“Round Table of the CEI Ministers of Economic Sectors. Role of Foreign Direct Investment (FDI) for CEI Countries’ Economies in view of EU enlargement”
Warsaw, 20 November 2003
Statement by Mrs. Brigita Schmögnerová,
“Prospects for foreign direct investment in the CEI area in post-enlargement Europe:
regional cooperation or competition?”
The CEI Region has successfully entered into global competition for FDI. While its share in global FDI at the beginning of the 1990s was close to one per cent, it increased five-fold within a decade. CEI countries continued to perform well in 2000-2002 despite the global FDI decline affected by the global slowdown of GDP growth and low investment tendency. What is encouraging is that in the CEI member States acceding to the EU, FDI increasingly entered into medium and high technology level production and into production with medium or high-level skills.
In spite of the rapid expansion of FDI in the CEI region there is a considerable heterogeneity within the region in terms of FDI per capita, FDI production share in GDP and in FDI generated exports. The strongest FDI inflow is in 2004 acceding countries, disproportionately lower in Bulgaria and Romania (Croatia performs better). FDI is increasingly taking part in the former Yugoslav Republic of Macedonia. There are also first FDI starts-up either as green field investments or buy-outs of state assets in Serbia and Montenegro and other Western Balkan countries. The CEI members in general have already attracted FDI in energy industry (oil and gas) but no significant improvement can be seen in the non-energy sector.
Is EU enlargement likely to improve investment opportunities for non-acceding CEI members and members in the framework of the Stability and Association Process? Or, on the contrary, will investment possibilities and FDI attractiveness decrease for all but 2004 acceding countries? The 2004 acceding countries, including the Baltic States, have become arguably significantly more attractive to FDI than most of the other European and CIS economies. Is there a further danger that 2004 non-acceding countries will be crowded out and their attractiveness for FDI further deteriorate? In order to answer this question we have to consider various aspects as discussed below.
Without any doubt, apart from global competition for FDI, regional competition for FDI will continue to exist. CEI members have competed for FDI a great deal. In general, in the non-energy sector FDI inflow depends significantly on progress in reforms, including regulatory environment and business environment, level of corruption, efficiency of the judicial system, market size, transport and communication infrastructure development, skill levels, etc. Many governments also provide different targeted FDI incentives like tax incentives (tax exemptions, tariff and tax free zones, etc.), direct or indirect subsidies. They agree with a lower level of environmental and labour standards. Investment incentives do matter, but like in “pyramid savings”, the first benefit most and the last lose. Competition in investment incentives generates a race to the bottom with a likely detrimental impact on budget. It leads to social dumping through low labour standards and low level wages, produces environmental degradation, etc. The acceding countries which provided incentives incompatible with the EU rules on state aid, EU labour or environmental standards will have to comply with the EU rules within the agreed transition period if they have not done so in advance. This is a challenge not only for governments but also for companies, whether small, medium-sized or large TNC. Governments should therefore not make large, if any concessions, with clear sunset clauses, to environmental, social or ethical responsibilities of foreign investors. If they do so, compliance with EU rules at a later stage could result in a drastic reduction of FDI and have negative implications on growth and employment.
Targeted investment incentives do not by far represent the most important allocation factor for FDI. There are numerous studies providing analysis of factors of FDI attractiveness and while they may differ in prioritisation, the list of factors is more or less identical. The power of most of the factors, excluding targeted investment incentives, might be strengthened by cooperation of neighbouring countries or by regional cooperation as such. It is therefore important to raise governments’ awareness that they should cooperate and not exclusively compete for FDI. Efficient cross border cooperation (cross border production networks, cross border labour movements, cross border trade facilitation, efficient and not too expensive cross border transport and communication) might attract FDI to the borders of two or more countries so that they can share the benefits of FDI even if not on an equal basis. I would like to use this opportunity to inform you that the UNECE contributes extensively to cross border facilitation by its work in trade and transport through many norms, standards and conventions (like the TIR convention, UN e-docs, etc.).
Apart from cross border cooperation, regional cooperation within the EU and in the framework of SAP and wider Europe may significantly improve the prospects for FDI in the CEI region through:
(a) strengthening political stability, democracy and security in the region - the key factor of FDI attractiveness;
(b) improving the regulatory environment through regulatory convergence either in the form of transposition of EU directives into legislation by its Member States or approximation of legislation in non-acceding countries and in the Western Balkan countries that do not have to adopt the “acquis communautaire” at this stage;
(c) improving the business climate, like achieving macroeconomic stability and growth, increased predictability, lower administrative barriers, etc. EU membership and commitments to comply with Maastricht criteria, however, by an unspecified time will discipline the fiscal policy of governments with positive implications for inflation and interest rates. In addition to this, the acceding countries, in the framework of the BEPG, will intensify their efforts to speed up structural reforms, increase productivity and competitiveness. It is likely that EU enlargement will generate higher growth rates and so will increase imports from non-acceding countries. The extent of the impact will depend on the strength of EU growth, on the share of non-acceding countries in EU imports and on the ability of these countries to respond to increased demand;
(d) Cooperating more intensively in the development of a knowledge-based economy through sharing investments, experience, and good practices in education, ICT, and R & D. Many EU initiatives (like eEurope, educational programmes such as ERASMUS, etc.) provide an appropriate framework. A high priority should be given to this field, since in recent years expenditures in education and R &D in most CEI member States have declined and are much lower than in the EU-15.
(e) In order to promote further economic cooperation within the CEI region and to enhance attractiveness for FDI, it is inevitable to further up-grade transport and communication infrastructure and adopt common norms and standards. The UNECE has always attached great importance to the development of transport infrastructure. We have developed four major infrastructure agreements that are the only pan-European basis for the long-term development of international networks for inland transport. They were the basis on which pan-European transport corridors have recently been extended to include the network of the Caucasus and Central Asian UNECE member countries. Furthermore, the UNECE has been supporting the TEM and TER projects in order to promote coordinated development of road and rail networks in the CEI region.
To conclude, it would be a missed opportunity not to make use of the great potential in the CEI region to address FDI attractiveness through regional cooperation. New prospects for economic cooperation, that in the future will perhaps develop into a free trade area which will include the European Union, South-east Europe and new neighbours in the framework of wider Europe, would provide the market size, the business and the regulatory environment and adequate infrastructure which would be of great attractiveness to FDI. The EU Lisbon strategy target to make the EU the most competitive economy of the world by 2010 is not only a challenge, but if achieved would be a further boost to FDI. In order not to be left aside, the CEI new EU and non-EU members must therefore continue to reform their economies, invest in the infrastructure, ICT, R&D and in human skills. UNECE will continue to cooperate with the CEI to achieve these common goals.