Romania Background

Romania Background

Romania is a country located at the intersection of Central and Southeastern Europe, bordering the Black Sea. Romania shares a border with Hungary and Serbia, to the west, Ukraine and Moldova to the northeast and east, and Bulgaria to the south. At 238,400 square kilometers (92,000 square miles), Romania is the eighth largest country of the European Union by area, and has the seventh largest population of the European Union (EU) with more than 20 million people. Its capital and biggest city is Bucharest, the 11th largest city in the European Union.

Romania is a market with tremendous potential, an advantageous location, and a business environment that offers opportunities amidst some risks. To successfully seize the business opportunities while reducing those risks requires a careful evaluation of the market, patience, and commitment. After several years of strong growth, Romania slumped into a deep recession in 2009 with GDP contracting by more than 7%. Since that time the country has seen a return to weak positive growth, with recent forecasts at 1.7% GDP growth in 2012. While it is difficult to predict, forecasts for succeeding years are more encouraging, as most predict the rate of economic growth to accelerate further. Stabilization of the economy has been due largely to a €20 billion ($27.4 billion) rescue package led by the International Monetary Fund (IMF). Romania has shown commitment to meeting the terms of the agreement with IMF, implementing a tough austerity program to reduce its budget deficit to 4.4% of GDP in 2011 and to 3% of GDP in 2012. (Appendix 1,2)

Romania’s government still plays an outsized role in the economy in terms of employment, ownership of assets, and influence on the business environment. The public sector includes thousands of entities authorized to spend public funds, and consequently most sizable businesses rely on public sector demand. This means that as a practical consideration, U.S. exporters cannot escape this aspect of the economy. State-Owned Enterprises shape many industries as dominant customers, suppliers, or in some cases competitors. The deployment of private sector management principles is incomplete or unknown in some cases, and political influence, opaque decision-making, conflicts of interest, questionable procurement practices, and problems of payment – even under contract -- are not infrequent issues when selling to the public sector. The oversight of the IMF has brought greater accountability and discipline to public spending. This discipline includes some settling of arrears owed by the Romanian Government, which has demonstrated commitment to meeting the conditions of the IMF.

Despite the challenges, several underlying attributes of the Romanian economy allow it to keep forward momentum. These attributes also produce the medium term business opportunities for American companies who have experience and expertise in the areas in demand.

Romania’s membership in the European Union is one of its most persuasive advantages. As a relatively new (2007) member, Romania offers a sizable domestic market and a comparatively low-cost foothold for accessing the EU market. Romania’s membership to the EU makes it eligible for billions of euro in EU grant funding. The set of financial supports known as “structural funds” are available to support investment in physical infrastructure and many other types of projects, and require a co-financing component from the recipient, in addition to the recipient’s government. In addition, Romania’s location in Southeast Europe shortens the distance for export sales to Turkey, the Balkans, the Middle East and markets such as Ukraine and Russia.

Romania actively seeks direct foreign investment. Romania's marketplace offers 20 million consumers, a well-educated workforce at competitive cost, a strategic location, and abundant natural resources, making it an attractive destination for investment. To date, favored areas for U.S. investment include IT and telecommunications, energy, services, manufacturing, and consumer products. Romania has taken steps to strengthen tax administration, enhance transparency, and create legal means to resolve contract disputes expeditiously. Mergers and acquisitions are subject to review by the Competition Council. Romania's accession to the European Union (EU) on January 1, 2007 has helped solidify institutional reform. Currently, customs and tax incentives are available to investors in six free trade zones. State aid is available for investments in free trade zones under EU regional development assistance rules. Large companies may receive aid up to 50% of their eligible costs, while small- and medium-sized enterprises (SMEs) may receive assistance of up to 65% of their eligible costs.

Romania did not attract significant foreign direct investment (FDI) until after the 1990s, due to delays in post-Communist economic reforms. According to data provided by the National Office of the Trade Registry, the cumulative net stock of FDI from January 1990 to September 2011 totaled USD 42.47 billion, about 21.2% of Romania’s GDP. Romanian direct investments abroad from January to September 2011 totaled USD 246.4 million. Officially, the value of U.S. direct investment in Romania as of September 2011 was USD 901.3 million. The U.S. is the 13th-ranked foreign investor nation, after the Netherlands, Austria, Germany, France, Cyprus, Greece, Italy, Panama, Spain, Switzerland, the UK, and Luxemburg. U.S.-source investment represented 2.1% of Romania's total FDI. However, because official statistics do not fully account for the tendency of U.S. firms to invest through their foreign, especially European-based, subsidiaries, the actual amount of U.S. FDI is higher.

The Dairy Industry In Eastern Europe

Milk is considered as an essential for child nutrition for most of the world. The Eastern Europe dairy market value is USD 8.5 billion. Some major dairy players have been following an intense acquisition strategy and increased their regional/global market value share instantly, although it required significant level of financial investments. Joint ventures and strategic alliances could be the more cost-efficient way of entering new markets. Danone, Lactalis and Royal Friesland Campina rank among the top five dairy players in Eastern European dairy. They followed rather diverse strategies to establish their presence in the still attractive regional market, despite the severe impact of the recession in the region.

Milk production across Eastern Europe is highly fragmented and represent the weakest link within the overall supply chain due to their low negotiation power (Appendix 3). The highly perishable nature of milk often puts suppliers under pressure to accept lower prices to avoid excessive losses or even a total write-off for their production.

...