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FDI AND THE MACROECONOMY IN THE TRANSITION ECONOMIES
UN/ECE Regional Conference
In co-operation with the EBRD and UNCTAD
6-7 December 2000
FDI AND THE MACROECONOMY IN THE
Background Paper for Special Session III on FDI and the
Restructuring of Transition and Emerging Economies
Economic Analysis Division, UN/ECE
________________________________________________________________________________________________ 1
the ECE region during the past decade, never less than 60
The potential contributions of FDI flows to
per cent of the total annual inflows. The focus then
economic development are well known. This paper
switches to the countries which have failed to attract
focuses on two related aspects of FDI, its implications for
much FDI. In some cases, they have been in a favourable
the external financial positions and economic growth of
position to do so, but domestic political and/or economic
the host countries. It commences with a discussion of the
policies have discouraged investment.          In certain
main determinants of FDI flows into the transition
countries, the causes appear to be more fundamental and
economies, which, it should be noted, is not intended to
be comprehensive. This is followed by an empirical
section, based largely on balance of payments data, which                     The first wave of EU accession countries were
quantifies FDI flows according to various indicators. The               among the first to achieve macroeconomic stabilization
paper concludes by raising a number of policy issues                    and their economic reforms have been the most advanced
associated with FDI promotion and the growing disparity                 in the ECE region.           Although there have been
of FDI inflows within the ECE region.                                   considerable policy differences between them, a key
element of the reforms has been the privatization of state
assets with the involvement of foreign strategic investors.
1.    Principal determinants of FDI flows.
These acquisitions, the timing of which has been
There is widespread agreement on the determinants                 determined by national timetables for the sale of specific
of FDI flows: countries attracting large amounts of FDI                 assets and the political process, have accounted for a
generally have good economic fundamentals: that is to                   considerable share of total FDI receipts. Exclusive of
say they have achieved a high degree of macroeconomic                   Slovenia (see below), the early investment promotion
and political stability and growth prospects look                       efforts of these countries not only signalled to the world
favourable.     They also tend to possess a good                        that foreign investment was welcome in the former state
infrastructure and legal system (including enforcement of               run economies, but they also capitalized on the
laws), a skilled labour force, and the foreign sector has               enthusiasm of western investors. At various times,
been liberalized to some extent (membership in free trade               investment incentives schemes have been introduced2
areas is a particular attraction). Location, country                    which still seem retain their effectiveness.
(market) size and natural endowments are generally
Geographical proximity to major western European
important as well. In the former centrally planned
markets and production centres is also a major advantage
economies, the degree of progress made in moving from
as four countries share borders with the EU while Estonia
plan to market has been a key explanation of FDI inflows
enjoys easy maritime access. The size of the Polish
(table 1 and charts 1 and 2; appendix tables).1 More
economy has contributed to its leading position as a
generally, those transition economies which have
domicile for FDI. Most of these countries embarked on
attracted substantial amounts of FDI have followed
the transition with poor market supporting institutions
policies which have created friendly investment
and physical infrastructure. However, considerable
environments (although they often possess certain natural
progress has been made in some areas, often with the
advantages as well).
assistance of the international development banks3 and
The following section will first discuss some
determinants of FDI flows into the first group of
transition economies chosen for EU accession (Czech
Republic, Estonia, Hungary, Poland and Slovenia).                         2
G. Hunya, International Competitiveness Impacts of FDI in
These countries have received the bulk of FDI flows into                CEECs, The Vienna Institute for International Economic Studies (WIIW),
Research Reports, August 2000.
These countries have received the assistance of the EBRD, World
Bank, the EU (through PHARE and EIB loans) and, more generally, the
The relationship between the degree of economic reform and FDI   G-24 programme (from the latter early in the reform process). Institution
inflows has been commented on previously. See for example, EBRD,        building has also been advanced through the process of the harmonization
Transition Report 1998, London, 1998.                                   of national laws with the EU Acquis Communautaire.
2 __________________________________________________________________________ Financing for Development
the involvement of foreign strategic investors.4 In                          Romania and Slovakia).10 From the very beginning of the
particular, these investments have been instrumental in                      decade, investors have differentiated between these two
upgrading the important telecommunications sector.5                          groups of countries (chart 1), although the official
Local corruption appears to be less of a problem than                        announcements began to do so only in 1997.
elsewhere in the region. Corruption is often cited by
An asset of interest to foreign investors which is
foreign business as a deterrent to FDI, and this appears to
broadly shared by the transition economies is the
be the case in the transition economies as well.6
abundance of a well-educated but low cost labour cost.
Prospects for (or actual) EU membership have often                      The five countries lead the region in terms of educational
proved a magnet for FDI in the accession countries.7 The                     attainment,11 and nominal wages are several times lower
acceleration of FDI flows into the EEC after the Treaty of                   than in the lowest-wage EU economies. Wages in the
Rome and into Portugal, Spain and Greece prior to                            first wave countries make them competitive as hosts for
accession to the EU is well known. The first wave                            FDI even after adjustments are made for their lower
countries have tended to have similar experiences with                       productivity.12 However, relatively rapid increases in unit
FDI.8 Initially, foreign investors were probably attracted                   labour costs seem to discourage foreign investors.13
by the free trade provisions of the Association
Given their favourable locations, educated labour
Agreements (negotiated in the course of 1991).9
force, and other assets, several other transition economies
Although these accords did not promise EU membership,
have been well placed to receive foreign investments, but
they were widely seen at the time as first step. More
the results have been largely disappointing (table 1 and
recently key announcements of the progress in EU
chart 1).     Slow economic reform and a lack of
accession seem to have resulted in larger FDI flows into
restructuring have been general features, but there have
the candidate countries, but much more so into the first
been specific factors as well. For example, in Slovakia
wave than into the second (Bulgaria, Latvia, Lithuania,
until recently the political climate and official attitudes
toward foreign investment were viewed unfavourably by
foreign investors.        Bulgaria and Romania were
The EBRD has become the largest single investor in the transition     characterized for years by policy immobility and periodic
economies. By mobilizing private investors, its influence on FDI inflows     economic crises. Subsequent changes in policy stances
extends beyond its stake holdings.
have led to their acceptance in the second wave of EU
According to the Hungarian Institute of World Economics, the         accession countries. FDI has increased, but so far mainly
world ranking of the first wave of accession countries in
telecommunications facilities has risen since 1990, and all except Poland    because privatization programmes have been accelerated.
are in the upper third of sample in 1999. However, Bulgaria, Romania,
Russia and Ukraine have lost ground. Similar differences were found in             The republics of the former Yugoslavia also possess
internet penetration. Berend, citing E. Erlich. Berend, From Regime          assets of potential interest to foreign investors. However,
change to sustained growth in Central and Eastern Europe, UN/ECE,            risks associated with the break-up of the country have
Economic Survey of Europe, 2000, No.2.
dominated foreign perceptions: regional and internal
According to the indices calculated by Transparency International,    conflicts, financial difficulties (e.g. FYSR default on
the 5.0 average for the first wave countries is much better than those for
other groupings of transition economies (Appendix Table 2). The
foreign debt, loss of official reserves, negotiations with
secretariat found a significant negative relationship between the            foreign creditors, etc.) and, most recently the Kosovo
corruption index and cumulated FDI inflows/GDP of the host transition        conflict (which adversely affected the whole Balkans).
economy. For a more general statistical analysis of corruption and FDI       Slow economic reform and the political situation (which
flows see Wei, Shang-Jin, How Taxing is Corruption on International
Investors?, NBER Working Paper, Number 6030, 1997.                           disqualified Croatia from the PHARE programme) were
7                                                                          also factors. However, investment into Croatia has
The potential benefits of EU membership, including for foreign
investors, have been extensively discussed. Very briefly, accepting EU       increased following the cessation of hostilities and again
rules and regulations reduces investment risk by creating a business
environment similar to that in western Europe. In particular, the risk of
arbitrary policy changes in, for example, market access and taxation are
diminished and property rights become more secure, and there is a              10
A. Beven and S. Estrin, The Determinants of Foreign Direct
reduction in the transaction costs of cross-border business. See, for        Investment in Transition Economies Centre for New and Emerging
example, R. Baldwin, J. Francois and R. Portes, The Costs and Benefits of    Markets, London Business School, Discussion Paper Series No. 9,
Eastern Enlargement: The Impact on the EU and Central Europe,                October 2000, Vol. 9. The EU accession-related announcements by the
Economic Policy, April 1997, Vol. 24, p. 127-170.                            European Council were Copenhagen (June 1993), Essen (December
8                                                                          1994), Madrid (December 1995) and Agenda 2000 (July 1997). The first
This issue has received considerable attention. For instance,
Havrylyshyn found that all potential EU accession countries, which he        three announcements were not country specific, but the most recent
defined as all non-CIS economies, attracted more FDI than the non-           defined the first and second wave countries.
accession group did. Havrylyshyn, Oleh, EU Enlargement and Possible            11
In general the transition economies rank very high by world
Echoes Beyond the New Frontiers, WIIW 25 Years Anniversary                   standards, significantly above the average of developing countries
Conference Shaping the New Europe: Challenges of EU Eastern                  (Appendix Table 3).
Enlargement – East and West European Perspectives Vienna, 11-13
November 1998.                                                                       Bevan and Estrin op.cit. have found that unit labor costs in a
9                                                                          selection of transition economies is a significant determinant of FDI
Under the interim arrangements of the Association Agreements         inflows. They note that nominal wages alone are not a good explanatory
between the EC and Czechoslovakia, Hungary and Poland, measures              variable.
liberalizing trade in industrial products entered into force on 1 March
1992. Economic Survey of Europe in 1991-1992, 1992, p. 188.                         Ibid.
FDI and the Macroeconomy in the Transition Economies __________________________________________________ 3
after the election of reform-minded government. On the                        west European markets and with different political
other hand, peace and huge foreign aid have done little                       histories seem to have been less fortunate.
help attract FDI into Bosnia and Herzegovina, which for
the time being remains a dysfunctional state subject to
2.     The development of FDI flows.
ethnic tensions. The FR Yugoslavia has been viewed as a
high-risk country, subject to a UN embargo and pursuing                             Foreign investment was generally prohibited during
an inward looking economic policy. Its only significant                       the period of central planning. Only Hungary, Poland
foreign investment has been the FDI- related privatization                    and Romania permitted FDI (in the form of joint
of the telecommunications company. After the recent                           ventures) and the amounts received were small.
elections, prospects for fundamental change have                              Yugoslavia, which was considered a mixed economy,
improved. Slovenia has attracted only modest amounts                          received modest foreign investments in the 1980s. From
of investment (see below) despite peace, a good location                      this low base, FDI flows to the transition economies
(bordering on two EU countries) and solid economic                            increased at a modest pace in the early 1990s. In fact,
fundamentals. The explanation seems to be their policy                        with the exception of Hungary, inflows were generally
toward foreign investment, which, however, seems to                           considered disappointing, far short of some
have become more welcoming in the past year.                                  expectations.16 However, in the second half of the
decade, FDI flows accelerated (table 1 and charts 1 and
Within the CIS, countries well endowed with
3). In 1999, annual investments reaching nearly $27
natural    resources     –     Azerbaijan,    Kazakhstan,
billion (4 per cent of GDP),17 and cumulated inflows
Turkmenistan (oil and gas) and Kyrgyzstan (gold) have
amounted to some $130 billion. Preliminary data for
attracted relatively large amounts of FDI into the
2000 suggest that annual FDI inflows increased again.18
extractive sector. However, generally unfavourable
investment climates (including, for example, slow                                   Policy decisions in Hungary and Estonia gave these
economic reform, a high level of corruption, a poor                           countries an early lead in attracting foreign investment.
record of enforcing existing laws and agreements, etc.),                      Their objective was to rapidly sell off state assets to
great distances from world markets, and landlocked                            foreign strategic investors and thus achieve increased
locations appear to have generally deterred investments                       economic efficiency and integration into world markets.
in other sectors. Some of these same factors help to                          In addition to Hungary, the Czech Republic19 and Poland
explain the low levels of foreign investments in other CIS                    attracted sizeable inflows through the middle of the
countries. This includes, Russia,14 which has a huge                          decade, which resulted in a high concentration of FDI
natural resource base and great potential for foreign                         (these three countries accounted for two-thirds of total
investment.15                                                                 annual flows to the ECE region in 1995). The subsequent
acceleration of privatization programmes and generally
Although a number of the factors discussed above
improving investment climates in other transition
appear individually to explain FDI inflows into the
economies boosted their FDI inflows and resulted in a
transition economies, they are in fact interrelated. It is
somewhat more even geographical distribution.
doubtful that their separate contributions can be
However, in 1999-2000 the concentration of inflows
unravelled. The countries of central Europe (and the
increased again, due to the fast pace of investments in the
Baltics to a lesser extent), have benefited from their
three leading countries. Other noteworthy developments
location, political history and initial economic conditions
in the second half of the 1990’s are:
which facilitated the early the launching of economic
reforms and stabilization programmes and the                                  • Poland became the main destination of FDI in 1996.
achievement of political stability. These factors, too, are
likely to explain the development of various institutions                     • An acceleration of flows into Latvia, and with a lag,
(especially of the market supporting type), the relatively                      into Lithuania (second wave countries), but their
lower level of corruption and early aspirations for EU                          cumulated flows continue to lag those of Estonia.
membership. The confluence of all these factors,
individually important to foreign investors, is likely to                       16
Early in the transition, some observers expected a rush of FDI
have created a virtuous circle of an improving investment                     which would play a major role in creating market systems, restructuring
climate, above average economic prospects and FDI                             economies and stimulating economic growth.
inflows. Others transition countries, more distant from                         17
The interpretation of the indicators of FDI penetration (including
FDI/gross domestic fixed capital formation) and methodological issues
are discussed in the appendix. It should be noted that the data for Poland
14                                                                          are on an accrual basis, and thus the relevant regional aggregates
R. Ahrend, “Foreign Direct Investment Into Russia - Pain Without       presented here are somewhat higher than those published regularly in the
Gain? A Survey of Foreign Direct Investors”, Russian Economic Trends,         Economic Survey. The latter source uses balance of payments data on a
June 2000.                                                                    cash basis which are available monthly.
A major reason for Russia’s has failure to attract much investment      18
Economic Survey of Europe, 2000 No.2.
in the extractive sector is the lack of a comprehensive legal framework for
production sharing agreements (PSAs) and protracted legislative                      Although Czech voucher privatization discouraged FDI in the
procedures. Chapter 5, “A note on Production Sharing in Russia”,              affected enterprises, there were several large FDI-privatizations (e.g. of
Economic Survey of Europe, 1998 No. 3.                                        Skoda involving VW) and greenfield investments.
4 __________________________________________________________________________ Financing for Development
• FDI into the Czech Republic surged following the                        the Czech republic, compared to around 10 per cent or
passage of a new investment law in 1998 and                             less in many other countries (chart 1). This indicator is
accelerated privatization.20 For two years the country                  calculated using the nominal GDP of the host countries -
has received FDI amounting to around 10 per cent of                     i.e. GDP at current prices and nominal (generally
GDP, the highest ratio in the region.                                   undervalued) exchange rates - a methodology which has
certain shortcomings discussed in the appendix. The FDI
• Accelerated privatization in Bulgaria, Romania and                      ratios have also been calculated using GDP estimates
Croatia significantly boosted inflows in 1996-1999.                     based on PPPs (table 2 and chart 3).22 Although the
The sale of the national telecom companies in the                       regional average has increased from 0.5 percent in 1993-
latter two countries markedly raised FDI in 1998 and                    1996 to 1.0 percent in 1997-1999, the ranking of
1999, respectively.                                                     countries remained broadly similar. By this measure, too,
• Azerbaijan, Kazakhstan, and Turkmenistan (1994-                         several east European and Baltic countries (and
1997) have received relatively large investment in the                  Azerbaijan) always rank near the top, while a number of
natural resource extraction sectors.                                    CIS members occupy the lower ranks. In these CIS
countries, the degree of FDI penetration has remained
• Changes in Slovak policy on FDI receipts are reflected                  below the regional average, implying that they have
in the 2000 sale of Slovak Telecom (X1 billion) and the                 failed to narrow the gap with the leading countries. FDI
VSZ steelworks ($500 million plus $700 million in                       has become another source of disparity in the region, with
promised follow-up investments over 10 years).                          the highest income countries having received the most
The global financial crises of 1997-1998 had only a                 FDI (chart 4).
limited impact on foreign direct investment in the ECE                          Attention is drawn to Slovenia which has been
region. In fact total inflows continued to rise, which                    considered one of the FDI leaders on the basis of
reflects the long-term planning horizon characteristic of                 cumulated inflows per capita (it ranked number 6 in
foreign direct investors and the more immediate                           1999; Appendix Table 3). However, taking the size of its
opportunities presented by depressed asset prices.                        economy into account, it ranks considerably lower (12th
Foreign investors also remained interested in acquiring                   relative to GDP-PPP and 22nd relative to GDP-nominal).
strategic assets, including especially stakes in                          These latter ratios suggest a much smaller FDI
telecommunications companies. However, FDI into                           penetration of the Slovene economy than is generally
Russia has fallen sharply in the wake of the rouble crisis,               supposed.     The ranking of Azerbaijan, Moldova,23
exacerbating a persistently unfavourable investment                       Kazakhstan, Kyrgyzstan also vary considerably
climate. Moreover, it has been reported that some new                     depending on the indicator used (Appendix Table 3).
investments intended to supply the CIS market were
postponed, particularly in the Baltic States. The Kosovo                        From a global perspective several transition
conflict also discouraged some investments in southeast                   economies have become strong competitors for FDI.
Europe, at least temporarily, but several key                             Even though they generally began to open up to
privatizations did go ahead.                                              investment only early in the decade, in 1998 their average
FDI/GDP (nominal) ratio increased to 3 per cent, around
Several major privatizations in 2000 (e.g. Poland=s                 that of both east Asia and South America (chart 5).
TSPA for $4 billion; Slovak Telecom for euro1 billion)                    Given that the developing countries had decades of
show their continuing importance as a determinant of                      headstart and an acceleration of FDI inflows in the 1990s,
FDI inflows. The experiences of Hungary and Estonia                       their cumulative FDI/GDP ratios in 1998 still exceeded
indicate that the winding down of privatization                           those of the transition economies by a considerable
programmes results in a downward adjustment of                            margin (chart 6). Nonetheless, FDI penetration of
receipts. In most east European and Baltic states, these                  Azerbaijan, Kazakhstan, Hungary, Estonia, Latvia and
programmes are to completed in 2001-2002, but in other                    the Czech are roughly comparable to leading developing
countries the process is much further behind.                             country FDI recipients such as Chile and Malaysia. The
Considerable differences have emerged in the                        growing presence of the transition economies as
amounts of FDI received by the transition economies. In                   domiciles for FDI is also reflected in their increasing
1999, the ratio of cumulated inflows to GDP, a measure                    share of FDI outside the developed market economies,
of the penetration of FDI in the host economy, is in the                  which has risen form 7.6 per cent in 1993 to 12.4 per cent
range of 30-40 per cent in Hungary,21 Estonia, Latvia and                 in 1998. The corresponding percentages relative to
20                                                                        22
According to R. Samek, a spokesperson for CzechInvest. Bureau             These ratios are lower (because the degree of exchange rate
of National Affairs (BNA), Eastern European Reporter, Vol. 10, No. 1      undervaluation tends to be adjusted for) and the inter-country variance is
(London), January 2000.                                                   smaller than that of the ratios based on nominal GDP. (Also Appendix
21                                                                      Table 3).
Hungary leads in the rankings despite the fact that its cumulated
FDI is underestimated by the absence of reinvested profits (see                  The ratio of Moldova has also been raised by the collapse of
Appendix).                                                                output in 1998-1999 (see Appendix).
FDI and the Macroeconomy in the Transition Economies __________________________________________________ 5
global FDI flows are 3 per cent and 3.5 per cent,                           privatization-related foreign investments, the volatility of
respectively.24                                                             FDI flows into the transition economies has been less
than that of other types of capital. For example, in the
wake of the global financial crises (1997-1998), FDI into
3.     Implications of FDI for external financial
these countries generally continued to rise, but most of
positions and the balance of payments                                them lost access to the international financial markets (at
FDI flows can have a considerable and immediate                       least temporarily) and experienced reversals of short-term
positive impact on countries’ external financial positions                  and portfolio investments.26 The notion of a relative
and, thus, on their development prospects. Such flows                       stability of FDI flows is supported by the calculations in
can be particularly beneficial when access to other types                   (table 4),27 particularly in the case of the east European
of foreign capital is limited. The financial effect of FDI                  and Baltic countries.28 This shift to a more reliable means
complements its potential technological, management                         of external financing has contributed to the strengthening
and restructuring impact. In Hungary and Estonia, for                       of financial positions in many transition economies.
example, early privatization-related FDI inflows helped                           These generally positive features of FDI and its
to permanently boost foreign exchange reserves and/or                       association with more dynamic export growth may
reduce external debt (i.e. net debt reduction). Indeed,                     improve foreign perceptions of the host country’s
reducing the high debt burden was a consideration                           creditworthiness. Thus FDI flows may contribute to the
determining Hungary’s particular privatization strategy.                    creation of a virtuous circle, which may also involve a
Revenues increased official reserves and net debt fell in                   reduction in borrowing costs, access to a broader range of
1990-93 and again in 1995 when privatization activity                       financial instruments, and more stable capital inflows. In
peaked. Estonia benefited comparably in 1992-1993.                          Hungary, for example, the record ($4 billion)
Toward the end of the decade, FDI-related privatization                     privatization-related FDI inflows at the end of 1995
helped to strengthen the reserve positions of Lithuania,                    contributed to the upgrading of its credit rating in 1996.29
Romania, Bulgaria and Croatia. In 2000 Poland retired                       This rating and the continuation of substantial, although
$940 million of Brady bond debt using some of the                           reduced, FDI inflows helped the country to maintain
proceeds from the sale of the telecommunications                            access to the international capital markets in the
company, TSPA.                                                              aftermath of the global financial crises.
FDI inflows have also contributed to a loosening of                        The potential financial benefits of FDI do not seem
balance of payments constraints facing the region early in                  to have been widely appreciated by policy makers early
the decade. The growth of FDI has been associated with                      in the transition. FDI, if it was considered important at
increasing current account deficits. However, despite a                     all, was viewed as complementing domestic savings and
fourfold increase in the combined current account deficit                   as a source of technology and advance management
of eastern Europe in the 1990’s, 86 per cent was financed                   techniques. That is to say, it was seen largely as an
by FDI in 1997-1999 (table 3 and appendix table 3). This                    element of industrial policy.        More recently, and
means of finance has been viewed favourably since it is                     especially among the countries recently accelerating
relatively stable (see below), often promotes exports and                   economic reforms, FDI-related privatization revenues
is largely non-debt creating.25 Despite periods of sizeable                 have often been counted on as a means of financing
current account deficits in the 1990’s, the Czech Republic                  current account (and fiscal) deficits and boosting official
and Poland could forgo sovereign borrowing and hold                         reserves.
down external debt. On the other hand, there was a
marked increase in the foreign indebtedness of several
low - FDI, high current account deficit countries (e.g.                       26
External bond issues were particularly affected, syndicated loans
Croatia, Romania, and Slovakia).               FDI-related                  to a lesser extent.
privatizations proved to be an attractive financing option                    27
These results are similar to those obtained for the developing
for several countries nearing a debt ceiling.                               countries. UNCTAD, World Investment Report, 1999, New York,
FDI is generally considered more stable than other                       28
financial flows, because investments in fixed assets may                            Attention is drawn to the fact that the calculations in table 4 may
not fully reflect the volatility of all FDI-related flows i.e. those outside
be difficult to withdraw (unlike financial investments)                     identified the FDI item in the financial (capital) account of the balance of
and because direct investors tend to make long-term                         payments. During a period of financial turbulence, for example, a TNC
commitments.       Indeed, despite the lumpiness of                         may accelerate (outward) profit remittances (a current account item) or it
may borrow locally, using fixed assets as collateral, and transfer the funds
abroad (perhaps selling the currency short). This latter transaction would
be recorded in “other investment” in the balance of payments and thus
would be excluded from the FDI volatility measure used here. However,
The source of data on global flows is UNCTAD, World Investment        the scope for such operations is a function of the sophistication of the
Report, 2000 (New York and Geneva), 2000.                                   financial system in the host country.
25                                                                          29
Discussions of FDI as a source of finance, however, often                    More generally, Bevan and Estrin op cit. found that FDI inflows
overlook the fact that loans by a TNC to its foreign subsidiary count as    improved the credit ratings of a sample of transition economies with a lag.
part of the host country’s foreign debt and that interest on the loans is   There was also evidence of a feedback effect whereby the amelioration of
counted as an outflow (in the current account).                             credit ratings attracted more FDI.
6 __________________________________________________________________________ Financing for Development
It is often maintained that FDI will increase a                     potential of the whole economy.32 This could happen, for
country’s exports and improve the current account                         example, if the presence of FIE contributes to the
balance. Thus, the argument goes, an increasing current                   improved export performance of domestic firms, because
account deficit financed by FDI should not be a cause for                 of increased competition, demonstration effects,
concern. However, assessing the full impact of FDI on                     technology transfers. Overall, the direct net balance of
the balance of payments is difficult, not least because of                payments impact of the foreign investment and its
data limitations. Four items in the balance of payments                   contribution to economic integration depends on many
accounts deal specifically with the transactions of TNCs:                 factors including the eventual success of exports, the
FDI flows, including reinvested earnings, in the financial                sector of operation (some sectors such as services export
(capital) account and, in the current account, interest on                little or nothing at all), the development of downstream
intercompany debt, repatriated profits and reinvested                     linkages, etc. Although the net effect is often assumed to
earnings from direct (equity) investment (see appendix).                  be positive it can very well be negative.
A narrow measure of the direct impact of foreign                          To take a specific example, Malaysia is one of the
investment enterprises (FIEs) is net transfers, calculated                few countries for which data permit an evaluation of the
as the difference between FDI inflows and repatriated                     direct balance of payments impact of FDI. Considered
profits.30 Repatriated earnings can be expected to                        one of the most successful countries in attracting and
increase as a function of the growth of the FDI stock and                 using FDI, the impact of FIEs on the combined trade
FIE profitability (This outflow is a reminder that FDI is                 balance and income flows of the current account has been
not a “free” source of finance (such as grants are)).                     estimated as negative in every year during 1980-1992.33
However, since earnings repatriation can only occur                       The trade balance of the FIEs became positive in the late
under conditions of FIE profitability, FDI is still likely to             1980s owing to their strong export expansion. However,
be preferable to debt, which requires servicing                           as their exports became more import-intensive, the
irrespective of the asset’s performance. Data for the                     current account became negative. Eventually, in the late
transition economies indicate that net inward transfers                   1980s, these outflows on current account were offset by
have been positive, owing to the small scale of profit                    new FDI inflows on capital account, but the cumulative
repatriation so far (generally repatriated earning have                   impact during the whole period was negative. There are
amounted to less than ten per cent of net FDI inflows).                   indications from other parts of the world that a negative
This is likely to change as FDI stocks increase and FIEs                  trade impact of FDI is not unique to Malaysia.34 In
move out of the start-up phase and become profitable.                     Austria, the aggregate merchandise trade balance of
For example, in Hungary (the country with the most FDI)                   resident FIEs has been persistently negative during 1990-
profit repatriation has risen steadily, the $920 million                  1997.35 The case is interesting because Austria is a
recorded in 1998 representing nearly 60 per cent of net                   developed country where FIEs might have been expected
FDI inflows. In Azerbaijan, the first repatriation of                     to quickly establish linkages with local suppliers and
earnings by foreign petroleum companies exceeded FDI                      reduce dependence of imported inputs.
in the first half of 2000 (tables 5 and 6).
In the transition economies the growth of total
A broader measure of direct-FIE cross border                        merchandise exports has been associated with FDI
activity includes their exports and imports of goods and                  inflows (chart 7).36 At the sectoral level the role of FDI
services. Typically a foreign direct investment finances                  as a driving force is suggested by the increases in the
the import of machinery and equipment,31 which ceteris                    shares of FIEs in the exports of the manufacturing sector.
paribus causes a temporary deterioration of the current
account balance. The current account remains under
pressure if the FIEs import merchandise for production or                   32
UNCTAD, Trade and Development Report, 1999, (New York and
distribution. If the FIEs begin to export (as is generally                Geneva), 1999, p. 121.
assumed for investments in the tradable goods sector)                       33
and/or if they replace imported inputs by local products                    34
A similar picture emerges for Thailand. Ibid. pp. 122-123. In the
(i.e. a positive spillover effect), the current account                   Mercosur FTA, FDI has been associated with a deterioration of the trade
balance will improve. However, even when FDI-linked                       balance. FIEs export to other Mercosur countries but they import capital
activities incur foreign exchange deficits, such                          goods and inputs from the USA.           Presentation of Professor D.
Chudnovsky, UNCTAD High-level Segment of the Trade and
investment may still improve the balance of payments if                   Development Board (Geneva), 16 October 2000.
it creates significant externalities that enhance the export                35
Presentation of W. Altzinger, A Few Data of Austrian FDI in CEE,
Seminar on Foreign Direct Investment and Privatization in Central and
Eastern Europe, (Vienna), 2-3 March 2000. On the other hand Austria’s
FDI abroad has generated a trade surplus for the country, lending support
to the notion that outward foreign investment is often undertaken to
The net transfer calculation excludes the following FDI related    promote exports.
flows for which data are often lacking: royalties, license fees, wage       36
remittances and net interest paid on loans to the parent firm.                   This correlation is significant at the five per cent level. However,
the robustness has not been tested with the addition of other potential
The FDI may also represent goods in kind imported for use in the   explanatory variables. The correlation is much stronger in the smaller
FIE.                                                                      sample of east European and Baltic countries.
FDI and the Macroeconomy in the Transition Economies __________________________________________________ 7
They rose from nil at the beginning of the decade to                            balance of payments in 1998 - 1999 and the first half of
substantial proportions by 1998 (table 7), in Hungary to                        2000.
86 per cent. This high share suggests that virtually all the
The evidence presented here suggests that FDI has
recent rapid export growth of Hungarian manufactures
so far had a positive impact on the balance of payments
originates in FIEs. In the Czech Republic and Poland, the
of two transition economies. However, for some of the
shares of FIE’s are smaller, but their rapid rise in the
other countries less is known about the development of
second half of the decade also suggests a powerful impact
FIE imports than of exports (in general total export and
of FIEs on export growth. In all these countries FIEs have
import growth seem closely linked in the transition
invested more heavily than domestic firms in new assets
economies). 41 It should be noted that if the payments
(e.g. relative to total sales, see table 7).37
outcome of TNC-related activities is constantly in deficit,
A broader assessment of the BOP impact of FDI is                          the economy would need to generate net foreign
possible only for Hungary and Azerbaijan, both of which                         exchange elsewhere since meeting such a deficit by
have attracted large amounts of FDI (tables 5 and 6). In                        simply relying on a new inflow of FDI would mean
Hungary, the foreign trade balance of FIEs located in                           engaging in an unsustainable process of “Ponzi”
industrial foreign trade zones (IFTZs) worsened in the                          financing.42 Moreover, FDI may pose some of the same
first half of the 1990s because of imports of high-value                        risks and financial management challenges as do other
machinery and inputs. However, between 1996 and 1999                            capital flows. Depending on the exchange rate system,
IFTZs became net exporters, their aggregate trade surplus                       capital inflows can cause an appreciation of nominal
increasing from 0.3 billion to $2.2 billion.38 This                             and/or real exchange rates and thus undermine export
performance is noteworthy because many FIEs have been                           competitiveness.43 This danger is accentuated if foreign
involved in assembly operations based on imported                               investments flow into the non-tradable sector (e.g. as real
components. In consequence, the balance on FDI-                                 estate), which, in addition, is not likely to generate
associated current account items has moved into surplus,                        foreign currency receipts.
despite increased profit repatriation (direct investment
income) and reinvestment of earnings by TNCs. This has
4.     FDI and economic growth.
helped to keep the total current account deficit in check
(on a cash basis it fell to 3.5 per cent GDP in the first half
(a) Evidence from the developing economies
of 2000).39 From these estimates, it appears that the
overall balance of payments impact of FDI has so far                                   A growing number of studies have found a
been increasingly positive, amounting to over $3 billion                        statistical relationship between FDI inflows and domestic
in 1999.                                                                        economic activity in host developing countries.44 In
many cases, they had received FDI for decades although,
In Azerbaijan large foreign investments in the oil
the inflows accelerated in the early 1990s. In this section,
sector have helped to boost oil exports,40 while oil-related
some of these empirical findings, generally relating to
imports (presumably equipment funded by FDI) peaked
FDI-rich developing countries in Asia and Latin
in 1998 (table 6). However, the service imports of the oil
America, are drawn on. Their experiences may hint at
sector and the compensation of employees (associated
the eventual macroeconomic impact of FDI in the
with oil consortia) have remained substantial. In the first
half of 2000, the first (large) repatriation of profits
occurred which caused the current account to remain in                            41
deficit. Overall the FDI in the oil sector appears to have                             At the enterprise level, results of the UNCTAD survey of mainly
import oriented firms privatized through FDI (i.e. M&amp;A) show that
made a net contribution of $500 - 600 million to the                            import growth accelerated after privatization, boosting import surpluses.
These results, of course, do not reflect the impact of any spillovers on the
economy. The main reasons for a growing import intensity were deemed
to be the increasing use of local affiliates as a distribution channel for
The assumption here is that FIEs are more dynamic exporters than         imports, the substitution of earlier local sourcing by suppliers from the
domestic firms. However, the increased export share of FIE’s may also           TNC’s own network, and the generalized increase in the pace of capital
be explained by a compositional effect, as TNC’s become foreign                 investment, particularly in imported capital goods. The sample consisted
investors in local export firms. While such a FIE/domestic firm shift has       of 23 firms in seven central and east European countries. G. Hunya and
undoubtedly occurred, the relative investment intensity of FIEs is likely to    K. Kalotay, “FDI and privatization in central and eastern Europe: trends,
have resulted in increased export performance as well.                          impact and policies”, UNCTAD Seminar, op. cit.
38                                                                              42
IFTZs account for the bulk of foreign investment in Hungary, and                UNCTAD, Trade and Development Report, op. cit., p. 12.
thus their trade is a good proxy for the trade of all FIEs. The trade deficit     43
of enterprises located in non-IFTZs (largely domestic enterprises) rose                The anticipation of large inflows from planned privatizations
from $2.8 billion to $5.2 billion, respectively, which caused the total         motivated the Czech and Polish authorities to create special foreign
merchandise trade deficit to increase (table 5).                                currency accounts to avoid disruption of the currency markets.
UN/ECE Economic Survey of Europe, 2000 No. 2, op. cit.                          For example, E. Borensztein, J. De Gregorio and J. Lee, “How
does foreign direct investment affect economic growth?”, Journal of
It is estimated that oil exports in 2000 will nearly double to 9         International Economics, Vol. 45, 1998. L. De Mello, “Foreign direct
million tons. Financial Times, 4 July 2000. Receipts have also risen be         investment in developing countries and growth: a selected survey”, The
cause of higher oil prices. Foreign investment in Azerbaijan has taken the      Journal of Development Studies, Vol.34, 1997. K. Zhang, “FDI and
form of production sharing agreements under which the government and            economic growth: evidence from ten East Asian economies”, Economia
foreign partner share the costs and output.                                     Internationale, November 1999.
8 __________________________________________________________________________ Financing for Development
transition economies, an issue also taken up briefly                       between 1.5 and 2.3 times the increase in the flow of
below.                                                                     FDI.49 This increase in total capital accumulation occurs
in addition to the positive impact of FDI on technological
The empirical studies pertaining to the developing
progress. Overall, in developing countries with an
economies generally seek to establish a statistical
average stock of human capital, the total effect of a 1 per
relationship between FDI inflows and a measure of
cent increase in the FDI-GDP (PPP) ratio is associated
output growth and/or domestic investment. (Investment
with a 0.4-0.7 per cent rise in long-term GDP per capita
is most directly affected by FDI, but FDI may also impact
GDP independently of the fixed investment channel).
Such work is of interest because it attempts to capture the                      In the second study51 FDI flows were found to
net effects of FDI in the economy as a whole. Negative                     stimulate the long-run growth of China, Indonesia, Hong
effects may stem from various distortions in an economy                    Kong, Japan, Taiwan, and the short-run growth of
– for example, those which offer profit opportunities to                   Singapore.52 However, no relation between FDI and
foreign investors without improving efficiency. Such                       economic growth was found in South Korea and the
distortions may occur, for example, if protectionist trade                 Philippines. The third work, examining the impact of
policies motivative TNCs to enter a country purely for                     different types of capital flows in 18 countries,
reasons of obtaining market share and monopolistic                         determined that FDI had the most pronounced positive
power.45 Or, governments may attract FDI to strategic                      impact on economic growth and domestic savings.53 It
industries by offering investment incentives which offset                  had less of an effect in the Asian countries in than in
any benefit the TNC may generate. Even FDI which is                        Latin America, presumably because domestic savings
not motivated purely by rent seeking or incentives may                     play a larger role in the Asian economies.
create various negative spillovers (which affect aggregate
output but may be difficult to identify from enterprise or                 (b) Direction of causation
sectoral data).
To this point, it has been assumed that FDI inflows
The three studies cited below have found a relation                  stimulate growth (FDI-led growth). Such a relationship
between FDI flows and economic growth in various                           might be expected because FDI can enhance the factors
samples of developing countries. The first, applying a                     which play an important role in promoting economic
model of endogenous economic growth finds that FDI                         development: investment, technical progress, and, in the
stimulated the long-term expansion of per capita GDP.46                    new growth theory, R+D, the accumulation of human
The contribution of FDI is likely to come from two                         capital and various positive externalities. However, the
effects: the more important, the results show, seems to be                 causation may run in the other direction, whereby rapid
that the productivity of FDI is higher than that of                        economic growth attracts FDI (growth-driven FDI).
domestic investment.47       This occurs because FDI
embodies advanced technology and management skills                         customers) with technology and finance while holding out the prospects
and enhances access to world markets, factors which can                    of a stable market for their output. On the other hand, FDI may “crowd
stimulate the host country’s efficiency and internal                       out” equal amounts of investment by domestic entities through aggressive
competition in local product or financial markets, especially in cases
competition. However, it appears that the higher                           where domestic firms are already financially strapped.
productivity occurs only when the host country has a                         49
Estimates by UNCTAD suggest that there are marked regional
minimum threshold stock of human capital (because there
differences among the developing countries with FDI tending to crowd in
is an essential interaction between FDI/technology and                     investment in much of Asia and crowding it out in Latin America. Also
human capital in the host economy). Second, FDI has the                    there are sectoral differences, mining and other raw material extraction
effect of increasing total domestic investment more than                   projects, for example, generate little indirect investment because the FDI
firms create few domestic linkages. World Investment Report 1999, op.
one-for-one.       Estimates of the “crowding in”                          cit., pp.172-173.
phenomenon 48 place the total increase in investment at                      50
Human capital stock is measured by the average level of secondary
school attainment in a sample of 69 developing countries.
Zhang, op. cit., has noted two problems of the studies relying of
In the extreme case, a TNC may close down an acquired asset to      cross-section analysis, applied by Borensztein et al and Kamin and
reduce capacity in the region and increase its market power.               Woods. All make a priori presumption that FDI responds to or causes
economic growth (also see below) and have not considered the possibility
Borensztein, op.cit. The data sample covers the years 1970-1989.    of feedback effects and a long run equilibrium relationship between FDI
47                                                                       and economic growth. Second, there is evidence of considerable
Using a different sample of countries Kamin and Wood found a       parametric variation across countries in regard to estimates of growth
significant positive relation between FDI and real investment. The study   equations and FDI. In effect the methodology involves imposition of a
covers the period 1983-1994, which includes the first years of the FDI     common (average) structure, thus masking these differences.
boom. S. Kamin and P. Wood, Capital inflows, financial intermediation,
and aggregate demand: empirical evidence from Mexico and other                     Ibid. These countries appear to have experienced FDI-led growth.
pacific basin countries, Board of Governors of the Federal Reserve         Except for China and Indonesia, where relationship was found to be bi-
System, International Finance Discussion Papers, Vol. 583, June 1997.      directional. The issue of causality is discussed below.
48                                                                         53
FDI may stimulate more domestic investment (“crowding in”) if             W. Gruben and D. McLeod, “Capital Flows, Savings, and Growth
there is complementarity in production between FDI and domestic firms.     in the 1990s”, The Quarterly Review of Economics and Finance, Fall,
In this case, the FIE may develop backward and forward linkages,           Vol. 38 (No. 3), 1998. There is no theoretical reason why FDI ought to
perhaps even assisting partner firms (subcontractors or downstream         increase domestic savings.
FDI and the Macroeconomy in the Transition Economies __________________________________________________ 9
Very briefly, under this hypothesis, expanding domestic                      begin to flow after a commitment has been made to
economic activity is likely to be associated with an                         reform (including a privatization programme) and
improving investment environment and increased                               investor friendly policies are in place.
opportunity for boosting profits. The expansion of
income and domestic markets makes it possible for TNCs                       (c) FDI and growth in the transition economies
to exploit economies of scale. In the longer term,
Studies of the impact of FDI inflows on GDP in the
growth-associated improvements in human capital,
transition economies are lacking.58 In most of these
labour productivity and infrastructure are likely to
countries it might be difficult finding such a relation
increase the marginal return to capital and, thus, the
given the known importance of other factors: the degree
demand for domestic and foreign investment.54 Improved
of economic reform, stabilization policies, import
economic performance should also generate profits and
demand in major trade partners, and so on. The data in
encourage their reinvestment (reinvested earnings being a
chart 9 suggest a positive association of FDI and
component of FDI). Evidence of a growth-led FDI
economic growth, but the correlation falls slightly short
relationship has been found in Malaysia and Thailand.55
of being significant.59 As regards indirect evidence, in
Another possibility is a bi-directional causal                          Hungary, FDI-driven export growth (see above) appears
process, under which FDI and growth have a reciprocal                        largely responsible for the improvement in economic
causal relationship. Evidence of such a virtuous circle                      performance in the second half of the 1990’s.60 Exports
has been found in China and Indonesia.56                                     were by far the most dynamic component of final
demand, far exceeding the combined contribution of
In the transition economies, Hungary and Estonia
consumption and investment (table 7).61 This was also
showed early signs of FDI-led growth. In Hungary, there
the case in the Czech Republic – GDP actually contracted
were significant inflows of FDI early in the early 1990’s
due to falling domestic absorption. In all the countries in
(chart 8), before GDP started to recover (from the
this sample, GDP and export growth were nearly always
transition recession) in 1994. The output of FIEs
positively related and FDI is likely to have contributed to
expanded already in 1992-1993 while that of domestic
this outcome (also see discussion of the FIE role in
firms continued to decline (it was only later that FIE
manufactures exports above). More direct evidence of
dominated economic performance). In Estonia, too,
the effects of FDI on economic activity is available at the
relatively large FDI inflows preceded the economic
sectoral level.62
upturn in 1995. (A similar case can be made for Latvia.)
In both cases, the governments’ strategies involved an                            The results of the analysis of FDI inflows in certain
early infusion of FDI through the sale of strategic state                    developing countries suggest that FDI could also boost
assets. On the other hand, in Poland an economic
recovery (starting in 1992) preceded the surge in FDI by
several years. Due to its size, location etc., Poland was                      58
The time series covering the transition years are still too short for
from the very beginning of the transition considered one                     the types statistical tests applied to the developing economies. At most,
10 years of data are available, less for all countries of the former Soviet
of the most attractive countries for foreign investment.                     Union. The period includes falls in domestic output early in the transition
However despite this and its early favourable economic                       and following the external shocks in the late 1990s, events independent of
performance, foreign direct investors essentially held off                   FDI activity. Moreover, in the early part of the transition inward FDI was
until 1996, after the country’s large external debt                          small and, with the exception of Hungary and perhaps some others could
not have contributed much to economic growth. A recent study of growth
overhang was reduced in agreements with London and                           factors in the transition economies (1990-1998) the IMF excludes FDI for
Paris Club creditors. Subsequently, FDI inflows and                          this reason. O. Havrylyshyn and T. Wolf et al, Growth Experience in
good growth performance appear to have joined in a                           transition Countries, 1990-1998, Occasional Paper 186, IMF,
(Washington D.C.), 1999.
virtuous circle (as has probably been the case in Hungary                      59
and the Baltic states). The fact that Croatia, Slovakia and                          A preliminary statistical analysis suggests that whether or not a
country experienced a serious economic crises (i.e.. resulting in a fall in
Slovenia achieved extended periods of fairly rapid                           output) is a much more important determinant of its average growth
growth without attracting much FDI is explained by                           performance in the second half of the 1990’s than is FDI. Large foreign
domestic policies (as noted)57. The experiences of                           investments in the natural resource sector are also important in this
Croatia and Slovakia underline the fact that FDI will only
Already in 1992-1993 the output of FIEs in the industrial sector
increased by 9 percent, in contrast to the 5 per cent decrease reported by
See Zhang op. cit. for a more systematic development of the              61
Exports in the national accounts also include traded services, some
growth-led FDI hypothesis.                                                   of which have benefited from FDI (i.e.. tourism and transport).
Ibid.                                                                   62
For example, the dynamic motor vehicles (and components) sector
Ibid.                                                                 in the Czech Republic, Hungary, and Poland is dominated by foreign
firms (their share ranged from 82 to 97 per cent in 1998). Hunya, op.cit.
Bevan and Estrin op.cit. found a strong relation between growth in    In Kyrgyzstan FDI in gold production has contributed heavily to overall
GDP and FDI increases in their eleven country statistical sample.            output growth, and gold is the only export which has increased in value
Perhaps with the exception of Hungary, Poland and the Baltic states in the   between 1996 and 1999. National Bank of the Kyrgyz Republic, Bulletin,
second half of the 1990’s, their results seem at variance with the data      7/2000. The contribution of foreign investment to output in Azerbaijan=s
presented in chart 8.                                                        oil and gas industry has already been mentioned.
10 _________________________________________________________________________ Financing for Development
the long-term growth of the transition economies. For                         manufacturing sectors of some transition economies.65
example, the FDI/GDP ratio of eastern Europe increased                        Moreover, the large foreign investments in
from nil at the beginning of the decade to around 4 per                       telecommunications, financial and various business
cent in 1997-1999 (using nominal GDP) and to 1.8 per                          services could be expected to generate positive
cent (using GDP (PPPs)). Applying the elasticities                            externalities and improve export efficiency.
estimated by Borenzstein (0.4-0.7, based on PPP GDPs)
to the latter yields an increase of some 0.7-1.3 percentage
5.     Conclusions/Policies/ prospects
points in the long-term per capita growth rate of the area,
with larger increases in, for instance, the Czech Republic,
(a) FDI and the process of catching up
Hungary and the Baltic States. It should be noted that
these elasticities reflect a human capital stock of an                              A recent ECE study has documented the income
“average” developing country. However, the Borensztein                        gaps between the transition economies and western
study also found that the FDI-growth elasticity is directly                   Europe.66 Even with the surge in growth in 2000, only a
related to a country’s human capital. That is to say a                        few central European countries have made any progress
given FDI inflow has a greater impact in a country with a                     in narrowing this gap in the past decade and, in many
high average level of human capital than in a country                         cases (especially the CIS) income differences have
with a low one. Since the transition economies are                            actually widened. The economic growth literature of the
relatively well endowed in this regard, generally rating                      past decade has highlighted the role of the technology
much higher than the developing countries in terms of,                        available in more advanced countries as a factor in the
say, secondary school attainment, it could be argued that                     process of “catching up”. An important component of
the impact of FDI in eastern Europe would be greater                          this process is FDI which is a major channel of
than the “average” elasticities would suggest.63                              international technology transfer. This raises the question
whether FDI can move countries from the “economic
It is, of course, impossible to judge the applicability
periphery” into the group of economically advanced
of the Borensztein elasticities to the transition economies.
nations.67 Within western Europe FDI is credited with
Doubts arise simply because FDI in a transition economy
helping to sharply narrow the income differences
may not have the same impact as in a developing country
between Ireland and the EU. In Portugal and Spain, the
with a long-established market system (however
effects of the surge in FDI inflows in the first half of the
rudimentary it may be). While examination of this
1980s appears to have been more modest in this regard.
question is beyond the scope of this paper, it may be
In Greece FDI seems to have had no impact at all,
useful to raise the issue of mergers and acquisitions
apparently because other policies were not supportive.68
(M&amp;As). Their share in total FDI flows in the region has
Evidence from Asia also indicate that FDI inflows do not
been high, probably higher than in the developing
automatically lead to improved economic performance.
countries in the period of estimation. A large share of
M&amp;As in FDI might suggest a smaller impact on                                        As regards the transition economies, it is difficult at
economic growth because they represent a change of                            this time to assess the role of FDI in output growth (the
ownership rather than an injection of new fixed                               most convincing evidence is at the sectoral/enterprise
investment (see appendix). However, the growth impulse                        level).      In the case of Hungary FDI-driven
could come, first of all, from better corporate governance                    exports/export-led growth appear to be the key factor
and restructuring of the privatized firms, both reflecting                    helping to narrow the gap with western Europe. In some
possible efficiency gains without new investment.                             other countries, too, at least a part of export-led
Second, the presence of these FIEs could generate                             expansion can be attributed to FDI. In Poland, where the
positive spillovers and externalities. Finally, as time                       catch-up process has gone on the longest and been the
passes and M&amp;A’s undertake new investments and
restructure, they begin to look more and more like
In fact, statistical evidence from some transition                         65
Note, however, that there is not much evidence of such spillovers
economies indicates that the economic performance of                          in Hungary.
manufacturing firms privatized through M&amp;A is                                   66
“Catching up and falling behind: economic convergence in
eventually as good as that of greenfield FDI.64 A                             Europe”, Economic Survey of Europe 2000, No. 1, chap. 5.
Secretariat study has also found positive spillovers in the                     67
For example, Berend argues that an appropriate response to the
challenge of the structural crisis is impossible without massive western
investments. Berend, op. cit.
See appendix table 3. In some countries there is concern about the             Ireland’s income rose from 42 to 74 percent of EU income
quality of education which appears to be adversely affect by years of tight   between 1986 and 1998. Comparable figures for Portugal and Spain are
budgets.                                                                      37 to 45 and 47 to 52 per cent respectively. Economic Survey 2000, No.1,
op. cit, charts 5.3.1. All three countries, of course, also benefited from
A. Zemplinerova and M. Jarolim, FDI through MNA &amp; vs.                 the single market effect. Also see B. Lane and R. Torres, “Is convergence
greenfield FDI: the case of the Czech Republic, UNCTAD, seminar,              a spontaneous process? The Experience of Spain, Portugal and Greece”,
op.cit.                                                                       OECD Economic Studies, No.16, Spring 1991.
FDI and the Macroeconomy in the Transition Economies _________________________________________________ 11
most significant,69 it is likely that domestic resources                        stability, long-term growth potential, market access,
have played the leading role. Whatever the impact of                            availability of skilled workers, and infrastructure. (In the
FDI, fundamental economic reform has been a                                     transition economies the fundamentals also include
precondition for attracting it and using it efficiently.                        necessary market reforms and structural transformation.)
It has been observed that while policy successes in these
Many transition economies have attracted
areas may not necessarily result in more foreign
significant amounts of FDI, and several now rank quite
investment, they are nevertheless necessary conditions
high in this regard by global standards. However, huge
for growth based on domestic resources.71 In the end,
disparities in FDI penetration have emerged in the region,
domestic and foreign investors tend to be motivated by
and there are some recent signs that the differences are
becoming even larger. In particular, the low-income
transition economies have lagged in attracting FDI. To                                With the tendency to focus on central Europe, sight
the extent that FDI can stimulate economic growth, the                          may be lost of the fact that in 2000 about one third of the
current pattern of FDI is likely to exacerbate income gaps                      transition economies have yet to achieve macroeconomic
between the transition economies themselves and vis-a-                          stabilization (as indicated by their very high inflation
vis the developed market economies.                                             rates) and to make much progress on structural
transformation. Beyond stabilization and fundamentals,
Growing FDI inflows have contributed to the
the above discussion suggests that policies toward FDI do
relaxation of the balance of payments constraint,
seem to matter a great deal. The mode of privatization
increasing the availability of resources for development.
(via vouchers or management buyouts; Czech Republic,
In recent years, policy makers have counted on FDI as a
Slovakia, Russia), discouragement of foreign investors
source of current account and other external financing, a
(Slovenia), introduction of investment incentives
pattern that is likely to continue since the income gap will
(conforming to EU and OECD rules; Czech Republic)
not be eliminated any time soon. However, as large-scale
can make a big difference as to whether FDI flows in or
privatization winds down, FDI inflows are expected to
not. In a number of natural resource-rich countries, a
diminish, with possible implications for external
workable production sharing agreement (PSA) law has
attracted foreign investment to large projects but in
The current economic situation in the ECE region                          Russia, the PSA framework still needs to be improved.
seems favourable to further FDI growth in transition
As a part of a strategy to attract FDI, some countries
economies. With improved growth prospects of western
have used business surveys to identity, monitor and,
Europe (the main source of FDI into the transition
where possible, eliminate specific obstacles to foreign
economies), further increases in FDI can be expected in
investment. The experience of Estonia is of particular
the transition economies as part of the continuing process
interest because it has long been one of the most
of economic integration and “internationalization” of
successful countries in this regard. Nevertheless, the
survey results indicate that there is still room for
improvement (table 8). This approach may be especially
(b) Measures to promote FDI inflows and
important for countries seeking FDI as a source of
increase their effectiveness                                                external financing, to replace dwindling privatization
To different degrees all the transition economies                         revenues as the stock of state assets runs out. As this
need to promote FDI flows. There is considerable                                occurs, there is an increasing role for greenfield (and
international experience on the means to do so.                                 follow-up) investments which may be more sensitive to
However, FDI promotion has occurred in an atmosphere                            the types of obstacles listed in table 8 than are large
of intense global competition for FDI (more so than was                         strategic FDI-privatizations.
the case in the 1970-1980’s). Moreover, given the legacy                              Measures may also be required to help maximize
of industrial development under central planning the                            the long-term benefits of FDI inflows, by fostering
transition economies are often in competition for FDI                           positive externalities (e.g. creation of backward and
among themselves, including for large strategic                                 forward linkages). This may involve the implementation
investments. Several selected issues of FDI regarding the                       of effective competition policies, improving the
attraction of FDI are raised below.                                             functioning of the banking system and capital markets,
A general policy approach to FDI promotion                                 educational reforms to provide the required skills, new
involves     strengthening    domestic  economic                                infrastructure, etc. In particular, domestic firms may
fundamentals:70 i.e. political and macroeconomic                                need to be strengthened so that they can compete more
effectively with FIEs (i.e. to avoid negative spillovers/
bankruptcies of domestic firms) or so they can become
Economic Survey of Europe 2000, No. 1, chart 5.3.1
Interviews with corporate managers indicate that investors, when        Direct Foreign Investment”, OECD Development Centre Studies (Paris),
selecting the site for a major investment project, tend to attach priority to   2000.
the “fundamentals’, more so than to receiving fiscal or financial incentive
from the prospective government. C. Oman, “Policy Competition for                      Ibid.
12 _________________________________________________________________________ Financing for Development
more viable partners for FIEs in upstream and                                 • land-locked, often remote mountainous regions (i.e.. as
downstream operations. Such policies could also help to                         opposed to the coastal areas preferred by foreign
avoid the emergence of FDI enclaves and an economy                              investors, especially for manufacturing);
stratified according to FDI/domestic enterprise lines.
While the problem of low (or negative) spillovers has                         • poor in infrastructure (which is also expensive to build
been observed in eastern Europe, it is of a more general                        given local conditions and distances); and
concern. A related question is how to channel foreign                         • small, with only limited possibilities of market growth.
capital into productive investment and exports, as
opposed to, for example, real estate speculation.72 Recent                          All these factors tend to raise transport costs,
experience has shown that a concentration of FDI in the                       increase travel time and raise the risk of transport
non-tradeable sector may weaken export performance                            disruptions (especially if the neighbours are unstable or
(due to real exchange rate appreciation) and make the                         uncooperative). Several transition economies (Asian
host countries more vulnerable to economic crises.73                          especially) face one or more of these challenges. The
problem is highlighted by the challenge of attracting FDI
Special attention attaches to the countries which                       into China’s western regions (adjoining several Asian
have received very little FDI. Fundamental economic                           CIS), despite their mineral wealth and the availability of
reform is essential (and not only for the sake of attracting                  some investment incentives. Yet, China is well known to
FDI), but often the commitment of the authorities                             international investors, having received more FDI than
(including the parliaments) is doubtful. This is largely a                    any other developing economy (over $40 billion annually
domestic matter and there is little the international                         in the late 1990’s). However, they are deterred by the
community can do until a change in thinking occurs.                           remoteness of the regions, weak infrastructure and
Pervasive corruption (often at both the centre and local                      communications links, inefficient state industries,
levels) and political tensions (ethnic conflict in                            corruption and ethnic unrest.76
Tajikistan) may stifle both economic reform and FDI.
Nonetheless, some natural resource rich countries have                              Concern has persisted in a number of countries that
attracted large investments and more projects are in the                      hesitant reforms and FDI promotion programmes have
pipeline. However, one of the conditions appears to be a                      caused them to fall permanently behind in the
workable law on production sharing agreements.                                competition for FDI among transition economies
Although FDI can boost the output of primary materials,                       (globally). In part these fears stem from the notion that
exports and improve the external financial situation, the                     competition for at least certain types of FDI is a zero sum
spillovers from this sector are generally small74 (in part                    game. Elements of this view are: first, that countries
because of the limited capacity to produce the required                       which attracted FDI early in the game have gained
capital goods). Moreover such a pattern of investment                         advantages which are difficult for others to overcome: for
can perpetuate dependence on primary material exports,                        example, investor friendly reputations, stronger financial
and large revenues might be viewed by domestic policy                         positions (reducing the risk of doing business), etc.
makers as a substitute for necessary reform.                                  Second, these advantages are reinforced if not totally
overshadowed by the status of first wave EU accession
It has been argued that certain natural deterrents to                  countries.77 Third, there is room (at least in eastern
FDI and technology transfer are virtually insurmountable                      Europe) for only a few large foreign companies in key
by policy measures. Even if a country gets the economic                       sectors such as automobiles. Once established in a
fundamentals (and reforms) right and otherwise follows                        country, the TNC will make any additional investment
recommendations for promoting FDI, it still may not                           there, for reasons of scale economies, etc. Moreover,
receive much. According to one view, these countries are                      such strategic investments will also attract foreign
fundamentally disadvantaged by geography because they                         suppliers or downstream firms (as VW has done in the
are:75                                                                        Czech Republic). These concerns receive some support
• at great distances from              major world markets and                from the findings presented here which show that the
primary sea routes;                                                         ranking of countries has remained s broadly similar (i.e.
there has been no closing of the FDI gap) and that the
concentration of FDI flows in the three leading countries
has recently increased. What is more, there is evidence
for a virtuous circle whereby FDI improves credit ratings
Thailand, for example, tried to curb foreign speculation in the real
estate market by taxing foreign investment.
Work by UNCTAD has shown that in the later stages of South-
East Asia’s expansion, FDI flows had a reduced impact on export growth
because they were directed to the non-tradeable goods sectors. TDR,
1999, op. cit.                                                                  76
Report on a government investment promotion conference,
UNCTAD, World Investment Report 1999, op. cit.                        Chengdu, China. International Herald Tribune, 31 October 2000.
75                                                                            77
See J. Sachs, “A New map of the world”, The Economist, 24 June               The issue of diversion of FDI to potential EU candidates was
2000.                                                                         raised by Havrylyshyn, op. cit.
FDI and the Macroeconomy in the Transition Economies _________________________________________________ 13
which in turn attract more FDI, thus increasing the
differential between the leaders and laggards.78
Among other things, transition economies beyond
central Europe may currently suffer a locational
disadvantage – the combination of distance from west
european markets and inadequate infrastructure.
However, this problem should not be insurmountable.
The Bulgarian Black Sea coast (and all the states of the
former Yugoslavia, the Baltic States, Belarus, Moldova,
most of Ukraine and parts of Russia) is 1500 kilometers
from the center of Germany, much less than the
dimensions of the current EU and the United States single
markets. It is likely that these outlying countries could
become more attractive to FDI if they were connected
with western Europe by an efficient integrated
telecommunications and transport infrastructure (clearing
the Danube will also help). The international investment
banks (EBRD, World Bank and the EIB) are engaged in
an upgrading of infrastructure in the transition
economies, but the question remains as to whether there
are coherent infrastructure plans on a sufficient scale to
meet the needs of potential investors?
Bevan and Estrin, op. cit.
14 _________________________________________________________________________ Financing for Development
underestimated, with implications for the international
APPENDIX                                                                  comparability of these statistics.           The largest
underestimate is likely to have occurred in Hungary were
Methodological Issues                                                     non-reported reinvested earnings are estimated to have
reached 1.3 per cent of GDP in 1997.81
This Appendix briefly discusses the balance of
payments statistics upon which this study is based, the                         FDI inflow data from the balance of payments
limitations of the data and the various FDI indicators.                   generally begin in 1990, later for the CIS and the
republics of the former Yugoslavia. In consequence any
I.        Definitions and coverage of data                                investments made prior to those dates are not reflected in
the cumulations. For reasons discussed above, this is not
Direct investment is a category of international                    likely to be a problem except perhaps in Hungary and
investment that reflects the objective of obtaining a                     Yugoslavia.82
lasting interest by a resident entity in one country (“direct
investor”) in an enterprise located in an economy other                   II.    Indicators of FDI flows and their
than that of the investor (“direct investment enterprise”).                      interpretation
The lasting interest implies the existence of a long-term
relationship between the direct investor and the                                Three types of ratios are typically used in the
enterprise. A direct investment relationship is created                   analysis of inward FDI: the FDI/GDP ratio, calculated
when a foreign investor owns 10 per cent or more of the                   from annual flows; the ratio of cumulated annual FDI
ordinary shares or voting power in the direct investment                  flows83 to GDP (using current year GDP); and the ratio of
enterprise (incorporated or unincorporated).79                            annual FDI flows to gross fixed capital formation. All
three ratios are a measure of the penetration of FDI in the
The FDI flows in the balance of payments comprise                   economy and give some idea of the potential economic
three components:                                                         impact of foreign investment.
• Equity: comprises equity in branches, all shares in                           The GDP statistic generally used in these ratios is
subsidiaries and associates and other capital                           calculated at current prices and exchange rates (nominal
contributions.                                                          GDP). One of its shortcomings stems from differences in
the degree of undervaluation of national currencies
• Reinvested earnings: consist of the direct investor’s
share (in proportion to direct equity participation) of                 relative to the US dollar and from the often large
earnings not distributed as dividends by subsidiaries                   depreciations of nominal exchange rates which, for
example, occurred in several transition economies
and earnings of branches not remitted to the direct
investor.                                                               following the 1997-1998 financial crises. A partial
solution is to use dollar GDP estimates at PPP exchange
• Other direct investment capital: covers the borrowing                   rates.84 This raises the GDP of the transition economies,
and lending of funds between direct investors and                       most of all those of the CIS (whose exchange rates are
subsidiaries, including both short- and long-term                       the most undervalued). FDI/GDP ratios (including those
investments.                                                            based on PPP GDP) are also sensitive to economic
downturns, the resulting increases in the ratios implying
The transition economies have made good progress
(incorrectly) increases in FDI penetration. This is
in reporting the components of FDI flows. By 1998
important because some countries have experienced falls
twelve of them reported reinvested earnings, several
in output from time to time during the transition,
having done so for a number of years (Appendix Table
particularly in the early 1990’s and again in 1997-1999.
1).80 The decision to report earnings results in a break in
the series. In most cases, this is not serious because                           A variant of these measures replaces GDP with the
reinvested profits have been small, given the relatively                  country population, yielding per capita flows or stocks.
recent establishment of direct investment enterprises.                    Population can be established accurately over time, which
However, a number of countries report reinvested                          facilitates cross-country comparisons (problems not
earnings of over 10 per cent of current equity                            entirely solved by GDP PPP), and it eliminates the
investments. For those countries, failure to report                       problem of economic downturns. However, since per
reinvested profits (and inter-company loans), means that
total annual and cumulated FDI flows are
IMF, op. cit.
79                                                                          Slovenia is estimated to have inherited an FDI stock of $666
IMF, Balance of Payments Manual, Fifth Edition, 1993.           million which is not reflected in cumulated inflows. Estimates for the
By comparison, in 1991 only eleven industrial countries surveyed   other republics are not available. World Investment Report 1999.
in the Godeaux Report compiled reinvested earnings. In 1997 an OECD         83
Cumulated annual FDI inflows are a measure of the country’s
survey concluded that about three-fourths of OECD countries reported      stock of foreign assets.
compiling reinvested earnings. “Foreign Direct Investment: Survey of
Implementation of Methodological Standards”, OECD, Financial Market              UN/ECE, International Comparisons of Gross Domestic Product
Trends, Paris, November 1998.                                             in Europe, 1996 (United Nations publication, Sales No. E.99.II.E.13).
FDI and the Macroeconomy in the Transition Economies _________________________________________________ 15
capita incomes vary considerably between countries,
population figures are not likely to provide an accurate
measure of economic size. Appendix table 3 contains
FDI ratios calculated using GDP (nominal), GDP (PPP)
and population and country rankings based on each
The FDI/domestic investment ratio is often
analyzed assuming (at least implicitly) that FDI
contributes to local gross fixed capital formation. This
can be justified if FDI inflows represent capital goods in
kind or if FDI cash flows are used to purchase capital
equipment (as is typically the case with greenfield or
follow-up investments in existing facilities). In both
cases FDI increases the capital stock and productive
capacity. The ratio loses this interpretation when FDI
takes the form of M&amp;A’s, which represent change in
ownership (rather than fixed investment). In many
transition economies M+A activity has accounted for the
bulk of FDI. Also the inter-company loan component of
FDI may be used for transactions other than the finance
of capital goods (e.g. financial speculation).85 As
privatization comes to an end, FDI will increasingly
reflect capital investment (as is already the case in
Estonia and Hungary).
It was argued above that M&amp;As can still positively effect
economic efficiency (independently of new investment) through new
management, integration in global marketing networks, etc.
16 _________________________________________________________________________ Financing for Development
Foreign direct investment a inflows, 1990-2000
(Million dollars, per cent)
Million dollars                                         FDI/GDP, nominal (per cent)
1990-    1993-    1997-                       January-June          1990-   1993- 1997-               January-June
1992     1996     1999     1998     1999       1999 2000 b          1992    1996    1999    1999      1999 2000 b
Eastern Europe c .....................            6 583 31 655 44 848       15 502 18 865 5 824 7 018                  1.0     2.6     4.0     4.9     3.3     4.0
Albania ...................................         20    271    134           45     41    15    31                  0.6     3.3     1.6     1.1     0.8     1.6
Bosnia and Herzegovina ..........                    –      –    160          100     60*   30*   30d                   –       –     1.3     1.4     1.4     1.7
Bulgaria .................................         101    345 1 848           537    806   286   250                  0.3     0.8     5.3     6.5     5.2     4.7
Croatia ...................................         16    844 2 788           898 1 408    299   582                    –     1.3     4.5     7.0     3.0     6.3
Czech Republic ......................            1 649 5 513 9 128          2 720 5 108 1 430 2 052                   1.9     3.0     5.7     9.6     5.5     8.4
Hungary .................................        3 241 10 213 6 153         2 036 1 944    712   910                  3.1     6.0     4.4     4.0     3.1     4.0
Poland (accrual basis) ............              1 058 11 747 18 543        6 365 7 270 2 210e 2 737e                 0.5     2.6     4.0     4.7     3.0e    3.6e
Romania ................................           117 1 117 4 287          2 031 1 041    673   257                  0.1     0.9     3.9     3.1     4.9     1.7
Slovakia .................................         200    949    999          508    330   130   130                  0.5     1.5     1.6     1.7     1.3     1.3
Slovenia .................................         180    612    804          248    181    51    39                  0.4     0.9     1.4     0.9     0.5     0.4
Republic of Macedonia .........                     ..      44      164     118         30      20      30*            –     0.3     1.5     0.9     1.1     1.7
Yugoslavia .............................             ..       ..     740       ..         ..      ..       ..           ..      ..      ..      ..      ..      ..
Baltic states .............................         119    1 836    4 144 1 863       1 139      627     462             ..    3.8     6.5     5.2     5.9     4.1
Estonia ..................................          82      729    1 152   581         305      208     145             ..    6.2     7.7     5.9     8.2     5.8
Latvia .....................................        29      821    1 225   357         348      157     179             ..    5.3     6.8     5.6     5.3     5.4
Lithuania ................................           8      286    1 767   926         486      262     139             ..    1.4     5.7     4.6     5.1     2.6
CIS ...........................................       .. 12 799 24 077       6 733    6 599 3 104 2 353                  ..    0.8     2.0     2.4     2.6     1.7
Armenia .................................           ..     52    395         221      122    60    60d                 ..    1.2     7.3     6.6     9.4     9.1
Azerbaijan ..............................           .. 1 039 2 648         1 024      510   401    85                  ..   12.1    21.3    12.7    23.7     4.2
Belarus ..................................          7     115    574         149      225   175    47                  ..    0.3     1.6     2.1     4.1     1.2
Georgia ..................................          ..     54    551         265       82    42    41d                 ..    0.6     5.7     3.0     3.5     2.9
Kazakhstan ............................           100 2 964 4 056          1 151    1 584   760   620f                 ..    4.6     6.7    10.0     9.6     8.3
Kyrgyzstan .............................            ..    191    228         109       36     4     -2f                ..    3.8     5.0     2.9     0.9    -0.4
Republic of Moldova ...............                42     116    195          81       34     6    66                  ..    2.1     4.1     2.9     1.1    12.9
Russian Federation ................             1 554 6 346 12 709         2 761    3 309 1 393 1 085                  ..    0.5     1.4     1.8     1.8     1.0
Tajikistan ...............................          ..     66     75          24       21     9     9d                 ..    2.0     2.3     1.9     2.2     2.7
Turkmenistan .........................             11     523    267          64       60*   30*   30d                 ..    2.8     3.0     1.8     1.9     1.5
Ukraine ..................................        170 1 145 1 862            743      496   166   252f                 ..    0.8     1.5     1.7     1.1     2.6
Uzbekistan .............................            9     187    518         140      121    60*   60d                 ..    0.5     1.1     0.7     1.0     1.0
Total above c ............................            .. 46 290 73 069 24 137 26 697            9 555   9 833            ..    1.7     3.1     3.9     3.1     3.0
CETE-5 ..................................        6 328 29 034 35 628       11 877 15 563       4 532   5 868          1.3     3.1     4.0     5.0     3.2     4.1
SETE-7 c ................................          254 2 621 9 220          3 629 3 326        1 292   1 150          0.1     1.0     4.1     4.5     4.0     3.5
Asian CIS ..............................             .. 5 076 8 737         2 998 2 535        1 365     903            ..    3.4     5.8     5.5     6.9     4.5
3 European CIS g .................                 194 1 376 2 631            974    755         346     366            ..    0.7     1.6     1.8     1.8     2.6
Poland (cash basis) ................               411 5 022 14 677         5 129 6 471        2 210   2 737          0.2     1.1     3.2     4.2     3.0     3.6
Source: UN/ECE secretariat based on national balance of payments statistics.
a Inflows into the reporting countries.
b Data for 2000 are preliminary.
c Excluding Bosnia and Herzegovina and Yugoslavia.
d Estimate, assumed to be the same as in 1999.
e Cash basis.
f Estimate, twice first quarter value.
g Belarus, Republic of Moldova and Ukraine.
17 _________________________________________________________________________ Financing for Development
FDI inflows as a percentage of GDP (PPP), 1993-1999                                                                                                 TABLE 4
(Period averages, per cent)                                                                                                       a
Coefficients of variation of FDI inflows and other capital flows b
1993-1996                                                       1997-1999                                       (Standard deviation divided by the absolute means)
Range 1.0-2.9                                                   Range 2.1-5.1                                                                                   1990-1999               1993-1999
Hungary ..........................         2.9                  Azerbaijan ......................           5.1
FDI inflows Other flows FDI inflows Other flows
Estonia ...........................        2.0                  Estonia ...........................         3.4
Azerbaijan .......................         1.7                  Croatia ...........................         2.9   Eastern Europe c .............              1.0         1.9         0.7         1.5
Latvia ..............................      1.7                  Latvia .............................        2.8    Albania ..........................         0.7         2.3         0.3         3.4
Poland ............................        1.3                  Lithuania .........................         2.5
Bulgaria .........................         1.2         1.6         1.0         2.6
Czech Republic ...............             1.2                  Czech Republic ..............               2.3
Croatia ..........................         1.3         1.5         0.9         0.9
Kazakhstan .....................           1.1                  Poland ............................         2.1
Turkmenistan ..................            1.0                  Range 1.1-1.9                                      Czech Republic .............               0.9         2.9         0.7         1.7
Range 0.5-0.9                                                   Hungary .........................           1.9    Hungary .........................          0.5         2.8         0.4         1.9
Albania ............................       0.9                  Kazakhstan .....................            1.8    Poland (cash basis) .......                1.1         1.0         0.8         1.0
Croatia ............................       0.8                  Armenia ..........................          1.5    Romania ........................           1.1         0.8         0.9         1.2
Slovakia ..........................        0.6                  Bulgaria ..........................         1.5    Slovakia .........................         0.7         1.3         0.4         0.7
Slovenia ..........................        0.6                  Romania .........................           1.1    Slovenia ........................          0.6         2.4         0.4         1.3
Kyrgyzstan ......................          0.5                                                                     The former Yugoslav
Republic of Macedonia ...                  1.7         2.5         1.3         0.9
Transition economies average = 0.5                              Transition economies average = 1.0
Range 0.3-0.4                                                   Range 0.5-0.1                                     Baltic states ....................           ..          ..         0.7         1.0
Lithuania ......................... 0.4                         Georgia ..........................  1.0            Estonia ..........................          ..          ..         0.6         1.5
Republic of Moldova ........        0.3                         Slovenia .........................  0.9            Latvia ............................         ..          ..         0.5         1.2
Range 0.1-0.2                                                   Republic of Moldova .......         0.9            Lithuania ........................          ..          ..         1.1         0.3
Armenia ..........................  0.2                         Kyrgyzstan .....................    0.7           Total CIS ..........................         ..          ..         0.7         1.7
Bulgaria .......................... 0.2                         Turkmenistan ..................     0.7            Armenia .........................           ..          ..         1.3         0.5
Romania .........................   0.2                         The former Yugoslav                                Azerbaijan .....................            ..          ..         0.8         0.7
Russian Federation .........        0.2                          Republic of Macedonia ..           0.6            Belarus ..........................          ..          ..         0.9         0.5
Tajikistan ........................ 0.2                         Slovakia .........................  0.6            Georgia .........................           ..          ..         1.2         0.5
Belarus ........................... 0.1                         Albania ........................... 0.5            Kazakhstan ....................             ..          ..         0.4         1.4
Georgia ........................... 0.1                         Range 0.0-0.4                                      Kyrgyzstan ....................             ..          ..         0.6         0.5
The former Yugoslav                                             Russian Federation .........        0.4                                                        ..          ..         0.7         0.6
Republic of Moldova ......
Republic of Macedonia ..           0.1                         Tajikistan ........................ 0.4
Russian Federation ........                 ..          ..         0.7         2.3
Ukraine ........................... 0.1                         Ukraine ........................... 0.4
Uzbekistan ......................   0.1                         Belarus ........................... 0.3
Tajikistan .......................          ..          ..         0.4         0.8
Uzbekistan .....................    0.3            Turkmenistan .................              ..          ..         0.5        10.7
Ukraine ..........................          ..          ..         0.5         0.8
Source: UN/ECE secretariat calculations based on national balance of                                            Uzbekistan ....................             ..          ..         0.9         1.4
payments statistics and GDP(PPP) estimates.                                                                       Total above .....................            ..          ..         0.7         1.4
CETE-5 .........................           0.8         2.1         0.6         1.3
SETE-7 c ........................          1.2         1.7         0.9         1.8
TABLE 3                                                           Asian CIS .....................            0.9         5.0         0.8         2.1
3 European CIS d .........                 0.8         0.8         0.7         0.6
Ratio of FDI inflows and current account deficits, 1993-1999
(Per cent)                                                                               Source: UN/ECE secretariat based on national balance of payments
1993-1996                 1997-1999               a Standard deviation divided by the mean, absolute annual dollar inflow.
b Excluding errors and omissions.
Eastern Europe .....................................                      58a                          86
Baltic states ..........................................                  97                           64
CIS b .......................................................             45                           77             d Belarus, Republic of Moldova and Ukraine.
Asian CIS ............................................                   66                           84
European CIS c ...................................                       21                           59
Source: UN/ECE secretariat based on national balance of payments
Note: The ratios are calculated as averages of cumulated FDI inflows to
cumulated current account deficits.
a Excluding Poland, which had a large current account surplus in 1995.
b Excluding Russian Federation.
c Belarus, Republic of Moldova and Ukraine.
18 _________________________________________________________________________ Financing for Development
Hungary: direct effect of FDI on the balance of payments, 1996-                                                                                         TABLE 6
1999                                                                         Azerbaijan: direct effect of FDI on the balance of payments of the
(Million dollars; per cent)                                                                                    oil sector, 1995-2000
1996      1997      1998      1999
Current account items ............................           -350   -155          184       556
1995          1998        1999         2000
Trade balance of FIEs .........................              320    876        1 804     2 219
Exports ..............................................   2 842 5 081         8 282    10 705              Current account items ......................           143           -228            258           467
Imports ..............................................   2 522 4 204         6 478     8 486               Trade balance ...............................         227             78            476           702
Income items .......................................        -670 -1 032       -1 620    -1 663                 Exports (oil and products) ...........              257            434            801           777
Direct investment income .................                -261   -438         -920      -863                 Imports (oil sector) ......................         -30           -356           -325           -75
Reinvested earnings a .......................             -409* -594*         -700*     -800*              Services .........................................    -68           -286           -189           -62
Capital account item:                                                                                         Income ...........................................    -16            -20            -29          -173
Net FDI (adjusted) b ............................. 2 687* 2 336* 2 255* 2 495*                                 of which:
Compensation of employees a ....                     -9            -20            -29           -20
Total above ............................................ 2 337        2 181    2 439      3 051                 Profit repatriation a ......................         -7              –              –          -153
Memorandum items:                                                                                            Capital account item:
Non FIE trade balance ............................ -2 760            -3 010    -4 505    -5 215
Net FDI b ........................................    130            757           350            11
Net FDI (cash basis) ............................... 2 278            1 742     1 555     1 695
Total current account/GDP (cash basis)                 -3.7             -2.1      -4.9      -4.3             Total above .....................................      273            529           608           478
Total current account/GDP (adjusted)c .. -4.6                           -3.4      -6.4      -6.0             Memorandum item:
Source: UN/ECE secretariat based on national balance of payments                                         Total current account .......................         -318          -1 363          -600           -49
statistics; for FIE exports and imports, K. Antaloczy and M. Sass, &quot;Greenfield                               Total net FDI inflows ........................         282           1 024           510            85
FDI in Hungary: is it better than privatization-related FDI?&quot;, UNCTAD seminar,                                    Source: UN/ECE secretariat based on balance of payments data reported
op. cit;. For estimates of reinvested earnings; 1996-1997, IMF, Hungary:                                     to the IMF.
selected issues, Staff Country Report No. 99/27 (Washington D.C.), April 1999.
a Oil consortia.
Note: The trade of FIEs is the trade of international free trade zones
(IFTZ) only; see text.                                                                                          b Excluding signing bonuses paid to the government by foreign oil
a Reinvested earnings estimates: 1996-1997 are IMF estimates. 1998-                                      companies.
1999 outfows are assumed to increased by $100 million annually.
b Net FDI on a cash basis plus estimates of reinvested earnings.
c Includes estimates of reinvested earnings (outflows).
FDI penetration and exports
(Per cent, ratios)
Cumulative                   Share of FIEs in manufacturing                          Total               Contribution of exports c to real GDP growth
FDI/            Investment Sales                  Exports                       exports                    (1) Exports         (2) GDP
GDP a               1998      1998             1996       1998                   growth b               1996         1997         1998       1999
Czech Republic ........................           12.3               41.6        31.5               15.9       47.0                   185          (1)      5.0            4.5             6.6           4.6
..                 ..          ..                 ..         ..                    ..         (2)      4.8           -1.0            -2.2          -0.2
Estonia .....................................     16.9               32.9        28.2               32.5       35.2                   366          (1)      1.6       21.6                10.5          -2.1
..                 ..          ..                 ..         ..                    ..         (2)      3.9       10.6                 4.7          -1.1
Hungary ...................................       17.8               78.7        70.0               77.5       85.9                   280          (1)      3.1       10.4                 8.0          7.0
..                 ..          ..                 ..         ..                    ..         (2)      1.3        4.6                 4.9          4.5
Poland ......................................     10.0               51.0        40.6               26.3       52.4                   192          (1)      3.0           3.0              3.7          -0.4
..                 ..          ..                 ..         ..                    ..         (2)      6.0           6.8              4.8           4.1
Slovenia ...................................       5.3               24.3        24.4               25.8       32.9                   140          (1)      2.0           6.4              4.0          1.1
..                 ..          ..                 ..         ..                    ..         (2)      3.5           4.6              3.8          5.0
Source: UN/ECE secretariat based on national balance of payments, trade and national account statistics. For penetration of FIEs in manufacturing, G&#224;bor Hunya,
International Competitiveness Impacts of FDI in CEECs, Research Reports No.268, August 2000,.
a Cumulated FDI 1988-1999 and nominal GDP in 1999.
b Ratio of the dollar value of total exports in 1999 to 1993.
c Goods and services.
19 _________________________________________________________________________ Financing for Development
Estonia: Obstacles to foreign direct investment, 1997 and 1998
(Index, range 0-5) a
1997      1998
Bureaucracy ................................................................           ..      3.22
Corruption ......................................................................   2.86       3.05
Labour quality ................................................................     3.09       2.89
VAT payments/rebates ..................................................             3.19       2.81
Customs procedures .....................................................            2.82       2.76
Project finance ...............................................................     2.69       2.69
Work and residence permits ..........................................               2.70       2.69
Tax rates b .....................................................................      ..      2.66
Gaps in legislation .........................................................       3.08       2.62
Slow land reform ............................................................       2.83       2.59
Unfair competition ..........................................................       2.79       2.41
Land acquisition .............................................................      2.56       2.22
Raw material availability ................................................          2.10       1.95
Absence of tariffs ...........................................................      2.03       1.65
Source: T. Ziacik, &#39;Foreign Investor 1997 and 1998 Surveys&#39;, Discussion Papers 2000, No.3, Bank of Finland Institute for Economies in Transition (BOFIT).
a A one denotes &#39;no problem&#39; and a 5 denotes a &#39;serious problem&#39;.
b Not included in the 1997 survey.
Balance of payments components of FDI in the transition economies as reported by the IMF
Equity capital              earnings            Other capital
Albania .......................         1992-1998                 ..                    ..
Bulgaria .....................          1990-1998                 1998                  1997-1998
Croatia .......................         ..                        ..                    ..
Czech Republic ..........               1993-1998                 ..                    ..
Hungary .....................           1991-1998                 ..                    1996-1998
Poland a .....................          1990-1998                 1990-1998             1991-1998
Romania ....................            1991-1998                 ..                    ..
Slovakia .....................          1994-1998                 1995-1998             1995-1998
Slovenia .....................          1992-1998                 ..                    ..
Republic of Macedonia                   1996-1998                 ..                    1996-1997
Estonia ......................          1992-1998                 1992-1998             1992-1998
Latvia .........................        1992-1998                 1996-1998             1996-1998
Lithuania ....................          1993-1998                 1995-1998             1995-1998
Armenia .....................           1993-1998                 1997-1998             1995; 1998
Azerbaijan ..................           1995-1998                 ..                    1995-1998
Belarus ......................          1993-1998                 1997-1998             1996-1998
Georgia ......................          1998                      ..                    ..
Kazakhstan ................             1995-1998                 1996-1998             1995-1998
Kyrgyzstan .................            1993-1998                 1996-1998             1995-1998
Republic of Moldova ...                 1995-1998                 1998                  1995-1998
Russian Federation ....                 1997-1998                 1998                  1997-1998
Tajikistan ...................          ..                        ..                    ..
Turkmenistan .............              1996-1997                 ..                    1997
Ukraine ......................          1994-1998 b               ..                    ..
Uzbekistan .................            ..                        ..                    ..
Source: IMF, Balance of payments Statistics Yearbook, Part 1 Country tables, 1999.
a Accrual basis.
b Total FDI.
20 _________________________________________________________________________ Financing for Development
Inflows of foreign direct investment a in ECE transition economies, 1990-1999
1990        1991        1992        1993        1994     1995        1996      1997     1998     1999
Eastern Europe .................................                 558        2506        3518        5276        4904     11743        9732    11951    15502    18865
Albania c ..............................................           ..          –          20          58          53        70          90       48       45       41
Bosnia and Herzegovina ....................                        ..          ..          ..          ..          –         –           –        –      100       60*
Bulgaria c ............................................            4          56          42          40         105        90         109      505      537      806
Croatia ................................................           –           –          16         120         117       115         506      530      898    1 408
Czech Republic ...................................               132         513       1 004         654         869     2 562       1 428    1 300    2 720    5 108
Hungary ..............................................           311       1 459       1 471       2 339       1 146     4 453       2 275    2 173    2 036    1 944
Poland (accrual basis) ........................                   89         291         678       1 715       1 875     3 659       4 498    4 908    6 365    7 270
Romania .............................................              –          40          77          94         341       419         263    1 215    2 031    1 041
Slovakia ..............................................           18          82         100         168         250       202         330      161      508      330
Slovenia ..............................................            4          65         111         113         128       177         194      375      248      181
Republic of Macedonia c ...................                          –           –           –           –       24           9       11       16      118        30
Yugoslavia ..........................................                 ..          ..          ..          ..       ..          ..       ..     740        ..        ..
Baltic states .........................................                ..          ..     119         238         460      454         685     1 142    1 863    1 139
Estonia ................................................              ..          ..      82         162         215      202         151       267      581      305
Latvia ..................................................             ..          ..      29          45         214      180         382       521      357      348
Lithuania .............................................               ..          ..       8          30          31       73         152       355      926      486
CIS .........................................................          ..       ..          ..      1 875       1 720     3 969       5 188   10 611    6 733    6 599
Armenia c ............................................                ..       ..          ..          1           8        25          18       52      221      122
Azerbaijan c .........................................                ..       ..          –          60          22       284         627    1 115    1 024      510
Belarus ................................................              ..       ..          7          18          11        15          73      200      149      225
Georgia c .............................................               ..       ..          –           –           8         6          40      203      265       82
Kazakhstan d .......................................                  ..       ..        100         228         635       964       1 137     1321    1 151    1 584
Kyrgyzstan c ........................................                 ..       ..          0          10          38        96          47       83      109       36
Republic of Moldova ...........................                       ..      25          17          14          12        67          24       76       81       34
Russian Federation ............................                       –      100       1 454       1 211         640     2 016       2 479    6 639    2 761    3 309
Tajikistan c ..........................................               ..       ..          9           9          12        20          25       30       24       21
Turkmenistan c ....................................                   –        –          11          79         103       233         108      102       64       60*
Ukraine ...............................................               ..       ..        170         198         159       267         521      623      743      496
Uzbekistan c ........................................                 ..       ..          9          48          73       -24          90      167      140      121
Total above b .........................................                ..          ..          ..   7389        7085     16212       15604    23704    24137    26697
CETE-5 ...............................................          554        2410        3364        4988        4268     11053        8725     8918    11877    15563
SETE-7 b .............................................             4          96         155         312         640       704         979    2 313    3 629    3 326
Asian CIS ...........................................              ..          ..          ..        435         899     1 605       2 092    3 073    2 998    2 535
3 European CIS e ...............................                   ..          ..        194         229         181       349         617      899      974      755
Poland (cash basis) c ..........................                  10         117         284         580         542     1 132       2 768    3 077    5 129    6 471
Source: National balance of payments statistics; IMF.
b Excluding Bosnia and Herzegovina.
c Net of residents’ investments abroad. Bulgaria, 1990-1994; Poland, 1990-1992.
d Drawings less repayments.
e Belarus, Republic of Moldova and Ukraine.
FDI and the Macroeconomy in the Transition Economies _________________________________________________ 21
Foreign direct investment inflows and selected indicators
(Billion dollars, per cent)
FDI inflows /         FDI inflows /
Secondary Corruption index                                                                    GDFCF c             current account
education a    2000                         Cumulative FDI inflows 1988-1999                  (per cent)             (per cent)
Per cent             Per
CPI     Billion Per cent             of              capita           1993-    1997-        1993-    1997-
1997   Rank b   score    dollars of GDP Rank GDP/PPP Rank dollars              Rank    1996     1999         1996     1999
Eastern Europe e .....................             80       51      3.8     84.4     22.8        ..     9.6        ..    789        ..     12        17           58d      86
Albania ...................................       38        ..       ..     0.4     11.8       18      4.1       16     126       16       ..        ..         104       28
Bosnia and Herzegovina ..........                  ..       ..       ..     0.2      3.6        ..       ..       ..     57        ..      ..        ..           –        4
Bulgaria .................................        77       52      3.5      2.3     18.5       14      5.5       11     279       12       6        39           26      488
Croatia ...................................       82       51      3.7      3.7     18.4       15     11.6        6     815        7       8        19           74       52
Czech Republic ......................             99       42      4.3     16.5     31.1        7     12.3        5    1609        2      10        20           92      164
Hungary .................................         98       32      5.2     19.8     40.9        3     17.8        2    1969        1      30        19           89      115
Poland (FDI: accrual basis) .....                 98       43      4.1     32.1     20.6       12     10.0        7     830        5      14        17         -672       85
Romania ................................          78       68      2.9      5.5     16.2       16      4.3       15     246       13       4        20           19       67
Slovakia .................................        94       52      3.5      2.2     10.9       20      3.9       17     400       11       5         5           58       20
Slovenia .................................        92       28      5.5      1.6      8.0       22      5.3       12     806        6       5         6          -88       88
Republic of Macedonia .........                  63        ..       ..     0.2      6.1       24      2.1       21     103       19       2             9         7      23
Yugoslavia .............................          62       89      1.3      0.7      4.2        ..     1.7        ..     70                ..            ..        –      21
Baltic states .............................        91       42      4.4      6.1     27.7        ..    12.0        ..    805        ..     18        26          97        64
Estonia ..................................       104       27      5.7      2.0     38.2        4     16.9        3    1361        3      23        28          104       86
Latvia .....................................      84       57      3.4      2.1     33.2        6     14.2        4     853        5      34        29         -255       75
Lithuania ................................        86       43      4.1      2.1     19.4       13      8.4        9     557        8       6        24           19       51
CIS ...........................................    86       74      2.5     38.7     14.1        ..     2.7        ..    137        ..      4        11           ..        ..
Armenia .................................        90       76      2.5      0.4     24.2       10      5.1       13     117       17       7        45             8      41
Azerbaijan ..............................        77       87      1.5      3.6     91.0        1     19.7        1     456       10      51        61           62       92
Belarus ..................................       93       43      4.1      0.7      6.6       23      1.0       25      68       22       1         6             6      30
Georgia ..................................       77        ..       ..     0.6     21.8       11      3.1       19     111       18       4        46             5      56
Kazakhstan ............................          87       65      3.0      7.1     44.9        2      9.7        8     477        9      20        55          131      185
Kyrgyzstan .............................         79        ..       ..     0.4     34.4        5      3.7       18      86       21      21        41           23       33
Republic of Moldova ...............              81       74      2.6      0.3     30.1        8      4.9       14      96       20      12        20           22       29
Russian Federation ................              96f      82      2.1     20.6     11.2       19      2.1       22     141       15       2         8          -15      -45
Tajikistan ...............................       78        ..       ..     0.2     13.8       17      2.4       20      24       25      12         ..          12       39
Turkmenistan .........................            ..       ..       ..     0.8     24.5        9      5.7       10     165       14       9        24          -59       18
Ukraine ..................................       94f      87      1.5      3.2     10.3       21      1.9       23      64       23       3         8           27       99
Uzbekistan .............................         94       79      2.4      0.7      4.1       25      1.2       24      28       24       2         3           14       77
Total above e ............................          ..       ..       ..   129.2     19.4        ..     5.5        ..    325        ..      8        14            ..       ..
CETE-5 .....................................       96       39      4.5     72.2     24.3        ..    11.1        ..   1088        ..      14       16          174       92
SETE-7 e ...................................       68       57      3.4     12.2     16.5        ..     5.5        ..    299        ..       6       22           28       69
Asian CIS .................................        83       77      2.4     13.9     29.8        ..     6.7        ..    191        ..      14       29           66       84
European CIS g ........................            91       72      2.6     24.8     10.9        ..     2.0        ..    118        ..       3        8           ..        ..
Poland: cash basis ....................             ..       ..       ..    20.1     12.9        ..     6.3        ..    520        ..     5.6       13           21       59
Source: UN/ECE secretariat based on national balance of payments statistics. Transparency International, Corruption Perceptions Index (CPI),
http:/www.transparency.de. For data on secondary education, The World Bank, World Development Indicators 2000 (Washington, D.C.), 2000.
a Per cent of the relevant age group.
b Country rank out of 90 countries surveyed. The score ranges from 0-6, highest to lowest perceived corruption.
c GDFCF - gross domestic fixed capital formation, converted to dollars at current exchange rates.
d Excludes Poland, which has a large current account surplus in 1995.
e Excluding Bosnia and Herzegovina and Yugoslavia.
f 1980.
22 _________________________________________________________________________ Financing for Development
Cumulative FDI inflows as a percentage of GDP, a 1990-1999
Central and eastern Europe                                                               South-east Europe
45                                                                                       20
Hungary                                                                                      Croatia
10                                                                       The former
20                                                                                                                                                                 Yugoslav
15                                                                                                                                                                Macedonia
0                                                                                                                                                              Herzegovina
1990    1991    1992    1993    1994    1995    1996   1997    1998      1999        1990   1991   1992   1993   1994   1995    1996         1997      1998      1999
Baltic states                                                                 European CIS
45                                                                                       35
Estonia                                                                                Moldova
Latvia                                                                                  Federation
1990    1991    1992    1993    1994    1995    1996   1997     1998     1999        1990   1991   1992   1993   1994   1995    1996         1997     1998       1999
Asian CIS                                                           EU accession countries
100                                                                                      35
90                                                                                                                                                              1st wave
70                                                                                      25
Kyrgyzstan                                      15
30                                                                                      10
Armenia                                                                5
1990    1991    1992    1993    1994    1995   1996   1997     1998     1999        1990   1991   1992   1993   1994   1995    1996     1997         1998       1999
Source: UN/ECE secretariat based on national account and balance of payments statistics. FDI inflows are cumulated from 1988.
a Nominal GDP, at current prices and exchange rates.
b First wave: Czech Republic, Estonia, Hungary, Poland and Slovenia; Second wave: Bulgaria, Latvia, Lithuania, Romania and Slovakia.
FDI and the Macroeconomy in the Transition Economies _________________________________________________ 23
Ratio of cumulative FDI inflows to GDP (PPP) and progress in
Azerbaijan                                   Hungary
15                                                                     Latvia
Cumulative FDI / GDP (PPP), per cent
10                                          Kazakhstan                                       Poland
R                     Lithuania
Armenia             Bulgaria
5                                       Moldova                                     Slovenia
Albania                          Romania
Russian         Kyrgyzstan
Federation     Georgia
Belarus                       Ukraine The former Yugoslav
Uzbekistan       Republic of Macedonia
0.0   0.5    1.0        1.5       2.0       2.5          3.0                     3.5        4.0
Reform indicator
Source: National balance of payments statistics and EBRD (for the reform
Note: Azerbaijan is excluded from the regression.
24 _________________________________________________________________________ Financing for Development
FDI inflows as a percentage of GDP, 1990-1999
FDI/GDP(PPP)                  FDI/USD GDP (nominal)
1990          1991      1992     1993       1994    1995    1996    1997    1998    1999
1990          1991      1992    1993       1994    1995    1996    1997    1998    1999
3 European CIS
1990      1991    1992   1993        1994   1995    1996    1997    1998    1999
1990         1991     1992    1993        1994    1995    1996   1997    1998     1999
Source: National balance of payments statistics; UN/ECE secretariat for
GDP(PPP).
a Belarus, Republic of Moldova and Ukraine.
FDI and the Macroeconomy in the Transition Economies _________________________________________________ 25
Cumulative FDI inflows per capita and GDP (PPP) per capita
1200                                                                2   =
Cumulative FDI per capita
Latvia     Poland                                 Slovenia
Azerbaijan    Kazakhstan       Lithuania
400                                                      Slovakia
Turkmenistan              Bulgaria
Armenia                    Romania
200                                                   Russian
Moldova        Georgia
Tajikistan                         Belarus           Federation
0               Ukraine
0        2000     4000    6000       8000      10000   12000            14000    16000
GDP(PPP) per capita 1999
Note: FDI inflows are cumulated from 1988-1999.
26 _________________________________________________________________________ Financing for Development
FDI inflows as a percentage of nominal GDP, 1985-1999
South, East and South-East Asia
1985    1987   1989     1991      1993       1995       1997   1999
Source: UN/ECE secretariat for the transition economies; UNCTAD, World
Investment Report 2000 (Geneva), for other areas.
FDI and the Macroeconomy in the Transition Economies _________________________________________________ 27
Cumulative FDI inflows as a percentage of GDP, 1985-1999
28 _________________________________________________________________________ Financing for Development
Export growth and ratio of cumulative FDI inflows to GDP (PPP) a
300                                                               Hungary
250       Belarus
Exports 1999/1993
Tajikistan                         Poland
Georgia                        Kazakhstan
Ukraine                              Lithuania
150                           Armenia
Uzbekistan               Slovenia
100                            Bulgaria      Croatia
0                  5              10            15                      20       25
Cumulative FDI/GDP(PPP)
statistics and merchandise trade statistics.
a Ratio of exports (in dollars) in 1999 relative to 1993. FDI is cumulated
from 1988 to 1999.
FDI and the Macroeconomy in the Transition Economies _________________________________________________ 29
GDP growth and FDI inflows as a per cent of nominal GDP, 1990-1999
FDI inflows as per cent of GDP                  GDP growth
Albania                                                                                          Hungary
-15                                                                                               -5
-25     1991             1992                   1993                 1994                 1995                  1996            1997             1998                 1999
-30                                                                                              -15
1991     1992   1993      1994     1995          1996   1997          1998   1999                1991     1992   1993   1994     1995   1996      1997   1998          1999
Bulgaria                                                                                         Poland
-15                                                                                                   -10
1991     1992   1993      1994     1995          1996   1997          1998   1999                1991   1992     1993   1994     1995   1996      1997   1998          1999
Croatia                                                                                          Romania
-25                                                                                                   -15
Czech Republic                                                                                   Slovakia
-5                                                                                                -5
-10                                                                                                   -10
-15                                                                                                   -15
(For Source see end of chart.)
30 _________________________________________________________________________ Financing for Development
CHART 8 (concluded)
FDI inflows as per cent of GDP                    GDP growth
Slovenia                                                                                         Latvia
0                                                                                                -15
1991             1992                   1993                 1994                 1995
-35             1996            1997             1998                 1999
-10                                                                                               -40
1991     1992   1993      1994     1995          1996   1997          1998   1999                1991     1992    1993   1994     1995   1996      1997   1998          1999
The former Yugoslav Republic of Macedonia                                                         Lithuania
5                                                                                                10
-10                                                                                                     -25
1991     1992   1993      1994     1995          1996   1997          1998   1999                1991   1992      1993   1994     1995   1996      1997   1998          1999
1991     1992   1993      1994     1995          1996   1997          1998   1999
Source: UN/ECE secretariat based on national account and balance of payments statistics.
FDI and the Macroeconomy in the Transition Economies _________________________________________________ 31
Growth of GDP and ratio of cumulative FDI inflows to GDP (PPP) a
Belarus        Republic of Macedonia
Kyrgyzstan                                          Estonia
5                      Slovenia
Uzbekistan                                           Latvia
0.0   7
4         Tajikistan         Armenia
Georgia       Slovakia                 Croatia
2                                 Lithuania
Russian      Bulgaria
1        Federation
Ukraine                             Czech Republic
-2                           Moldova
0                  5                  10                  15                   20     25
Source: UN/ECE secretariat based on national account and balance of
payments statistics.
a Average growth of GDP, 1997-2000 (estimates). FDI inflows are
cumulated from 1988 to 1999.
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