General Trends

Keeping track of FDI is no simple matter. The latest analysis from UNCTAD differs considerably from other assessments, including that of FIAS (see table page 5). For Poland, for example, UNCTAD calculates that FDI last year was a mere $5.1 billion, whereas the EIU puts the total at $8 billion and Oxford Analytica puts it at $7 billion. Poland’s own foreign investment agency estimates the total at $11 billion. Despite the differing numbers, there is little dispute that Poland leads the region in absolute numbers. Several other trends can also be seen:

The highest per capita inflow of FDI was registered in Estonia ($401) followed by the Czech Republic and Lithuania (around $250). Croatia, Hungary, and Poland came next with sums below $200 per capita. In Bulgaria, Romania, and Slovakia per capita FDI was below $100, and in Russia and Ukraine that number remained at around $15.

1999 Trends

Investment volumes in the first half of 1999 were generally higher than a year earlier, although this may reflect significant one-off privatization deals rather than a continuous trend:

FDI Stocks

As a result of an inflow of new capital, methodological changes, and exchange rate fluctuations, the stock of FDI in the region increased by 33 percent in 1998. Methodological differences make stock data less comparable across countries and years than flow data. FDI stocks in countries of Eastern Europe and the former Soviet Union reached $104.4 billion, $14.8 billion of it invested in Russia and $72.1 billion in the 10 EU-associated countries. Poland has the highest amount of FDI: $24.8 billion, if the estimation for the 1998 inflow of $7 billion proves to be correct. Hungary comes second with $18.3 billion. For the Czech Republic, revised data include not only equity capital but reinvested profits and inter-company loans, leading to a jump in FDI stocks to $13.5 billion.

The size of the FDI stock relative to GDP is generally used to assess the comparative attractiveness of countries to foreign investors. In this respect, Hungary, with FDI stocks at 38.5 percent of GDP, and Estonia, at 35.0 percent of GDP, are far ahead of other Eastern European countries. Indeed, they are among the leading FDI recipients worldwide. The Czech Republic and Latvia have more than the world average of 15 percent of GDP, while Lithuania and Slovenia are near the world average. In the western Balkans the stock of FDI is about 5–6 percent of GDP.

These data broadly reflect the progress of each country in terms of transformation, pace of economic development, and progress of privatization. The lack of basic economic stability in most of the western Balkans has been a major obstacle to investment. Countries bordering the EU are more attractive, owing to their stronger economies and faster transformation, as well as their geographic and cultural proximity. In the more stable Central European region, the choice of privatization method and speed of privatization sales have also been important. Fast sales of state-owned enterprises to the highest bidder allowed foreign investors to take a controlling position over most of the Hungarian manufacturing, financial, and retail sectors. Sales to foreigners were more selective in other countries, where voucher methods and leveraged sales to management dominated.

FDI Sources

Germany is the largest investor in Central Europe, followed by the United States. The stronger European capital-exporting countries—such as France, Italy, the Netherlands, Switzerland, and the United Kingdom—have a significant presence in almost all Eastern Europe states. Japan shows weak interest in the region. Like the Republic of Korea, Japan is involved in a small number of large projects. U.S. investors prefer larger than average-size investments, with Poland the number one target. Austria has a prominent role in this region, with its proximity compensating for the country’s small size. In tiny Slovenia, for instance, Austrian investors rank number one, surpassing U.S. and German investors. Austria also plays a major role in Slovakia. Neighborly ties to Bulgaria and Romania lead to high levels of FDI support from Turkey and Greece. Russia is not a significant direct investor in the region, except in Poland.

FDI in manufacturing is concentrated in car production, electronics, and construction materials. In countries where telecommunications or banking privatization lags behind, manufacturing accounts for more than 50 percent of FDI. Only in Hungary is the manufacturing sector less than a 40 percent share, owing to the progress of privatization in all sectors of the economy, including utilities.