The Republic of Moldova is situated in south-east Europe. The land surface of Moldova covers 33.7 thousand square kilometres. To the south and east Moldova borders with the Ukraine, and in the west, with Romania.

The Republic of Moldova was declared independent on 27 August 1991. After six years of independence the political situation has remained stable. Internationally, Moldova is well-recognised. It is noteworthy that Moldova was the first country of the Commonwealth of Independent States (CIS) to be offered admission by the European Council. It is now developing a democratic society based on human rights and freedoms; protection of private property; and a market economy with free competition. Since independent financial stability is being pursued, the national currency is stable; the inflation rate and bank interest rates are reduced; the fiscal budget deficit is moderate; and the stock market is established and functioning.

Presently, the initial stage of transition to the market economy is completed. As a result, a progressive privatisation programme was implemented and continues; mass privatisation of public properties has concluded; the private sector has expanded; various agricultural enterprises have appeared; and a base of legal and regulatory actions were implemented to promote reforms.

It should be noted that as a result of these massive reforms, enterprise restructuring activities and privatisation, one-third of Moldovan businesses have passed the 'critical situation' point and are now experiencing growth.

The geographical background which harmoniously combines an agriculturally favourable climate and soil conditions, together with an adaptable and available workforce, are the preconditions for Moldova to create a national economy focused on serving its internal market needs and the export of its products. Moldova has developed a productive capacity in wine, cognac and other beverages; processed tobacco and tobacco products; fresh fruit and vegetables, animal products; agricultural machinery; electrical appliances and machines; electronic products; and various textile and furniture products.

The main sectors of the economy are:

Industry	Percentage
Agriculture and food processing	56.5 (of total industrial production)
Machinery and metals processing	13.9
Power sector	7.5
Light industry	4.8
Building materials	4.5
Milling and fodder	4.5
Forestry, wood, pulp and paper processing	3.3 per cent

Foreign investment is encouraged in all sectors, especially in the fields of agriculture, light industry, transportation and telecommunications.

In the medium-term the key priorities of the economy are major reforms including, restructuring enterprises; increasing domestic and foreign private investment; and strengthening the commercial and industrial legal framework.

Among current key tasks of industrial policy is the reformation of ownership and privatisation and the post privatisation restructuring of viable industries, namely financial strengthening, technology updating and structural reform.

Since 1991 much has been done to increase the country's international profile. For example, opening air routes and other transportation and communication links, as well as highlighting the potential attractiveness of Moldova to foreign investors.

In 1992 the state monopoly on foreign trade was removed. In April 1993 the centralised system for issuing export licenses was substituted by goods lists, for which some restrictions were settled. Since 1994 foreign trade of the Republic of Moldova was liberalised. At present, businesses freely market a wide-range of goods, with the exception of some specific groups including weapons, precious metals, explosive matter, poisons, medicines, medical items and equipment.

Since 1995 there have been neither quotas nor other restrictions for exports. Meanwhile, import tariffs do not exceed 20 per cent.

In 1996 a notable increase in international economic relations was recorded, demonstrated by an increased volume of imports and exports of commodities, services and capital. However, imports exceeded exports which contributed to a negative balance of payments position.

Created within the Ministry of Economy and Reforms has been the Development and Foreign Investment Agency, which provides a range of services for foreign investors.

Enterprises with foreign capital (joint ventures and companies fully owned by foreign investors) can be set up under any legal form of business. The requirements for establishing and operating a company with foreign capital are regulated by the law 'On Foreign Investments', adopted in April 1992, by subsequent amendments issued in 1994 and 1996, and other normative acts of the Republic of Moldova.

Foreign investors can be included in the process of enterprise restructuring by buying stocks of production enterprises in order to update production technologies; develop markets further; and to provide capital and modern equipment to companies set up with local partners.

From July 1997 the number of companies with foreign capital registered in Moldova was 1217. In the first half of 1997 about 300 enterprises with foreign capital were registered. Sector distribution of foreign investments is as follows:

Sector	Percentage
Electric, energy, gas and water supply	54.4
Processing industry	4.7
Trade	4.5
Financial operations	5.0
Estate transactions	4.2
Other	7.2

Major investors are companies from the following countries:

Country	US$
Russia	53,900,000
Malta	13,900,000
Liechtenstein	6,500,000
Germany	4,900,000
Ireland	4,700,000
United States of America (USA)	4,400,000

Their share in total foreign investments volume accounts for 82%.

In 1996 foreign investments in different forms (fixed capital, authorised capital, portfolio investments end, etc) amounted to $143,200,000. In the first half of 1997 investments in authorised capital of joint ventures totalled $9,000,000.

In 1996 the total output of companies with foreign capital recorded the sum of Lei 183,800,000 (4.8 per cent of total national output), increasing 2,2 times in the first half of 1997, compared with the corresponding period of the previous year. Produced with the participation of foreign investors were food products, beer and soft drinks, wines and strong drinks, clothes, shoes, carpets, construction materials, and video and audio systems. The role of companies with foreign capital in the promotion of exports has increased as well. In 1996 the companies exported goods totalling $36,000,000 (7.1 per cent of total exports). In the first half of 1997 this figure achieved $50,000,000.

At present most investments are oriented towards agriculture. as a strategic sector, wine-making has attracted investors, but requires additional investment. Unfortunately, investments in agriculture are hindered by the prohibition to purchase land. The first phase of mass privatisation has not attracted large foreign investment. Presently, efforts are being undertaken with the aim of direct foreign investment involvement for the current privatisation phase. In this phase, enterprises and unfinished constructions are proposed for sale. They can be privatised using various means, including participation of foreign investors.

Custom facilities offered to the enterprises with foreign capital

The right of enterprises with foreign capital to profit from custom facilities is confirmed by the Law on Foreign Investments. According to this, exemption from paying custom tax covers the following:

• the material values brought into the Republic of Moldova which contribute to the formation and enlargement of share capital;
• goods, including raw materials and half-finished products, imported into Moldova and used for the manufacturing of goods to be exported.

Fiscal facilities offered to the enterprises with foreign capital

According to the Law on Foreign Investments, enterprises with foreign capital have a 50% exemption from income tax for a period of 5 years if the following conditions are respected:

• the public capital is entirely formed;
• the first profit is declared;
• the foreign investments quota in the equity capital of the enterprise shall exceed $250,000; more than 50% of the income of the enterprise comes from the sale of its own goods.

Moldova's first Free Enterprise Zone

The 'Expo-Business Chisinau' Free Enterprise Zone (FEZ) was established to attract foreign investment and technology.

Established for 30 years, the FEZ is located in the Moldovan capital of Chisinau. The residents of Fez may be foreign physical and juridical persons, as well as Moldovan legal entities established with foreign investment.

FEZ is open for the following licensed types of activities:

• organisation of fairs and exhibitions;
• information and advertising;
• leasing;
• banking and insurance;
• tourism and hotel business;
• trading and storage business;
• public catering services;
• environment friendly production.

Legislation provides incentives, guarantees and privileges for businesses established in the FEZ. For example, FEZ residents enjoy exclusive customs and tax regimes. In particular, they are exempt from the customs tax for:

• goods and items imported into the FEZ for ultimate consumption;
• FEZ origin goods exported to the customs territory of the Republic of Moldova;
• goods produced in the FEZ and exported outside the customs territory of the Republic of Moldova;
• goods exported via the FEZ outside the customs territory of the Republic of Moldova, regardless of their country of origin.

The profit tax to be paid by FEZ residents has been set at 15% (elsewhere in the Republic the rate is 32%). Goods and services manufactured and rendered in the FEZ are exempt of VAT, whereas in the Republic it is 20%. FEZ residents who invest $250,000 or more in the zone development shall be relieved from paying the profit tax for a period of 5 years.

Arguments for investment in Moldova

• a legal framework insuring and protecting the economic activities of foreign businesses;
• low inflation and a stable national currency;
• state protection of private property is provided, giving priority to the development of the private sector;
• membership of the MultilateraI Investment Guarantee Agency (MIGA), which assures investment protection against political risks, such as civil war, political disturbances and governmental actions;
• integration with other regional countries including, the Black Sea Area for Cooperation, the Commonwealth of Independent States and the Cooperation Initiative in south-eastern Europe;
• 45 treaties signed with world states, including 17 treaties concerning trade and economic collaboration; 10 treaties for free trade; and 18 treaties concerning mutual promotion and protection of investments;
• geographical positioning on the cross-roads of commercial routes joining western Europe and the CIS countries;
• combination of agriculturally favourable climate and soil conditions which favour high-quality agricultural production;
• intellectual and scientific potential, with qualified specialists in the field of electronics, agriculture and food, construction materials, textiles, furniture, etc, and low labour costs;
• communication (telephone, fax, Internet) and accessibility (air, road, railway) to most European countries and other regions worldwide;
• lack of restrictions concerning conversion and repatriation of financial means gained by foreign businesses.