Leading transnational corporations (TNCs(1)) in Central and Eastern Europe "are about to establish themselves as prominent players" in the global investment arena, says the World Investment Report 2001 (2), published today by the United Nations Conference on Trade and Development (UNCTAD).
For most of the top 25 non-financial TNCs in the region (see table 1), foreign activities grew faster than domestic activities in 1999. The Russian Federation´s Lukoil Oil Co. easily tops the list, with $3.2 billion in foreign assets. Transportation, petroleum and natural gas, and pharmaceuticals are the leading sectors for outward investment.
Foreign direct investment (FDI(3)) into the region (4) rose to an unprecedented $27 billion last year, up 7% (excluding Malta). Following the pattern of previous years, the bulk of investments come from Western European countries, especially the members of the European Union. But inflows remained uneven, with three countries (Poland, Czech Republic and Russian Federation, in that order) absorbing two-thirds of the total (see figure 1). In Poland and Hungary, FDI rose (in the latter slightly), while in the Russian Federation and the Czech Republic it declined, in the latter despite a continued increase of greenfield investment. Slovakia´s $2.1 billion in inflows was almost as high as the preceding nine years combined, reflecting a series of major FDI deals realized in 2000. Yugoslavia, which is included in the WIR´s FDI statistics for the first time, showed inflows of $29 million in 2000.
Overall, FDI was dominated largely by privatization-related transactions. Privatization will continue to lead FDI inflows into the region at least through 2002. The $4 billion purchase of a majority share in Telekomunikacja Polska (Poland) by France Telecom, carried out in 2000, was the region´s largest privatization and largest FDI transaction to date. Elsewhere in the region, the privatization trend has either run its course (Hungary) or not yet begun (Commonwealth of Independent States, where there have been no large-scale privatizations involving foreign investors). After 2002, the trend will probably be completed in some economies that are far advanced in the transition process (especially the Czech Republic and Poland). FDI patterns there may well come to resemble the picture in Hungary now, where FDI inflows are driven by additional greenfield investments and, increasingly, by private cross-border mergers and acquisitions (M&As).
The Transnationality Index (5) of Central and Eastern European countries -- published for the first time in this year´s WIR --- surpassed 10% on average in 1999, although it was still lower than the averages for both developed and developing countries (15% and 18%, respectively). In Estonia and Hungary, the ratio was close to 25%, and in the Czech Republic and Latvia it exceeded 15%, indicating a high degree of transnationalization. On the other hand, it was below 5% in one-third of the countries surveyed.
Last year´s FDI outflows from the region ($4 billion) grew even faster than inflows, despite the fact that official data on outward FDI are likely to underestimate the actual outflows. Some of the transactions carried out by firms in the Russian Federation, for example, with the intention of establishing control over companies abroad, go unreported or are reported under other items in the balance of payments. When these outflows are included in the estimates, the Russian Federation becomes a major capital exporter. In Hungary, which ranks second for outward FDI after the Russian Federation, the government provides support to such investment. The bulk of these flows take place within the region.
1. "Transnational corporations" comprise parent enterprises and their foreign affiliates: a parent enterprise is defined as one that controls assets of another entity or entities in a country or countries other than its home country, usually by owning a capital stake. An equity capital stake of at least 10% is normally considered as a threshold for the control of assets in this context.
2. The World Investment Report 2001: Promoting Linkages (Sales No. E.01.II.D.12, ISBN 92-1-112523-5) may be obtained at the price of US$ 49, and at a special price of US$ 19 in developing countries and economies in transition, from United Nations Publications, Sales Section, Palais des Nations, CH-1211 Geneva 10, Switzerland, F: +41 22 917 0027, E: firstname.lastname@example.org, Internet: www.un.org; or from United Nations Publications, Two UN Plaza, Room DC2-853, Dept. PRES, New York, N.Y. 10017, USA; T: +1 212 963 83 02 or +1 800 253 96 46, F: +1 212 963 34 89, E: email@example.com.
3. "Foreign direct investment" is defined as an investment involving management control of a resident entity in one economy by an enterprise resident in another economy. FDI involves a long-term relationship reflecting an investor´s lasting interest in a foreign entity.
4. The transnationality index of host economies is calculated as the average of the following four shares: FDI inflows as a share of gross fixed capital formation; FDI inward stock as a percentage of GDP; value added of foreign affiliates as a percentage of total national value added; and employment of foreign affiliates as a percentage of total employment.
5. The transnationality index of host economies is calculated as the average of the following four shares: FDI inflows as a share of gross fixed capital formation; FDI inward stock as a percentage of GDP; value added of foreign affiliates as a percentage of total national value added; and employment of foreign affiliates as a percentage of total employment.