Is the Level of Foreign Ownership a Problem in Emerging Europe?

.

Mark Le Gros Allen

About Mark Le Gros Allen

Mark Le Gros Allen is a CASE Fellow based in Warsaw. He is a former Director of Policy at the IMF and a former IMF Regional Representative.

Economic strategies are being questioned in several countries, both in Emerging Europe and elsewhere. Politicians have proposed more nationalist economic approaches, and in some cases are acting on them, in both Hungary and Poland as well as the US and the UK. In the former two emerging Europe countries, governments have consciously adopted policies of promoting nationally owned businesses, ostensibly out of concern that excessive foreign ownership hurts the country’s welfare.

To what extent does this concern have merit?

The extent of foreign ownership in the new EU member states and in the Western Balkans is generally higher than in the rest of Europe. However, to describe these economies as “largely foreign-owned,” as Filip Novokmet, Thomas Picketty, and Gabriel Zucman do in a recent paper, is an exaggeration. Foreign ownership of the capital stock (FDI to total capital stock) ranges from about 15 per cent in Romania, to over 50 per cent in Montenegro, with most countries between 25 to 40 per cent. This compares with levels of 10 to 30 per cent in most western and southern European countries. The relatively high level of FDI in the transition economies is heavily influenced by the local capital needs of cross-border bank groups.

But does this level of foreign ownership hurt the economy? Direct foreign investment through the banking system has been the main vehicle for the import of modern technologies, skills and organisation that have stimulated rising productivity. There is little evidence that foreign investment has looted assets or closed down potential competitors: on the contrary, there are conspicuous examples of production of parts or whole product lines being shifted into the region, particularly in the automobile industry. Cross-border banking made a vital contribution to raising the standards of commercial behaviour, even if there were some negative phenomena, such as FX lending. And on the whole, the foreign-owned banking system provided considerable support to countries which might otherwise have been badly hit by the global and eurozone crises.

The foreign-owned banking system has been the conduit for considerable flows of capital into the region over the last fifteen or twenty years. Unlike most emerging market regions which have seen sustained outflows, capital has flowed towards places in Emerging Europe where it was scarce, benefitting both sides of the deal. The relatively high level of foreign ownership in the region is a reflection of these sustained inflows.

It would be very difficult to reverse this high level of foreign ownership, in any case. The transition economies in the region have very low levels of foreign assets. This reflects both initial endowments and the current account deficits that have been the counterpart of the import of capital. Resources to buy out foreign ownership could only be found by running much higher rates of domestic savings than hitherto.

Higher savings rates may be desirable for other reasons, although they would depress consumption in the short run. The region’s populations are ageing rapidly, and it would be useful to have a pool of assets to draw on until the dependency ratio (working age population to total population) stabilises. But if these countries were to run balance of payments surpluses which they could devote to their looming pension problems, should they buy out non-resident owners of their capital stock, or acquire assets abroad? Just like an individual, a country can benefit from a diversified asset portfolio, and hard-earned national savings would earn a better risk-adjusted return by acquiring assets in growing economies outside the country. Some politicians need to learn that an outward-oriented investment strategy for their countries’ assets is likely to be of most benefit to their people.

_______________

The views expressed in this opinion editorial are the author’s own and do not necessarily reflect Emerging Europe’s editorial policy.

RELATED ARTICLES

January Kicks Off an Exciting Year for Emerging Europe

Poland’s Drift Away From Democracy

Hungary and Israel: the Collision of Past and Present

Budapest synagoge

European Volatility Makes Economic Development Slower for Ukraine

Why Hungary’s New NGO Law Is Harmful for Business

Budapest, Hungary. Aerial view of the old city Budapest, Hungary with river and Parliament Building with cloudy blue sky

When Neutrality Isn’t an Option

President of the Russian Federation Vladimir Putin

EU Visa-Liberalisation Strengthens Georgia’s Pro-Western Path

georgia emerging europe eu

Why Was Zapad-2017 So Important?

russian tank belarus zapad

Belarusian Journalists Still Face Huge Problems

China: A Giant That Is Hard to Crack

Where’s My Cheese? – The GREAT British Food Tour 2014

Cheese Shop

Moldova’s Briefly Suspended President is Still in Business

chisinau moldova parliament

Prepare for a New Europe

Are Czech-EU Relations at Breaking Point?

PRAGUE, CZECH REPUBLIC - 21 JUNE 2014: People on the streets of Prague, Czech Republic. Prague is one of the most visited city in Europe with over 5 million visitors every year.

Fiscal Policy Predictability in CEE — It’s Time for Change

The EU’s Choice: Fundamental Reform Or Disintegration

Measuring Growth of Societies with GDP Alone Shows an Incomplete Picture

The Capital Markets Union: a New Beginning in the European Financial Sector?

Not All Quiet on the Eastern Front

History as Destiny? Institutional Erosion in Ukraine and Poland

Ex-Transition Economies’ FDI Recovery

dollar euro fdi

Bulgaria Needs a Reform-Oriented Government to Take Full Advantage of its EU Membership

bulgaria emerging europe

E-lifestyle and Cyber Security: Some Views From Estonia

Cyber Security Protection Firewall Interface Concept

Finalising the DCFTA is Expected to Bring Multiple Benefits to Ukraine

Poland’s Unicorn, Slovakia’s Flying Car and the Future of Europe

Falling into Old Ways in 2017? Ukraine’s Struggle for Functioning Economic Institutions

Global Expansion in the Digital Age

Nagorno-Karabakh Conflict Moves from Frozen to Kinetic

Nagorno-Karabakh

Brexit: Let’s Learn the Lesson and Hope a Better Europe Will Arise

Why is Armenia Borrowing Another 100 Million US Dollars From Russia?

Under Promise, Over Deliver: Prospects for the EU’s Eastern Partnership in 2018

Eastern partnership

Serbia’s New PM Is Cut From a Familiar Cloth

Serbian flag emerging europe

Could the West At Least Help Ukraine To Insure FDI Against Political Risks?

Europe Needs To Be More Proactive In Embracing Armenia

Will a Two-speed European Union Side-line the Visegrad Four?

Poland Challenges the European Identity

Poland emerging europe

A Positive and Modern View of Entrepreneurship

‘Traditional Values’: A Potent Weapon Against LGBT Rights

gay rights putin

After 25 Years of Restructuring, the Romanian Power Sector Is at a Crossroad

Czech Own Currency Insures Against Euro Losses

Euro Czech republic emerging europe

How Will Poland Approach the Brexit Negotiations?

Stuck in Neutral: Georgia’s Constitutional Reforms

Tbilisi Parliament Georgia

We, the Post-Communist Generation, Have the Skills to Rid of the Past And Create Our Own Future

The EU’s Benign Neglect Of Eastern Europe

Poland’s Capital Saturation Lower Than the Czech Republic’s

deloitte fdi poland

A Bosnian Referendum Shows Russia’s Influence in the Balkans—As Well As Its Limits

CEE — Do We Need a Launch Pad For Our On-Site Tech Intelligence in the Silicon Valley

Romania Surviving the Waves of Recent Political Tsunamis in Europe

The Morawiecki Plan Promises a Brighter Future for Poland

People Power Reminds the Government of the Rule of Law

Is there any prospect of ‘Polexit’?

poland european union polexit

How strong is V4?

Viktor Orban

Will Poland Leave the European Union?

polexit

Let’s Stop Wasting Time Redefining our Place in Europe

The Netherlands’ Objection to the Ukraine-EU Association Agreement could be Costly to Europe

The Voice of European Business Must Be Heard Loud and Clear by Brexit Negotiators

The Global Outsourcing Industry — the Rise of the Phoenix

The Competitive Edge in Central and Eastern Europe

SOFIA BULGARIA - MAY 5: View of the Ivan Vazov National Theatre in Sofia on May 5 2016. Sofia is the largest city and capital of Bulgaria.

Political Tensions Rise As Croatia Allegedly Breaks the Dublin III Refugee Regulation

croatia migrants

Big Fish, Small Fish, Where to Fish? On the Eve of the Fourth Industrial Revolution

Outsourcing in Germany: Stop Talking at and Start Talking to

Poland’s Confusing GDP Growth

LGBT in CEE — A New Acceptance Is Being Born From Migration

Emerging Europe Back on Track to Convergence

wiiw

The Sharing Economy Could Bring New Business Models to CEE

Only a United Opposition Can Defeat Poland’s Ruling Law and Justice Party

Classical building of Polish parliament. Warsaw in Poland.

Regional Relations in the Western Balkans: Moving Beyond Folklore

Bosnia and Herzegovina flag with Serbia flag, 3D rendering

A New Division Between Eastern And Western Europe?

Czech Republic Renaming Has Real Economic Costs

Resignation in Ukraine: War, Revolution, Crisis — Some Things Never Change

Business Moving Forward with Cautious Optimism — Can Investors Win the Confidence Game?

CEE-Benefits and Disadvantages of Joining the Eurozone

forint zloty euro

Albania’s Election Apathy

tirana albania

2018 Elections — Vital Decisions for Hungary’s Future

Victor Orban energing europe

Poland: Is it Ready, and is it Time to Adopt the Euro?

Will the New Five-day Visa-free Regime Encourage More Visitors to Belarus?

Slovenia’s Presidential Election: Pahor Expected to Romp Home

Slovenia flag against blue sky waving in wind

Defending EU Values in Poland and Hungary

Eu hungary poland

Euroscepticism in Serbia: An Image Problem?

Moldova Falls Victim to Politicising

moldova emerging europe

The Right to Water: Who Can Change Today’s Situation?

Ukraine’s Economic Recovery: Good, But Slow

ukraine money

International Women’s Day — Let’s Take Action And Then Celebrate

How Will Trump’s Visit Affect Polish Politics?

Donald trump

After Its Significant Rise the Georgian Economy May Now Fall

Panorama of Tbilisi, Georgia in sunset rays. Vivid, saturated, splittoned image.

Hungary’s Nationalist Assault on Free Enquiry

victor orban ceu

Europe at Odds over OPAL and Nord Stream 2

The GREAT London Food Scene

Bakery in London

Azerbaijan: The Rich Get Richer and the Poor Get Nothing

Baku

Partnership is the Key to CEE-Indian Business

Adam Smith’s Warning for Poland

Good Match But Unlikely Marriage

Belarus 2020: Turning the Vicious Circle Into an Upward Spiral

The CEE Region Is Making Advances in Prioritising Waste-to-Energy Projects

Ukraine’s Reputation for Cheap Labour May Not Ring True in the Long-term

Changing Perspectives and Showing That True Romania is a Vibrant Innovative Country

Impact of Brexit on EU-CEE Not Overstated

theresa may brexit

Are There Differences Between How Tax Regulations in Poland and IAS Treat Intangible Assets?

Are Labour Shortages Driving Economic Growth?

Macedonia’s Controversial Coalition Government

SKOPJE MACEDONIA emerging europe

Breaking With Imitations of the Past

The Long Tail of Global Expansion

Poland Needs to Cling to the Eurozone

zloty euro emerging europe

Old Fashioned Skulduggery Overshadows the Elections in Moldova

Is the CEE Region About to Steal the Outsourcing Crown From India?

Amazing view on the Taj Mahal in sunset light with reflection in water. The Taj Mahal is an ivory-white marble mausoleum on the south bank of the Yamuna river. Agra Uttar Pradesh India.

Swimpassing Dniester Without Prejudice To Democracy

Parliament of the republic of moldova in chisinau, national flag, stefan cel mare street, spring time with blue sky

United or Divided? Europe in the Face of the Challenges of Tomorrow

PiS Uses Media Control to Bring Poland to Heel

Jaroslaw kaczynski pis emerging europe

Polish Tax Laws — Fighting a Winning Battle Against Tax Evaders

Can Armenia Keep a Foot in Both Camps?

European union armenia russia emerging europe

Examining How a Strong Swiss Franc Could Single-Handedly Topple Poland’s Economy

EU-CEE Is Still Growing at a Healthy Rate

Prague emerging europe

Emphasising the Incongruence Between the V4 Countries

Macron emerging europe

Central and Eastern European Consumers Are Joining the Global Trends for Change

Leave a Reply

Your email address will not be published. Required fields are marked *