Impact of Foreign Direct Investments on Croatian Financial Growth

By Ivanovic, Zoran; Bogdan, Sinisa et al. | UTMS Journal of Economics, December 2014 | Go to article overview

Impact of Foreign Direct Investments on Croatian Financial Growth


Ivanovic, Zoran, Bogdan, Sinisa, Baresa, Suzana, UTMS Journal of Economics


INTRODUCTION

This research is based on foreign direct investments in Croatia with respect to how Croatian economy looks to foreign investors and which sectors foreign investors find the best choice for investing. Croatia is country which is interested for foreign direct investments. Unfortunately, in Croatia there is a declining trend in foreign direct investment, the reasons are mainly attributed to the global financial crisis and the poor climate for investment in Croatia. This research is concentrating mainly on poor climate for investments in Croatia.

Investment can be defined as any investment in real or financial asset in the purpose of acquiring of certain economic benefits or profits. The investment can be defined as delay in spending which is very similar with spending. Unlike savings investments contain some risks associated with the realized effects of investment; because of that risk we can expect higher earnings from interest on savings. Financial investments represent investments in financial asset (stocks, bonds, T-bills and other securities). Revenues from financial investments are dividends, interest rates and other fees that are received as current income from financial investments. Except mentioned revenues it is possible to realize a capital gains if the market price exceeds the purchase price. Investors combine financial investments in the investment portfolio and thus produce a combination of return and risk, to gain maximal profit for minimal risk. Real investments are investments in tangible fixed assets. Real investments can be productive and non-productive. The most important non- productive investments are housing investments. Productive investments are classified as investments in fixed and working capital. Investments in fixed assets (buildings and equipment) can be gross and net. Some authors besides financial and real investments differ investments in intangible assets. These investments represent purchase of patents, royalties, copyrights etc.

Some basic investment motives can be: achieving the capacity that is necessary to conduct business. Maintaining the current position in the market or improving it. Replacement of physically and economically obsolete fixed assets. One of the possible motives can be business expansion or achieving funding structure that allows optimal utilization of company.

FOREIGN DIRECT INVESTMENTS (FDI)

According to Benito and Gripsrud (1992) a foreign direct investment is defined as ownership of 10% or more of the equity in a foreign company. However, in a majority of the actual cases the level of ownership is far higher, and 55% of the cases are wholly owned subsidiaries. The World Bank has defined foreign direct investments as net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short- term capital as shown in the balance of payments. According to Perovic (2005) foreign direct investment culminate in eighties, when the world's flows are growing yearly average of 30%, which is three times more than the growth of world exports. Their strong growth undoubtedly is linked to the activities of transnational corporations, as well as changes in the global business environment. FDI is motivated by the permanent interest of investors in making a profit in the long run.

Opinions on foreign direct investment are divided. It is believed that FDI differ from other forms of inflows of private foreign capital, primarily, by a permanent interest in the target company and the active participation of foreign investors in the business. With the help of foreign capital countries technologically innovate production faster, they improve the quality and lower the cost of the product and thus act on raising the competitiveness of the domestic and foreign markets. …

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