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. / bne IntelliNews
By Robert Anderson in Prague December 2, 2022
Foreign direct investment (FDI) has stimulated economic growth in Central, East and Southeastern Europe (CESEE) over the past 30 years, helping convergence with Western Europe, but some forms of FDI have been much more beneficial than others, according to econometric research by the Vienna Institute for International Economic Studies (wiiw) published on November 30.
At a press conference, speakers from the wiiw and the German Eastern Business Association (which commissioned the report) insisted that despite a slowdown in FDI flows since the Global Financial Crisis, foreign investment would continue to have a vital role to play in the region’s development, particularly now that international companies are rethinking their supply chains.
Phillipp Haussmann of the German Eastern Business Association admitted that the German economy had benefited more than almost any other from the opening of markets and the lower production costs in Eastern Europe since 1989.
At €360bn, German trade with the CESEE region was now one fifth of Germany’s total trade, bigger than that with the US and China combined. “Our close economic ties with the region made a decisive contribution to Germany’s global competitiveness,” he said.
But he added that the investment and trade relationship between Germany and Eastern Europe had benefited both sides and was not a “one-way street”.
The report, entitled “Economic and Social Impacts of FDI in Central, East and Southeast Europe”, in fact showed that German and Austrian FDI had the most impact on the region in terms of growth, creating jobs, raising wages, as well as reducing poverty and not widening inequality, largely because it was concentrated in the sectors such as manufacturing, and via means such as retained earnings, that had the biggest effects.
Haussmann added that the efforts by some states to weaken these investment links were therefore misguided. “Efforts to disadvantage foreign investors or to force them out of strategic sectors are a loss for both sides,” he warned. Viktor Orban’s regime in Hungary has regularly launched such campaigns against foreign investors.
The report dismisses populist arguments against FDI, such as that it crowds out domestic investment, arguing that the weak linkages between domestic and foreign companies in the region meant that FDI had had no effect on domestic investment either way.
Tremendous opportunities
The panellists also pointed out that there would also still be great opportunities for CESEE countries from planned nearshoring or “friendshoring”, as multinationals seek supplies from nearer countries or those that share Western values following the disruption to supply chains caused by the COVID-19 pandemic in China, as well as the Ukraine war and sanctions on Russia.
“Right now, German companies are reorganising their international supply chains against the backdrop of global upheavals,” Haussmann said. “The shortening and regionalisation of supply chains play an important role in this. There are tremendous opportunities for Central and Eastern Europe if the framework conditions are right.”
Gunter Deuber, chief economist of Raiffeisen Bank, one of the biggest banks in the region, added: “A lot of companies are currently looking at projects,” though he said the new investment cycle would start in two to three years.