Greece still has some way to go to attract investments

While its economic outlook has recently improved, Greece is still in dire straits: By the end of this year gross domestic product (GDP) will have declined by 25 percent in cumulative terms and unemployment has already reached more than 27 percent. And the Greek economy lacks, regardless of the efforts of Greek officials, substantial investments from Greek, European Union and other third countries.

It is a well known fact that Greek private investors, who could be the first sponsors of investments, have parked their funds outside Greece and that beyond some individual company decisions (more recently by Hewlett-Packard, software giant SAP and Boehringer Ingelheim pharmaceuticals), foreign investors are similarly reluctant. Many firms have decided, in the recent past, to move their headquarters out of the country or leave altogether – Societe Generale and Carrefour are such examples. In the meantime, the Greek government has been relentlessly stressing that Greece offers good investment prospects. However, calls that are not backed by concrete actions usually tend to fall flat without effect.

The fundamental question that should rather be raised is why investors are staying away from Greece. Simply speaking, decisions on where to allocate funds depend on the answer to two questions. First, are there any promising investment opportunities out there – with different levels of innovation (some investors prefer investments containing more innovation and, therefore, more profit opportunities but also more risk, others prefer less)? Second, to what extent is the business environment in the respective country friendly to investments and to innovation so that the invested funds are protected from problems beyond market-related risks and uncertainties?

Only if both answers are sufficiently positive, will investments into the economy of any country be attracted from locals and even more so from foreigners. Thus, beyond the direct expected payoffs associated with a given investment opportunity, it is crucial to create an environment that allows business plans to be turned into positive cash flows.

Greece today has a scattered number of innovative companies and certainly a fair amount of further investment opportunities. But most of them lack capital because the environment for innovation and investments was in a bad shape before the economic crisis and still is despite initial reform efforts. For instance, the lack of codification of Greece’s legal framework often adds a substantial burden; lengthy procedures erect barriers to entry and, more importantly, obtaining or extending licences or permits, as well as excessive reporting duties stifle business. In addition, cost-effective ways to protect intellectual property rights are lacking.

In 2010, the World Bank’s “Ease of Doing Business” report ranked Greece 109th out of 183 countries, far below any other eurozone economy (with Italy the second lowest at 78th). As the European Commission put it at the time, “the business environment suffers from obstacles to starting a business, the little protection given to investors and the difficulty to access finance.”

Some advances have been reported over the last two years. In 2013, according to the World Bank’s “Doing Business” report, Greece rose to 78th place. Some of the recent improvements noted were in the following categories: protecting investors, paying taxes, trading across borders and resolving insolvency. However, entry barriers are still very high for new firms in Greece, its ranking is far below average with respect to “starting a business” (146th place) “enforcing contracts” (78th) and – despite some improvements – with respect to “protecting investors” (117th), thus hindering investors and innovators who are seeking to commercialize their ideas and intellectual property through new businesses ventures in Greece.

In this context, it has to be emphasized that it was crucial for the future development of the Greek economy that the current and the previous two governments passed reforms on the business and regulatory environment and on the opening of certain closed-shop professions through parliament. However, it should be clear that there is no room for complacency: without continuous improvement in the business environment, Greek investors, researchers and business owners will continue to leave or stay abroad. Moreover, an efficient set of commercial laws is not only crucial to promoting entrepreneurship and innovation and for introducing innovative products in the Greek economic fabric, it is also important to attracting highly mobile foreign direct investment. International capital, as the critical indicator for a country’s openness to investments, can easily vote with its feet and shy away from Greece, and will allocate its money to other countries where investments are better protected. Declarations of intent are no match for a friendly business environment.

Therefore, if they want the initiated reforms to become effective and if they aim to use the entrepreneurial capacities of their fellow Greek citizens in a better way, Greek authorities need to accomplish this process. This means that they need to create a business climate that is conducive to investment, innovation and entrepreneurship, in particular by reducing regulatory burdens. This also means that the Greek government not only has to pass the relevant laws through parliament but also to develop an implementation strategy to make the laws effective in everyday business.

For instance, administrative efforts for starting, continuing and shutting down entrepreneurial activities need to be substantially reduced. This should include reducing the number of days needed to register a business, the number of bureaucratic steps, as well as the number of regulations, fees and reporting duties. As a benchmark, Greece should aim to implement permanent business registration (without regular renewal) within one day.

To become a fast and efficient public administration, Greece must implement state-of-the art online e-administration for all standard businesses, (e.g. registering online new businesses, tax declarations, etc, each within one hour).

Bluntly speaking, instead of relaxing on the improvements made from spot 109 to 78, Greece must focus on becoming one of the top 25 economies in the World Bank index when it comes to ease of doing business, just as a couple of other European countries – most recently the Former Yugoslav Republic of Macedonia – succeeded in doing, with first successes becoming obvious. Then entrepreneurs will be interested in transferring their new ideas into marketable products in the Greek economic fabric and not abroad, and foreign direct investment will start in a more substantial way. The Greek minister of development promised to proceed with these necessary reforms at the end of this year – let’s hope that he will succeed.

* Alexander S. Kritikos is research director at the German Institute for Economic Research (DIW) in Berlin, professor of economics at the University of Potsdam and research fellow of the Institute for the Study of Labor (IZA) in Bonn.

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