Foreign Direct Investment Into Ukrainian Term Paper

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However, the development and implementation of the new fiscal regulations could expand throughout numerous years.

Lack of incentives and transparency in the privatization process - the current administration is basically blamed for its refusal to privatize large state owned companies and numerous banks. In addition, the government is also accused that when they do indeed agree to the privatization of a bank or company, their procedures and reasons are not made public. (Wold Bank, 2001)

These issues, alongside with other significant matters have been raised by international organizations and their quick resolve is vital for a balanced economy. While the North Atlantic Treaty Organization places increased emphasis on military strategies and alliances, the European Union places increased interest on all aspects of life. In this order of ideas, the European organization imposed numerous conditions including, amongst others, the reduction of taxation, the implementation of transparency policies and the reduction of political restrictions. Ukraine will fail to accede to the EU until they have resolved these problems.

In all, foreign direct investments represent a major chance for economic growth and stability in Ukraine. However the economic growth and the FDI have not decreased during the recent years, they have increased at a slower rate, discouraging as such investments. Problems have also been posed by a weakening national currency, raising inflation and a series of inadequate government policies and regulations. In addition, investors compare the developments made by Ukraine with other emerging economies, and are rarely satisfied with an inferior rate of growth. Table two shows the foreign direct investments into nine emerging countries, since 1991 up to 1994.

Table 2: FDI to 9 emerging economies

Source: Pietsch, B., 1997, Investment in Ukraine, the OECD Observer, Number 24

As it can easily be observed, Ukraine is far behind other similar economies, a negative point when analyzing the investment opportunities. A particular feature of the foreign direct investments to Ukraine is its linkage to the country's desire to adhere to international organizations, such as the North Atlantic Treaty Organization, the World Trade Organization or the European Union.

4. Particularities of FDI into the Banking Sector of Ukraine

The economic instability and a reduced growth and development rate must be overcome in order to increase the foreign direct investments, so necessary to all industry sectors. "One ingredient Ukraine needs plenty of is foreign direct investment (FDI) to boost capital, improve skills and raise its economic performance generally - just as in other successful transition countries. This goes for almost every sector of the economy, from agriculture to banking." (Ogutcu and Kinach, 2003)

The banking sector in Ukraine is severely affected by the lack of foreign investors. Most banks and financial institutions in Ukraine are owned by local investors. The most common form of foreign banks is the formation of financial institutions by companies from abroad. But these companies are basically Ukrainian companies, founded abroad. In other words, Ukrainian investors use the national capital to create companies outside Ukraine's territory, and then use the newly founded companies to invest into the national banking system. "In turn, residents can be owned by non-residents, such as is the case with Ukrainian banks that are, in large part, owned by non-residents such as offshore companies that are, in reality, Ukrainian companies." (Deloitte Touche Tohmatsu Emerging Markets Ltd., 2003)

Another feature on the Ukrainian banking system is the country's partial acceptance of foreign direct investments. In this order of ideas, foreign investors who desire to purchase stocks at a national bank are only allowed to do this within the limits and boundaries imposed by both state officials and the banks' management. Alfa Bank and Ukrsib are for instance two relevant examples of this situation as they are both partially owned by residents and non-residents. ING on the other hand is one of the few entirely foreign banks. (Deloitte Touche Tohmatsu Emerging Markets Ltd., 2003)

The partial privatization of banks and financial institutions has long been debated by numerous economists, as it presents both advantages and disadvantages for both parties. In this order of ideas, it dissatisfies the investors as it prevents them from holding the entire or the majority package of stocks, preventing them from exercising full control over the bank. On the other hand, a commonly owned institution gives the advantage of shared risks.

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To the Ukrainian state, a joint ownership of the national banks offers the advantage of reduced costs and increased investments, while offering the possibility to still control the actions of the financial institution.

However the banking sector has yet to develop and reach its maturity to become fully liberalized and free from state interventions, the foreign direct investments of the recent years have set a favourable course for the Ukrainian financial institutions. Table 3 shows the main features of the banking sector throughout six years.

Table 3: Banking Sector

Source: Deloitte Touche Tohmatsu Emerging Markets Ltd., 2003

As compared to the previous decade, the foreign direct investments into the Ukrainian banking sector have increased and are expected to follow their ascendant trend. However, the state officials must improve and clarify the legislature on the field as well as present foreign investors with numerous incentives. The most significant reasons why Ukrainians should place more emphasise on increasing the levels of foreign direct investments into their banking system include:

FDI would bring about cutting edge technologies and would become the promoter of technology outsourcing

FDI would improve the skills and qualifications of the human resource

FDI would generate a higher quality of the financial products and services, leading as such to increased customer satisfaction, increased market share and increased profits

FDI would increase competition on the banking market, increasing as such the overall quality of the financial products and services offered by the banking sector

FDI would create and sustain a stable and developed banking system, setting as such the basis for sustained economic growth, a much needed characteristic for the accession to North Atlantic Treaty Organization, World Trade Organization and the European Union.

There is a strong link between foreign direct investments and successful adherence to NATO, WTO and EU and this resides in meeting the requirements established by the international organizations throughout the usage of foreign direct investments.

For instance, Ukraine's adherence to NATO is conditioned by improvements in the military and technological sectors. However the country has been collaborating with the international organization on matters of security and defence, it has yet to reach the development level of a NATO member. "Consultations and cooperation between NATO and Ukraine cover a wide range of areas identified in the 1997 Charter and the 2002 Action Plan. These include peace-support operations and security, defence reform, military-to-military cooperation, armaments, civil emergency planning, and science and environment" (NATO Website, 2007). The situation is similar with the case of WTO and the European Union. The two international organizations have both posed numerous conditions upon Ukraine's adherence, conditions with which the country has yet to comply.

In a nutshell, fact remains that the state's accession to the three international organizations is conditioned by its compliance with the regulations imposed. Currently however, Ukraine does not possess the necessary resources to meet the conditions. The most suitable approach to meeting the conditions imposed is that of encouraging foreign direct investments into all sectors of Ukrainian industry, most importantly in the banking sector.

The basic line of thoughts which links foreign direct investments to Ukraine's adherence to the North Atlantic Treaty Organization, World Trade Organization and the European Union is the following:

NATO, WTO and EU imposed numerous condition to Ukraine, but the country is currently unable to meet the requirements

The encouragement of foreign direct investments into all sectors of Ukrainian economy would aid the country in meeting the requirements

FDI would improve the quality of the products and services, the qualifications of the human resource and the companies' profits

FDI into the banking system would foster fair competition and superior products and services, better financing opportunities for the population and the entrepreneurs

All profits and activities resulting from investments would be taxed and would generate as such additional incomes to the state budget. These additional funds could then be used to sustain the growth of agriculture and other emerging industries

With the aid of foreign direct investments, Ukraine would be able to meet the requirements presented by NATO, WTO and EU and would be able to successfully adhere to the international organizations......

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