Page 13 - bne Magazine February 2023

bne February 2023 Companies & Markets I 13
Most of these inflows into CESEE – around 60% of the total
– have come from the nearby EU15 countries, with Germany focussing most on Central Europe, while Austria has carved out a niche in the Western Balkans, and the Nordic countries in the Baltic states. By contrast, Russia, China, Turkey and companies registered in Switzerland have been big players in the Western Balkans.
According to the report, FDI inflows representing 1 percentage point (pp) of GDP are associated with 0.19 pp higher GDP growth, indicating a causal link between FDI and GDP growth via increased household consumption and higher exports.
For FDI from Germany and Austria, this effect is five times higher – FDI inflows of 1 pp of GDP have led to 0.9 pp higher GDP growth. Germany had invested some €190bn in the region by the end of 2020, while Austria had contributed €76bn.
FDI has also lowered unemployment, though normally after a two-year lag, and has also increased wages.
“CESEE economies should not give up on their efforts to attract more FDI, but also their endeavours should be more targeted, focusing on investments that have greater economic and social impacts”
Investment into manufacturing and services has had more impact on economic growth than investment into the primary sector (agriculture and mining), and FDI via equity injections or retained earnings has been more beneficial than investment via debt instruments (such as loans to affiliates), the research found.
“FDI in debt instruments or FDI in the primary sector does not have the same effect on GDP growth, and sometimes it has negative effects,” Branimir Jovanovic, one of the authors of the report, told the press conference.
This would indicate that equity investments by German carmakers into greenfield plants in Central Europe
have helped convergence much more than investments through loans in Southeastern European countries such as Montenegro, Serbia and Bulgaria, a path often followed by Chinese companies.
Targeting investment
The report admits that overall, FDI has had no significant impact on inequality and poverty, but adds that FDI from
European countries has been found to reduce both inequality and poverty, likely because it has benefitted mainly lower- income persons. By contrast investment through loans or into primary industries such as mining have had much
less impact.
“CESEE economies should not give up on their efforts to attract more FDI, but also their endeavours should be more targeted, focusing on investments that have greater economic and social impacts,” the report recommends.
The report argues that foreign investment should not be criticised for widening inequality, or the fact that the region has the highest poverty rates in Europe, but instead, the causes of this should be sought in domestic factors.
“Our results indicate that the reasons for the perhaps unsatisfactory economic and social outcomes in the
CESEE countries – such as the limited economic growth and the significant level of social disparities – should not
be attributed to the foreign investment,” the report says. “Instead, one should look at domestic factors, such as weak support for domestic private investment, insufficient public investment in infrastructure, a modest level of spending
on public services and the limited scope of government redistribution.”
At a press conference, Doris Hanzl-Weiss, one of the authors of the report, concluded that, “FDI is still important for the growth model of the region. We don’t see any big alternative growth model for the region without FDI as a cornerstone.”
Maria Holzner, executive director of wiiw, also insisted that FDI still had a big part to play in the region’s development. “Foreign direct investment continues to be the basis of the growth model in Central and Eastern Europe,” he
said. “Those countries in the region that have the highest incomes are also closely integrated into the Central European industrial cluster through high levels of foreign direct investment. A good example is the direct investments of the German automotive industry, which have created tens of thousands of jobs for qualified skilled workers who were particularly hard hit by the collapse of large state- owned industrial enterprises in the course of the economic transformation after 1989.”
“Foreign direct investment continues to be the basis of the growth model in Central and Eastern Europe”
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