UNEVEN PATTERNS OF FDI INFLOW IN 2011
The year 2011 saw a strong recovery of FDI inflows in the 16 countries of Central and Southeast Europe (CSEE – see Table 1). Inflows rose more than 50% in current euro terms based on balance of payments statistics compiled in the wiiw Database on FDI. The amount –EUR 29 billion – was still well below the peak years 2006–08. The increase was 42% in USD terms within a global environment that has seen an FDI inflows rebound of 16%, to USD 1.5 trillion.1 With this growth, global FDI exceeded the average of the pre-crisis years 2005–06, but remained significantly below the peak years of 2007–08.
The strongest growth in FDI in 2011 was observed in the countries of Southeast Europe (SEE) (64%), following a year with extremely low inflows. The growth in FDI in the new Member States (NMS) was 26% and in the CIS 18%, both regions recording significantly lower amounts than in 2008. FDI inflows declined in only five of the 22 countries, which is in line with the general upswing in business sentiment and economic growth – at least up until the fourth quarter of the year. Host country trends did not diverge from each other as much as in 2010, indicating that improved investor sentiment can bring more foreign investment, even to countries that are potentially less attractive to FDI.
There is only a general link between GDP growth and the recovery of FDI, and it does not reveal the direction of causality. However, countries with strong GDP growth (like Poland, Turkey, Kazakhstan and Russia) did receive significantly more FDI than before, whereas this was not the case in Estonia. Slow GDP growth in the Czech Republic coincided with less FDI inflow than in the previous year, while it was just the opposite in Hungary. In absolute terms, the Czech Republic had been ahead of Hungary for several years, which is in line with its more robust economic performance (although methodological discrepancies may have had a strong impact on data – see below). The correlation between FDI and economic growth is more robust if we take several years, like 2008–11 (Figure 2). Demand contraction and the financial crisis in Europe curtailed investment, including FDI. Even if economic growth was, on the whole, positive in some countries, FDI was negative due to investors’ deleveraging.
The new EU Member States regained their attractiveness to FDI in 2011, registering inflows of EUR 24 billion (data for Poland estimated). Compared to the previous year, the recovery was strongest in Slovakia, Latvia and Slovenia; it was weaker in Poland and Hungary, while setbacks were registered in the Czech Republic, Estonia and Romania. None of the changes was especially positive or alarmingly negative. Countries with recovering inflows could overcome the setback suffered in 2009–10, but still received less than in 2008. There may be two reasons for the setbacks in Bulgaria and Romania: first, these countries have completed most of the planned privatization; and secondly, the real estate bubble fed by foreign investors has burst. But the two countries remained attractive, as is shown by the number of new manufacturing and services projects.
Export-oriented foreign subsidiaries expanded, as European exports were robust, and the NMS have maintained their cost-competitive edge. The region is now perceived as being economically more stable than the South European EU members, and it will take some time before the North African countries are able to attract export-oriented projects on a similar scale. Some large export-oriented projects have significantly raised the level of FDI, e.g. in Hungary, with the automotive sector projects of Daimler-Benz, Audi and Opel under construction. In Romania, Ford kept investing last year, and as a result started its car and engine production in 2012. In other countries, such as Slovakia, foreign investment enterprises restarted production shifts that had been idle during the crisis years.
Even if manufacturing projects dominate the news, FDI has flown most intensively into and out of the financial sector and the sector of real estate and business services (the sectoral distribution of FDI inflows is not reported by most countries). For example in Slovakia, financial services received the highest proportion of 2011 inflows (21% of equity inflow), followed by real estate and business activities (10%) and the electricity sector (8%); the automotive industry received only 2%.