|Foreign direct investment (FDI) by transnational
corporations (TNCs) into Central and Eastern Europe increased by more than 40 per cent to
a record US$19 billion in 1997. The Russian Federation accounted for one-third of the
region's total. Its FDI increased dramatically, to US$6.2 billion last year from US$2.5
billion in 1996, according to the World Investment Report 1998: Trends and
Determinants (WIR98), released today by the United Nations Conference on
Trade and Development (UNCTAD).
three-quarters of the 1997 FDI inflows to the region was due to inflows to the Russian
Federation, Poland, Hungary and the Czech Republic. The next 4 largest FDI recipients were
Romania, Ukraine, Bulgaria and Latvia, which boosted their share of total regional FDI
from 10 per cent to 15 per cent in 1997.
The United States was the largest single source of foreign investment into Central and
Eastern Europe last year, followed by Germany and the Netherlands. United States TNCs were
the most important sources of FDI into the Russian Federation, Poland and Ukraine, while
German TNCs took the lead in the Czech Republic and in Hungary and were the second most
important source for Poland and Slovenia.
FDI flows to the Russian Federation were mainly in natural
resources and infrastructure development. In the other Central and Eastern European
economies, most of the FDI growth occurred in manufacturing and services.
While there are a wide range of factors influencing FDI flows to the region, a primary
stimulus appears to be the degree to which the countries have made progress in their
transition to modern, market-based economies. This is especially true for the Czech
Republic, Estonia, Hungary, Poland and Slovenia, which have been the forerunners.
WIR98 states: "It can reasonably be expected that
this group is more attractive to foreign investors than those countries which are still
facing considerable transitional uncertainty."
Today's report notes that recent developments in FDI patterns
have implications for future FDI trends in Central and Eastern Europe.
- Countries that are relatively attractive to FDI whether
because of the pace of transition or of economic growth, opportunities in privatization or
for other reasons will have a better chance to overcome economic recession.
- New competitors for FDI among the latecomers in the transition
process may attract additional flows to the region, without impairing FDI prospects for
the currently most attractive countries. For example, the potential of
privatization-related FDI is still seen as untapped in several countries, such as the
Russian Federation. It could play a lead role in these countries in the immediate future.
- Countries in the region that are in negotiation to join the
European Union may become more attractive to foreign investors, as their economic systems
and regulatory frameworks become more like those of the European Union and as the dynamic
effects of the Union association become more evident.
FDI inflows to the top 10 recipient
countries in Central and Eastern Europe,
1996 and 1997
(in millions of U.S. dollars)
|All Central and Eastern Europe total
Is the region obtaining as much FDI as
could be expected?
Today's report questions whether the region is obtaining as much FDI as might be expected
given its economic development. Its share in world inward FDI stock is still very low:
only 1.8 per cent in 1997. To a large extent this is explained by the fact that the
majority of the countries opened up to inward FDI fairly recently; their accumulated FDI
stocks are therefore small.
WIR98 says the low FDI inflow levels may also be partly due to: "legal
and regulatory problems, a deeper and longer than expected transition-related recession, a
prolonged privatization process, and the lack of local experience in business
Outflows remain low
Outflows of FDI trebled last year from the region. Nevertheless, they remain low at just
US$3.4 billion. About US$2 billion of this was accounted for by the Russian Federation and
the next largest sources were Hungary, Croatia and Estonia. However, in a cautionary note,
the report stresses that statistical methods of data collection in the region are
incomplete and some domestic firms may be reluctant to report their outward investments.
WIR98 suggests that part of the FDI outflows from the Russian Federation may be
motivated by a desire by investors to diversify assets as a safeguard against domestic
instability. Almost all of this FDI went outside of the Commonwealth of Independent
In the longer run, states the report, outward FDI is likely
to gain in importance as firms, especially in Central Europe, begin to lose
competitiveness based on low wages, particularly in industries such as textiles, footwear
and other labour-intensive industries. Indeed, firms from some more advanced transition
economies such as Hungary and Slovenia have already started to invest abroad in
UNCTAD surveys region's investment-promotion agencies
An UNCTAD survey of the region's investment-promotion agencies, conducted earlier this
year, indicated that most respondents did not believe the Asian financial crisis would
have a significant effect on FDI flows into the region. This evaluation appears to be
based on the assumption that the attractiveness of the region to market-seeking FDI will
continue to improve. At the same time, Asia is expected to become a tougher competitor for
The respondents to the UNCTAD survey were optimistic overall of prospects for inward FDI
flows and saw various locational determinants of FDI changing in the 1998-2002 period.
They said that improvements are likely in the region's physical and financial
infrastructure. They noted that increased economic integration with investor countries is
probable, which suggests that the possibility of wider regional markets would improve
prospects for market-seeking, and possibly efficiency-seeking, investment.
On the policy front, the survey respondents said the stabilization of the legal
environment is the single most important factor expected to boost FDI flows in the future.
Other positive factors noted were advances in enterprise restructuring, improved
macroeconomic stability, major advances in privatization, and more welcoming attitudes
toward FDI on the part of local firms. In addition, most respondents forecast improved
country images, reflecting improvements in the regulatory and economic determinants,
coupled with better information about investment opportunities.