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Figure 9.4: FDI inflow in the CIS-4 and Ukraine, 2013–2016, EUR million

0 5000 10000 15000 20000 25000 30000 35000

Belarus Kazakhstan Moldova Russia Ukraine 2013 2014 2015 2016

Remark and sources: see table 9.1.

About half of the Russian inward FDI stock originates from tax havens and off-shore centres, while two-thirds of the outward FDI goes to these destinations.

Some EU members – such as Cyprus, Luxembourg and the Netherlands – as well as the offshore centres in the Caribbean are home to Russian companies and holdings, most probably for security and tax optimisation reasons; inflows and outflows are of similar size over the long run. Most of the FDI in Russia is thus originally Russian capital kept abroad which returns to Russia as FDI.

This roundtripping capital is essentially different from other FDI as it does not contribute to the capital stock, and overstates the importance of FDI in Russia.

FDI inflow into Ukraine recovered in 2015 and increased further in 2016.

It went primarily into the banking sector, in a move related to recapitalisation needs (with EBRD participation); investments in telecommunications were a consequence of the 3G mobile licence sale. The same trend continued in 2016, with further bank recapitalisation and the privatisation of some companies.

Roundtripping is a characteristic of Ukrainian capital as well, but not to the same extent as is the case in Russia.

number of new projects and not only their capital as this provides a picture of sectors with low capital intensity. The development has been positive in recent years: both the number and the value of greenfield projects have increased.

The number of announced greenfield FDI projects was 1,150 in 2016, after only 1,017 in 2015 and even less in 2014, but without coming close to the num-ber achieved in 2013. In half of the countries surveyed, the numnum-ber of projects was higher in 2015 compared with the preceding year, and even more coun-tries reported increases in 2016 (figure 9.5). The highest numbers and strongest increases in absolute terms were recorded in Russia in 2015 and in Poland in 2016. Only these two countries and Hungary recorded increasing numbers of greenfield projects in both years. The Czech Republic received the same number of projects in 2016 as in the previous year. The third most important destination was Romania, which suffered modest setbacks in both years. As to the Western Balkans, Serbia and Macedonia are the most important greenfield investment sites and both of them registered increases in 2016, confirming the position of these countries in attracting also export-oriented FDI. Albania, which was a prominent FDI target in terms of capital inflows, has been neglected by green-field investors, meaning that privatisation and investment into existing projects have attracted most of the FDI beyond the Trans Adriatic Pipeline project.

Figure 9.5: Number of announced greenfield FDI projects, 2014–2016

0 50 100 150 200 250 300

Bulgaria Croatia Czech 

R.

Estonia Hungary Latvia Lithuania Poland

Romania Slovakia Slovenia Albania BiH

Macedonia Montenegro

Serbia Belarus Kazakhstan Moldova

Russia Ukraine

2014 2015 2016

Source: fdimarkets.com.

to intended investment projects that are to be realised over a longer period of time. This forward-looking character of the database may support forecasts, but there is a good deal of uncertainty, as the realisation time of individual projects may differ substantially. We excluded retail outlets and shops from its coverage. The investing country is the final home country of the investor, thus tax havens do not show up. Projects have been recor-ded by fDiMarkets since 2003 and are continuously updated. The data used in this report have been downloaded on 2 March 2017.

The capital investment pledged in the greenfield projects skyrocketed in 2016 due to Kazakhstan, but remained at the level of the previous year if that coun-try is disregarded (figure 9.6). Poland and Hungary attracted more capital than before, but the majority of countries reported declines in 2016. This indicates a shift to smaller, less capital-intensive projects or to services in terms of eco-nomic activity.

Figure 9.6: Capital investment pledged in announced greenfield FDI projects, 2014–2016, EUR million

0 2000 4000 6000 8000 10000 12000 14000

Bulgaria Croatia Czech 

R.

Estonia Hungary Latvia Lithuania Poland

Romania Slovakia Slovenia Albania BiH

Macedonia Montenegro

Serbia Belarus Kazakhstan Moldova

Russia Ukraine

2014 2015 2016

Remark: Partly estimated; Kazakhstan 2016: EUR 35,122 million.

Source: fdimarkets.com.

The country that did worst in recent years in terms of greenfield FDI compared to its size was Ukraine; investors removed the country from their location map due to economic and political instability. But Russia, which has also been hit by recession and plummeting FDI inflows, seems not to have lost its attrac-tiveness to greenfield projects. The number of projects has recovered recently, while the investment value of projects fluctuated only slightly over the past three years. A possible explanation why greenfield investments have behaved differently from FDI inflows is that increasing barriers to trade (sanctions) stimulated the market entry by import-substitution investments, especially in food production and the consumer goods sector.

Manufacturing is the most important greenfield FDI activity both in terms of the number and the investment value of projects (figures 9.7 and 9.8).5 It constitutes a higher share than in the FDI stock of inflow values on account of the missing financial sector FDI among the greenfield activities. The share of

5 “Activities“ relate to what is actually done in the project and do not match NACE catego-ries. In contrast to balance of payments data, the financial sector is not identified.

manufacturing increased from 29.7% in 2013 to 44.6% in 2015 and fell back to 41.9% in 2016; in terms of investment capital pledged, the figure rose from 37.2% in 2013 to 52.3% in 2015 and declined to 51.2% in 2016 (Kazakh-stan excluded). There has been a shift towards manufacturing to the detriment of sales and logistics over four year. In 2016 the share of advanced services expanded, at the expense of electricity generation. As for industrial sectors, the automotive sector was the leading industry in manufacturing. The food and tobacco sector came a strong second, followed by metals, rubber and industrial machinery.

Figure 9.7: Distribution of greenfield FDI projects by economic activity in the CESEE, 2013–2016

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016

Other

Advanced services Construction Electricity Sales, logistics Manufacturing

Remark: capital partly estimated; extraction in Kazakhstan 2016 excluded.

Advanced services include the following activities: Business Services, ICT & Internet Infrastruc-ture, Design, Development & Testing, Headquarters, Shared Services Centre, Research & Deve-lopment, Technical Support Centre, Customer Contact Centre, Maintenance & Servicing.

Source: fdimarkets.com.

Figure 9.8: Distribution of greenfield FDI capital investment by economic activity in the CESEE, 2013–2016

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016

Other

Advanced services Construction Electricity Sales, logistics Manufacturing

Remark: see figure 9.7.

Source: fdimarkets.com.

Greenfield investments have contributed to the re-industrialisation only of some of the CESEE economies and advanced services have also been unevenly spread (sum of four years, 2013–2016, figure 9.9). The countries with the high-est per capita greenfield FDI capital pledged in manufacturing are Slovakia, Estonia and Hungary, in the Western Balkans Macedonia and Serbia. The ranking in terms of capital invested per capita in advanced services is led by the three Baltic countries followed by Slovakia and Romania.

Figure 9.9: Greenfield FDI in manufacturing and advanced services in the CESEE per inhabitant, 2013–2016 cumulated, EUR

0 100 200 300 400 500 600 700 800 900

Manufacturing Advanced services

Remark: see figure 9.7.

Source: fdimarkets.com.

The most important greenfield investors in the EU-CEE countries have been companies from the United States and Germany. The number of projects has increased from these countries, as well as from Switzerland and China. Austria ranked 5 in terms of the number of projects in 2013; in 2016 it was overtaken by China and Switzerland. In terms of investment capital, Austria occupied ranks 8–10. Austrian greenfield investments are strongest in real estate devel-opment and the manufacturing of wood and paper. A number of smaller proj-ects are engaged in a wide variety of other manufacturing activities.

4 Conclusions

FDI inflows to the CESEE countries recovered in 2016, but it is not clear whether they will prove sustainable or whether they constitute only a tempo-rary peak. One may expect that the modest economic recovery in the region as well as in the main investing partners may provide another impetus in 2017, but FDI inflows and economic growth have not correlated in recent years. The Central European FDI-based manufacturing hub comprising four Visegrad countries has recently been expanding to Romania; a slow expansion is on the way towards Serbia and Macedonia. Advanced business services including shared service centres have become important areas for FDI activity although they do not show in terms of invested capital due to low capital intensity, but they comprise an important number of greenfield investment projects.

5 References

Adarov, Amat, Mario Holzner, Gábor Hunya, Isilda Mara, Sándor Richter and Hermine Vidovic, et al. (2016), Growth Stabilises: Investment a Major Driver, Except in Countries Plagued by Recession, wiiw Forecast Report, Economic Analysis and Outlook for Central, East and Southeast Europe, Spring 2016, wiiw, March 2016.

Adarov, Amat, Vasily Astrov, Vladimir Gligorov, Richard Grieveson, Peter Havlik, Mario Holzner et al. (2017), Cautious Upturn in CESEE: Haunted by the Spectre of Uncertainty, wiiw Forecast Report, Economic Analysis and Outlook for Central, East and Southeast Europe, Spring 2017. wiiw, March 2017.

Hunya, Gábor (2015), Recovery in the NMS, Decline in the CIS, wiiw FDI Report, Central, East and Southeast Europe, wiiw, June 2015.

Hunya, Gábor (2016), FDI in Central, East and Southeast Europe: Slump des-pite Global Upturn. wiiw FDI Report, Central, East and Southeast Europe, wiiw, June 2016.

Aktuelle FDI-Entwicklungen in Mittel-, Ost- und Südosteuropa

Der Zufluss von ausländischen Direktinvestitionen (FDI) in 22 mittel-, ost- und südosteuropäische Länder stieg im Jahr 2016 auf sein höchstes Niveau seit 2008.

Die Erholung fiel in den mitteleuropäischen EU-Mitgliedstaaten am stärksten aus, während in Russland eine große ausländische Akquisition einen einmaligen Beitrag leistete. Auch Greenfield-Projekte nahmen zu, wenn auch in geringerem Ausmaß als FDI-Zuflüsse. Die Industrie und Finanzdienstleistungen konnten den größten Anteil an FDI auf sich ziehen, aber es gibt auch zahlreiche Greenfield-Projekte im Sektor hochwertiger Dienstleistungen.

JEL code: F2

global value chains

Jože P. Damijan1,

Č

rt Kostevc2

This paper summarizes the effects found in empirical studies on firm and industry performance of Central and Eastern European (CEE) countries over the last two decades. It discusses Foreign Direct Investment (FDI) effects in three main areas based on the direction and the technology segment of where FDI has been attract-ed. The first part reviews the effects of the first round of inward FDI inflows in the early 1990s. It finds that a catching up process of transition countries in terms of GDP per capita has coincided with robust inflows of foreign capital, while its effects on productivity and other aspects of micro performance of local firms are still debated. Here, heterogeneity of acquired local firms in terms of absorptive capacity, size, productivity and technology levels may be the key to explain the effects on own productivity performance and spillover effects on horizontally and vertically linked firms. The second part focuses on the effects of outward FDI and mostly finds correlation between investing firm’s productivity and its outward FDI engagement. The evidence also shows positive effects on a number of investing firms’ performance characteristics, but no or limited effects on employment. Final-ly, the third part studies the most recent episode of FDI patterns and its effects on CEE countries in the age of global supply chains (GVCs). Based on scant studies so far, it shows that a positioning within individual GVCs may be essential for future economic growth with a clear preference for attracting FDI to industries of higher-end technology intensity.

Keywords: Foreign direct investment, global supply chains, employment and ex-port performance

1 Introduction

Inward foreign direct investment (FDI) has traditionally been regarded as one of the most important drivers of technological upgrading and structural change in Central and Eastern European (CEE) countries. Traditionally, FDI was considered as a channel of technology transfer to host countries (see Find-lay, 1978, Wang, 1998; De Mello, 1997; Borensztein, De Gregorio and Lee, 1998; Carkovic and Levine, 2005; Barba Navaretti and Venables. 2004;

Con-1 University of Ljubljana; VIVES and University of Leuven. address: Faculty of Economics, University of Ljubljana, Kardeljeva ploscad 17, 1000 Ljubljana, Slovenia, e-mail: [email protected].

2 University of Ljubljana; address: Faculty of Economics, University of Ljubljana, Kardeljeva ploscad 17, 1000 Ljubljana, Slovenia, e-mail: [email protected].

tessi and Weinberger, 2009). Since then a vast number of empirical papers studied partial effects of FDI on different aspects of foreign-owned firms’ per-formance, such as productivity growth, employment, exports and innovation.

Much less attention, however, has been given to the changing nature of FDI flows and to their differential impact on performance of CEE countries. While in the beginning of transition in early 1990s FDI flows have mostly been related to the privatization processes in CEE countries attracting foreign capital flows to acquisitions of former state-owned companies, this pattern has changed over the course of 1990s. Increasingly, inward FDI flows have also been attracted to greenfield investments, in particular to manufacturing and retail. At the same time, over the last quarter of a century global economic and trade patterns have evolved, in particular with overall trade liberalization following the comple-tion of the Uruguay round GATT negotiacomple-tions in 1994, establishment of World Trade Organization (WTO) in 1995 and China’s entry into WTO in 2001. In the meantime, former transition CEE have concluded an asymmetric trade liberal-ization with the EU and joined EU in 2004 as full-fledged members.

Following this substantial regional and global trade liberalization the motives for FDI changed. With no trade restrictions between the “old” and “new” EU member states and with very low remaining tariffs and almost no quantita-tive restrictions among all members of WTO, the traditional market-seeking motive has given way to resource- and efficiency-seeking motives for FDI. In effect, global production patterns changed in terms of centralizing business and production processes along global supply chains (GSCs) controlled by a few large multinational corporations (MNCs). In the manufacturing sector, it became less important to invest into a foreign company to secure market penetration to a particular foreign market, but to secure investment into foreign companies with specific resources, assets or technical capabilities that could be integrated into a global supply chain. Production patterns became fragmented into stages of production located around the globe in order to achieve the highest effi-ciency in production and return to investment for a particular MNC.

As noted by Baldwin (2012), in addition to substantial global trade liberaliza-tion and revoluliberaliza-tionized transportaliberaliza-tion means (container box), the revoluliberaliza-tion in information and communication technologies (ICT) made possible the so-called “2nd unbundling”, ie functional and geographical separation of produc-tion. Cheap transportation and low trade cost made it possible, but available and cheap communication made it feasible to unbundle factories into stages of production around the globe by securing “real time” control over the design, production and assembly processes.

This evolution over the last two decades not only affected the pattern of FDI flows to and from CEE countries, but also impacted the effects of FDI flows on particular aspects of micro and macro performance in CEE countries. This paper summarizes the empirical studies on firm and industry performance of CEE countries over the last two decades. The first part focuses on the initial round of FDI inflows in the early 1990s, where CEE countries mainly benefitted from inward FDI through restructuring of former state-owned companies. This led to overall productivity growth and export expansion, with possible moderate initial negative effects on employment immediately after the acquisitions.

The second part of this paper looks into the effects of outward FDI from CEE countries. Notably, with advancing restructuring in CEE countries, many thriv-ing domestic firms involved in consolidation within their local industries or started to organize their own value chains both domestically and internation-ally. This process has witnessed waves of local or international acquisitions after 2000, which is shown also in increased outward FDI flows from CEE countries.

These processes, in turn, contributed to restructuring and productivity growth of parent firms, but with ambiguous effects on home industrial output, exports and employment.

In the third part, we review the most recent episode of FDI patterns and its effects on CEE countries. With enhanced trade liberalization, CEE countries became attractive for greenfield investments in manufacturing, particularly to fragmented production processes that are integrated into the network of upstream and downstream suppliers organized by a dominating MNC. Though ownership control over these fragmented production processes abroad is not necessary due to ICT revolution, it is still preferred over contractual arrange-ments in some circumstances when the affiliates are engaged in design and production of strategic components. What is more, in this wave of FDI flows the importance of industry, technology segment and production stage to which FDI were attracted seems to be essential for future micro and macro perfor-mance. While firms in industries at either technology level are likely to increase their employment and export performance if they succeeded in attracting FDI, technology upgrading and productivity growth are more likely to occur only if FDI were plugged into according technology segment. In other words, position-ing within individual GVCs becomes critical for future economic growth and technology upgrading of CEE countries.

The paper is organized as follows. The next section reviews the effects of inward FDI on firm performance in CEE countries. The third section gives an overview of effects on performance of CEE firms investing abroad. The fourth section reviews the effects on industry performance of CEE countries in the era of GVCs, where technology segments of inward FDI become key to understand future performance of industries and technological upgrading. The last section concludes.