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East: Foreign Direct Investment Is On The Rise In Eastern Europe

A United Nations agency says the flow of foreign direct investment into the countries of Central and East Europe has been rising over the last few years at the rate of 28 percent annually. RFE/RL's Robert Lyle reports from Washington that this is an important, but little noticed, form of investment.

Washington, 28 September (RFE/RL) -- Foreign direct investment, often referred to by its initials as FDI, is investment money that moves between countries, but within the same company or within companies controlled by the same management, such as subsidiaries. When the Pepsi Cola company or McDonald's builds a new plant or expands a facility, that is FDI.

The United Nations Conference on Trade and Development, known as UNCTAD, Monday issued it's latest report on FDI and it found that this kind of investment into Central and East Europe in 1998 totaled nearly $19.5 billion. The biggest recipients were Poland, the Czech Republic, Romania, and Hungary. Russia, which was a major recipient in 1997, experienced a 60 percent drop in 1998 to just over $2 billion.

Most FDI obviously moves within transnational corporations, and World Bank Chief Economists Joseph Stiglitz told a press conference that the global economy is becoming one international production system:

Stiglitz said: "Given the importance of this production system, by FDI and the transnational corporation can play an important role in integrating developing countries deeper into the global economy."

Stiglitz said foreign direct investment is long-term and is so good because it brings with it a package of resources, including technology transfers, access to other markets, modern managerial and organization practices and training.

Stiglitz said: "These characteristics really stand out in very marked contrast to short-term capital flows, which can (quickly) come in and out of a country, do not bring with them knowledge, do not bring with them the training, do not bring with them the organization, do not bring with them the access to markets that are associated with foreign direct investment."

Foreign direct investment also spurs trade because a major part of international trade today is within firms -- that is, trade going from one affiliate of a firm to another affiliate or subsidiary.

World Bank and UN officials dismiss concerns that the large number of mergers going on between transnational corporations could diminish competition. Stiglitz says that within many countries, there were traditionally only two or three firms supplying a particular product. Now, however, he says, with the transnational's able to move into most countries, there are a large number of competitors within most nations.

UNCTAD's Chief of International Investment, Karl Sauvant, told the press conference that there can be negative effects of FDI:

Sauvant said: "These negative effects can be larger, if for instance, competition is restrained (in a particular country). So I think the idea, as far as I'm concerned, is not to give the impression that all FDI is all good and there are no negative effects, no. There are some things one should keep an eye on. And equally important, policies make a difference in terms of actually trying to increase the positive effects and decreasing the negative effects."

Globally, UNCTAD says some 60,000 transnational companies with over 500,000 foreign affiliates, account for an estimated 25 percent of global output. Foreign direct investment world wide rose by over 20 percent last year to more than $4 trillion US dollars.

Foreign direct investment flows both in and out, of course, and for the first time UNCTAD noted that many transnational firms are now headquartered in Central and East Europe. It issued a list of the top 10, which was headed by the Latvian Shipping Company (with 1,600 employees worldwide) followed by Croatia's Podravka food group and Slovenia's Gorenje appliance group.