Foreign direct investment (FDI) inflows into Central and Eastern Europe (CEE) last year reached a new high of $29 billion, according to the World Investment Report 2003(1), released today by UNCTAD. "We anticipate further gains this year and next of FDI flows into the region", said Rubens Ricupero, Secretary-General of UNCTAD. "The 2002 advances, and indeed those we are expecting this year, are in sharp contrast to declines in FDI in all other world regions." CEE, which saw FDI rise 15% from $25 billion in 2001 to $29 billion last year, is increasingly viewed by investors as a stable and promising location for FDI, especially within the framework of a division of labour across the integrating European continent. The upward trend is divergent, however, with inflows actually falling in 10 of the region´s 19 countries.
UNCTAD expects the region´s FDI flows to increase further this year, reaching close to $30 billion, led by a surge of flows into the Russian Federation (see press release TAD/INF/PR/73) and fuelled by the momentum of the European Union (EU) enlargement. UNCTAD´s global survey of investment promotion agencies (IPAs) (see press release TAD/INF/PR/71) for the 15 respondents from CEE suggests an overall optimism about the region´s FDI prospects for the next few years. Nine of the 15 expected improved prospects in the short term (2003-2004). Optimism is even more evident for the medium term: 12 of the 15 respondents expected a further improvement in FDI flows by 2004-2005.
Changing FDI geography
As part of the diverging trends within the region, FDI growth was particularly strong in countries with privatization peaks (Czech Republic, Slovakia and Slovenia; see figure). As a result of some latecomer countries catching up, the traditional geography of FDI in CEE, based on the dominance of the Czech Republic, Hungary, Poland and the Russian Federation, is starting to change. The relative importance of the Czech Republic continues; while that of the three other countries is on the wane: Hungary, for example, was only the eighth largest FDI recipient in the region in 2002.
Regional FDI trends varied across industries as well. The automotive industry in CEE - a major recipient of FDI - is still on a growth path. New projects announced in early 2003 in Slovakia (by PSA) and the Russian Federation (by Renault), coupled with the expansion of existing projects (e.g. by Audi and Suzuki in Hungary), mean that FDI inflows will grow again this year. In contrast, the electronics industry in CEE is facing a crisis as a result of global overcapacity, sluggish demand and cost competition from East Asia, especially China - factors affecting local firms and foreign affiliates alike.
Outward FDI from CEE ($4 billion) recovered in 2002, after a downturn in 2001, although it was still much lower than inward FDI. The Russian Federation continued to account for the bulk of the region´s outflows, and for most of its dynamism. In 2001 - the latest year for which data are available - the 25 largest non-financial transnational corporations (TNCs) based in CEE (see table) were only marginally affected by that year´s global economic slump. This was mostly due to the industry composition of the list, in which the largest firms are to be found in natural resources or transport. To some extent, the geographic concentration of their activities in countries less affected by the worldwide slowdown also protected them. (Russian TNCs continue to be larger and more globally spread out than their non-Russian counterparts.)
EU enlargement could mean more FDI
The enlargement of the European Union, envisaged for 2004, is one of the most important policy developments affecting foreign direct investment in CEE for the immediate future. It is expected to have a positive impact on FDI flows to these countries, in both the accession and the non-accession groups. In the countries slated to accede in 2004, activities based on unskilled labour are already being shed in favour of higher-value-added activities, taking advantage of the relatively high educational level of the local labour force. For national policies in accession countries, a major challenge is to harmonize FDI regimes with EU regulations. Successful adjustment to EU membership will also depend on the ability of accession countries to establish and develop the institutional framework required to administer and properly channel the variety of funds available from European Community sources for assisting economic development.
The non-accession countries of CEE face the challenge of updating and modernizing their FDI promotion policies and activities in order to optimize the potential benefits from their status as "new frontiers" for efficiency-seeking FDI and maximize their prospects of attracting firms that choose to switch to lower-cost locations within CEE.