Short-lived FDI Recovery in the CESEE region

Short-lived FDI Recovery in the CESEE- Raport publicat The Vienna Institute for International Economic Studies (wiiw)


The year 2011 saw a strong recovery of FDI inflows in the 16 countries of Central and Southeast Europe (CSEE – see Table 1). Inflows rose more than 50% in current euro terms based on balance of payments statistics compiled in the wiiw Database on FDI. The amount –EUR 29 billion – was still well below the peak years 2006–08. The increase was 42% in USD terms within a global environment that has seen an FDI inflows rebound of 16%, to USD 1.5 trillion.1 With this growth, global FDI exceeded the average of the pre-crisis years 2005–06, but remained significantly below the peak years of 2007–08.

The strongest growth in FDI in 2011 was observed in the countries of Southeast Europe (SEE) (64%), following a year with extremely low inflows. The growth in FDI in the new Member States (NMS) was 26% and in the CIS 18%, both regions recording significantly lower amounts than in 2008. FDI inflows declined in only five of the 22 countries, which is in line with the general upswing in business sentiment and economic growth – at least up until the fourth quarter of the year. Host country trends did not diverge from each other as much as in 2010, indicating that improved investor sentiment can bring more foreign investment, even to countries that are potentially less attractive to FDI.

There is only a general link between GDP growth and the recovery of FDI, and it does not reveal the direction of causality. However, countries with strong GDP growth (like Poland, Turkey, Kazakhstan and Russia) did receive significantly more FDI than before, whereas this was not the case in Estonia. Slow GDP growth in the Czech Republic coincided with less FDI inflow than in the previous year, while it was just the opposite in Hungary. In absolute terms, the Czech Republic had been ahead of Hungary for several years, which is in line with its more robust economic performance (although methodological discrepancies may have had a strong impact on data – see below). The correlation between FDI and economic growth is more robust if we take several years, like 2008–11 (Figure 2). Demand contraction and the financial crisis in Europe curtailed investment, including FDI. Even if economic growth was, on the whole, positive in some countries, FDI was negative due to investors’ deleveraging.


The new EU Member States regained their attractiveness to FDI in 2011, registering inflows of EUR 24 billion (data for Poland estimated). Compared to the previous year, the recovery was strongest in Slovakia, Latvia and Slovenia; it was weaker in Poland and Hungary, while setbacks were registered in the Czech Republic, Estonia and Romania. None of the changes was especially positive or alarmingly negative. Countries with recovering inflows could overcome the setback suffered in 2009–10, but still received less than in 2008. There may be two reasons for the setbacks in Bulgaria and Romania: first, these countries have completed most of the planned privatization; and secondly, the real estate bubble fed by foreign investors has burst. But the two countries remained attractive, as is shown by the number of new manufacturing and services projects.

Export-oriented foreign subsidiaries expanded, as European exports were robust, and the NMS have maintained their cost-competitive edge. The region is now perceived as being economically more stable than the South European EU members, and it will take some time before the North African countries are able to attract export-oriented projects on a similar scale. Some large export-oriented projects have significantly raised the level of FDI, e.g. in Hungary, with the automotive sector projects of Daimler-Benz, Audi and Opel under construction. In Romania, Ford kept investing last year, and as a result started its car and engine production in 2012. In other countries, such as Slovakia, foreign investment enterprises restarted production shifts that had been idle during the crisis years.

Even if manufacturing projects dominate the news, FDI has flown most intensively into and out of the financial sector and the sector of real estate and business services (the sectoral distribution of FDI inflows is not reported by most countries). For example in Slovakia, financial services received the highest proportion of 2011 inflows (21% of equity inflow), followed by real estate and business activities (10%) and the electricity sector (8%); the automotive industry received only 2%.


In the Czech Republic, the highest share was invested in the electricity sector (35%, mostly solar energy), followed by the financial sector and trade (about 20% each), while manufacturing had only 9%.

FDI trends and country distributions have been influenced by some major changes in investors’ strategies in response to the financial crisis. Especially in the NMS, FDI inflow and outflow figures have been shaped by restructuring in some of the investor companies.

- The Estonian subsidiary of Swedbank used to be the owner of the subsidiaries in Lithuania and Latvia, which have now been placed directly under the parent bank. In terms of FDI flows, this means that Estonia repatriated outward FDI from the other two Baltic states, as is shown by the positive outflow figure. Sweden repatriated this capital from Estonia, producing a high negative FDI inflow figure. In addition, Swedbank increased its capital in the subsidiaries in Latvia and Lithuania, which boosted inflows of financial sector FDI in these countries.

- The Hungarian government purchased from the Russian investor Surgutneftegas the shares that it held in the Hungarian oil company MOL. This foreign disinvestment reduced FDI inflow by EUR 1.88 million in 2011.

- Nokia underwent major restructuring worldwide and closed production facilities in Hungary and Romania, resulting in disinvestment in both countries. Nokia’s subcontractor Elcoteq filed for bankruptcy and stopped most of its activity in Hungary and Estonia, while another contract manufacturer, Huawei, shrank its related production. In most cases, production facilities have been sold to other foreign investors that intend to start new production on the same site.

In Southeast Europe, Serbia has become a primary target for foreign investors. The country received close to EUR 2 billion in 2011, which is not far behind the 2007 peak. This came despite the failed privatization of Serbia Telecom.

A large share of the new FDI was invested by Fiat, which took over and restructured the automotive producer Zastava and also brought subcontractors into the country. Also in the SEE, FDI in the financial sector, real estate and other business activities dominated the inflows, with Austria and the Netherlands featuring prominently in these fields. (The Croatian National Bank notes that a large proportion of this flow is round-tripping capital, appearing as both inflows and outflows.

In Turkey, FDI inflows reached a peak in 2006–07 and shrank to less than 40% of that figure in 2009 and 2010. The FDI recovery in 2011 was quite robust – 67% more inflows than in 2010, but still 29% less than in 2007. The overwhelming part of the inflow has been in the form of equity (no data are published on reinvested earnings). Manufacturing sector FDI has expanded over the past three years to 29% of stocks; the main targets are the food and automotive industries, and to a lesser extent the oil processing and chemical industries. The sectoral distribution indicates that most of the FDI serves the dynamically growing local demand.


FDI inflows increased to all CIS countries under consideration. The most prominent target in CESEE as a whole has been Russia (although the statistics contain substantial upward bias), which recorded a large increase in 2011. A novelty for the region in 2011 was the strong inflow in Belarus, reaching an all-time high of EUR 2.8 billion, mainly due to one single deal: as a condition of Russia’s financial support for the battered Belarus economy (and related to disputes over oil and gas prices), Gazprom took over 50% of the transit pipeline Beltransgaz. About 70% of the FDI stock in the country originates from Russia, and this figure is bound to increase, as further similar takeovers are planned. Kazakhstan – new to the wiiw FDI Database – differs from the majority of CESEE countries by virtue of its abundant natural resources, which are so attractive to investors, and its limited manufacturing capacity outside primary processing. It receives as much FDI as Poland or Turkey, and is thus second or third in terms of inflows among the countries surveyed.

Relative to size of population, FDI inflows per capita have been highest in Montenegro for many years now (mainly real estate investments in the tourism sector). Because of the developments in the banking sector outlined above, Estonia – usually second among the CESEE – lost ground last year to Latvia, Slovenia and the Czech Republic. Sparsely populated Kazakhstan also has high per capita inflows. These countries, plus Ukraine, received high inflows as a percentage of fixed capital formation as well. An earlier target of large FDI flows, in 2011 Bulgaria suffered setbacks on all FDI indicators, but still maintained its position in terms of stocks.

FDI stocks as a percentage of GDP, an indicator of long-term attractiveness to investors, is highest in Montenegro and Bulgaria (mainly related to the real estate boom in the 2000s) and is low in larger countries like Turkey and Russia. More developed countries with higher GDP fare better in terms of per capita stock – thus Estonia and the Czech Republic are way ahead of other countries in the region, followed by Slovakia and Montenegro. Low per capita stocks indicate lower attractiveness and a late start for foreign investment inflows in Albania, Belarus, Moldova and Ukraine.



Several governments tried to draw lessons from the recent financial crisis and modified their FDI policy. Reactions went in two directions: the transmission of the crisis by foreign affiliates and outflows of FDI-related income gave rise to a degree of economic nationalism; on the other hand, some governments felt the need to try to do better in the international competition for FDI and so improved their incentive systems.

The Czech Republic has continued with its FDI support programmes. In 2011, the investment promotion agency CzechInvest mediated a record 233 new investment projects, with 56 companies investing in manufacturing projects. The largest share comprised 112 new projects involving business support services, while 65 projects targeted research and development. (Such shifts to less capital intensive activities do not show up properly in FDI statistics; they will be analysed in the section on greenfield projects below.) In addition, generous solar energy guaranteed tariffs (to be phased out) have generated a huge investment boom in that sector.

The Czech Republic has continued with its FDI support programmes. In 2011, the investment promotion agency CzechInvest mediated a record 233 new investment projects, with 56 companies investing in manufacturing projects. The largest share comprised 112 new projects involving business support services, while 65 projects targeted research and development. (Such shifts to less capital-intensive activities do not show up properly in FDI statistics; they will be analysed in the section on greenfield projects below.) In addition, generous solar energy guaranteed tariffs (to be phased out) have generated a huge investment boom in that sector.

In Slovakia, an amendment to the Act on Investment has been in effect since 1 August 2011. State assistance (in the form of tax relief) is aimed at regions with high unemployment. In November 2011, the government approved investment support for nine foreign investors (Secop, Aspel Slovakia, Plastiflex Slovakia, Celltex Hygiene, Behr Slovakia, Gallai & Wolff, Johnson Controls, Continental Matador Rubber and Sungwoo Hitech Slovakia). They will receive EUR 45.8 million in tax breaks and state assistance, and are going to invest EUR 235 million.

In Serbia, a special package for foreign investors includes benefits that other countries in the region do not offer: the government pays up to EUR 10,000 for every new job, or up to 20% subsidy on total capital investment. When it comes to investments of special interest, arrangements are made for the transfer of land.



The current account statistics include the total income (profits and interest earned) of the foreign direct investors in the host country as outflow. (Income earned by outward direct investors is treated as inflow.) The FDI-related income (outflow) relative to the inward FDI stock provides the rate of return on the foreign investment. In time, foreign investment enterprises in mature FDI-receiving economies became highly profitable, and the profit rates climbed to about 10%, making these countries attractive FDI locations. The crisis years brought a decline in profits, and the profit rate fell back in most countries in 2009–10. A recovery in the profits of foreign investors in most countries is an important development in 2011. They climbed above 10% not only in the Czech Republic, but also in Estonia and Russia, and to around 8% in Hungary, Lithuania, Poland and Slovakia. Very meagre profits were recorded in Bulgaria, Romania, Slovenia and several SEE countries that were hard hit by the crisis and where the foreign investment enterprises are still rather new.

Part of the foreign investors’ income is reinvested and booked as FDI inflow on the financial accounts of the host country. Another part of the income is repatriated and leaves the host country. The share of repatriated income in foreign investors’ total income rose when foreign investment enterprises matured and made more profit. In the crisis years, even more income was repatriated if parent companies were in need of revenue. In 2011, the repatriation rate fell in the majority of the countries; it was higher than 100% only in Romania (and in another five countries in 2010). As indicated above, reinvested earnings provided a significant contribution to the increased FDI inflows in several countries.


High rates of inward FDI-related income and high repatriation rates have resulted in net ‘inward-FDI-related outflows’ in several countries over the past couple of years. Taking the repatriated income in relation to FDI inflow, we get the net direct effect of inward FDI on the balance of payments. Numbers below 100 denote that more FDI-related income is taken out of the country than there is inflow of new FDI. Among the NMS in 2008, this was the case only in the Czech Republic and Hungary. In 2011, the situation changed for the worse in several countries, and only Poland and Slovenia received more FDI than the income that left the country.

The negative effects of the repatriation of FDI-related income can mostly be balanced by other positions in the current account. Foreign investors have established huge export capacities, especially in the Czech Republic, Hungary and Slovakia; thus, when the income balance turned negative, the improving foreign trade balance compensated for this.

The role of FDI in the balance of payments underwent important changes after 2008 in terms of three important indicators: the current account balance, the contribution of FDI-related income to the current account, and the role of net FDI in financing the current account. In the year at the outset of the crisis, several countries in the region had unsustainably high current account deficits. FDI income was responsible for only a minor part of that deficit. The share of FDI income was high only in countries with relatively low current account deficits – the Czech Republic (which, without this position, would have run a current account surplus), Hungary and Slovakia. In 2008, FDI was only one source of financing for the current account deficit – and in most countries not the most important. It covered more than half of the deficit in Bulgaria, the Czech Republic, Romania, Slovakia and Croatia, and less than that in the other countries. The share of FDI in financing current account deficits increased later when the deficits contracted.

In the wake of the crisis, current account deficits shrank and the remaining negative balance was due primarily to the net FDI-related income in the NMS and Croatia. High deficits persisted in several SEE countries, and net FDI, even if it was increasing, could not finance those deficits. An expanding current account deficit and a decline in the rate at which it is financed by FDI is becoming a problem, above all for Turkey, but also for Albania, Macedonia and Ukraine.


Conditions for FDI and the availability of FDI to support economic growth have changed substantially since the outset of the financial crisis. Slow or negative rates of economic growth have reduced investments in general. After two years of modest post-crisis recovery the European economy has plunged into a renewed recession in 2012. This is driven by the euro crisis and shows up most intensively in the countries of the European South. Fiscal consolidation has put brakes on most economies although at different rates. Most NMS has followed the euro-area example of fiscal consolidation not only in countries with high debt to GDP levels like Hungary, but also in countries with modest public debt like the Czech Republic and Bulgaria. Also foreign demand has been sluggish but less for those countries that are competitive on expanding markets outside Europe. In the NMS only Poland is in better shape where household consumption and GDP have not declined in the past four years. Al other countries have one or two years with negative growth, some close to stagnation like the Czech Republic and Slovakia, others recording serious declines like the Baltic states, but also Romania and Hungary. All these countries achieved positive growth rates in 2011 but have worse outlook for 2012. Gross fixed capital formation declined in three consecutive years in Bulgaria, Hungary and Slovenia. In Poland it declined only marginally during the crisis and took off in 2011 together with several other countries. The conditions for investments both domestic and foreign are bad throughout Europe as demand is down and bank financing is expensive and restricted. Profitable companies sit on cash and wait for less risky investment opportunities while many companies especially SMEs locked into stagnating markets have lost profits.

As a result, global FDI is expected to decline in 2012. Responses to the UNCTAD questionnaire indicate a smaller value of mergers and acquisitions and also of greenfield projects announced in the first quarter of 2012 than in any quarter since 2007.

The UNCTAD World Investment Prospects Survey indicates that firms are generally less optimistic about their foreign investment plans for 2012 than they were before. According to the 2012 A.T. Kearney Foreign Direct Investment Confidence Index,5 a regular assessment of senior executive sentiment in the world’s largest companies shows a modestly positive trend for FDI. But most of the optimism relates to non-European investors; among the CESEE countries only Russia and Turkey are given good prospects. Quarterly FDI data also point to lower inflows in the CESEE than previously expected. Also the number of newly announced greenfield projects has been lower.


Based on all of this information, wiiw experts expect a stagnation of FDI inflows for the CESEE as a whole. Countries with declining amounts of FDI dominate the region; with the possible exceptions of Russia where also privatization plans, if they materialize, may attract a lot of capital, perhaps round-tripping via Cyprus. In the rest of the countries, their proximity to highly developed European countries with stagnating or declining economies is expected to result in substantially less FDI than in the previous year, but notable exceptions appear like Croatia, Lithuania or Estonia. FDI is expected to remain an important support of growth and technological improvement in the CESEE in the future. But demand factors and financial deleveraging may suppress investments for quite some time.