Business Environment: Romania

Euromonitor International
23 May 2014

Romanias business environment faces many challenges. The knock-on effects of weakness in the eurozone, as well
as underinvestment in education and innovation, are hampering its competitiveness. Nevertheless, government
finances are sound and its low corporate tax rate and tax reforms make it an attractive business destination. However,
as one of the most corrupt countries in the European Union (EU), Romanias competitive image is tarnished.

EXECUTIVE SUMMARY
The general government net budget deficit came down to 2.3% of total GDP in 2013, from a high of 9.0% in
2009, as a result of the implementation of severe austerity measures, following the global financial crisis of
2008-2009;
With a ranking of 69th out of 177 countries in Transparency Internationals Corruption Perceptions Index 2013,
Romania is one of the most corrupt countries in the EU;
Foreign direct investment (FDI) intensity was significantly affected, falling from 6.8% of total GDP in 2008 to
1.3% in 2012 (latest data available), as the eurozone sovereign debt crisis took its toll;
A low corporation tax rate of 16.0% in 2014 places Romania in a competitive position, whilst its tax
environment has been enhanced through reforms;
Total R&D) expenditure equated to only 0.5% of total GDP in 2013, comparing poorly to the Czech Republics
at 1.6%, demonstrating a lack of investment in this area;
Romania is blighted by low productivity (defined as GDP per person employed) that equalled US$17,808 in
2013, somewhat below the Eastern European average of US$22,343, owing to the large proportion of the
employed population working in agriculture.
Chart 1

Overview of the Business Environment in Romania: 2014

Source:
Notes:

Euromonitor International from Doing Business, World Bank; Global Competitiveness Index, World Economic Forum
Regulations in Doing Business 2014 are measured from June 2012 until June 2013. The data for all sets of indicators
in Doing Business 2014 are from June 2012 until June 2013 (except for paying taxes data which refers to January
December 2012).
Doing Business presents quantitative indicators on business regulations and the protection of property rights that can be compared
across economies. A high ranking means the regulatory environment is conducive to the operation of business.
The Global Competitiveness Index measures the microeconomic and macroeconomic foundations of national competitiveness,
taking into account 12 subjects - Institutions, Infrastructure, Macroeconomic stability, Health and primary education,
Higher education and training, Goods market efficiency, Labour market efficiency, Financial market sophistication,
Technological readiness, Market size, Business sophistication and Innovation.

OPERATING ENVIRONMENT
Measured corruption one of highest in the EU
Ease of Doing Business
In the World Banks Ease of Doing Business (Doing Business) 2014 report, Romania ranked 73rd out of 189
countries, unchanged (out of 185 countries) from the previous year. Its 2014 ranking was ahead of the Czech
Republic (75th) but was below Bulgaria (58th).
Getting Credit was Romanias best performing category in Doing Business 2014, ranking 13th, owing to good
scores for its strength of legal rights and depth of credit information indices, with the former above the Europe
and Central Asia average and the latter on par with the regional and OECD averages, where a higher placing
demonstrates transparency and the ease of obtaining credit.
Romanias worst category was Getting Electricity (174th). It takes 223 days to obtain an electricity
connection at a cost of 534% of income per capita versus 146 days and 487% respectively for the Europe and
Central Asia average. The most significant movement was seen in Starting a Business, improving by five

positions to 60th out of 189 countries in Doing Business 2014 from 65th out of 185 countries in Doing Business
2013, owing to the change in the authority responsible for delivering the headquarters clearance certificate.
Additionally the time to register a business (8.5 days) and the costs of 2.4% of income per capita compared
favourably with the regional average of 12.8 and 6.7% respectively.
Government Finances, Inflation and Credit Availability
Annual inflation came down from 7.9% in 2008 to 4.2% in 2013, as Romanias raised interest rates from 7.00%
in June 2007 to a high of 10.25% in August 2008. Since then, as inflation steadily reduced, interest rates also
came down to 3.50% in February 2014. However, inflation was also restrained because of weak domestic
demand that kept imports low; falling food prices resulting from a good harvest; and a reduction in the valueadded tax (VAT) rate on bakery goods. After reaching a high of 9.0% of total GDP in 2009, the general
government net budget deficit came down to 2.3% in 2013, below the EU Stability and Growth Pact target of
3.0%, due to greater government budgetary discipline. Nevertheless, public debt increased from 13.6% of total
GDP in 2008 to 37.9% in 2013, as reorganisation of tax collection and a fall in the VAT rate for imports led to a
revenue decrease.
Romanias financial system shows some weakness with stress tests on its banks showing that whilst most would
withstand a major external shock, some would have to bolster further their capital bases. Furthermore, foreign
banks have been withdrawing funds from local entities, leading to a further dwindling of banks asset bases,
which has subdued credit lending. Romanias bank nonperforming loans (NPLs) rose from 2.8% of total gross
loans in 2008 to a sizeable 17.7% in 2013, one of the highest levels in Eastern Europe, which was due to
generous lending practices prior to the global financial crisis of 2008-2009. However, this policy has been
reversed through a limitation in foreign currency lending to indebted households adopted in 2011. With annual
real GDP posting a gain of 3.5% in 2013, business confidence in Romania is increasing, particularly given the
lower interest rate environment.
Political Stability and Regulatory Quality
In the World Banks Political Stability and Absence of Violence Index, Romanias ranking deteriorated from
84th out of 202 countries in 2009 to 102nd out of 203 countries in 2012 (latest data available), as severe
austerity measures introduced in 2010 led to street protests and skirmishes with the security authorities.
Furthermore, attempts to impeach the President, Traian Basescu, in 2007 and 2012 have created political
instability. Its 2012 ranking was well below the Czech Republic (27th) but was above Ukraine (117th).
In the World Banks Regulatory Quality Index, Romanias ranking deteriorated from 52nd in 2011 to 63rd in
2012 (latest data available), both out of 202 countries, owing to difficulties encountered in the governments
attempts to privatise the freight railway entity, CFR Marfa S.A. Its 2012 ranking was below Hungarys at 43rd
but above Ukraines at 146th.
Chart 2

Corruption Perceptions Index: 2013

Ranking out of 177 countries

Source:
Notes:

Euromonitor International from Transparency International

The index measures perceptions of the degree of corruption as seen by business people and country analysts, and
ranges between 10 (highly clean) and 0 (highly corrupt).

Global Competitiveness Index

Romania ranked 76th out of 148 economies in the World Economic Forums Global Competitiveness Index
(GCI) 2013 (versus 78th out of 144 economies in the GCI 2012). Its best ranking was in the Market size
category (46th) with its worst in Goods market efficiency (117th).
Corruption
With a ranking of 69th out of 177 countries in Transparency Internationals Corruption Perceptions Index,
Romania does have an issue with corruption and is one of the most corrupt countries in the EU only Bulgaria
(77th) and Greece (80th) ranked worse. An attempt to impeach President Basescu placed judicial independence
in jeopardy. According to the same source, 87.0% of the total population felt that corruption had increased in
Romania from the 2007-2010 period to 2013. A report by the EU in January 2013 raised ongoing concerns
about Romanias lack of impetus in tackling corruption, which is especially pervasive within public
procurement. News broke in 2013 that a Romanian European Parliament member would be prosecuted for
allegedly taking bribes to sway EU policy. The government introduced anti-corruption measures for the period
of 2012-2014 in 2011, with a view to increasing transparency.

GOVERNMENT REGULATION AND TRADING ACROSS BORDERS

FDI intensity affected following global and eurozone economic downturn
Government Attitude to FDI
With total exports equating to 34.9% of total GDP in 2013, Romania has an open policy towards foreign trade
and welcomes FDI. Its large market and central geographic location make Romania attractive to foreign
investors. However, corruption and uncertainty in its regulatory framework can deter investment. Moreover,
legislation for foreign ownership can be complex and subject to change and whilst the Romanian state has done
much to align its laws with those of the EU, national interests can supersede business principles to the detriment
of companies operating there. Nevertheless, the current law treats foreign and domestic firms equally, whilst
foreign companies can repatriate profits fully and can engage in state privatisations. There are six free trade
zones in Romania, which allow the entry and re-export of goods whilst also benefiting from customs duty
exemption. Some sectors, such as those involved in environmental protection and national security, require
compliance with state rules.
With its accession to the EU in 2007, Romania gained access to one of the worlds largest trading blocs with
free trade amongst member states under a single tariff. Its EU membership has made Romania privy to many
free trade agreements (FTA) with countries including Mexico, South Korea and South Africa. Negotiations
towards the formation of the Transatlantic Trade and Investment Partnership with the USA are on-going. In
2013, Romania threatened to veto the FTA between the EU and Canada (also known as the Comprehensive
Economic Trade Agreement) unless Canada lifted visa restrictions for Romanians. The country has been a
member of the World Trade Organization (WTO) since 1995.
Trends in FDI Flows
Following accession to the EU in 2007, FDI inflows into Romania equalled RON35.0 billion (US$13.9 billion)
in 2008. However, given the opacity within its regulatory environment, coupled with the problems arising from
the start of the eurozone sovereign debt crisis in 2011, FDI inflows receded to RON7.8 billion (US$2.2 billion)
in 2012 (latest data available). This resulted in FDI intensity dropping from 6.8% of total GDP in 2008 to only
1.3% in 2012, comparing unfavourably with the Czech Republics at 5.4% and Bulgarias at 3.7%. As Romania
concentrated its efforts on the domestic arena through austerity measures, as well as dealing with the negative
impact of the global financial crisis of 2008-2009, FDI outflows fell to only RON147 million (US$42.4 million)
in 2012, from RON690 million (US$274 million) in 2008.
Infrastructure
Romania ranked relatively poorly in the Infrastructure category of the GCI 2013 at 100th out of 148
economies. Its highest subcategory ranking was in Fixed telephone lines/100 pop. (53rd), whilst Quality of
roads ranked the worst at 145th. Between 2007 and 2013, Romania tapped 1.4 billion (US$2.0 billion) of the
EUs total 4.3 billion (US$6.0 billion) of funds allocated for transport infrastructure projects. In 2013, the
government earmarked 30.0 million (US$41.8 million) to upgrade Constanta airport, which has access to the
Black Sea port of Constanta.

Chart 3

Trading Across Borders Time and Cost to Import/ Export: 2013

US$/ days

Source:

World Bank Groups Doing Business 2014

TAX ENVIRONMENT
Reforms have improved the tax environment
Ease of Paying Taxes
In Doing Business 2014, Romania ranked 134th out of 189 countries for Paying Taxes, improving from 139th
out of 185 countries in Doing Business 2013, as it reduced the number of times per year that a firm had to settle
its tax bill. The time taken to prepare, file, pay or withhold taxes and contributions reduced to 200 hours per year
in 2014, down from 216 the previous year, comparing well with the Europe and Central Asia average of 246
hours in 2014. Despite its reforms, Romanias tax ranking compared unfavourably with that of Bulgaria (81st)
and the Czech Republic (122nd).
According to Eurostat, the shadow economy (income and activities that avoid government regulation or
taxation) equated to 29.1% of total GDP in 2012 (latest year available) in Romania, which was the second
highest rate after Bulgaria in the EU-27, suggesting that much potential tax revenue is lost (Romanias tax
revenues equated to only 17.3% of total GDP in 2013, one of the lowest in the EU).
Tax rates
Romanias corporation tax rate is 16.0% in 2014, unchanged from the previous year. This is below the Czech
Republics rate of 19.0% but above Bulgarias at 10.0% in 2014. Nevertheless, Romanias rate is still very
competitive compared to its more developed EU counterparts.
The total tax rate equated to 42.9% of commercial profits, comparing unfavourably with the Europe and Central
Asia average of 38.7%, whilst labour tax and contributions were 31.5% of commercial profits versus 22.6% for
the regional average, according to Doing Business 2014.
Romania has a standard VAT rate of 24.0% in 2014 but also a reduced rate of 9.0% applicable to periodicals,
bakery goods and some medical equipment. A 5.0% rate applies to government-funded housing. Financial
services, as well as medical and educational services, are exempt from VAT. The Czech Republic has a standard
VAT rate of 21.0% whilst the rate in Bulgaria is 20.0% in 2014.
Chart 4

Total Tax Rate and Number of Hours to Prepare, File Returns and Pay Taxes in Selected
Countries: 2012

% of total profits/ hours per year

Source:

World Bank Ease of Doing Business Reports

INNOVATION AND TECHNOLOGY

Capacity for innovation is inferior to peers
Uptake of Technology
Romanias information and communications technology (ICT) sector is one of the least developed in Eastern
Europe, owing to low disposable incomes and a weak telecommunications infrastructure. However, rapid
adoption of the Internet and mobile communications, as well as EU membership requirements to upgrade ICT
infrastructure, could result in rapid sector expansion and greater competition amongst operators. The
telecommunications sector is liberalised, with foreign players, such as Orange and Vodafone, playing a
dominant role.
In 2013, 84.3% of total households possessed a mobile telephone, up from 73.4% in 2008, with the 2013 figure
lower than the Eastern European average of 94.1%. Romanian businesses using the Internet equated to 79.8% of
all businesses in 2013, up considerably from 66.8% in 2008, and below the Czech Republics figure of 97.2% in
2013. In 2013, 53.0% of the total population used the Internet, increasing substantially from 32.4% in 2008, but
was below the Eastern European average of 57.0%, owing to underdeveloped infrastructure.
Networked Readiness Index
In the Networked Readiness Index (NRI) 2013, Romania ranked 75th out of 144 economies, compared with
67th out of 142 economies in the NRI 2012, owing to an unstable macroeconomic environment that was
detrimentally affected by external influences. Its 2013 ranking was below the Czech Republic (42nd) and
Bulgaria (71st).
Research and Development
Romanias total research and development (R&D) expenditure equalled RON3.0 billion (US$899 million),
declining by 21.4% in real terms since 2008. Meanwhile, total R&D expenditure equated to only 0.5% of total
GDP in 2013, down from 0.6% in 2008, and compared poorly to the Czech Republics at 1.6% in 2013,
demonstrating a lack of commitment to innovation and, by the governments own admission, an absence of
investment in this area.
Although the government had a National Research, Development and Innovation Strategy in place for the 20072013 period, it failed to ignite growth in this sphere. Nevertheless, the government has set a target for R&D
spending to equate to 2.0% of total GDP by 2020. Whilst businesses expanded their R&D spending
considerably from 23.3% of total R&D spending in 2008 to 40.6% in 2013, their commitment is not considered
to be sufficient to reach this target. Romania offers investors R&D incentives, in the form of accelerated
depreciation on R&D-related assets and super tax deduction on R&D-related expenses.
Patent Numbers, Protection and Targets
The number of patent grants at the National Patent Office decreased from 689 in 2008 to 622 in 2013, owing to
lack of investment in R&D activities. Additionally, total patents granted at the European Patent Office (EPO)

declined from 7.0 in 2008 to 2.7 in 2013, whilst at the United States Patent and Trademark Office (USPTO) the
number of patent grants decreased from 2.5 in 2008 to 2.1 in 2013 (of which 0.9 related to ICT in the latter
year). Although Romania is a signatory to a number of international intellectual property rights (IPR) and patent
protection conventions, enforcement of these is often unsuccessful.
Chart 5

Total Expenditure on R&D by Category: 2008-2013

% of total expenditure on R&D

Source:
Note:

Euromonitor International from EUROSTAT, UNESCO

R&D refers to research and development

LABOUR MARKET AND POPULATION SKILL SET

Low productivity poses risks to competitiveness
Government Expenditure on Education / Education Standards
The Romanian governments expenditure on education equated to only 1.3% of total GDP in 2013 (versus 4.9%
for the Czech Republic), down considerably from 4.5% in 2008, whilst it fell by 72.3% in real terms in the
2008-2013 period, as severe austerity measures decimated education spending. Indeed, public schools have seen
closures or mergers, whilst teachers salaries and pensions have also come under attack. This has led to
extensive protests by teachers and their unions that have been canvassing for increases in education spending.
There was a slight discrepancy between the female and male adult literacy rates in 2013, equating to 97.2% and
98.3% of the female and male adult population aged 15+ respectively. The gender gap narrowed marginally
from 2008 when the female and male literacy rates equated to 97.0% and 98.3% respectively. This gap was
partly due to the relatively high rural population, accounting for 46.1% of the total in 2013 (versus 31.9% for the
Eastern European average), which could result in lower educational access for females.
Higher Education and Skills Shortages
In 2013, 10.8% of the Romanian population aged 15+ had attained higher education, up from 10.1% in 2008,
below the 2013 Eastern European average of 14.9%. There were over 213,000 graduates in 2013, decreasing by
31.5% since 2008, as lower government spending on education had a detrimental effect on graduate numbers.
This suggests that Romania does not suffer from a graduate surplus but with 55.0% of all graduates having
studied Social Sciences, Business and Law in 2013, there is a surplus of graduates for these professions.
Conversely, Agricultural graduates accounted for only 1.6% of the total in 2013.
Chart 6

Graduates by Discipline: 2013

% of total

Source:

Euromonitor International from Eurostat/OECD/UNESCO

According to the Manpower Talent Shortage Survey 2013, 54.0% of Romanian employers experienced
difficulty in filling positions. Skills shortages appear to be most acute in industries, such as engineering and
skilled trades. The severity of skills shortages is partly due to Romanias accession to the EU in 2007, which
resulted in its skilled workforce defecting to higher-income countries in the Union. This is despite the freedom
of labour movement restriction that was placed on Romanians and Bulgarians, as lower limitations were set for
highly skilled workers. With the removal of all movement restrictions within the EU in 2014, skills shortages
are likely to be exacerbated further. The lack of satisfactory earnings opportunities for Romanias skilled labour
force has resulted in brain drain, illustrated by the Country capacity to retain talent category in the GCI 2013,
where it ranked a lowly 138th out of 148 economies.
Chart 7

Unemployment Rate and Youth Unemployment Rate: 2008-2013

% of economically active population / % of economically active population aged 15-24

Source:

Euromonitor International from UNESCO/national statistics/ International Labour Organisation (ILO)/OECD/Trade

Sources

Labour Market Landscape

In 2013, the female employment rate was 61.5% of the female working age (15-64) population, up from 58.9%
in 2008. However, a gender gap existed where the male employment rate equated to 74.1% of the male working
age (15-64) population in 2013, owing to womens preference for childrearing and homemaking. State childcare
provision also remains inadequate, acting as a barrier to female employment.
The Community, Education, Health, Social, Personal Services, Public Admin and Defence sector saw the largest
increase in employment from 2008-2013, from 15.1% of the employed population in 2008 to 16.9% in 2013,
notwithstanding government-instigated austerity measures, as the weakness in the private sector resulted in
stunted job creation. Meanwhile, the Manufacturing sector experienced the greatest fall in employment from
20.3% of the employed population in 2008 to 17.3% in 2013, owing to the loss of manufacturing jobs to lowercost countries, such as China and India.

Although the GCI 2013 ranked Romania eighth out of 148 economies in the Redundancy costs, weeks of
salary subcategory, the countrys labour market is quite rigid, as illustrated by the low rankings of 139th for
Cooperation in labor-employer relations and 84th for Hiring and firing practices. The 2011 Labor Code
attempted to bring flexibility to the labour market through the expansion of fixed-terms contracts and the
extension of probationary periods.
Wages and Productivity
In 2013, the wage per hour in manufacturing in Romania stood at RON11.8 (US$3.6) whilst its average wage
per hour was RON12.9 (US$3.9), considerably below the Czech Republics wages of US$7.2 and US$7.3
respectively. The Romanian minimum wage per month was RON729 (US$219) in 2013, again below the Czech
Republics at US$409. The lower wages make Romania an attractive business destination, given the benefit to
companies bottom line. In 2013, Romanian productivity equalled US$17,808 (declining by 8.2% in US$ terms
since 2008), somewhat below the Eastern European average of US$22,343. Lower productivity was primarily
due to a large proportion of employment in agriculture, a labour-intensive sector.
Chart 8

Employment by Industry: 2013

% of total

Source:
Note:

Euromonitor International from International Labour Organisation

Undefined Sectors refers to activities not adequately defined elsewhere in the other categories

Definitions:
Political Stability and Absence of Violence: measures the perceptions of the likelihood that the government will be
destabilised or overthrown by unconstitutional or violent means
Regulatory Quality Index: measures the perceptions of the ability of the government to formulate and implement
sound policies that permit and promote private sector development
Networked Readiness Index: measures the propensity for countries to exploit the opportunities offered by
information and communications technology