Press Release ECE/GEN/00/33
Geneva, 7 December 2000
"FINANCING FOR DEVELOPMENT" Conference Holds Panel Debate
on Transition Economies and Foreign Direct Investment
Group Discusses Methods for Spreading Foreign Capital Flows to a
Wider Range of Countries
A panel of economists and investment specialists said this morning that
foreign direct investment was highly influential in speeding structural economic change in
Central and Eastern European countries and in improving their international
competitiveness.
They also noted, however, that the bulk of such investment had been
going to a small group of transition countries and that extending its benefits to other
nations, particular those in southern and the extreme eastern regions of Europe, would be
a complex and difficult task.
The discussion, entitled "FDI (foreign direct investment) and the
restructuring of transition and emerging economies", was held as part of a conference
on financing for transition countries. The two-day gathering -- the "UN/ECE Regional
Conference on Financing for Development" -- is organized by the United Nations
Economic Commission for Europe (UN/ECE) in cooperation with the European Bank for
Reconstruction and Development (EBRD) and the United Nations Conference on Trade and
Development (UNCTAD). One of its aims is to offer input to a High Level Intergovernmental
Event on Financing for Development to be convened next year by the United Nations General
Assembly.
A separate, simultaneous panel debate was held this morning on the
topic of "a regional perspective on global financial issues".
Chairing the discussion on foreign direct investment was Krzysztof
Ners, Deputy Minister of Finance of Poland, who opened the meeting by saying that foreign
investment flows could be catalysts for economic restructuring and development, and
especially for opening up economies to world markets, but also could cause short- and
medium-term problems, among other things in terms of current-accounts deficits.
Serving as introductory speaker was Gabor Hunya, of the Vienna
Institute for International Economic Studies, who said, among other things, that FDI was
not the main source of capital financing development, but it was a "special"
source, as it brought not only capital but technology; that significant inflows of such
funds appeared to speed the rate of structural reform in transition economies; that often
the firms affected were export-oriented and enhanced a country's international
competitiveness; that inflows of foreign capital did not appear to solve employment
problems; and that problems as well as benefits could result from FDI, such as gaps
between the profits and progress made by foreign affiliates and domestic companies, a loss
of independence in business decision-making, and, through higher specialization of
foreign-capitalized industries, more vulnerability.
Mr. Hunya and others noted that to date FDI inflows were very unevenly
distributed -- the great bulk had gone to the Czech Republic, Hungary, Poland, and the
Russian Federation -- and that to attract such investment, other countries had to carry
out a number of complex reforms that involved not only policy changes but their
implementation in a fashion that was thorough enough and consistent enough to foster
confidence in potential investors.
Panellists were Rolf Alter, Co-Chair of the Investment Compact Project
Team of the Stability Pact of the Organisation for Economic Cooperation and Development
(OECD); Richard Eglin, Director of the Trade and Finance Division of the World Trade
Organization (WTO); John Fitzgerald, Research Professor at the Economic and Social
Research Institute of Dublin; Jonathan Harris, President of the Royal Institute of
Chartered Surveyors of the United Kingdom; Eugenijus Maldeikis, Minister of the Economy of
Lithuania; Aleksei Moiseichikov, Ambassador on Special Commissions of Belarus; Signe
Ratso, Deputy Secretary General of the Ministry of Economic Affairs of Estonia; Karl
Sauvant, Chief of International Investment, Transnationals and Technology Flows Branch,
Division on Investment Technology and Enterprise Development of UNCTAD; Joseph Smolik,
Chief of the International Economic Relations Section of the Economic Analysis Division of
the ECE; Vassili N. Takas, Co-Chairman of the Business Advisory Council of the South East
European Cooperative Initiative, of Greece; and Ralf Zeppernick, Director in the
Foreign Trade Division of the Ministry of Economy of Germany.
Introductory statements
KRZYSZTOF NERS, Deputy Minister of Finance of Poland, Chairman of the
session, said two major issues should be reviewed: what contributed to the inflow of FDIs,
including enabling institutional environments and incentives; and the economic
consequences of FDIs. FDIs could be catalysts of economic restructuring and development,
but also could cause short- and medium-term problems, especially in terms of
current-accounts deficits. FDIs were one of the most important players in the process of
opening to world economies, which was critical for the process of transition.
GABOR HUNYA, of the Vienna Institute for International Economic
Studies, said FDIs supported the whole transition process -- they played a role in
knowledge, technology, in changing attitudes, and in all other aspects of the process. To
date the bulk of FDI had gone into four transition countries, the Czech Republic, Poland,
Hungary, and the Russian Federation -- although Russia was so large that this inflow was
"small" in terms of the Russian economy. Perhaps the Baltic countries also, in
terms of their size, were receiving notable flows of foreign investment. Some countries
had received quite little, such as Slovenia, and yet had been relatively successful in
their growth processes. FDI had been fairly uneven, year by year, as it was connected with
privatization programmes and privatization "sales" in transition countries. FDI
appeared not to be the main source of capital financing development, although it was a
special source, as it brought not only capital but technology, for example.
About 70 per cent of industrial output in Hungary was produced by firms
that had foreign affiliates or connections, Mr. Hunya said. Employment problems appeared
not to be solved by the inflows of foreign capital. Foreign affiliates were more
export-oriented than domestically focused companies, and that in turn led to an ability
for countries hosting them to participate in world markets. As for the types of industries
FDI was involved in, in the more-developed countries, such as Poland, it was usually
technically advanced fields such as motor vehicles; in less-developed countries, it was
more light industry and consumer goods aimed for domestic consumption. There was a
positive link between FDI penetration and international competitiveness, and between FDI
and the speed of structural economic change in transition countries.
There also were problems, Mr. Hunya said, and FDI certainly didn't
solve all problems of transition countries. There was usually a gap between profits and
progress made by foreign affiliates and domestic companies, and some industries, such as
steel, did not seem to be helped by FDI. Also, companies that had a great deal of FDI lost
a great deal of their independence in decision-making; and through higher specialization
they could, paradoxically, become more vulnerable.
Panellists' statements
ROLF ALTER, Co-Chair of the Investment Compact Project Team of the
Stability Pact of the Organisation for Economic Cooperation and Development (OECD), said
it was important to consider how to structure a reform process to attract FDI in such a
way that it was most useful. FDI helped to close finance gaps; that was clear; other
benefits also were clear; the question was how to do it. In southern and eastern Europe,
the effect to date was disturbingly weak. Legal frameworks were often in place, but they
weren't enough -- they had to be implemented; that was vital. The complexity of change
could be overwhelming, and policies to carry out change had to be consistent.
Foreign investment was an engine for integration in the world economy,
it was true, but that was true for all economies, Mr. Alter said; that included the OECD
countries. Being willing to change on a constant basis in order to remain competitive was
the key thing -- that was an attitude that had to be learned, and it was a challenge for
transition countries and their institutions to shift to this kind of perspective.
RICHARD EGLIN, Director of the Trade and Finance Division of the World
Trade Organization (WTO), said rules, if made standard and enforced, "locked in"
policies that were useful for attracting investment flows; the WTO was considering such
rules for foreign direct investment, with the possibility that they would be extended to
cover investment in broader terms.
Already "half" a set of rules existed, Mr. Eglin said;
proposals were being made to extend them to other sectors, such as manufacturing and
agriculture. Negotiations were now being carried out, and probably would continue through
most of next year, with countries on what might be the effects on them of signing onto
rules regulating foreign direct investment.
JOHN FITZGERALD, Research Professor at the Economic and Social Research
Institute of Dublin, said that in 1960, Ireland was one of the most closed economies in
Europe; a major change in policy focusing on foreign direct investment had been one of the
critical tools in making Ireland internationally competitive and in turning the country's
economic performance around. Firms coming to Ireland knew they would be treated equally
under the law, particularly in terms of tax policy; successive Governments had doggedly
preserved that consistency. Not EU membership so much as agreement on membership also had
been a spur for investment in Ireland.
It was clear that labour costs were important -- investors wanted to
produce cheaply -- but in addition, it was useful to have domestic skills, such as
management skills, to supply, Mr. Fitzgerald said. Streamlining bureaucracy was critical
-- Ireland had succeeded in making it relatively simple for firms to set up there; IBM,
within 18 months of deciding to build a plant in Ireland, had built it and put it
into operation. It also had helped that Irish workers had been employed for decades by
multinational firms overseas; they had returned home and now ran and managed foreign
affiliates within Ireland. There was a danger in doing too much to attract foreign firms
-- you had to strike a careful balance; it wasn't easy; and it helped to have a diversity
of businesses; if the computer business caught a cold, for example, Ireland would be in
trouble.
JONATHAN HARRIS, President of the Royal Institute of Chartered
Surveyors of the United Kingdom, said chartered surveyors performed a multitude of
functions and had a great understanding of what potential investors required when
considering putting money into new locations. Private investors would not be attracted to
any country unless certain fundamental systems were in place -- systems governing land and
property. Without that, there would no be real confidence.
To establish confidence, Mr. Harris said, Governments should provide,
among other things, sound legal bases for ownership and property, set up and run land
registries, have clear and effective systems for resolving disputes, effectively manage
the public sector's own land and property, and operate a fair property-tax regime. In
addition, Governments should make their operations transparent, so that the costs were
clear and could be seen by investors to be fair and sustainable; and their actions should
be ordered so as to do things of service to the public rather than to "control"
the public. Governments should in fact have a national land policy to ensure that its
various components did not act in conflict.
EUGENIJUS MALDEIKIS, Minister of the Economy of Lithuania, said
attracting FDI, especially to small countries, required tax incentives and related steps
to increase competitiveness with neighbouring countries. Lithuania's experience showed
that small domestic companies reacted and there was a strong consolidation process
consisting of mergers and acquisitions. Instruments, regulations, and legal bases had to
be set up to keep the system fair for all -- domestic firms, for example, might try to
establish cartel arrangements to keep out foreign firms. Regional issues also were
important and had to be balanced; Governments had a strong interest in even development.
Municipalities should be supported by Governments so that their
business climates and their transport systems and other infrastructure could attract
foreign investment, Mr. Maldeikis said. Utilities were an extremely important area, and
Government contract policies involving the utility sector should be transparent and should
be seen to be fair.
ALEKSEI MOISEICHIKOV, Ambassador on Special Commissions of Belarus,
said Belarus was a transition economy that was achieving its growth through domestic
transformation; FDI, which could play a useful role, hadn't come to much so far. A legal
basis had been laid down for foreign investment, with a law in force since 1991; much
other legislation had been amended. Stability was important, and the Government was doing
all it could to provide a stable business environment. There was a Belarus Agency for
Promotion of Foreign Investments that worked with potential investors to find solutions to
various obstacles.
There were some 2,800 firms connected with foreign capital, Mr.
Moiseichikov said, and they employed tens of thousands of people; much of the output of
these firms went for export. Economic zones recently had been set up for foreign
businesses, and these offered tax benefits and tax incentives. Land was not sold to
foreign investors but leased for 99 years; it was hoped that the length of such leases
would help attract foreign investors.
SIGNE RATSO, Deputy Secretary General of the Ministry of Economic
Affairs of Estonia, said Estonia's model for transition was to have rapid privatization,
little regulation, and no incentives; it had worked in Estonia's case; it was a small
country and had focused on providing an open economy with a liberal attitude towards all
investors. Consistency was an important element; since Estonia had regained independence,
it had kept its economic-policy cornerstones the same -- free trade, free attitude towards
all investors. The aim was to create as favourable an economic climate as possible for all
investors, domestic or foreign.
There was a fixed-exchange-rate system and an emphasis on a balanced
budget, a simple and consistent tax system, and on keeping tax rates as low as possible,
Ms. Ratso said. International rankings of various sorts related to business and
investment climates now ranked Estonia quite highly. Efforts were being made to reduce
costs for small- and medium-sized businesses, including domestic businesses. Almost all
sectors of the economy had been privatized. One matter that had proved very important for
attracting FDI was providing a good telecommunications infrastructure, and Estonia had
been successful at this.
KARL SAUVANT, Chief of International Investment, Transnationals and
Technology Flows Branch, Division on Investment Technology and Enterprise Development of
UNCTAD, said FDI actually was a triangle arrangement consisting of investing countries,
recipient countries, and transnational corporations. The rules for the game were set by
international financial institutions. The international framework for such investment had
become more and more hospitable over the last decade, and UNCTAD was helping transition
countries to improve and set up state-of-the-art investment climates. For host countries,
there was one persisting difficulty; attracting FDI was one thing, but increasing its
domestic benefits was another. If managed right, FDI should contribute to establishing a
vibrant domestic enterprise sector.
Perhaps an inventory of best practices should be put together by
investing countries to show what best stimulated investment outflows to appropriate
recipient countries, Mr. Sauvant said.
JOSEPH SMOLIK, Chief of the International Economic Relations Section of
the Economic Analysis Division of the ECE, said the secretariat had provided two papers on
FDI for the conference, including analyses of FDIs and their impacts on various industries
in selected countries. FDI "spillovers" didn't appear to have received
sufficient attention. The direct effects of FDI on an economy stemmed from the fact that
it increased resources, including technology and management resources. Indirectly, FDI
could create positive spillovers by increasing the potency of domestic firms. FDI exposed
domestic firms to competition, which made them more efficient and effective, and created
forward and backward linkages, by drawing on local suppliers, for example. Spillovers
could result in increased domestic investment, known as the "crowding-in" effect
of FDI. This was not an automatic benefit -- it happened in some cases and not in others.
Foreign firms could have negative spillovers, too, Mr. Smolik said.
They could drive out domestic firms, for example. A limited presence of spillover effects,
positive or negative, might be an indication that FDI flows weren't sufficient. In the
best scenario, FDIs had a significant positive leverage effect on domestic economies.
VASSILI N. TAKAS, of Greece, a member of the Business Advisory Council
of the South East European Cooperative Initiative, said the Initiative was intended to
spur development of the economies of the region. Attracting investment to the region had
not been easy to date, and less had come than to the Central European countries. The
region was small and had gone through turbulent times; if something happened in one
corner, it affected the whole; the Bosnian crisis, for example, had affected the entire
region. The Balkans had been left behind, in a sense, in part because of their
unfavourable starting point in terms of economic development; there was a lack of
entrepreneurial spirit and enabling investment framework; and there was the fallout from
the breakup of the former Yugoslavia.
The human capital situation exceeded current economic development in
the region, Mr. Takas said; there was a well-educated and trained labour force. Other
comparative advantages were a large, populous market -- some 100 million people in the
region; a low cost of labour; and extensive progress in privatization. Regional
governments were being advised by the Initiative on ways to overcome impediments to
attracting foreign investment.
RALF ZEPPERNICK, Director in the Foreign Trade Division of the Ministry
of Economy of Germany, said there was a far-reaching consensus on the positive effects of
FDI, also a consensus on the policies to be adopted by host countries to attract FDI. The
key was in realizing those policies. Estonia was a heartening case study showing that
implementing such policies could have successful results. Germany, after World War Two,
and after the recent reunification of the country, had found that such investment was
critical. It seemed to work best with those countries that had implemented lasting
economic reforms and had good potential for long-term economic development. Fifty per cent
of FDI to the transition countries had gone to three of them -- Poland, Hungary, and the
Czech Republic.
One also had to remember that there was intense international
competition for FDI, Mr. Zeppernick said. Among other things, transition countries were
competing with the United States, which was by far the most successful nation at
attracting FDI. Germany had found that the "breeding ground", the economic
environment, had to be well-established for FDI to be fostered. It was best if a country's
overall economic policy -- not just selected parts of it -- was good; you had to get the
basic things right; there was no short way around.
Discussion
A number of comments came from the floor, with speakers contending,
among other things, that a stable political situation bolstered by such things as
membership in NATO and affiliations with the EU could help a country build confidence in
potential foreign investors; that steps could be taken by host countries to steer such
investment into less-developed regions of the national territory; that regional trade
links and trade corridors were important for stimulating private investment; that the
details of "success stories" in attracting FDI and in carrying successful
economic transitions should be further publicized and spread; and that the conversion of
economies formerly heavily dependent on military-industrial production posed special
political and social problems both in implementing transition and in attracting foreign
investment.
For further information
please contact:
Economic Analysis Division
United Nations Economic Commission for Europe (UN/ECE)
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Tel: (+41 22) 917 27 18
Fax: (+41 22) 917 03 09
E-mail: [email protected]
Website: http://www.unece.org/ead/ead_h.htm