no massive diversion of foreign direct investment seen

 

on eve of european union enlargement

(Reissued as received.)

GENEVA, 30 April (UNCTAD) -- Contrary to prevailing perceptions, the 10 countries joining the European Union tomorrow have not been diverting massive foreign direct investment (FDI) flows away from the 15 older members of the Union, the United Nations Conference on Trade and Development (UNCTAD) has found.  During the late 1990s and early 2000s, the combined inflows of the 10 new members -– Cyprus, CzechRepublic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia -– remained considerably lower than those of such current European Union States as France and Germany and, more recently, Ireland and Spain (see table).

It thus comes at no surprise that since the mid-1990s, the FDI inflows of the “accession-10” have accounted for a fraction of those of the European Union-15 -– a mere 3.5 per cent in 2003, down from a high of 10.6 per cent in 1995.  While part of the low inflows of the early 2000s can be explained by such short-term factors as the end of large privatization deals -– first in Hungary, then in Poland and, last year, in the Czech Republic and Slovakia -– the gap between real and potential FDI is too large to be explained by such factors alone.

The low numbers suggest a large untapped FDI potential in the accession countries, as well as a need for concerted policy efforts between home and host countries, to speed up both the integration of the accession group into the enlarged European Union and the group's economic catching-up with the 15 older members.

    The countries joining the Union tomorrow have developed and improved on the key ingredients for becoming a major pole of attraction for FDI within the enlarged Union, partly during their early transition from centrally planned to market economies –- with the exception of Cyprus and Malta –- and partly during the accession negotiations.  Within the enlarged European Union, the accession countries offer both competitive production costs and relatively low tax burdens.  In parallel with the accession negotiations, huge amounts were invested in improving the physical infrastructure -– an effort that is expected to continue after accession.  The group's main source of competitiveness is its labour skills, the driving force behind the most dynamic product segments of FDI.  One advantage of Union membership of great value to firms locating within the accession countries is the relatively untrammelled access it provides to a large customs union.  Membership also increases the stability and safety of investments.

One of the main reasons why FDI has not yet increased so fast in the accession group may be related to the nature of foreign direct investment, especially the sunk costs of existing projects.  New locations are considered only if firms are envisaging large new ventures, and even then, they must consider the trade-off between the synergies and relative security of old locations and the lower costs offered by new ones.

Despite a widespread perception that changing locations automatically means job losses, the accession countries are far from posing the threat often attributed to them.  First of all, the relatively low level of their FDI suggests they cannot be a major source of the employment problem currently facing the Union-15.  Secondly, the location of FDI projects is not a simple game of win or lose.  The locations not chosen for a given activity can still retain business links with the new project (and thus create additional jobs).  Thirdly, as the example of the food industry shows, reorganization itself is a two-way street:  projects can be relocated from accession countries to older Union members if the latter offer better agglomeration advantages.

The low level of FDI in accession countries might also be due to a lack of vigorous home-country measures in the 15 older member States and at the level of the Union.  Because of the perception that new countries are a threat to jobs at home, no member country thus far has felt obliged to suggest a programme of outward FDI promotion in new member countries.  The gradual introduction of structural and cohesion funds into the new members -– in the first year, they will be entitled to only 35 per cent of what is provided to old members (a differentiated treatment favouring the rich over the poor) -– could further handicap their efforts to attract FDI.

Despite the short-term constraints on FDI in new European Union members, UNCTAD believes there is reason for hope in the medium and longer term.  It is expected that despite the lack of policy support, investors will substantially increase their presence in accession countries because it makes good business sense.  By 2014, the transition period for regional and structural funds provided to new members will be over, and accession countries will be entitled to the same assistance as the Union-15.  Furthermore, awareness of the interdependence of welfare in the two parts of the enlarged European Union might well increase.  If perceptions change, home countries might give more serious consideration to the idea of promoting investment in the new member States.

Firms from outside the European Union in particular are likely to locate increasingly their efficiency- and Union-market-seeking new FDI in the accession countries.  For them, the considerations of sunk costs and home-country pressure might be less relevant.  They, in turn, could imitate the strategy of such firms as Flextronics (Singapore) that have started using accession countries as a regional export platform.  These platforms have in part replicated the global production strategy with which such firms experimented in China.

Table. FDI inflows of the countries acceding to the European Union (EU) in 2004      in international comparison, 1995-2003
(Billion dollars)
Country/region	1995	1996		1997	1998	1999	2000	2001	2002	2003p
Countries acceding to EU	12.1	10.7		12.6	16.7	20.0	21.7	19.5	21.5	11.7
of which:
CzechRepublic	2.6	1.4		1.3	3.7	6.3	5.0	5.6	8.5	2.6
Hungary	4.7	3.3		4.2	3.3	3.3	2.8	3.9	2.9	2.5
Poland	3.7	4.5		4.9	6.4	7.3	9.3	5.7	4.1	4.2
Slovakia	0.3	0.3		0.2	0.7	0.4	1.9	1.6	4.0	0.6
Memorandum items:
World	332.9	385.1		484.6	686.7	1 077.9	1392.0	826.1	644.7	650.7
EU-15	114.4	110.7		127.9	249.9	475.5	683.9	389.4	374.4	332.4
of which:
Belgium and	10.7	14.1		12.0	22.7	119.7	88.7	88.2	..	..
Luxembourga
Belgium	..	..		..	..	..	..	..	18.3	22.9
Luxembourg	..	..		..	..	..	..	..	125.7	103.3
France	23.7	22.0		23.2	31.0	46.5	43.3	55.2	51.5	36.2
Germany	12.0	6.6		12.2	24.6	55.8	203.1	33.9	38.0	36.1
Ireland	1.4	2.6		2.7	8.6	18.5	26.4	15.7	19.0	34.3
Spain	6.2	6.6		7.7	11.8	15.8	37.5	28.0	21.2	18.8
Accession countries per EU-15 (%)	10.6	9.7		9.9	6.7	4.2	3.2	5.0	5.7	3.5
Source: UNCTAD, FDI/TNC database.
p: preliminary.
a: until 2001, no separate data were available for Belgium and Luxembourg.

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