Lessons in Transition

Q: What the most successful approaches to attracting direct foreign investments: offering prospective investors tax breaks and similar arrangements, or improving the overall investment climate in the country?

Empirical research has shown that investors are not lured by tax breaks and monetary or fiscal investment incentives. They will make use of existing schemes (and ask for more, pitting one country against another). But this will never be the determining factors in their decision. They are much more likely to be influenced by the degree of protection of property rights, the level of corruption, transparency, the state of the physical infrastructure, education and knowledge of foreign languages ​​and "mission critical skills", geographical location and proximity to the markets and culture and mentality.

Q: What are successful techniques for countries to improve their image rather negative investment?

The politicians of the country must be seen to be transparent, non-corrupt encouraging business, liberalization and protection of the property rights of investors. A real, transparent (eg through international tender) privatization a case where the government supported a foreigner against a local, a politician severely punished for corruption and nepotism, a fearless new medium - change image of a country.

Q: Should there be restrictions on the repatriation of foreign investment capital (such restrictions could prevent an investment panic, but at the same time they have a negative impact on investor confidence's)?

Short term and long term capital flows are two disparate phenomena with very little in common. The first is speculative and technical in nature and has very little to do with the fundamental reality. The latter is investment oriented and committed to increasing the prosperity and wealth of his new residence. It is therefore wrong to talk about "global capital flows". There are investments (including even long term portfolio investments and venture capital) - and there is speculative, "hot" money. While "hot money" is very useful as a lubricant on the wheels of liquid capital markets in rich countries - it can be destructive in less liquid, immature economies or economies in transition.

The two phenomena should be accorded different treatment. While long term capital flows should be liberalized, encouraged and welcomed completely - in the short term, "hot money" type should be controlled and even discouraged. The introduction of targeted tax capital controls (as Chile has implemented) is one possibility. The less attractive Malaysian model springs to mind. It is less attractive because the offense both short-term and long-term financial players. But it is clear that an important and integral part of the new international financial architecture control of speculative money in pursuit of ever higher returns MUST be. There is nothing wrong with high yields - but the capital markets provide yields connected to economic depression and cuts through the mechanism of short selling and the use of certain derivatives. This aspect of things must be neutered or at least countered.

Q: What approach has been most useful in best meet the needs of small businesses: through private business support companies, business organizations, or government agencies?

It depends where. In Israel (until the beginning of the 90s), South Korea and Japan (until 1997) - The State shall provide the necessary guidance and support. In the United States - the private sector invented its own enormously successful support structures (such as venture capital funds). The right approach depends on the characteristics of the country in question: how entrepreneurial its citizens, how accessible credit and micro-credit for SMEs, how benign the bankruptcy laws (which always reflect a social ethos), how good is the physical infrastructure , how educated are its citizens and so on.

Q: How can collective action problems in numerous and scattered small and medium entrepreneurs be best addressed?

It is set in the era of cross-Atlantic transport, telecommunications and computer networks (like the Internet). An odd question Geographic distribution is absolutely irrelevant. The problem is in the diverging self-interests of the various actors. The more numerous they are, the more niche-oriented, the smaller - the lesser of the common denominator. A proof of this fragmentation is the declining power of cartels - trade unions, on the one hand and business trusts, monopolies and cartels, on the other hand. The question is not whether this can be remedied, but whether it should be overcome. Such diversity of interests is the lifeblood of the modern market economy based on conflicts and disagreements as much as it is based on the ability to end a compromise and reach a consensus.

What should be done centrally is public relations and education. People, politicians, big business must learn the value and benefits of small business, entrepreneurship and intrapreneurship. And new ways to support this sector must constantly be borne in mind.

Q: How would the small firms' access to seed capital and other resources best be promoted?

The traditional banks around the world failed in maintaining the balance between risk and reward. The result was a massive shift to the capital markets. Scholarships for trading in the shares of small and technology companies jumped over the world (NASDAQ in the U.S., the former USM in London, the Neue Markt in Germany and so on). Investment and venture capital funds was the second most important source quantitatively. They not only funded budding entrepreneurs but also coached them and saw them through the excruciating and dangerous research and development.

But these are rich world solutions.

An important development was the invention of the "third world solutions," such as micro loans granted to the agricultural and textile sectors, especially for women and that involve the whole community.

Q: Women start one-third of new businesses in the region: now can this contribution to economic growth be further stimulated?

By providing them with the conditions for their entrepreneurial skills to work and exercise. Through the establishment of day care centers for their children. By providing microcredit (women have proven extremely reliable borrowers). Through them tax credits. By allowing or encouraging flexitime or part-time work or work from home. By recognizing the home as the domicile of business (especially through the appropriate tax laws). By equalizing their legal rights and their wages. By protecting them from sexual harassment or gender.

Vaknin is the author of "Malignant Self Love - Narcissism Revisited" and "After the Rain - How the West Lost the East". He is a columnist in "Central Europe Review", United Press International (UPI) and ebookweb.org and the editor of mental health and Central East Europe categories in The Open Directory, Suite101 and searcheurope.com. Until recently he was economic advisor to the Government of Macedonia...