Slovakia delays decision on FDI stimulus to Samsung

By bne IntelliNews March 6, 2012

Tim Gosling in Prague -

The outgoing Slovak government has turned over a decision on granting millions in subsidies to investor Samsung to the next administration. The authorities are insisting the South Korean company hasn't threatened to quit the country, but the case illustrates the political confusion in Slovakia, as well as the precarious nature of relying so heavily on foreign investment.

Prime Minister Iveta Radicova's cabinet decided to delay a decision on €28m in tax relief to Samsung on February 22, reports Sita news agency, arguing that it needs assurances the investment will go into a long-promised R&D set-up and towards the creation of new jobs. The South Koreans said last year that they would seek the state incentives for a planned €90m investment to modernize its plant in Galanta, which produces LCD screens. "We have not refused to provide assistance, but we have several question marks," said Radicova. "The first question mark is whether the preservation of existing jobs is in question and the second is whether Samsung will go on in the same way after every investment stimuli, ie. after exhausting one it will then apply for another and say that if it is not provided, it might leave."

Slovakia has depended on FDI from global manufacturers for the rapid development of its economy over the last decade, and analysts say that due to heavy reliance on export demand from Europe and low domestic consumption, it's vital that investment continues to play an important role as the debt crisis unfolds.

The limping governing coalition has reportedly secured commitments from several large investors over the past few months. However, the current administration will come to an end after snap elections on March 10. Radicova is quitting politics, and many other members of the government look set to lose their remits in the wake of the "Gorilla" corruption scandal. That appears to have prompted them to turn a decision on paying out such huge tax relief over to the next government, which will likely be headed by the left-leaning Smer.

The incentives sought by Samsung reportedly amount to nearly €30,000 for each of the 950 jobs the company says the new investment will protect. Whilst unemployment has been a particular bugbear of the Slovak economy for several years - the jobless rate rose to 14% in the fourth quarter of 2011 - investment incentive rules allow state support only for the creation of new jobs, or for regions with high unemployment. The Trnava Region, which hosts the Galanta plant, has comparatively low jobless numbers.

Despite the setback, Samsung has not threatened to up sticks and leave for greener pastures, officials claim. Slovak President Ivan Gasparovic's spokesman, pointing out that his boss supports the delay, said that the company is ready for further negotiations, adding that Samsung "in no way said a word about leaving Slovakia" during a recent meeting with Gasparovic.

Radicova said that, "as long as Samsung turns to the government and really fulfills the agreement from 2005 about a research and development centre, then the government, of course, can only support such activities."

However, that could prove a long shot. According to economic weekly Trend, despite receiving investment aid of over €130m since 2006, Samsung is no longer obliged to remain in Slovakia, as the incentives ran out last year. But the prospects for further investment look limited. Lower-added value production left the country in 2009 for lower cost operations in Hungary and Romania, whilst Samsung has admitted recently that the market for LCD screens is struggling. At the same time, analysts doubt that Samusng is ready to move significant R&D functions outside its home country.

It's a delicate line that Smer leader Robert Fico now looks left to walk, illustrating the uncertainty that investors face amidst the ongoing political instability in Bratislava. During Fico's last term as PM, Slovakia slipped seven places in the World Bank's "Doing Business" ratings after the government increased regulation and halted privatisation.

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