A UN report says investment by major transnational corporations in Central and Eastern Europe increased for the third straight year in 1999. The report said overall capital flows to the region were "remarkable" in the light of a series of crises that shook emerging markets last year, but still lag behind investments that soared in other regions.
United Nations, 4 October 2000 (RFE/RL) -- A UN report says foreign direct investment, or FDI, rose for the third straight year in Central and Eastern Europe in 1999, a sign of resilience despite the effects of the recent Russian and Asian financial crises and the war in Kosovo.
The annual "World Investment Report" by the UN Conference on Trade and Development -- known as UNCTAD -- shows that foreign investors were again most attracted to Poland, the region's largest recipient of investment at $7.5 billion.
The Czech Republic saw its FDI nearly double last year to $5.1 billion. The report attributed this to a turnaround Prague's privatization policies that permitted more foreign involvement.
FDI investment to Russia was $2.9 billion, the second-highest level since economic transition began but still far below its record high FDI of $6.6 billion in 1997 -- before the 1998 financial crisis.
The report said the region's overall investment level of $23 billion was a slight increase from last year. But the region still accounted for less than 3 percent of global foreign direct investment while FDI soared in emerging markets in Latin America and South Asia.
A senior official in the UN Secretariat, Georg Kell, told a news conference yesterday (Tuesday) that a range of factors, including the cycle of privatization in the stronger economies, led to the relatively modest growth of investment in Central and Eastern Europe.
"Much has to do with privatization that has played out in the first wave. That has given us one explanation to it. Another one is, as indeed you know, some perceptions about instability, wait and see, accessions to the European Union."
But the UNCTAD report stressed what it called the "remarkable" resilience of investment in the region, especially Southeastern Europe. Direct foreign investment to Croatia, for example, was $1.3 billion, up from about $900 million. And Bulgaria's FDI increased to $770 million, a jump of more than $200 million.
The situation is less encouraging for Central Asia and the Caucasus nations. Investment flows to the two areas in 1999 were $2.8 billion, down about one tenth from 1998.
Investments in the oil and gas industries of Kazakhstan and Azerbaijan accounted for most of the investments. The report linked lagging reforms in Uzbekistan and Turkmenistan to their poor investment figures. Last year, FDI dropped almost one half in both Turkmenistan (from $130 million to $80 million) and Uzbekistan (from $200 million to $113 million).
Foreign direct investment is money that moves between countries but within the same company or subsidiaries. The UNCTAD study said that, increasingly, large transnational companies are choosing to invest by buying or merging with foreign companies, rather than starting a new company from the bottom up.
The study says mergers and acquisitions by west European countries are becoming increasingly important in the region, going beyond the high-profile moves such as purchases of privatized telecommunications companies. In Hungary, for example, transnational corporations are buying locally owned private businesses. In Poland and the Czech Republic, the restructuring and consolidation of the banking industry is attracting cross-border mergers and acquisitions.
Kell, the UN official, says this reflects a worldwide trend which has made mergers and acquisitions the dominant form of foreign direct investment overall.
"It's technology, communications costs, deregulation and increased competition and the fact that companies indeed view the marketplace increasingly as an integrated market, not national, not subdivided by national boundaries."
Kell, citing the report, said in the short term mergers and acquisitions provide less help to the host country than what are known as "green-field investments," in which companies start new operations. But he said after a few years, there is little difference to be seen.
But one of his colleagues launching the report disputed this. The UNCTAD liaison officer in New York, Khalilur Rahman, told reporters it is not a healthy situation to have so many mergers and acquisitions occurring.
Rahman said this places far too much influence in the hands of single companies, which could be harmful in developing countries.
"You don't want in the end to be in the hands of mega-companies running the whole show. So the lives of people, ordinary people, 10 years, 20 years down the line are going to be affected by this as they are being affected immediately."
UN officials are encouraging developing countries to adopt investment strategies that suit them best. In the long run, they say, there will need to be some sort of global competition policy to handle this aspect of globalization.
(For more information about specific countries, consult the UNCTAD web site at www.unctad.org)