Executive summary
Engaging in international business for any given country requires meeting international standards due to the presence of complex policies some set by the trading blocs and also country risk in the international business.
In the case study of Romania as a country of choice, there are factors both external and internal that makes investment flourish hence increasing country returns from the international business due to the well laid favorable environment for direct foreign investment. However, there are still existences of factors that limit the international business activities in Romania.
In the year 2007, Romania registered a decrease in returns realized from the foreign direct investment. That notwithstanding, Romania has made several strides in a foreign direct investment where between 2007 to 2018, it made the highest return in the year 2008 with a total of 3.4$ billion in the month of April. In the month of May 2018, the foreign direct investment in Romania increased by about 490$ million (Hunya, 2018). However, as more is being done to make the entry in the international business through exports and imports in Romania, recently from the business reports, comparing capital and current account net cash inflows, the current account registered a deficit of $1.2billion in May 2018 but with positive reflection of more investment by the investors from the Romania abroad.
The GDP of Romania grew by about 7% in the year 2017 which deemed to be facilitated by government intervention in increasing the household consumption. Bureaucratic measures that include taxation, import procedures, local manufacturing and legislation policies including the licensing has been variable of significance which largely derails and slows doing business in Romania. Other factors of interest are labor policies and dynamics in the market structure that makes Romania a hub for investment interest by investors (Ștefănescu-Mihăilă, 2015)
Legal environment
Bureaucratic and legal process have immense influence in the determining the economic status of the country. The bureaucratic process generally involves all sorts of rules, paperwork, license, taxes or similarly the necessary requirements for one to open up a business or company. In the global setting, the investors experience varying bureaucratic systems that affect more or less in their interest in investing in particular areas.
In particular, the business environment in Romania is facing several problems with bureaucratic and legal phenomena being one of the major problems thus affecting the doing of the business in Romania, both through foreign domestic investment as well as abroad. The question of the bureaucracy cannot be undermined due to fact; it informs the entrepreneur when it comes to decision making whether to carry investment in a particular field or not specifically in the case study of Romania country.
The existence of excessive bureaucratic systems in the public institutions has caused very potential investors with interest in investing in agricultural and tourism to shun away from taking these opportunities. Though Romania is in Western Europe, where also the countries within the region do have a legal and bureaucratic process, the Romania bureaucratic process is too much thus placing it at a competitive disadvantage and the eventually scaring away the investors. This is the core reason why Romania growth in foreign domestic investment is too slow and the reason why it posted imbalance in the balance of payments with more imports than exports and consequently more cash outflows than inflows in the current account, 2018. If the legal environment would be favorable, more people from other countries would have taken advantage of the potential areas such as agricultural and tourism and the results in a balance of payments would be positive.
In Romania, the bureaucratic systems are weighty in influencing investment in the country and include; taxation legislation, import procedures, procedures in setting up a local manufacturing plant, obtaining the work permits and local content laws. These legal concerns have negative influence where they scare away investors because of how unfriendly they are to the investors.
To start with, the tax system and the regime in Romania provide the following forms of taxes. One is the corporate taxes which in itself is composed of various categories; profit tax rated at 16%, capital gains tax at the rate of 16%, branch tax at a rate of 16%. Another type of taxes in Romania is value added tax, excise duty which is paid to imported goods and locally produced goods that are exported from Romania. Local taxes are also another form of tax which paid by local business units and is subject to increase upon review by up to 20%. Advertising, resort, stamp duty, show, and vehicle taxes also forms of taxes in Romania.
All the above taxes have negative effects on the business environment. The large categories of taxes that are paid together with the huge amount of time used in paying’s kill the morale of investing in Romania. To the Romanian entities, they pay most of their taxes in the European Union. On the same note, they spend a good amount of time about two hundred and fifty hours per year in the whole process which could be used to do other important issues in business. According to 2013 report by the audit firm PWC, Romania surpasses EU average three times, taking position 139 out of 189 countries that were sampled, regarding tax payment process and meeting the laid tax obligations which adversely affect foreign direct investment in Romania.
Importation procedures laid in Romania is another factor that scares investors from investing in Romania. Romania is a member of EU and in that respect, import licenses are requirements set by the EU concerning trade agreements, import quotas and ensuring needs of a specific country of interest is met. There are several requirements that need to be met to import as recorded in EU import requirement documents which include; commercial invoice , transport documents, freight insurance, customs import declaration, labeling that demands all products to contain Roman as country of production in case of exports as well as packaging and marketing standards that meets the EU requirements( Ialomitianu et al..2016)
Of the all above procedures involved, is a hectic process where each process requires some good time in acquiring all the necessary documents which are all from different stations involving different national and international bodies. Similarly, in all due process, the investor incurs huge costs together with time as a resource that is spent finally scares away the investors.
Setting a manufacturing plant in Romania is a whole process that causes the investors to feel tired due to the lengthy bureaucratic process that it involves. Visiting public institutions to obtain the necessary documents may take months due to a high level of corruption in the public institutions. Similarly, lack of transparent information from public officers and a large amount of time spent in obtaining necessary information for investors to open up new companies is a bother and this greatly affects doing in Romania (Klašnja, 2015).
To sum it all, the bureaucratic and legal process is a concern that needs to be addressed to create a better environment that motivates the entrepreneurs to take opportunities of the potential areas of investments in Romania. Romania should review its tax policies, import, and export regulations and carry training to public institution officers on delivering effective services to the public and business community in view of making legal processes less.
Business Culture
According to Denmark in Romania (n.d.), the Romanian business culture is very formal, with a sense of hierarchy. They place great importance on respect for the older generation. Normal business hours in Romania are 9am to 5pm. The Romanians don’t tend to work during the summer and most of their shops close down. This also happens during Easter and Christmas. The business structure follows a top-down model of delegation. This simply means that the people of lower rank rarely ever question or challenge the decisions that are made by their superiors. The majority of the business meetings are very formal. The senior members that are a part of that specific group have the most privileges and are the most respected members. This can be seen where there are decisions that need to be made as well as formal greetings and titles. When businesses have meetings with one another they are extremely formal and the senior members often lead the meeting. During these meetings, there is no time at all for small talk. The Romanians like to get right to business. Romanians value privacy, so during these meetings there are no questions about personal information. In the Romanian business structure, meeting schedules are not of importance, but they utilize them on occasion as general guidelines. Romanian business men/women have to be flexible.
The Romanians are extremely tough negotiators because they are worried that they will be taken advantage of, so the most senior member of that specific party will handle all the decision making. Also, negotiations are done in person so that nothing goes wrong and there is clear communication. To Romanians, contracts are not a binding agreement, instead they are more considered guidelines and explanations of intent. Communication is key in the Romanian business structure. Business meetings start with a firm handshake and great eye contact. There is a lot of respect towards women in these meetings and the only time a male shakes a female's hand is if the female initiates it. As previously stated, titles are extremely important. One must call another by their professional or academic title with a Mr. or Mrs. in front of it, followed by their last name. Communication styles vary depending on the type of meeting. One must communicate directly and frankly while also being sensitive to others so no one in the room is offended. While sensitivity when communicating is important, Romanians value straightforwardness. Romanians prefer to do business with down to earth people that won’t brag about accomplishments or achievements. They really pride themselves on making sure they use proper etiquettes in every situation and the expect you to do the same as well. The average Romanian is extremely friendly, but previously stated the business side is very formal but somewhat reserved. Good manners are of great importance in the country, so all Romanians must present themselves professionally. As stated above, Romanian’s value privacy and it can take a while to earn the trust of a Romanian business man/woman, but once that trust is gained it can open doors in the business world. In Romania gifts aren’t a normal practice, but it is wise to carry around flowers, chocolates and liquor as a gift in case you are invited into someone’s home. The country of Romania is still governed by a bureaucracy. Personal relationships are vital in business if you would like to succeed (Denmark in Romania, n.d.).
Economic Overview
Romania has a GDP of $245,212 billion USD, this ranks them the 41st in the world. They have a GDP per capita of $12,575 USD. With a labor force of 9.133 million in three main industries (agriculture, services, and industry) and only a 5.3% unemployment rate. In the last ten years Romania has shown an increase in economic growth after joining the EU. They made very significant changes to their legislation to their economic structure, politics, and society. They changed their focus on their key industries. Their main industries are electric machinery and equipment, textiles footwear, light machinery, auto assembly, mining, timber, construction materials, metallurgy, chemicals, food processing, and petroleum refining. They have the second largest growing economy in the European Union. Romania has a pretty high poverty percentage with ¼ of their population below the poverty line. Romania has about half of their population living in a urban area (1.9 million), with the other half living in rural farm areas.
Romania is considered a stable economic and social state. However, they do have issues when it comes to politics. They were a communist country under the rule of dictator Nicolae Ceaușescu. The Romanian population is considered to be politically immature, this means that they are uneducated in the field of politics. They have many issues with the first one being their politicians to be undemocratic and unfair. Secondly and most important is the immaturity of their politicians. They go around discrediting and slamming their political rivals on very small issues instead of focusing their energy on larger issues in Romania. The largest social issue in Romania is education, this is due to their political issues. The Romanian government does not focus attention on large issues like education and public services. This causes a low percentage of higher educated population.
References
Denmark in Romania. (n.d.). The Romanian Business Culture. Retrieved September 24, 2018, from http://rumaenien.um.dk/en/the-trade-council/tradecouncil-in-xx/the-romanian-business-culture/
Hunya, G. (2018). CEFTA Investment Report 2017. Transition Studies Review, 13(2), 359-377.
Ialomitianu, R. G., Danu, A. L., & Bucoi, A. (2016). The effects of fiscal policies on the economic growth in Romania. Bulletin of the Transilvania University of Brasov. Economic Sciences. Series V, 9(2), 291.
Klašnja, M. (2015). Corruption and the incumbency disadvantage: theory and evidence. The Journal of Politics, 77(4), 928-942.
Ștefănescu-Mihăilă, R. O. (2015). Social investment, economic growth, and labor market performance: Case study—Romania. Sustainability, 7(3), 2961-2979.
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