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2021 | OriginalPaper | Buchkapitel

3. FDI as Force of Convergence in the CESEE Countries

verfasst von : Septimiu Szabo, Jorge Durán Laguna

Erschienen in: Does EU Membership Facilitate Convergence? The Experience of the EU's Eastern Enlargement - Volume II

Verlag: Springer International Publishing

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Abstract

Trade and access to international capital markets are often assumed to support countries’ development, notably through technology transfers that support convergence. In this chapter we review economic developments in the EU Central, Eastern and Southeastern (CESEE) countries (namely Bulgaria, Croatia, Czechia, Estonia, Latvia, Lithuania, Malta, Poland, Romania, Slovenia and Slovakia) since the late 1990s, linking their take-off to the opening to trade and infusion of foreign direct investment (FDI), largely facilitated by the EU accession and geographical proximity. The region has had one of the most significant growth of foreign investment as a share of GDP in the recent global history, and this has contributed to productivity convergence. We argue that FDI increased the well-being of people, by bringing in new jobs and higher wages, led to technological spillovers to domestic firms and increased efficiency and innovation in the market. Various trade-offs, particularly regarding the political implications of privatising national resources, repatriating profits and agglomeration effects are also acknowledged. We conclude that FDI can act as a force of growth and convergence when it comes alongside with a strong institutional, legal and regulatory environment, on the likes of the EU Single Market.

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Vorheriges Kapitel The Economic Impact of Single Market Membership on the EU Enlargement Countries

Nächstes Kapitel The Impact of EU Cohesion Funds on Macroeconomic Developments in the Visegrád Countries After the 2008–2009 Financial Crisis

Nur mit Berechtigung zugänglich

Poland and Hungary were the first countries to sign the Association Agreements in 1994. Croatia signed it in 2005.

At various times in the 1990s, inflation in Romania or Bulgaria reached more than 300% but Slovenia, Poland or Czechia also witnessed rates of 30% to 50% in the early 1990s.

See Annex A with some basic charts. The Baltics are Estonia, Latvia and Lithuania; Visegrád is the Czech Republic, Slovakia, Poland and Hungary; the South is Bulgaria, Romania, Slovenia and Croatia.

For consistency with UN data, we use US Dollars when comparing the CESEE countries with the rest of the world. We use euro when comparing the countries at the EU level.

Albania, Bosnia-Herzegovina, Georgia, Moldova, Montenegro, North Macedonia, Serbia, Ukraine.

The Netherlands appears often among top investors because of their intermediate role: many investment projects are channelled via special purpose vehicles and entities for fiscal and regulatory reasons (see, e.g. Weyzig 2013).

An SPE is legal entity with no or few non-financial assets and employees, little or no production or operations and sometimes no physical presence beyond a ‘brass plate’ confirming its place of registration. Half of EU’s FDI is channelled via SPEs, particularly in Netherlands, Luxembourg and Malta.

Figures for Bulgarian regions only include non-financial FDI.

However, some of the data may be misleading. A case in point is Estonia where outward FDI in the financial sector is driven by local branches of Swedish banks operating in the region (see, e.g. Durán 2019).

Due to data availability, all data in this section include FDI generated via SPEs.

Lithuania has higher productivity levels, but the car manufacturing sector is very small in the country.

There is a vast literature on this. For FDI and long-term growth see, for example, Hansen and Rand (2006). For a general overview of theory and empirics of technology diffusion, see Keller (2004).

This is, of course, not mechanical. Borenszteina et al. (1998) explore the conditions under which FDI increases productivity more than domestic investment. Not surprisingly, the formation of human capital turns out to be a critical factor.

See Chiacchio et al. (2018) for the effect of FDI on the absorptive capacity of frontier firms and the trickle-down effect on laggards.

For a more nuanced view on FDI in general, see Mencinger (2003) and references therein.

In general, foreign firms often perform better in terms of capital, labour and corporate governance.

In this regard, the EU has recently adopted a new EU framework for the screening of FDI in order to better scrutinise purchases by foreign companies that target Europe’s strategic assets. The area remains a national competency but it will enhance cooperation among member states on these matters.

Contessi et al. (2013) note that FDI inflows are countercyclical in developing countries, most likely because of the low price of local firms for potential foreign owners during recessions, particularly during large devaluations or depreciations of the local currency.

Javorcik and Poelhekke (2017) show for a sample of Indonesian firms that disinvestment is associated with a drop in total factor productivity, output, mark-ups and export and import intensities.

Borensztein, E., De Gregorio, J., & Leec, J.-W. (1998). How Does Foreign Direct Investment Affect Economic Growth? Journal of International Economics, 45 (1), 115–135.

Brada, J., & Tomšík, V. (2009). The Foreign Direct Investment Financial Life Cycle: Evidence of Macroeconomic Effects from Transition Economies. Emerging Markets Finance and Trade, 45(3), 5–20.CrossRef

Canton, E., & Solera, I. (2016). Greenfield Foreign Direct Investment and Structural Reforms in Europe: What Factors Determine Investments? European Commission, European Economy Discussion Paper 33.

Chiacchio, F., Gamberoni, E., Gradeva, K., & Lopez-García, P. (2018). The Post-Crisis TFP Growth Slowdown in CEE Countries: Exploring the Role of Global Value Chains (European Central Bank Working Paper No. 2143).

Contessi, S., De Pace, P., & Francis, J. L. (2013). The Cyclical Properties of Disaggregated Capital Flows. Journal of International Money and Finance, 32, 528–555.CrossRef

Durán, J. (2019). FDI and Investment Uncertainty in the Baltics. European Commission Economic Brief No. 043, Luxembourg: Publications Office of the European Union.

European Parliament. (2016). Cost of Non-Schengen: The Impact of Border Controls Within Schengen on the Single Market. European Parliament: European Parliamentary Research Service.

Hansen, H., & Rand, J. (2006). On the Causal Links Between FDI and Growth in Developing Countries. The World Economy, 29(1), 21–41.CrossRef

Javorcik, B. S., & Poelhekke, S. (2017). Former Foreign Affiliates: Cast Out and Outperformed? Journal of the European Economic Association, 15(3), 501–539.CrossRef

Keller, W. (2004). International Technology Diffusion. Journal of Economic Literature, 42(3), 752–782.CrossRef

Mencinger, J. (2003). Does Foreign Direct Investment Always Enhance Economic Growth? Kyklos, 56(4), 491–508.CrossRef

Szabo, S. (2019). FDI in the Czech Republic: A Visegrád Comparison, European Commission Economic Brief. Luxembourg: Publications Office of the European Union.

Weyzig, F. (2013). International Finance and Tax Avoidance Via Dutch Special Purpose Entities. Paper for Presentation at Research Seminar, Radboud University Nijmegen.

Titel: FDI as Force of Convergence in the CESEE Countries
verfasst von: Septimiu Szabo
Jorge Durán Laguna
Verlag: Springer International Publishing
Buch: Does EU Membership Facilitate Convergence? The Experience of the EU's Eastern Enlargement - Volume II
Print ISBN: 978-3-030-57701-8

Electronic ISBN: 978-3-030-57702-5

Copyright-Jahr: 2021
DOI: https://doi.org/10.1007/978-3-030-57702-5_3

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