Abstract
During the transition to market economy, inward foreign direct investment was a major source of growth and structural transformation in the 11 Central and Eastern European member states of the European Union. In these countries, the onset of the Great Recession coincided with the gradual exhaustion of competitiveness based on cheap semi-skilled labour. In the aftermath of the crisis, these countries have to find new ways of leveraging their skills base, if they wish to defend their place in the international division of labour. Difficulties in attracting FDI are reflected in the fact that the share of the CEE countries in world FDI flows and stocks has stopped increasing. The chapter analyses past features of FDI in the region in order to draw conclusions on potential future performance. It also analyses the policy responses of individual countries to the crisis and the new conditions of attracting FDI.
The author is grateful to Andrea Szalavetz and Balázs Szent-Iványi for their comments, but he remains responsible for any remaining errors. The views expressed in this chapter are those of the author and do not necessarily reflect the position of the United Nations.
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Notes
- 1.
The obsolescing bargain theory states that at the moment of initial investment, the power relations between investors and the host government favour the former in the mining and infrastructure industries. Over time, however, the sunk costs of investors increase, and the government can gain a stronger position, and thus attempt to renegotiate the terms of the original contracts in its favour. In case of continued disagreement, they can even resort to re-gaining the control over the disputed assets.
- 2.
The flying geese paradigm is related to the product cycle model, under which the mature products are first exported abroad and later produced there (Vernon 1966, 1979). The flying geese model’s advantage over the product cycle is that it includes more layers and adapts better to more recent production methods such as the fragmentation of production.
- 3.
Data from the UNCTAD database indicate that in transition front runners Poland, Czech Republic and Hungary, real GDP exceeded its pre-transition (1990) level in 1994, 1996 and 2000, respectively. In the laggard country of Romania, this only happened in 2003 and in Bulgaria only in 2004. The transition-related decline was 7% in Poland, 14% in the Czech Republic, 15% in Hungary, 16% in Bulgaria and 21% in Romania.
- 4.
An additional issue with this methodology is that the situation of the local private sector may in part bias the results. If local private enterprises are relatively competitive from the outset (like in Slovenia), then the results partly underestimate the real impact, and if the local private sector is weak (like in Romania), the impact is overestimated.
- 5.
The use of this proxy was justified by the fact that M&As move together with FDI globally, and, in economies in transition, FDI and M&As have been traditionally linked together via privatisation, although unevenly. Also, data are more detailed for M&As than for FDI.
- 6.
The question of whether the crisis is over is outside the scope of this chapter.
- 7.
This dataset covers restructuring in all EU countries, including cases not specifically related to FDI or the transition-economy members, and it is also far from complete. Still, it contains very useful information. See: http://www.eurofound.europa.eu/emcc/erm/index.php?template=searchfactsheets.
- 8.
The relocation from Hungary has been precipitated by Nokia’s ongoing problems. Following the sale of its mobile business to Microsoft, the rationalisation of production affected the less competitive part of production in Hungary. Its activities were relocated to Asia. See European Restructuring Monitor (2014).
- 9.
See, for example, Budapest Business Journal (2011).
- 10.
The author is grateful to Andrea Szalavetz for drawing his attention to this point.
- 11.
The falling behind of the country compared with its regional competitors seems to indicate that state capitalism may be good for gaining electoral support, but is less beneficial for development.
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Kalotay, K. (2017). Post-crisis Crossroads for FDI in CEE. In: Szent-Iványi, B. (eds) Foreign Direct Investment in Central and Eastern Europe. Studies in Economic Transition. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-40496-7_2
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