wiiw: FDI in CESEE declined in 2018

Foreign direct investment (FDI) inflows to Central, East and Southeast Europe (CESEE) declined in 2018, according to a new report from the Vienna Institute of International Economic Studies (wiiw).

The report views the main cause of the decline to be Russia, with inflows to the rest of the region either flat or increasing on the year. However, wiiw expects lower inflows in 2019 throughout CESEE, on account of declining global investment appetite and weaker business sentiment. Austrian FDI in the region has declined, but continues to earn relatively high profits.

The report finds that FDI inflows to the new EU member states (EU-CEE11) were largely unchanged from the previous year, despite strong economic growth. By contrast, inflows into the Western Balkans rose by 28 per cent, thanks in particular to rising investor interest in Serbia and North Macedonia.

Services account for the bulk of FDI in most countries in CESEE. In particular, producer-related business activities such as information and communication technology (ICT), business process outsourcing and shared service centres expanded across the region. These are not capital intensive, and thus are barely reflected in FDI data. However, the increasing share of services in announced greenfield FDI projects, and of commercial services in total exports, both point to a growing importance for foreign investors in these sectors.

Germany and the US are the most important ultimate sources of FDI in CESEE. Tax havens – in particular the Netherlands, Cyprus and Luxembourg – are among the largest immediate investors, but not among the important ultimate investing countries for CESEE. This confirms that these countries serve mainly as intermediaries and headquarters of holdings.

Several trends shaping the future of FDI are given special attention in the report. First, wiiw finds that the link between FDI inflows and GDP growth has become less strong since the 2008 global financial crisis. Second, FDI inflows and participation in global value chains are strongly and positively correlated. Third, the report highlights several CESEE countries attracting FDI at a level above that which would be consistent with their macroeconomic fundamentals, particularly Montenegro and Bulgaria. By contrast, Belarus and Moldova could attract more FDI if business conditions improve.

Finally, wiiw notes that business sentiment has a significant impact on greenfield investment decisions. Given that economic confidence across EU-CEE11 countries appears to be declining, wiiw expects lower FDI inflows in 2019, which could lead to lower GDP growth.