FDI in Central and Eastern Europe: Business Environment and Current FDI Trends in Poland

The Central and Eastern European Countries (CEEC) acknowledge foreign direct investment (FDI) as an essential tool in the development and modernization of their economies. The first part of this paper centers on economic stability and FDI inflows in the CEE indicating the Polish leadership in inward FDI inflow. The section of this study focuses on Poland and provides a description of business environment and current FDI trends in Poland. It analyzes the factors influencing the inward FDI in Poland, such as: economic stability, cost of labor, EU membership, regulatory framework. It presents the current FDI trends in Poland, such as: number of foreign firms, geographic origin of inward FDI, inward vs. outward FDI. The future research will focus on the impact of inward FDI stock on economic growth in Poland. To analyze the impact of the FDI stock on output growth in the Polish economy, a model of the economic growth based on the production function will be used. Research in Business and Economics Journal FDI in central, Page 2 Introduction Attracting foreign investment has become a key component of national strategies for Central and Eastern European (CEE) countries (www.poland.gov.pl/index.php?document=1638). Foreign direct investment in Poland has increased in the past twenty years, to become the most common type of capital flow needed for stabilization and economic growth. Foreign capital coming into the Polish economy has fulfilled a very important role in the process of privatization and restructuring. Poland seeks to attract and promote foreign investment and to liberalize its economy to ensure free movement of capital and profits. Poland became a member of the European Union (EU) on May 1, 2004 (http://www.eurunion.org/eu/index.php?option=com_content&task=view&id=34&Itemid =43 ). The EU membership has shaped major aspects of economic policy and new legislation. Poland is the largest economy among the CEE countries with the population of 38.6 million. This compares to 10.244 million in the Czech Republic, 10.063 million in Hungary, 5.392 million in Slovakia, and 2.004 million in Slovenia. The most of the statistics used in this paper is based on the Polish Information and Foreign Investment Agency (PAIiIZ) sources. This study utilized as well archival data (1960-2006) from the following sources: United Nations Conference on Trade and Development (UNCAD), United Nations Economic Commission for Europe (UNECE), World Investment Reports, as well as other selected databases. In 2005 Poland was the 5th most preferred investment location worldwide. Poland jumped from 12th to 5th place in the Index since 2000, which was driven by increased interest from U.S. and European investors. One in 10 global investors indicated they will make first-time investments in Poland. http://www.paiz.gov.pl/index/?id=59112692262234e3fad47fa8eabf03a4 Economic stability and inward FDI: CEE comparison Increasing standard of leaving: GDP per Capita, CEE comparison There are a variety of indicators assessing transition outcomes in the CEE transforming economies. This paragraph will be limited to GDP per capita, as it represents standard of leaving indicator in the CEE. It indicates increasing output performance during the transition period. All of the transitioning CEE countries have been building the new economic system via deregulation of prices, liberalization of trade, privatization, external assistance and capital market development. Since 1992, GDP per capita in all analyzed CEE countries has been increasing dynamically. Currently, the relatively high GDP per capita shows Slovenia (22.632 US Dollars) in comparison with the Czech Republic (20.417 US Dollars), Hungary (16.994 US Dollars), Slovakia (15.214 US Dollars) and Poland (13.791 US Dollars). The lowest GDP per capita in Poland relates to the highest population numbers among transforming CEE countries, while the highest GDP per capita in Slovenia relates to the lowest population numbers. Research in Business and Economics Journal FDI in central, Page 3 Figure 1. GDP per Capita (US Dollars) CEEC Comparison, 1990-2005 GDP per Capita in the CEE Countries, 1990-2005 0 5,000 10,000 15,000 20,000 25,000 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 Years G D P p e r C a p it a , U S D o ll a rs Czech Republic Hungary Poland Slovakia Slovenia Source: UNECE Statistical Database, Economic Statistics: http://w3.unece.org/pxweb/Dialog/statfile1_new.asp Openness of the Polish Economy: leadership in export and import, CEE comparison The impressive economic growth in the CEE economies resulted in the growing level of export. Between 1990-2005, Poland was a leading exporter in comparison with the Czech Republic, Hungary, Slovakia and Slovenia (Figure 2). For last several years Poland’s firms have been exporting more goods abroad and earning good profits. Among the exporters there are many foreign investors, what indicates that the FDI contributes to higher export in the host countries. Products produced in Poland have been enjoying great success abroad, due to their high quality. Considering the size of imported goods and services in million of USD Poland is a leader among the CEE countries (Figure 3). Figure 2. Export, CEE Comparison, 1990-2005 Export in Millions of US Dollars, CEE Comparison, 1990-2005 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 Years E x p o rt i n M il li o n o f $ U S Czech Republic Hungary Poland Slovakia Slovenia Source: http://w3.unece.org/pxweb/Dialog/statfile1_new.asp, UNECE Research in Business and Economics Journal FDI in central, Page 4 Figure 3. Import, CEE Comparison, 1990-2005 Import in Millions of US Dollars, CEE Comparison, 1990-2005 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 Years Im p o rt i n M il li o n s o f $ U S Czech Republic Hungary Poland Slovakia Slovenia Source: http://w3.unece.org/pxweb/Dialog/statfile1_new.asp, UNECE Statistical Database, Economic Statistics Poland’s leadership in inward FDI: CEE comparison Foreign direct investment (FDI) has increased in the past twenty years, to become the most common type of capital flow needed for the reconstruction, stabilization of the CEE economies and economic growth. The volume of FDI inflows has grown rapidly, as the Governments of the CEE countries have officially encouraged FDI and developed a FDI promotion programs providing substantial incentives for foreign companies (Vaknin, 2005). Figure 4. presents FDI inflows into the CEE between 1990 and 2005. The size and increasing FDI inflows to transitioning CEE countries were impressive. Poland, Hungary, and the Czech Republic have become the most attractive destination for foreign investments. From 1990-2000, and in 2004, Poland was the leader in FDI compared to the other CEE countries. The FDI in Poland increased from 3 million (USD) in 1990, to 10,000 million (USD) in the year 2000. The decline in FDI inflows into CEE countries between 20022003 was due to the end of privatization, as Greenfield projects generally smaller in size and spread over a longer period of time could not compensate for the fall in privatizationoriented FDI. Increase in the FDI inflows in CEE in 2003 and 2004 can be attributed to the EU membership (Kornecki, 2006). Figure 4. Inward FDI Inflow: CEE Comparison FDI Inflows, Millions of US Dollars, CEE comparison 1990-2005 0 5,000 10,000 15,000 20,000 25,000 30,000 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 Years F D I In fl o w s , M ill io n s o f U S