Investment attractiveness of the region: position, problems and ways of stimulating investment activity (let’s consider Kharkov region)

Экономические науки/14. Экономическаятеория

PhD Kuzmynchuk N.

National Technical University “Kharkov Polytechnical Institute”, Ukraine

PhD Zyma O., Masaltseva E.

Kharkov National University of Economics, Ukraine

Investment attractiveness of the region: position, problems and ways of stimulating investment activity (let’s consider Kharkov region)

Providing a favorable investment climate in Ukraine is a matter of strategic importance. Socio-economic dynamics and possibilities of modernization of the Ukrainian economy depend on its implementation.

Realization of the President's program “Ukraine for People” which is about large-scale modernization of the domestic production by investment and innovation development model requires raising of investments to the economy of the country and its regions [5].

The global economic crisis in 2008 negatively had influenced at the investment activities. In 2009, Ukraine took the seventeenth place by the foreign direct investment volume in the TOP-20, which determined by the international analytic company Ernst&Young [1, с. 421]. It should be noted that in 2000-2008 the positive dynamics of foreign direct investment inflow trend to increase both in Ukraine (in 9.22 times) and in Kharkov region (in 13.22 times).

One of the main problems of regional business is limited capability of domestic savings, inability of private investors and business groups to fully compensate the capital for further business development. In this situation an urgent problem is to attract foreign capital into the regional business [4].

Modern transformations of society have faced on the objective need of investment intensification today. Nonetheless, there are many problems that hinder the competitive advantages creation in the investment activity, which is the biggest factor of technical renovation, socio-structural reconstruction in the national economy and an additional source of income into regional budget. This is the objective premise of the research in this area.

The aim of this work is to analyze the investment potential of Ukraine, particular of Kharkov region, to determine the basic factors influencing on the country investment potential and suggest the investment intensification ways of Kharkov region.

Industry’s one of the most perspective economic activities Ukrainian for investors in Ukraine (22,6 %) [1, с. 428]. Investment attractiveness of Kharkov region can be considered as a combination of two components – industrial capacity, its growth and risk factors of the region. While speaking about diversified industrial structure it is interesting to note that the last year economic crises affected its branches, such as metallurgy and chemical industry diminishing their proportion in the region's economy. At the same time, food processing, pharmaceutical and energy industries are the least affected sector (in the industrial structure they occupy 44%). 5,9% is the share of regional industrial production in the whole Ukrainian industrial production volume. Almost all industries are being developed here including the key Ukrainian machine-building industry, cutting tool industry, fuel, energy and electrical engineering enterprises as well as IT and processing branches and agriculture. It should pay attention on the tractors production, building, power engineering equipment manufacturing; aircraft building, fuel industry, and radio electronics, chemical, pharmaceutical, food and light industries [3].

Banking sector. The banking system of Ukraine is in establishing process, which provides great opportunities for ambitious investors.

Foreign analysts speak about the financial sector dynamic development and its attractive qualities for investors. The increased activity of foreign banks which are eagerly purchasing Ukrainian banks and openning their branches in this country has started to have a positive influence of both the banking system reliability and its development.

The entrance into powerful foreign market has stimulated capital raising, facilitated access to international financial markets and effective management processes [8].

Ukrainian market is absorbing all types of financial services. The most common are insurance and leasing. Opportunities exist for large operator entry. It takes over existing companies and establish of brokerage networks across the whole territory of Ukraine [7].

The biggest deal of Mergers & Acquisitions in the financial sector was the purchase of Kharkov’s Ukrsibbank by the leading European banking group BNP Paribas in April 2006 [4]. BNP Paribas takes the leading part among foreign banks presented in Ukraine in terms of assets, net profits and market capitalization.

According to the Standard Poor’s BNP Paribas rating is АА, a rating that very few banks can claim. Paribas bought 51% of Ukrsibbank shares, one of the most dynamically developing universal banks on the Ukrainian market. In 2009 the stake of the French group increased to 81,42%.

During the period of strategic partnership with BNP Paribas, Ukrsibbank has reached an absolutely new service level and opened a new business line. Today it is a universal bank that follows a balanced developed strategy in retail and corporate banking [13].

In the same year Kharkov Megabank sold 20% of shares for about 20 million USD to the investors. Among the new shareholders of the bank, there are three Russian companies and ten European (Switzerland, Germany and Austria). The European Bank for Reconstruction and Development (EBRD) and the German KW Development Bank, bought 15% of Megabank shares each. The volume supported by the programs of Kharkov Megabank is about 30 million Euros. One of the latest and biggest deals in the market of Mergers & Acquisitions in the financial sector was the purchase of Kharkov "Factorial-Bank" by the Scandinavian banking group SEB in November 2007. The Swedish bank bought 97% of Factorial Bank shares for 120 million USD. It is nearly 4.5 times greater than its capital. Dozens of banks have extensive branch network with foreign capital in Kharkov region: Raiffeisen Bank Aval, OTP Bank, Erste Bank, UniCredit Bank, Ukrsotsbank, Pravex Bank, etc. [4].

Construction and production of construction materials sector. The necessary condition for the effective work of a vertically-integrated construction complex is the ability to produce its own non-metallic minerals, cement, and concrete. That is why investors pay special attention to the production of raw materials at our construction branches [9].

A rich resource base of Kharkov region and the rapid development of construction in the pre-crisis years resulted large inflows of foreign capital in the production of building materials.

The major German operator in the market of household chemicals and building materials is Henkel GmBH. It launched a plant which produces construction mixes in Balakleya in 2004. It is the most powerful in Ukraine. Another large German company is GLAST GmBH, specializing at producing plastic profile TM WINBAU. On the Ukrainian market it is represented by “Evrotehplast”. Another producer of plastic windows is “Dresdner Fensterbau”. They opened their factory in Kharkov too.

Since 2006, EBRD has been a shareholder of Ltd. “Slobozhansky Ceramics”; it is the largest Ukrainian producer and exporter of ceramic facing bricks. The important transaction in the Mergers & Acquisitions market in the region was the acquisition of Kharkov Pls. “Balcem” shares (the largest cement producer in Ukraine and in Europe) by the leading Russian industrial holding company of building materials production “Euro-cement Group” in June 2005. Recently, the total amount of the Group's investment in the Kharkov is about 30 million USD [4].

The unsatisfactory condition of the majority of Ukrainian residential and commercial properties, as well as poor infrastructural facilities (most of them were built over half a century ago) means that we can’t predict high profitability of the construction industry [6].

The companies presented for future privatization aroused permanent interest. First of all, it is “Turboatom” - a leading producer of turbines for nuclear, thermal and hydroelectric power plants. The plant "Electrotyazhmash" is one of the world's largest producers of turbine motors and generators.

Food industry. The food industry is one of the most rapidly developing branches of Ukrainian industry. Nowadays, the food industry covers over 15 % of the general production in Ukraine. The positive changes occurred due to the substantial foreign and domestic investments in food industry, implementation of international experience. The novelties in production technologies helped to raise the level of products’ quality.

Traditionally, food industry of Ukraine is the major supplier of basic foods, such as sugar, salt, oil, dairy products, alcohol, confectionery, etc. Among the leading sub-sectors of the food industry are meat and dairy processing, sugar refining, flour milling and cereals production, oil extraction and starch and molasses production.

The sector has considerable production, research and labor potential, thus trough the last years international food companies found the market of Ukrainian food industry very attractive. Presently, the share of domestically produced food products on the Ukrainian market has grown to 95% [12].

The rich resource basisand the broad sales market have led to the significant volumes of transactions of Mergers&Acquisitions in food industry.

The first example of successful investment is the “Philip Morris” in Ukraine. A company has been operated in region since 1994. Nowadays it has 20% shares of the Ukrainian tobacco market. The American company Philip Morris International has invested approximately 100 million USD in the construction and equipment of the enterprise. French investment came to the region from Malteurop Group (the third largest malt producer in the world). Its East-Ukrainian company Malteurop is the main supplier of malt in Ukraine, it has worked in the region since 2002.

The Swiss company “Nestle SA” signed a contract on buying the Ukrainian company TechnoCom (producer of fast food products), which has worked more than 10 years on the Ukrainian market.

During the last crisis year, the share of imported goods was reducing significantly; as a result, the local producers could take their niche. The potentially attractive companies for investors are the Corporation “Biscuit – Chocolate”, JSC “Kupyansk Milk Factory”, CJSC “Hladprom”, JSC Plant "Berezovsky mineral water" [4].

Pharmaceutical industry. Current economic situation invites a closer look at investment opportunities in the Ukrainian pharmaceutical market. Up to date, Ukrainian pharmaceutical market has been growing steadily at 26% p.a., driven by growing consumer spending. Foreign pharmaceutical producers dominate at the Ukrainian market in value terms; as generic drugs prevail. Despite a forecasted decrease in the retail pharmaceutical market, domestic producers have the opportunity to increase sales. Ukrainian pharmaceutical market is very fragmented – many players compete for the small market shares. There is no real leader among domestic producers –JSC “Farmak” and JSC “Arterium” outperformed previous leader JSC “Darnitsa” in 2007. A crisis in the Ukrainian economy represents an opportunity to catch the next growth wave from the very beginning.

Due to high prices, foreign direct investments in Ukrainian pharmaceutical production have been minimal so far, but credit crisis will make local producers to collaborate with foreigners more actively. Financial crises significantly reduced capital expenditures and other relevant costs for Greenfield development in Ukraine [11].

About one half of Ukrainian medicines are also produced in Kharkov region [10]. It takes the first place in Ukraine by the total volume of production. The most attractive investment companies are LLC Pharmaceutical company “Health”, JSC “Stoma”, OJSC “Chimzavod Red Star”, LLC Kharkov pharmaceutical company “Health of the Nation” and several others.

Software Development. Ukrainian IT brains have been renown all over the World and many of them have actually returned to Ukraine to start up new Internet ventures and software houses producing some of the most sophisticate web applications and mobile applications used all over the World. Ukrainian software developers mostly work with their Western European or American partners as the R&D and back office support. World leaders in software development outsourcing have opened their branches in Ukraine to elaborate software architecture design projects and brain-intensive R&D assignments [7].

During the crisis period, economy needs industries reduce their costs. First of all, investments are feasible in the enterprises of IT-sector. Kharkov, with its powerful human potential, has opportunities to become a real “Silicon Valley” in Ukraine.

Powerful scientific potential determines the investment projects in the research sector. During the crisis period interest to the new development and innovation will only increase. The most attractive investment companies are Pls. “Ukrhydroproject”, Ltd. “Strum”, Pls. “Ukrgiproruda”, Pls. “Energoprojekt”, Ltd. “Institute Harkovproekt” [4].

Euro-2012. Widespread phenomenon is the preparation for Euro-2012. Conducting of this tournament envisages the comprehensive program of reconstruction and development of sports facilities, tourism, transport and socio-cultural infrastructure of the city with the support of foreign investors.

Analysis suggests that Kharkov region is ready for large-scale and long-term cooperation with investors and owners of media technologies.

Thus, foreign capital in Ukraine and in Kharkov region has huge prospects. Its involvement will be significant synergies for the region, for local and foreign businesses.

It should be noted that region’s investment potential and investment riskhavea significant impact on foreign investment inflow.

The investment risks are usually defined as political, economic and legal factors that could deprive the investors of their benefits, or profits resulting from their activity in the recipient country. In general, Ukraine has a strong potential for attracting essential amount of foreign investments due to its geographical position, large market of numerous free “niches”, rich natural resources, powerful manufacturing base, cheap and skilled labor force, and other important factors. However, the amount of foreign investments in Ukraine remains at a very low level and they are not enough to facilitate the country’s vigorous economic development.

This situation has been caused by a number of factors that not only defer the investment processes in Ukraine, but also put the break on general economic development. At the regional level, problems can be grouped as follows:

1) Domestic investor’s problems.

· Burden of taxation.

· Lack of motivation for re-investment of free working capital.

· Difficulties in obtaining permissions and approvals, certification, licensing and registration.

2) Foreign investor’s problems: lack of information (for example, Absence of the visual presentation of strengths and opportunities of the region) and frequent changes in legislation, particular, unclear legislation in the relation to the free economic zones and priorities of the development. The instability of the internal legislation is considered to be the major investment risk factor that calls distrust among foreign investors to Ukraine’s economy and creates unfavorable environment for business activity. In order to achieve unified actions and single strategy, a stable and developed legal base must be created all over the country; a clear division of power among different government agencies must be established and status of foreign investors must be specified.

• Weak organization of the investment process (imperfection of investment activity management system).

• Corruption.

3) Banking institution’s problems.

· Repayment of loans.

· Lack of large-scale regional projects.

4) State budget finance problems.

· Lack of developed state programs aimed at achieving concrete results.

· Corruption in the higher bodies of state power [2].

There are the following ways to stimulate investment activity: the creation of an informational system and consulting support for investors; the creation of science and industrial enterprises to attract venture capital in realization of investment projects; the inventory conduction of state and municipal property in order to identify their investment potential; the establishment of professional training for managers, marketers, lawyers and economists to work with potential investors; the establishing a system of monitoring and institutional support for investment projects; the realization of measures for preparing to Euro-2012; the development of tourism networks(the development of hotel and restaurant business; the reconstruction of the historical monuments and architectural buildings; the attraction of people who may orient visitors of the city and region territory; the organization of social pedestrian and bus routes around the city; to announce the competition for the best souvenirs’ production, etc.).

Thus, today the effectiveness of investment policy influences on the production, level of the technical equipment of the national economy capital assets, restructuring of the regional economy, social and environmental problems solving. Implementation of the proposed measures will facilitate development of investment activity in Ukraine and strengthen its economic potencial.

Reference:

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