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The East: Investment Lags Behind Rest Of World

By K. P. Foley

Washington, 22 September 1997 (RFE/RL) - United Nations economic experts say Central and Eastern Europe and the countries of the former Soviet Union are not attracting as much foreign investment as the rest of the world, and prospects for an increase in investment are mixed.

The UN Conference on Trade and Development's annual report on world investment says foreign direct investment into the entire region of former communist countries was $12 billion last year. That is a decrease of $2 billion from the year before.

Even with the decline, the UN notes that foreign investment in the region is still twice what it was in the years 1992-94.

Investment in the region is still concentrated heavily in the Czech Republic, Hungary, Poland and Russia, the report says. The Czech Republic, Hungary and Poland alone accounted for 68 percent of the whole region's foreign investment.

According to the U.N, "privatization is proving to be a critical factor," in attracting foreign investment in the region. The main investors are big, so-called trans-national corporations from Western Europe and the United States, the UN said, although some developing countries in Asia -- mainly South Korea -- are starting to invest in Central and Eastern Europe.

Privatization -- the selling off of state enterprises to private concerns -- is at different stages of development in the region, and the UN says the reduced levels of investment reflect, in part, declines in investments connected to privatization schemes.

The biggest drops were reported in Hungary, where investments were off by about $3 billion from the year before, the Czech Republic, which saw a decrease of more than $1 billion, and Russia, where investment was down by $200 million. Only Poland saw a substantial increase, to $5.2 billion.

The drop in foreign investments, the UN says, "also reflects problems related to transition to a market economy." The UN says that, "without a stable market economy in place, some foreign investors may have overestimated the region's potential to absorb (foreign direct investment) and temporarily shelved plans for expansion."

Nevertheless, the UN says the prospects for privatization investments are still good, especially in countries such as Bulgaria and Romania, where large scale privatization efforts are just getting underway.

Even in countries where privatization is advanced, such as the Czech Republic, there is still the prospect for more investment, although the extent varies from project to project.

One good sign mentioned in the report is the increase in investments not connected to privatization projects and which are directed at domestic and regional markets. The report says these investments are driven by closer trade links with the European Union. There has also been an increase in investment by trans-national companies looking for efficiency. The UN says many companies are taking advantage of the availability of skilled, but low-cost, labor.

Another encouraging development, the report says, is "a small but growing share," of investments within the region, particularly within the Commonwealth of Independent States.

The report says: "With Central and Eastern European countries recovering slowly from the transitional depression, many companies based there are beginning to rebuild their export networks in other countries of the region."

These countries, the report says, are "banking on their connections and knowledge of markets and a level of local brand awareness that remains high."

Foreign investment, privatization and the opening up of centrally planned economies to market forces has had good and bad results in the region, the UN says.

On the one hand, foreign investment helped to ease the ill effects of outside competition on domestic producers, and, competition helped expose goods and services produced by Central and Eastern European firms to world market prices. In some cases, local companies couldn't compete and were killed off. The report says that left some industries, notably production of television receivers, almost entirely in the hands of foreign owners.

Foreign investment's negative impact, the report says, was reduced competition in some instances. This happened when trans-nationals closed off entry to markets, fixed prices and engaged in anti-competitive mergers. In the early days of privatization, some countries were so eager for foreign investment that they made wholesale concessions to trans-nationals, such as granting exclusive supply rights for long periods.

However, the countries aspiring to join the European Union have learned that anti-competitive practices such as exclusive agreements and big tariff breaks will have to be removed if they want EU membership.