Department of Economics, Democritus University of Thrace
Greece in a serious recession for the last 7 years. This is a world record for a developed economy. With the decline in wages, pensions and most significantly government spending the tools to overcome the recession are limited. In this situation, it is imperative to create a positive business environment and put forward the appropriate policies in order for Greece to attract foreign investors. Foreign Direct Investment (FDI) can be used as a shortcut to Greece’s recovery. FDI is essentially a new stream of influx that includes the transfer of capital. This capital inflows may be in various forms: physical capital, business and scientific expertise, new production methodologies, technology, etc. These assets play a significant role and greatly contribute to the economic development. They can enhance the a country’s production base bycreating economies of scale.
In their simplest and more direct form, FDIs create jobs which, in turn, create demand that subsequently leads to profits and new investments, new jobs etc. In the macroeconomics terminology these are called multiplier effects of the FDI on the economy. In a crisis striken country like Greece, domestic capital is limited. Moreover, for Greece, capital controls and the problematic banking sector resulted in a steep decline in domestic savings. These facts limit the ability of the country to start a virtuous cycle of investment, production, demand, consumption and increased income and employment. This is the main reason why FDI is vital, especially in a country like Greece.
When it comes to the factors that affect the attraction of foreign capital, besides the strictly economic ones (such as the GDP, production costs, productivity and trade volume) the role of institutions and political stability are also important. In Greece, some of the most important impediments to FDI are: the bureaucracy, the unstable tax system and the delays in the administration of justice.
As seen in the graph, as far as capital inflow is concerned, the performance of Greece in attracting foreign investments has been satisfactory, despite the deep economic crisis that the country has had to endure since 2010. The gross inflows of foreign investment capital are what mirrors the true performance of the country in attracting foreign capital. However, more steps need to be taken by Greece in order to improve its business environment in an attempt to attract more foreign capital.