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Central Europe: Foreign Investment Reaches New High

A report out today shows that foreign investment around the world dropped by one-fifth last year to its lowest level in five years. But one region defied the trend -- Central and Eastern Europe, where foreign investment reached a new high.

Prague, 4 September 2003 (RFE/RL) -- Earlier this year, Head, a multinational sports company, chose the Czech town of Litovel as its new site for making ski boots.

Development Director Jiri Oubrecht said the Czech Republic offered Head good logistics and the workers they needed.

"Czechs are good and productive workers. That was one reason," he said. "Another was that the management is capable. That was the second [reason]. And the third was logistics. And our workforce is, of course, still a lot cheaper than in [Western] Europe -- that was one of the main reasons," Oubrecht said.

It's decisions like these that made the Czech Republic -- and Central and Eastern Europe in general -- the global star performers in attracting foreign direct investment (FDI) last year.

Overall, investment in foreign markets around the world dropped by one-fifth. At $651 billion, it hit its lowest level in five years.

That's the finding of the annual World Investment Report, released in Geneva today by the UN Conference on Trade and Development.

Andreas Nicklisch was the local UN official launching the study in Prague. He described the main factors that led to the drop, citing "weak overall economic growth, tumbling stock values, and a dramatic decline in cross-border mergers and acquisitions; low corporate profits and financial restructuring." He said other institutional factors included "the winding down of privatization, the loss of confidence in the wake of some very high-profile corporate scandals, and the demise of some very large enterprises."

The one region that defied the global trend was Central and Eastern Europe. Nicklisch said, "The development in this region stands in stark contrast to the global picture as the region reached a new high of FDI inflows of $29 [billion] and further gains are projected for the rest of this year and 2004. This represents a rise of 15 percent from 2001. It's obvious that the region is viewed by investors as an increasingly stable and promising location for FDI."

The main reasons are threefold: ongoing privatization, looming EU membership for some, and better incentives for luring the big investors.

But as always, the region-wide figure masks big country-to-country distinctions. Nine countries in the region saw investment rise, but it fell in the other 10.

"We have now a new leading class [in the region]. It used to be the Czech Republic, Poland, Hungary and Russia. Russia has maintained about the same level of investment, with a slight drop. But the new countries which have joined this new dominant class in the region are Slovakia and Slovenia, which had privatization peaks," Nicklisch said.

The top performer was the Czech Republic, attracting some $9.3 billion last year. That put it in the top 10 countries defying the worldwide investment downturn.

No wonder Martin Jahn, the head of CzechInvest, looked pleased. He said the Czechs, and the region as a whole, had also benefited from Western Europe's downturn.

"Firms can fight [recession] in two ways -- cut costs or expand to new markets, and investment in this region covers both of these factors. So we're getting some good out of the recession in EU countries," Jahn says.

Jahn says regional competition is set to get tougher, as neighboring countries improve their investment incentives and some, like Slovakia, lower taxes.

But he says, so far, very few investors have chosen to leave the Czech Republic for cheaper destinations further east.