditions, evaluates them, paying priority attention to these stable conditions and how long they persist.political stability, there are several important features like situation in the state economy and economic development policy. Constant growth of gross domestic product and constant growth of production (even small) - are pretty important factors.investors also assess the level of prices for local raw materials, the degree of increase in wages, prices on local raw materials and so on. Important role is played by inflation and inflation expectations.- also one of the important factors that affect the foreign investor.negative effect on the investment climate causes a lack of transparency, lack of clear, easily understandable and generally accepted methods of doing business in global markets and in the national economy.of Price Walerhouse Coopers (auditing company) have made the evaluation of the capital that have not come to the state. This evaluation method is performed on five criteria: the level of corruption, non-transparency of the legal system, economy and financial policy, accounting standards and relationships in business. For each of the criteria for every country was given a certain number of points - from 0 to 150 (where 150 - absolute opacity). [24]evaluation can be interpreted as: a country that intends to stimulate the inflow of foreign investments must create on its territory favorable conditions for investors, including lower tax burden.value foreign investor pays on the specific country agreement on promotion and mutual protection of investments and how the country fulfills its contractual obligations. The most important thing - the presence of legal stability. Investor should clearly know the "rules of the game" and be sure that they will be kept unchanged.sum up the above said, we can conclude that the state investment policy must constantly respond to the economic state of the environment, continuously adapting to the changes not only in the country but also around the world. Particular attention should be given to the stability, predictability and transparency of the economy.

1.2 Factors that forming investment climate

Creating a favorable investment climate depends on several factors.legal environment is one of the most important factors in forming favorable investment climate. The experience of many countries shows that the balanced budget, modern technology and strong NBU not enough to guarantee normal investment activity. There should also be effective courts; contracts with legal force; fair laws; protection of property rights; predictable rules and procedures. Countries where legality is not the basis of life are remaining as "countries with great potential" and nothing more. The development of law is also the key to a successful fight against corruption.in all countries have problems with taxes, customs procedures and other requirements. But the attractive investment climate offers entrepreneurs certain rights and guarantees.this area, "clarity" is the key word. Each country creates its own legal system, and they are quite complex. But the lawyer should explain investor about risks, in simple examples, that he will meet. In other case, it will mean a lawyer mistake or a mistake or imperfection of laws that are poorly formulated because of political compromises or lack of time.of these features are very important for investors: [16]

Ø  civil, contract and corporate law (corporate law in Ukraine is especially imperfect);

Ø  ownership of land and property, because no one wants to invest if the law can be repealed;

Ø  reliable system of land registration;

Ø  the right to use land as collateral for a loan that gives the bank or lender;

Ø  guarantees in case of insolvency of the debtor., foreign investors identify existing barriers to investment in the Ukrainian economy, which form the unfavorable investment climate: unstable and excessive government regulation, strict legal system, corruption, high tax burden, problems in establishing clear property rights, low income, lack of physical infrastructure etc.a climate conducive to business development, strengthening rule of law, increase transparency - a key factors to give more economic opportunities for Ukrainians. Our state should also work on other key tasks.very important factor in creating a favorable investment climate is the financial stability of the country. This factor increases the urgency of reform, so Ukraine should make the order in its economy, lower interest rates to attract much-needed investment.in Ukraine from US and other foreign investors - is essential, and the reasons for this are clear:

Ø  Ukraine is a market of more than fifty million consumers;

Ø  Ukraine occupies a strategic position in Europe, so products can be easily delivered to Central Europe and so on;

Ø  Ukraine has the most fertile agricultural land in the world and is rich in other natural resources;

So, many foreign investors, in theory, can and want invest their capitals. But, unfortunately, unstable situation and not transparent legislation in our country do not allow to use the whole potential. We should not forget about the problem of so-called net investment. Ukrainian economy is characterized as shadow at least on 50%.stocks in Ukraine are pretty worn. The degree of deterioration is about 76% (by the end of 2013); In industry - 57,3%; agriculture - 34,6%; transport communication - 96%. These indexes are growing every year, but this doesn’t mean something bad for foreign investors, ‘cause even small technical upgrade, made by investors - leads to bigger productivity, revenues etc. That’s why purchase of machinery, equipment, construction of craft buildings - are the most widely-spread forms of investments [7].but undeniable fact is that Ukraine is losing in this competition, and losing much. Foreign investments in Romania about four times higher per capita than in Ukraine. In Slovakia - five times higher. US foreign investment in Hungary higher per capita in the twelve-eighteen times than in Ukraine.potential investors are interested in the large market of Ukraine, its generous resources, its skilled workforce, but are not in a hurry to make this step. Prospective US investors fear such negative factors of the investment climate as excessive regulation; complex, confusing and high taxes; constantly changing rules. All this creates a non-favorable environment for business and investment. Ukrainian businessmen call the same list of negative factors.like Grabenko O.V. and Gubskiy B.V. have defined other important factors of a favorable investment climate:

Ø  Taking money abroad. As already noted, the exchange rate is one of the main economic risks that exists in the world, except for the euro area. National Bank of Ukraine, trying to defend the hryvna, has introduced a significant number of restrictions on the transfer of money abroad and from abroad. Worse, these restrictions are changing daily and this fact makes investors to reconsider their ideas about investing capitals in our economy.

Ø  Labor legislation. Investor wants to know the principles of conduct with employees in the event of collapse of business and the volume of its obligations. The harder it is to stand off people from jobs, the more investor will be careful in hiring workers.

Ø  Opacity of business. Unreliable annual reports on the balance of income and expenditure provided by Ukrainian companies. Banks were established western accounting standards, but they still remain unknown to many businesses. Of course, it inhibits the desire of foreign investors to cooperate with Ukrainian companies.

Ø  The high level of crime. Crime threatens the security, welfare, health and even the lives of people. In economic terms, it is a major factor influencing investor behavior. He is forced to worry about protection, payment for this protection. It is clear that a safe environment for businesses is an important task of the government.

Ø  Government intervention in business activity. Despite promises to develop a market economy, the Ukrainian government is constantly interfering in the affairs of business. This is particularly noticeable in the banking sector, where the impact on banks is obvious.it is clear that investment (especially abroad) - is risky. Some types of risks inherent in business (competition) are healthy, so they stimulate innovation, progress and prosperity. Other types of risk, with the efforts of the government or other organizations, can be removed, providing a favorable investment climate in Ukraine. To increase investors Ukraine must first analyze and eliminate the barriers to foreign investment. This will contribute to the Ukraine’s prospect.when investing in a country also take into account secondary factors:

Ø  cooperation in as more countries as possible;

Ø  the level of competition;

Ø  the level of import duties or transportation costs., they will not invest if there will not be profits, moreover relatively higher than in other country. Why do companies invest in Ukraine if it is able to earn more in, for example, US, Germany or Singapore? So, Ukraine competes in the investment market with other world countries. And even when in Ukraine there will be created good conditions for investment, they may not be quite favorable compared with other countries. And this factor, unfortunately, must be taken into account.that plan to invest in Ukraine should understand that investment - is always a risky business, so it should be properly assessed.degree of commercial risk affecting the following points:

Ø  demand for the product;

Ø  creditworthiness of customers;

Ø  the behavior of competitors;

Ø  opportunity to export their products from Ukraine to other states.problems concern any investor.additional risks arising when investing in a foreign country, it is very difficult to estimate, but they must be taken into account. It is, for example, differences in mentality and culture of different countries. In most cases, the language problem is an additional complication.economic problem investing abroad is the risk associated with exchange rates. For example, the company will invest in dollars or euros and profits from Ukrainian investment receives in national currency. The question arises: what is the difference in rate of hryvna against the major currencies at the moment when the investor wants to get at least dividends? To reduce the risk of certain exchange rate was the introduction of the euro in the European Union. However, in other countries this type of risk is still present, in some states more, in others less.reforms - the third important factor in creating a favorable economic environment. It is not easy to implement economic reforms ‘cause one of the key requirements of economic recovery - an investment. On the one hand economic reforms - the key to improve investment climate, on the other - economic reforms require investment.

1.1. Dynamics of main economic indexes in Ukraine [1]

European Business Association presented its data on investment attractiveness of Ukraine for 2009-2013. Was done a survey of 105 CEOs to determine the index of investment attractiveness - evaluation of investment attractiveness of Ukraine, detailed information described in Pic.1.1

Pic 1.1 Dynamics of investment attractiveness of Ukraine [3]

case of the situation in Ukraine and on the Crimean peninsula, most businessmen refrain from investment in the Ukrainian economy. Situation in the country is very dynamic. Every day we can expect the most improvident events and their consequences. For the first time in the history of observations experts called no positive changes in the investment climate.'s economy to foreigners - an object of world economy, in which can and should invest. Foreigners show great interest to invest in Ukraine's economy. The next logical step in attracting investment resources must be decisive action from the side of the recipient. Like solution problems with current situation, stabilization of hryvna to the world currencies, reducing the damaging effects of corruption etc.and geographical barrier are increasingly losing its relevance, to the potential economic and social benefits. Some sectors of the economy dramatically need funding as investments. Even small financial resources may cause significant economic and social benefits.

PART 2. ANALYSIS OF CURRENT INVESTMENT CLIMATE IN UKRAINE AND WAYS OF SOLVING PROBLEMS

.1 Dynamics of foreign direct investment (FDI) in Ukraine

The change in the investment climate of the state most clearly demonstrates the dynamics of foreign direct investment, which is considered as changing indicator in the level of trust and country rating.direct investments (FDI) play a significant role in the economy of Ukraine. Comparing with them loans and credits of the state are less important.can add, that saturation of the economy of Ukraine with FDI is quite small, comparing with European countries and CIS (Commonwealth of Independent States). Thus, it must be mentioned that it is important to formulate economical attractiveness of Ukraine to foreign investors (TNCs).

2.1. Dynamics of foreign direct investments (FDI) to Ukraine (2004-2015) [2]

to the information in the Table 2.1, we can add, that amount of FDI increased up to 2013. It was able thanks to the privatization processes within the state boarders.2014, FDI growth rate started to fall.of January 1, 2015 amount of FDI in Ukraine was 45 bln.916mln.USD. This quality is less on 19.5% than in 2014 (1072 USD per capita in 2015, in the previous year - 1328 USD). [2]flow of FDI was from 125 countries of the world. There are following states -investors: Cyprus, Germany, Netherlands, Russia, and Austria. They make up 65% of total FDI (Pic.2.1).

.2.1. The structure of FDI to the economy [4]

main cause of reduced amount of investments was in withdrawal of assets, mainly from banking sector.do a great impact on the economy of Ukraine. So, there are global companies on some sectors of Ukrainian economy:

Ø  Tobacco products - TNC “Japan Tabacco International”, “Imperial Tabacco Group”, “Philip Morris”, “B.A.T.”;