FDI in Romania: from low-wage competition to higher value-added sectors

Over the past four years, Romania has benefited from record FDI inflows, thanks to macroeconomic stabilisation, strong GDP growth, large-scale privatisations and the prospect of EU membership. However, privatisation-related FDI flows are slowing down since 2007, which have been an important source of capital inflows over the past decade. Furthermore, successive wage negotiations have driven up unit labour
cost, affecting Romania's international competitiveness, especially in light industry, in favour of low-cost Asian countries.

Faced with slowing FDI inflows and at the same time with large catching-up needs (in 2007, Romania's GDP per capita stood at just below 40% of the EU27 average in purchasing power standards), it is time for Romania to step up efforts to attract investment in higher value added sectors, which are less dependent on low wages, by further improving the business climate, upgrading infrastructure and developing
labour skills. Increasing external imbalances make the need for policy measures which ensure continued FDI inflows particularly acute.

This Country Focus analyses the size and composition of FDI flows to Romania and identifies some key policy messages for maintaining the country's attractiveness to investors. It compares Romania's performance with central and eastern European countries, where FDI has proved to be a key catalyst in moving up the value chain, and hence speeding up convergence.