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East/Central Europe: Investments Reached Record High

  • Robert Lyle



Washington, 11 November 1998 (RFE/RL) --Foreign direct investment into Central and Eastern Europe increased by 44 percent to a record $19 billion in 1997, according to the newest World Investment Report released Tuesday by UNCTAD, the Geneva-based United Nations Conference on Trade and Development.

Russia accounted for more than a third of the region's total, more than doubling from 1996 to $6.2 billion in 1997.

Even with the Russian financial crisis, UNCTAD's Chief of International Investment, Karl Sauvant says, 1998 is expected to see foreign direct investment remain about the same:

Sauvant says inflows to the area will be more or less the same because the Russian crisis occurred late in the year. At the same time, foreign direct investment into countries like Poland is going up, so the regional total should remain level.

Sauvant told a Washington press conference releasing the report that it is important to understand that foreign direct investment is quite different from portfolio investment or bank lending. Foreign direct investment is very long term, he said.

Sauvant says foreign direct investment is investment in defined assets which involves a management control by the foreign investor for at least a year. Anything else is portfolio investment or capital flight. There are some border-line cases, says Sauvant, but the underlying principle carefully defines what is foreign direct investment.

Almost all foreign direct investment comes from transnational firms. American-based General Electric company has the highest amount of foreign assets of any other firm in the world.

The East/Central European area has one of the lowest stocks of foreign direct investment, says Sauvant, mostly because investment was not allowed until the 1990s. But even today, the region receives far less than its level of development would indicate. In 1997, the region drew only 1.8 percent of the world's total of foreign direct investment.

Sauvant says that once most of the countries in the region "put their houses in order, so to speak, one can expect a considerable increase in foreign direct investment flows."

On the other side of the ledger, foreign direct investment flows OUT of the countries in the region are very low, hitting just $3.4 billion last year.

About $2 billion of it was from Russia, almost all of which went outside the Commonwealth of Independent States (CIS). That indicates that investors wanted to diversity assets as a safeguard against domestic instability, says the report.

Sauvant says that foreign direct investment both inward and outward is very important in a world where the economy is liberalizing and globalizing. No longer can any country or company think it can have a protected market for it's products or services:

Sauvant says the winds of competition are blowing everywhere and part of the drive to remain competitive demands having assets in many different locations. That means, for example, that U.S. companies must invest abroad, but as importantly, foreign companies must invest in the U.S. In fact, he says, the U.S. is the largest recipient of foreign direct investment in the world.

Companies, especially those providing services, have no alternative but to invest in the countries where they want to sell their services, says Sauvant, because services are not tradable. This underlines the fact that no local market niches are protected from global competition, he says, and that affects both large and small companies:

Sauvant says that in the 14 most important developed countries, there were under 9,000 transnational firms at the end of the 1960s, but that now those countries host 27,000 such international companies, which means many are small and medium sized. All must remain as efficient as possible and increasingly making direct investments in other countries is a key source of competitive strength.

Global foreign direct investment is expected to reach around $440 billion this year, a 19 percent increase in inflows and a 27 percent rise in outflows. The increase is projected despite slower world economic growth and the various financial crises, says the report.

The complete report can be seen on UNCTAD's web page at www.un.org/publications.

Following are individual country foreign direct investment inflows as listed in the 1998 World Investment Report compiled by UNCTAD, the United Nations Conference on Trade and Development:

All figures in millions of dollars:

Country/Region 1996 1997

Central Asia 2,084 2,627 Armenia 18 43 Azerbaijan 601 872 Georgia 103 100 Kazakhstan 1,137 1,320 Kyrgyzstan 47 83 Tajikistan 16 4 Turkmenistan 108 121 Uzbekistan 55 85

Central/East Europe 12,344 18,428 Albania 90 48 Belarus 18 163 Bulgaria 109 497 Czech Republic 1,428 1,301 Estonia 150 262 Hungary 1,982 2,085 Latvia 382 418 Lithuania 152 355 Moldova 45 43 Poland 4,498 5,000 Romania 265 1,224 Russia 2,452 6,241 Slovakia 251 170 Ukraine 521 623

Developing Europe 1,029 796 Bosnia - 1 Croatia 533 348 Malta 300 110 Slovenia 186 321 Macedonia - -

Other Iran 26 50 Iraq - - Turkey 722 606

More figures available on UNCTAD's website at: www.un.org/publications

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