This book investigates the role that foreign direct investment (FDI) in central-eastern and southern Europe has played in the post-crisis period, comparing patterns across countries and sectors. An overarching objective of this publication is to assess the extent to which FDI can still be seen as a key driver of economic development, modernisation and convergence for Europe’s low- and middle-income economies, taking into account also the risks and limiting factors associated with FDI. Download the book at: http://www.etui.org/Publications2/Books/Wage-bargaining-under-the-new-European-Economic-Governance

1. fdi after 2008jan drahokoupil © etui (2015)

2. Questions
● FDI in crisis
● A stabilizing factor, or a vulnerability?
● FDI after 2010
● A new role? A qualitative change in the patterns that
characterised the pre-crisis economic expansion?
● A driver of economic development and convergence?
● Differences: Within CEE, Eastern/Southern Europe
● What have been the differences between countries and
across sectors? What explains these differences?
jan drahokoupil © etui (2015) fdi after 2008

3. jan drahokoupil © etui (2015) fdi after 2008

4. FDI inflows dropped after 2008
EUR million, Eastern Europe, V4 (DMEs)
Source: national statistics and Eurostat, HU and PL cleared by Hunya (SPEs and capital transit removed)
0
10000
20000
30000
40000
50000
60000
70000
2007 2008 2009 2010 2011 2012 2013 2014*
Eastern Europe
V4
jan drahokoupil © etui (2015) fdi after 2008

5. But variation
jan drahokoupil © etui (2015) fdi after 2008

6. Regional structure unchanged, a shift from capital
intensive manufacturing to services
jan drahokoupil © etui (2015) fdi after 2008

7. FDI in crisis
1. Foreign (manufacturing) sector a stabilizing factor, but FDI
has lost its growth-driving role
2. FDI, however contributed to structural vulnerabilities that
were important in the crisis
● export dependence, financialization
3. Prospects?
● The eastward shift in manufacturing in the EU largely over
● Efficiency seeking FDI in manuf not that important, reinvested
earnings, a shift to the service sector
● Signs of upgrading but a value capture problem
jan drahokoupil © etui (2015) fdi after 2008

8. What legacy of the FDI-based model?
● A basis for a new growth?
● FDI can have both positive and negative development role
● A framework to structure the discussion:
● Balance of payments level
● Enterprise level
● Whole-economy level
Source: Myant/Drahokoupil, 2011, Table 15.3
jan drahokoupil © etui (2015) fdi after 2008

9. Balance of payments level
Potentially positive Potentially negative
Financial inflows as FDI comes Repatriated profits
Higher exports from MNCs Higher imports from market-seeking
investors
● Profit repatriation now an important issue: 6% of GDP in CZ
● Manufacturing substantial repatriator but not the biggest and
generates import earnings
● Biggest repatriators infrastructure (electricity, gas, heating),
financial services, telco and may also increase imports
● Policy implications? How to capture value locally?
○ competition policy, role of wages, spillovers
○ repatriation also reflects a lack of investment opportunities (macro-
economic policy?, lack of resources to exploit – skills?)
jan drahokoupil © etui (2015) fdi after 2008

10. Profit repatriation relative to FDI stock: Is Czechia special?
Source: Chmelař et al. 2016 (Czech Office of Government)
jan drahokoupil © etui (2015) fdi after 2008

11. Enterprise level
Potentially positive Potentially negative
Privatization specific
Survival; access to capital, technology,
know how, distribution networks
Closure to eliminate competitors;
labour shedding, reduced production
Increased R&D Centralization of functions in centres
Greenfield/General
High-tech activities, higher skill levels,
higher productivity, wages
Concentration on low-skilled, labour
intensive, activities
Benefits from MNC network External control, dependence on
decisions made abroad
● Privatization to FDI a positive experience in manufacturing,
infrastructure sectors less clear benefits
● Overall: foreign-controlled firms higher productivity, wages,
complexity than domestic
jan drahokoupil © etui (2015) fdi after 2008

12. Whole-economy level
Potentially positive Potentially negative
Spillovers to local firms of higher
productivity, wages, mngment methods
Attraction of skilled workers away from
local companies
Development of new activities, leading
to higher competitiveness
Local firms unable to compete with
MNCs (+ MNCs enjoy gvt incentives)
Subordination of economic
development to strategies of MNCs
MNCs may favour home base when
difficulties
● Evidence of spillovers, but a dual economy
● Some rely on foreign inputs, some sectors regional
supplier bases, but Tier 1 foreign controlled
● Development strategies rely on low wages and taxes?
● May limit value capture, human capital investment,
upgrading of companies (domestic and foreign)
jan drahokoupil © etui (2015) fdi after 2008

13. Conclusions: the role of domestic institutions
● The ‘new normal’: foreign-controlled dominant, but no longer the driver of
economic growth & profit repatriation lowers GNI
● But a debate ‘foreign vs. domestic’ misplaced
● Issue local investment and upgrading opportunities -> better FDI & domestic
● Domestic institutions suddenly matter, FDI will not solve problems
companies face any more
● access to finance, skill formation, coordination of labour relations and
training
● Limits on industrial policy?
● Better FDI incentives a limited role if inflows low
● Are existing foreign-controlled sector within the reach of public
policy? Upgrading opportunities though GVCs may be limited if left to
the market (e.g. concentration of R&D)
● Domestic sector appears very weak as a basis
● Hence going back to 0/1989: institution building, what kind of capitalism
for Eastern Europe?jan drahokoupil © etui (2015) fdi after 2008