FDI in the CEECs - uneven recovery
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August 2011 |
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GABOR HUNYA - Senior Economist
THE VIENNA INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES (wiiw) |
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GABOR HUNYA
Senior Economist
THE VIENNA INSTITUTE FOR INTERNATIONAL ECONOMIC STUDIES (wiiw)
FDI continues to be of great significance for the development of CEECs, in particular of the new EU members. The domestic engines of economic growth are still weak, and fiscal consolidation drags on the economies. Recovery started mainly based on external demand which has upgraded the importance of foreign investors that generate the major part of exports.
FDI inflow to CEECs* recorded a modest increase of 9% in 2010 (in current Euro terms). The strongest growth of FDI was observed in the European CIS, in particular Russia, which determined the positive performance for the CEEC region as a whole. Southeast Europe booked another year of severe decline while the NMS-10 were characterized by a close to average increase. The 2010 recovery in the CEECs may have been above the global trend, but also the setback in the previous year was more severe than the world average. Compared to 2008, the amount of FDI inflow in 2010 was 46% lower for the region as a whole, but 53% lower in the NMS-10 and 64% lower in Southeast Europe. Thus the recovery started from a very depressed level.
There is only a general link between GDP growth in the NMS and the recovery of FDI. Countries with stronger GDP growth do not necessarily get more FDI, but countries with stagnating or contracting GDP are more likely to receive less FDI than before. Modest economic growth following recession may not attract new investments as unused capacities may make expansion unnecessary. Stagnating private demand and expanding exports have even restructured the needs for new capacities. In another context, surging commodity prices stimulated investments in the energy sector. Finally, financial stability, economic performance and longer-term growth prospects diverge among the CEECs. Data on FDI inflow by form reveal that the Czech Republic and Poland were considered especially good places to park intercompany loans and profits in 2010 while Hungary and Slovakia were not. In contrast, Hungary was considered advantageous for new investment projects as illustrated by particularly high equity capital inflows.
Not only the host countries but also investors showed some peculiarities in shaping the flow of FDI in 2010. Potential investors have been moderately active on the international investment scene as financing new projects has still been more cumbersome and more costly than before the crisis. Many investors have also shifted their focus to the high-growth developing countries. But according to recent trends in international relocation, nearshoring is preferred to far-shoring, thus CEEC locations may gain attractiveness concerning outsourced activities in Europe
In the following we look at country-specific developments explaining the recent trends in FDI inflow, first in the NMS-10, then in the other countries. We also comment on changes in the prevailing forms of FDI as well as the home country and targeted industry. This way we explore some possible reasons for the divergence between countries.
In BULGARIA FDI subsided during the crisis and continued its fall in 2010 when the country’s GDP stagnated. FDI inflows reached only one quarter of the 2008 amount, less than the regional average. Of the low FDI amount, one third was invested in manufacturing, a much higher share than before the crisis. Investments in financial intermediation, real estate and trade comprised only 20% instead of over 60% two years before.
The highest growth of FDI in 2010 was registered in the CZECH REPUBLIC which was the only country where the 2010 inflow surpassed the 2008 level. Equity investments were modest but reinvested earnings grew fast and FDI in the form of other investments became positive. These features characterize FDI inflows to mature host countries under a normal economic situation, meaning that investors do not find the country risky for FDI. Low inflation, modest interest rates, a relatively stable currency and a good rate of economic growth provided favourable conditions for investors in the Czech Republic. Contrary to most other countries in the region, this country attracted investments mainly in the financial intermediation sector as well as in wholesale and retail trade, while FDI in manufacturing declined. Services sectors, in particular export-oriented activities, received more FDI than before. Austria and Poland were registered as the most important investing countries in 2010.
HUNGARY received less FDI in 2010 than before as conditions for FDI were rather unfavourable. The country just came out of recession while it was still implementing a fiscal austerity programme. Household consumption declined for the second year in a row. Political instability around the parliamentary elections and some of the new government’s policy declarations increased risk perception. Special taxes on the banking and the retail sectors drained profits and funds for investment. These may be the reasons why a substantial amount of inter-company loans (FDI in the form of other capital) were withdrawn from the country. At the same time, equity capital investments in new projects were high and three large new automotive industry projects have started during the year. As opposed to the Czech Republic, significant investments were made in the Hungarian manufacturing sector in 2010, while investments were modest in trade and in financial intermediation.
POLAND was a country with relatively robust economic growth in 2010 and also experienced no recession in the previous year which set very favourable conditions for capacity expansion. But despite the favourable economic conditions, FDI declined by nearly 20%, primarily in terms of equity capital, while reinvestments boomed. This structure indicates that the expansion of existing projects had priority over starting new ones.
