Mapping flows and patterns of foreign direct

investment in central and eastern Europe,

Greece and Portugal during the crisis

Gábor Hunya

1. Introduction
Economic growth in Europe took a downturn in 2008/2009 due to the
financial crisis. Since then, recurring setbacks and modest short-term
recoveries have occurred, with significant national variations. Foreign
direct investment (FDI) was one of the driving factors of the pre-crisis
boom period, when large capital inflows – especially in the banking and
real estate sectors – contributed to economic overheating in several
countries. In response to the new macroeconomic environment and
financing conditions that set in from 2008 – such as contracting demand
for products and increased perceptions of investment risk – FDI flows
suffered a harsh Europe-wide decline. Data indicate some recovery of
cross-border investment activities in some countries already in 2010 and
more robustly in 2011. But the euro crisis brought about a new setback
in 2012 and 2013 when EU27 FDI flows plummeted below the 2009 level.
Preliminary 2014 data and prospects for 2015 signal some recovery, but
not beyond the 2011 level. FDI has lost its growth-engine function, while
economic growth has become sluggish and new EU members’ efforts to
catch up with the EU15 have slowed down. Meanwhile, some
characteristics and the structure of FDI have also changed, making a new
review necessary.

This chapter looks at the changing characteristics of FDI in the 11 new

EU member states (NMS11), as well as in two southern European EU
members – Greece and Portugal – in the years 2008 through 2012/2013.
The countries have several characteristics in common. All are less
developed than the EU average in terms of per capita GDP and they are
net FDI importers, which means that inflows mostly outpace outflows.
Most of them relied on FDI in the pre-crisis period to underpin economic
growth and to obtain access to markets and the technology necessary to
catch up with the more developed parts of the EU. A lasting setback in
FDI flows may be one of the factors that has curtailed catch-up in recent

Foreign investment in eastern and southern Europe 37

Gábor Hunya

years. An analysis of available statistical information will help us to

identify the relationship between FDI and economic growth and to
describe the growth-enhancing effects of FDI during and since the crisis.

The method used in this chapter is descriptive, as is often the case for
discussing short-term changes. It relies on standard datasets and
compares cross-country changes, but without going into a general
explanation of causal relationships. Scrutiny of data and resources is
perhaps a novelty compared with most econometric studies.

FDI is defined by IMF and OECD conventions (Balance of Payments

Manual, 5th edition (IMF 2007), and its statistical reporting as part of the
balance of payments is followed by Eurostat and the national banks of all
EU member countries. Recently, one has been able to observe mounting
problems in interpreting data as the delimitation of FDI from other cross-
border financial transaction has become blurred. This chapter indicates
this problem and corrects some of the fallacies of reporting, but only if
official sources are available for the purpose. Another way of overcoming
incoherencies in FDI statistics is to use different sources with indicators
of different content describing complementary aspects of the FDI activity.
We do this to reveal trends in greenfield investment and to present the
role of the foreign sector in the economies under survey.

First, we look at FDI flow and stock trends based on FDI statistics of the
balance of payments (wiiw FDI database incorporating national statistics
and Eurostat). As for FDI inflow and outflow data we make some
adjustments in the time series published by Eurostat. Based on the
reporting of the national banks of Poland and Hungary we exclude the
investments of special purpose entities (SPEs) and in the case of Hungary
also capital in transit. Data for 2014 are not yet available for all countries;
those that are are based on the Balance of Payments Manual, 6th edition
(IMF 2013). We estimated the flow data relying on available information.

Next we analyse the change in the number of announced greenfield invest-

ment projects, based on www.fdimarkets.com, a database that reports on
new cross-border investment projects in detail. Thirdly, Eurostat’s foreign
affiliates statistics (FATS), which comprise data on majority foreign
owned enterprises, indicate the importance of the foreign sector for the
relevant economies. Finally, conclusions are drawn concerning the new
characteristics and structure of FDI and on the FDI-based catching-up of
new member states and southern European countries.

38 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

2. The relationship between FDI inflow,

outflow and net FDI

The balance of payments concept of FDI registers a country’s inflows and

outflows, as both investments and disinvestments. As usual in the FDI-
related literature, we do not track the highly volatile flows of investments
and disinvestments separately, but consider both inflows and outflows in
net terms.

FDI in- and outflows in the 13 selected countries roughly followed the
European trend. They reported record high flows in 2006–2007, sharp
declines in subsequent years and modest recovery in 2011 and 2012,
followed by a renewed setback. Changes went in the same direction
regarding both the direct investments of foreigners in the host countries
(FDI inflow having a positive sign in the balance of payments) and the
investments of domestic companies abroad (FDI outflow having a
negative sign in the balance of payments). As a result, the amount of net
FDI diminished in the years 2009–2013 to about one half of the level
attained in 2007–2008 (Figure 1). The lowest level of both net FDI and
FDI inflow was recorded in 2013, which points to a lasting phenomenon
of low FDI in the region.

Figure 1 FDI inflow, outflow and net FDI in the NMS11, Greece and Portugal
60000

50000

40000

30000

20000
10000

0
-10000

-20000
2007 2008 2009 2010 2011 2012 2013 2014*
Inflow Outflow FDI-net
Note: Balance of Payments Manual (IMF 2013); 2014 estimated. Hungary and Poland: excluding SPEs,
Hungary excluding capital in transit.
Source: National statistics and Eurostat

Foreign investment in eastern and southern Europe 39

Gábor Hunya

Net FDI is one of the financing resources of the current account deficit.
Since the outset of the financial crisis, capital inflows of all kinds have
diminished and current account deficits were cut back. Rebalancing was
steepest in countries that had previously relied on external financing to
a large extent, such as Bulgaria, Greece and Romania. But FDI was
usually less curtailed than portfolio and other investments and thus the
role of FDI increased in the financing of current account deficits. (Other
relatively stable inflows were the transfer of EU funds and in some
countries’ IMF loans.) Although FDI did mitigate the need for current
account rebalancing, it was far from enough. Rebalancing took place
mainly by the contraction of domestic demand, which triggered a further
fall in domestic market–oriented FDI. Demand contracted also in the
main trading partners, thus curtailing FDI in export-oriented capacities.
Still, net exports were able to mitigate the GDP decline and in general
exports recovered more rapidly in the wake of the financial crisis than
domestic demand. Foreign subsidiaries played a leading role in export
recovery to the extent that they have dominated the export sectors of a
particular country.

The negative balance of payments effect of FDI is that it is an important

item in the current account. The income earned by the foreign investor
is booked as income outflow from the host country. (Incomes accrued by
outward investments are booked with a positive sign.) While rebalancing
in the wake of the crisis affected mostly the balance of goods and services,
the income account continued to show large deficits of the host country.
In fact, most of the foreigners’ income was repatriated. Positive overall
FDI-related balance of payments effects could be achieved only if the FDI
had produced trade surpluses, compensating for repatriated incomes. In
general, high exposure to FDI triggers high profit repatriation, but also
creates large export capacities and a positive trade balance. This has been
the case in Czechia, Hungary and Slovakia, where foreign affiliates
account for about 70–80 per cent of exports (OECD 2010).

The importance of FDI goes well beyond its role in the balance of
payments. FDI inflows may finance new investments and allow access to
technology and markets. FDI outflows, on the other hand, indicate the
competitiveness of domestic companies in penetrating foreign markets
based on their own superior technology and specialised knowledge. Thus
while from a balance of payments viewpoint outward FDI is a capital loss
to the country, it may play a positive role from a developmental
viewpoint. It allows domestic companies to improve competitiveness by

40 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

sourcing cheap inputs and to penetrate new markets, which in turn can
have positive production and employment effects.

Developed countries usually export more FDI than they import or the two
items are similar to each other at a high level. Catching-up countries, such
as those under survey, have far more FDI inflow than outflow, although
their outward FDI has increased with time. Some of the more developed
countries among those we are looking at register significant amounts of
FDI outflows, including Czechia, Estonia, Hungary, Poland, Greece and
Portugal. The FDI outflow of the other countries is marginal and thus FDI
inflow and net FDI are similar in their case. A negative net-FDI position,
when outflows are higher than inflows, rarely occurs among the countries
under survey, but it did in two years in Greece and one year in Portugal,
Latvia, Slovakia and Slovenia. In the latter three countries this happened
in 2009 when inflows were negative. Negative FDI inflow occurs when
the capital withdrawal of foreign investors in the host country is larger
than their new direct investments. Such deleveraging can be a sign of an
acute crisis either in the home or the host economies or signal a change
in international capital flows away from emerging markets, as was the
case in 2013.

Companies from the countries hardest hit by the crisis curtailed their
foreign investment activity the most (Greece, Slovenia). Poland was in
much better shape and boosted outward FDI. Also Hungary and Czechia
have domestic multinationals that are penetrating less advanced
countries of the region. Unexpected high fluctuation in FDI outflows may
occur, as in the case of inflows, for example, in Portugal in 2010–2011,
when disinvestments of one year were compensated by even higher
investments in the next. In fact, the small overall FDI outflow figure for
2010 and its sudden increase in 2011 (Figure 1) can be attributed mainly
to this one country.

3. FDI inflow trends

Because inward FDI is of overwhelming importance for catching-up
economies we look into it in more detail, explaining trends over years and
across countries. We try to identify lasting effects and distinguish them
from transitory phenomena. It must also kept in mind that, beyond the
general and policy framework conditions, FDI inflows may also fluctuate
due to single large deals or for statistical reasons.

Foreign investment in eastern and southern Europe 41

Gábor Hunya

Figure 2 FDI inflows (EUR million)

14000
13000
12000
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
-1000
Bulgaria

Croatia

Czechia

Estonia

Hungary1

Hungary2

Latvia

Lithuania

Poland

Romania

Slovakia

Slovenia

Greece

Portugal
2008 2009 2010 2011 2012 2013 2014*
Note: Hungary1 and Poland excluding SPEs; Hungary2 excluding SPEs and capital in transit; 2014 estimated.
Sources: National statistics and Eurostat

Let’s first summarise the main trends (Figure 2). FDI inflows were at a
high level in most of the countries in 2008 with the remarkable exception
of the Baltic states, which fell into recession and whose receipt of FDI had
been declining already the previous year. Due to the financial crisis 2009
inflows were only a fraction of 2008 in most countries, but declines
registered in Poland as well as in Greece and in Portugal were more
modest than elsewhere. In some of the countries – including Bulgaria,
Croatia and Greece – inflows fell to even lower levels in 2010. The year
2011 brought some modest recovery almost throughout the region, with
the exception of Estonia, Romania and Czechia. In 2012 the recovery
reversed in Latvia and Lithuania, whereas it continued in Slovakia,
Bulgaria, and Greece. Only Poland recorded almost uninterrupted high
inflows throughout the five years. One country suffering constant decline
throughout these years is Romania. Some data can be considered outliers,
namely very high figures in 2012 for Czechia (matched by a very low
figure in 2011), Hungary and Portugal (also 2011). Except for these
countries and Poland, the 2012 inflow figures were significantly below
the 2008 level. The year 2013 brought a renewed setback – with the
exception of Romania and Greece – in line with the deleveraging in
emerging markets. This was corrected in 2014, especially in Poland, while
one can observe no significant change in most of the other countries.

42 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

It is worth looking at the annual data in more detail. In 2009 FDI inflows
plummeted to less than half compared with the previous year in almost
all of the 13 countries, reaching a level nearly as low as in 2002–2003
when the decline was due to the ‘dotcom’ crisis. Two countries, Slovakia
and Slovenia, booked negative FDI inflows, implying that accumulated
capital reserves were being repatriated. In some countries – including
Czechia, Hungary, Latvia and Lithuania – the setback was more than 50
per cent. Less hard hit were Poland, which showed the strongest
economic performance in terms of real GDP growth, and Estonia, which
consolidated its economic position after severe GDP and FDI declines in
the previous year.

The crisis of core European countries was directly transferred to the less
developed regions via foreign subsidiaries. Countries with a strong
presence of export-oriented subsidiaries suffered immediate drawbacks
when demand in western Europe shrank. In addition, foreign owned
banks holding the wide majority of banking assets in most countries also
curtailed their activities. In addition, capital repatriation escalated to
mitigate losses of the parent companies.

It is important to note that equity investments were positive throughout

the region in 2009 and comprised a much higher share of FDI than
earlier. The resilience of equity FDI meant that ongoing new projects and
restructuring investments were not halted due to the impact of the crisis.
Continuous high equity inflows of 2 billion euros or more to Bulgaria,
Hungary, Poland and Romania indicated that these countries had
maintained their attractiveness for new investments and also that
ongoing projects were not being stopped but perhaps downsized. In
addition, parent banks were forced to increase capital in subsidiaries to
improve the equity ratios of their balance sheets.

Another component of FDI, reinvested earnings, fell strongly in most new

member states as investors’ overall income, too, declined. But investors
repatriated less income than earlier; only Hungary suffered a record
amount of repatriated income. This kind of capital flight of the more
liquid parts of FDI can be associated with the record high sovereign risk
in this country. In more stable countries – especially Poland and also
Czechia – reinvestments recovered in 2009 and were even larger than
equity FDI. The main form of the FDI decline was in the form of ‘other
capital’, which comprises mainly loans from parent companies to
subsidiaries. Under the pressure of the financial crisis inter-company

Foreign investment in eastern and southern Europe 43

Gábor Hunya

credits dried up and it was often the subsidiaries that credited the parent.
As a result, the FDI inflow in the form of ‘other capital’ became negative
in Czechia, Estonia, Hungary, Slovakia and Slovenia. In the two latter
countries, the withdrawal of ‘other capital’ was even higher than the
inflow of equity and reinvested earnings, which led to the mentioned
negative figure for FDI inflow.

The above processes either continued in 2010 or gave way to a modest

recovery, but in general, FDI regained momentum only in 2011 (Hunya
2012). The recovery in that year was strongest in Slovakia, Latvia and
Slovenia; it was weaker in Poland and Hungary; while setbacks were
registered in Czechia, Estonia and Romania. None of the changes was
especially positive or alarmingly negative. Countries with recovering
inflows could overcome the setback suffered in 2009–2010, but still
received much less FDI than in 2008. There may be two reasons for the
continued inflow declines in Bulgaria and Romania: earlier high inflows
were to a large extent fed into real estate investments and this bubble
burst.

It is worth noting that the inflows to manufacturing recovered more

robustly than in other sectors. Export-oriented foreign subsidiaries
expanded, as European imports regained momentum and the new
member states were able to maintain their cost-competitive edge. The
new member states proved economically more stable than the southern
EU members and continued to enjoy a cost advantage over them. Some
large export-oriented projects significantly raised the level of FDI, for
example, in Hungary, with the automotive sector projects of Daimler-
Benz, Audi and Opel under construction. In Romania, Ford kept
investing, although less than had been envisaged earlier, and started its
car and engine production belatedly in 2012. In other countries, such as
Slovakia, foreign investment enterprises restarted production shifts that
had been idle during the deepest crisis years.

FDI inflows in 2011 were also influenced by some major changes in

investors’ strategies in response to the financial crisis:

— Swedbank reorganised its activity in the Baltic states by trans-

ferring headquarters functions from Estonia to Sweden. In terms
of FDI flows this meant that Estonia repatriated outward FDI from
the other two Baltic states and Sweden repatriated this capital
from Estonia, resulting in a high negative FDI inflow figure in the

44 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

latter country. At the same time, Swedbank increased its capital in

the subsidiaries in Latvia and Lithuania, which boosted financial
sector FDI in these countries.
— The Hungarian government purchased from the Russian investor
Surgutneftegas the shares that it held in the Hungarian oil
company MOL. This disinvestment by the foreign investor reduced
FDI inflow to Hungary by 1.88 billion euros.
— The multinational electronics company Nokia underwent major
restructuring worldwide. It closed production facilities in Hungary
and Romania, resulting in disinvestment in both countries. Nokia’s
subcontractor Elcoteq filed for bankruptcy and ceased most of its
activities in Hungary and Estonia, while another contract
manufacturer, Huawei, shrank its related production. In most
cases, production facilities were sold to other foreign investors that
started production later.

The 2012 upsurge of FDI inflows in most countries cannot be attributed

to economic factors as economic growth declined, and five out of the 13
countries – Hungary, Czechia, Slovenia, Greece and Portugal – registered
real GDP contraction. The most robust growth of FDI inflows in 2012
compared with the previous year was reported by Hungary (almost three
times) and Czechia (almost five times), while the earlier front-runner
Poland recorded an amount 40 per cent down from the previous year.
Among the smaller countries Estonia received six times more than in the
previous year, while Slovenia got 85 per cent less. Estonia’s recovery
followed the exceptional low of the precious year. In the case of Slovenia
the political and economic crisis aggravated and deterred investors and
thus both FDI and GDP subsided. This was not the case in some other
countries in recession, Czechia and Hungary (GDP down by 1.3 per cent
and 1.7 per cent, respectively) where FDI boomed. Thus the changes of
FDI and GDP were not synchronised in that year.

The correlation between FDI inflow and real GDP growth is fairly robust
if we take several years, such as 2008–2011 (Figure 3). Demand
contraction and the financial crisis in Europe curtailed investments,
including FDI. Even if economic growth was, on the whole, positive in
some countries, FDI inflow became lower due to investors’ deleveraging.
The positive relationship between FDI and GDP hardly existed in
individual years as one-off effects took on overwhelming importance in
shaping FDI.

Foreign investment in eastern and southern Europe 45

Gábor Hunya

Figure 3 FDI and GDP change in 2008–2011

40
LV
FDI inflow change % 2011/2008

20

0
PL
CZ
-20
LT HU
-40
SI
SK
-60
RO
-80 BG
EE
-100
-15 -10 -5 0 5 10 15
GDP real change 2011/2008
Source: wiiw database relying on national statistics; author’s own calculations

Returning to 2012, the structure of the record inflow to Czechia did not
show many peculiar features: almost one-quarter was in the financial
sector, exceptionally high amounts in the automotive sector and almost
40 per cent of FDI came from the Netherlands. Because outward Czech
FDI is only around 1 billion euros, high inflows cannot be considered
transitory, such as in Hungary. But Hungary and Portugal were in a true
outlier position in 2012, Portugal already in 2011, for which we can find
some methodological explanation (Box 1).

Even after correcting the methodology (Box 1, Figure 2) Hungary’s FDI

inflow was significantly higher in 2012 than in previous years or what the
economic situation in the country would have led one to assume. One can
find further explanation by examining the components of FDI: almost half
of the inflow was in the temporary form of ‘other capital’, which under-
went subsequent rebalancing. The structure was specific: half of the equity
FDI in 2012 and also in subsequent years went to the banking sector. A
large part of it was triggered by the special tax on turnover to be paid also
by loss-making financial institutions and the simultaneous obligation to
increase the capital adequacy ratio and compensation for losses. Had the
involuntary FDI in the financial sector not taken place, FDI inflows to
Hungary would have been mediocre in most years since 2011.

Inward FDI to Greece remained marginal but saw a rise in 2012, mostly
explained by injections of capital by parent companies to cover losses of

46 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

Box 1

Outlier 1: Hungary – the case of capital in transit

FDI inflows and outflows had similar dynamics in Hungary in 2008–2013. The difference
between the flows in the two directions, net FDI, was positive in each year, especially in
2008 and then again in 2012. The latter year had especially high inflows and outflows
due to the presence of significant amounts of capital in transit and restructuring of
corporate assets. Corrected numbers for 2012 still reveal a one-off peak in FDI inflows.

Table 1 Inflow and outflow of FDI including and excluding capital in transit and
restructuring of assets in Hungary, EUR million

Year 2008 2009 2010 2011 2012 2013

Outflow in balance of 1,514.1 1,347.9 887.6 3,140.7 8,799.9 1,701.1
payments

Outflow balance of 433.3 1,159.8 374.2 453.6 1,490.7 1,167.9

payments less transit
and asset restructuring

Inflow in balance of 4,190.7 1,476.1 1,674.7 4,131.1 10,850.9 2,316.5

payments

Inflow balance of 3,109.9 1,288.0 1,265.6 1,517.9 3,916.1 1,783.3

payments less transit
and asset restructuring

Source and explanation: Hungarian National Bank; updated December 2014 (HNB 2014)

Outlier 2: Portugal
The Bank of Portugal does not give an official explanation for the sudden rise of FDI in the
years 2011 and 2012. Standard explanations related to economic conditions do not work
either. UNCTAD explains that in 2012 inflow remained at a relatively high level, helped
by Chinese acquisitions of state assets in the energy sector (UNCTAD 2013). Despite this
operation, FDI inflows from non-OECD countries were negative in both 2011 and 2012
(Bank de Portugal 2013). The bulk of inflows in both years were investments from the
Netherlands in the financial sector. FDI outflow was at a record high in 2011, amounting
to 9 billion euros and going also to the Netherlands and to the financial sector. These data
indicated similar processes to those in Hungary and point to capital in transit operations.

their affiliates, a phenomenon also present in some new member states

(UNCTAD 2013a). World Investment Report 2013 attributes the increase
in foreign direct investment to multinationals’ pumping in capital to
cover the losses at their Greek subsidiaries. An example was Emporiki

Foreign investment in eastern and southern Europe 47

Gábor Hunya

Bank, which ran losses of 6 billion euros from 2008 to 2012. ‘In
response, the parent company, Crédit Agricole, injected capital worth
$2.85 billion, as required by the Greek regulator, before it sold off the
unit’, UNCTAD (2013b) states. In Greece, as in Italy, Portugal and Spain,
the crisis has also been marked by the foreign acquisition of distressed
assets and the exit and relocation of firms from the crisis-hit countries,
the report added.

Caring for the methodological problem of 2012 outlined above, we are

left with rather low amounts of economic growth supporting FDI in
Hungary, Greece and Portugal. We incline to conclude that the overall
recovery of FDI in the 13 countries in 2012 was rather modest and no
return to the high inflows of the pre-crisis era took place.

As for more recent years, FDI recovery seems even farther away than in
the core years of the financial and euro crisis (Hunya 2014). Another
negative global event – the deleveraging of emerging markets investments
in 2013 – took its toll. FDI inflow to the 13 countries plummeted to its
lowest level since 2008. The intra-company loan component of FDI was
highly negative in many countries, meaning that a large part of FDI was
made liquid and repatriated. This was possible because it had not been
invested in physical assets but kept on the accounts of the foreign
subsidiaries. This development challenged the general belief concerning
the lasting character of FDI; a part of the capital classified as FDI behaved
in fact like portfolio investment.

4. FDI inward stock position

The size of the accumulated FDI stock indicates the importance of a
country for international investors. It is not a simple addition of annual
inflows but a separately measured indicator that depends on the length
and size of inflows, the exchange rate at the end of the reporting year and
valuation of the assets of foreign investment enterprises.

In 2012 the stock of FDI was highest in the largest new member state,
Poland, followed by Portugal, Czechia and Hungary (Table 2). The second
largest country, Romania, comes only fifth as inflows started belatedly
compared with most other countries in the group. Poland takes almost
one-third of the foreign capital invested in the NMS region and Czechia
almost 20 per cent. These two countries, together with Hungary, Romania

48 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

and Slovakia, form the core of the new member states which have received
most of the large investment projects. Here the concentration of capital
and population produce agglomeration advantages that attract further
investments. Small countries necessarily have smaller FDI stocks in
nominal terms and do not host very large investment projects. Greece is
among the countries with low FDI stocks, similar to much smaller
countries in the Baltics, Slovenia and Croatia.

Table 2 FDI stock (EUR million) and change (%)

2008 2012 Change

Bulgaria 31,658 37,320 118
Croatia 22,199 24,068 108
Czechia 81,302 103,456 127
Estonia 11,775 14,667 125
Hungary 62,455 78,488 126
Latvia 8,126 10,258 126
Lithuania 9,191 12,101 132
Poland 110,419 170,599 155
Romania 48,797 59,125 121
Slovakia 36,226 42,304 117
Slovenia 11,326 11,724 104
Greece 27,390 19,770 72
Portugal 71,833 90,783 126

Sources: Eurostat and national statistics

The amount of FDI stock in a country changes due to inflows of new FDI,
exchange rate fluctuations and the revaluation of foreign assets. Over a
longer period of time, stock changes may reflect shifts in countries’
relative attractiveness. In the 2008–2012 period FDI stocks increased at
the highest rate, by 55 per cent in Poland reflecting the continuously
robust inflows to the country and the overall good economic performance
underpinning the value of firms. The Baltic countries, Czechia, Hungary
and Portugal obtained 25–32 per cent and form the mid-range. The
relatively good position of Hungary (and probably also of Portugal) is,
however, the result of including transit capital in the statistics, in the
absence of which the change would be only in the range of 15 per cent,
putting the country into the third group, alongside Bulgaria, Romania
and Slovakia. The worst performers were Croatia, Slovenia and,
especially, Greece. These countries received meagre inflows and probably
the value of FDI capital also diminished. Greece is the only country in the

Foreign investment in eastern and southern Europe 49

Gábor Hunya

group in which the value of FDI stock became smaller despite positive
inflows indicating a radical devaluation of the existing FDI stock.

FDI stock compared with population reveals the intensity of FDI

penetration and thus the importance of FDI for the host country.1 In terms
of per capita FDI small countries may come to prominence (Figure 4); the
countries under survey show striking differences in this respect. Countries
with relatively weak FDI penetration include both large countries
– Poland and Romania – and some small ones, such as Greece, Lithuania
and Latvia. The latter two may be put into a mid-range group together
with Bulgaria, Croatia and Slovenia. The group of countries with high FDI
penetration comprises the core new member states: Czechia, Hungary
and Slovakia. But the highest indicator is achieved by Estonia, indicating
that early and radical opening up to FDI can lead to large accumulated
stocks. Portugal is similar to the central European new member states
with a high rate of FDI penetration. Figure 4 also shows that the relative
position of the countries did not change in the wake of the financial crisis.
The list of countries with high or low FDI penetration was the same
already before the slowdown of inflows; it reflects longer historical
processes and structural differences in and among the countries.

Figure 4 Inward FDI stock per capita (euros)

12000

10000

8000

6000

4000

2000

0
Bulgaria

Croatia

Czechia

Estonia

Hungary

Latvia

Lithuania

Poland

Romania

Slovakia

Slovenia

Greece

Portugal

2008 2012
Sources: Eurostat and national statistics

1. The relative size of FDI stock can be calculated either per capita or per GDP. We use per
capita stock in the first instance as population was fairly stable over 2008-2012 while GDP
fluctuated a lot.

50 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

The level of economic development is one of the factors that attracts FDI
and countries with higher GDP generally receive more FDI, too. On the
other hand, some of the less developed countries in the group fare better
in terms of FDI stock per GDP than in per capita terms. Relative to GDP,
the FDI penetration of Bulgaria, Romania, Latvia and Lithuania would
be upgraded relative to the other countries in the group and that of
Czechia, Slovenia and Croatia would be scaled down in relative terms.
The weak position of Greece would be even more striking.

During 2008–2012 FDI (measured in stock change) was more resilient

than the overall performance of the economy (measured in nominal GDP).
GDP was lower in 1012 than at the outset of the crisis in eight out of the
thirteen countries, but the FDI stock fell in only one of them (Figure 5).

Figure 5 FDI stock change and GDP change (nominal euro based),
2012/2008 (%)

Portugal
Greece
Slovenia
Slovakia
Romania
Poland
Hungary
Estonia
Czechia
Croatia
Bulgaria
60 70 80 90 100 110 120 130 140 150 160
GDP FDI
Sources: Eurostat and national statistics

Greece suffered the biggest fall in GDP – 17 per cent – which coincided
with an even larger decline in FDI (28 per cent), thus demonstrating the
extremity of the country’s crisis. Countries with a 5–8 per cent fall in
GDP, but a positive change in FDI included Hungary, Croatia, Romania
and Slovenia, closely followed by Portugal and Latvia. FDI growth ran
counter to GDP decline in these countries, and FDI grew more in
countries with higher FDI stocks at the outset of the crisis (Hungary or

Foreign investment in eastern and southern Europe 51

Gábor Hunya

Portugal) than in those that did not have a strong FDI sector (Croatia and
Slovenia). A fast and thorough economic adjustment in Latvia triggered
some GDP decline but also attracted FDI. The case was similar in the
other two Baltic countries, which suffered severe GDP declines ahead of
the global financial crisis and also until 2010 but received high FDI.
Rather robust post-crisis economic recovery in Bulgaria and Slovakia, on
the other hand, coincided with relatively modest FDI growth; more
modest recovery in Poland and Lithuania triggered the highest rates of
FDI stock growth. The difference between these two pairs of countries in
terms of GDP is only in nominal, but not in real terms as the former had
a fixed exchange rate regime, the latter a flexible one, with stable and
depreciating currencies. Poland was the only country in the group that
did not experience real GDP decline in any of the years (national currency
based), although its nominal euro GDP fell strongly in 2009. Investors
reacted positively to the increasing cost competitiveness of production in
Poland made possible by devaluation.

5. Inward FDI by economic activity

We rely first of all on FDI stock data in the NACE Rev. 2 classification,
although this is not available for all countries and years. Reclassification
of activities does not allow comparison of these data with NACE Rev. 1,
although the difference in some main activities, such as manufacturing,
is marginal. More and more countries provide stock data in the new
classification and two (Bulgaria and Croatia) only in the old.

About 30 per cent of the FDI stock has been invested in manufacturing
sector ‘C’ in most of the countries for which NACE Rev. 2 data are available
(Figure 6). In the relatively small Greek FDI stock manufacturing plays
the primary role, while there is relatively little foreign capital in the
financial sector, but more in the transport and telecommunications sector.
Notable exceptions are Estonia and Latvia, with shares below 20 per cent.
Another exception is Hungary, where a number of large investors have
been reorganised into holdings, making sector ‘M’ the overwhelming
economic activity. The financial sector ‘K’ has attracted more FDI than
manufacturing in Estonia, Latvia and Slovenia and is in second place in
other countries. The third investment target is generally wholesale and
retail trade ‘G’. The size of some other sectors depends on national
privatisation policy, which resulted in a high share for electricity ‘D’ in
Slovakia or the transport sector in Estonia.

52 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

Figure 6 FDI stock by economic activity, NACE Rev. 2, 2012 or latest

100 %

90 %

80 %

70 %

60 %

50 %

40 %

30 %

20 %

10 %

0 %
Czechia

Estonia

Latvia

Lithuania

Poland

Romania

Slovakia

Slovenia

Greece
2011
Portugal
2010
Hungary

C Manufacturing D Electricity ... E Water ... F Construction

G Wholesale ... H Transport ... I Accommodation ... J Information ...
K Finance ... L Real estate M Professional ... Other
Sources: wiiw FDI database and OECD FDI statistics

Among the countries with only NACE Rev. 1 statistics Bulgaria has a small
manufacturing sector, but a very large real estate and other business
services sector, while Croatia has more industry and a much larger
financial sector.

Changes in the sectoral distribution of the FDI stock for NACE Rev. 2
countries (Figure 7) show an increase in the weight of manufacturing ‘C’
in Czechia, Estonia, Latvia, Lithuania, Poland and Romania, while espe-
cially in Hungary this sector’s share declined (shifted to ‘M’), as it did in
Slovakia and Slovenia. The financial sector ‘K’ gained weight in Czechia,
Lithuania, Poland and Slovakia; while declining in the other countries.
Information and communications ‘J’ increased a lot in Estonia, but
declined in all other countries. In Greece the share of manufacturing

Foreign investment in eastern and southern Europe 53

Gábor Hunya

increased, while that of financial intermediation declined between 2008

and 2011. FDI in Portugal is predominantly and increasingly in the real
estate and other services sector, probably in the form of holdings.

Figure 7 Change of FDI stock between the first and last year of observation,
NACE Rev. 2 (%)

Slovenia
2012/2008

Slovakia 2012/2009

Romania 2012/2008

Poland
2012/2010

Lithuania
2012/2008

Latvia
2012/2008

Hungary
2012/2008

Estonia 2012/2008

Czechia
2012/2009

0 50 100 150 200 250 300 350

M Professional… L Real estate… K Finance…
J Information… I Accommodation… H Transportation…
G Wholesale… F Construction E Water supply…
D Electricity… C Manufacturing
Source: national statistics

54 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

There were some major changes in the weight of one or the other industry
during the period 2008–2012. The transport sector ‘H’ gained large
shares in Czechia, Estonia and Romania. Professional, scientific and
technical activities ‘M’, which may include holdings with mixed activities,
more than doubled their share in Hungary and Lithuania.

Diverging changes in individual countries may be the result of one or

another larger transaction mainly related to the foreign or domestic
takeover of larger companies. In general, one may conclude that
manufacturing and some services in the real estate and professional
services category were less hit by the crisis than other activities.

6. Inward FDI by country of origin

In the 13 countries, EU member home countries owned 80 per cent of
FDI stocks as of 2012. This indicates strong regional integration in
Europe. Investors from other continents are not very common: the US
provides just 4 per cent of the foreign direct capital. The exception is
Greece where the US held 10 per cent. Neither China nor Hong Kong
appears among the 25 most important investors in most of the countries,
and if they do, then with less than 0.5 per cent of the stock. Higher shares
are achieved by those operating through Caribbean tax havens, as well as
Cyprus, which was at least until 2012 the hub of Russian capital exports.

The Netherlands is identified as the home country with the largest share
of FDI stocks in the five largest new member states, as well as in Portugal.
Germany is in second place in the new member states generally, but first
in Hungary and Lithuania and second in five other central and eastern
and southern European countries. Austria ranks first in Slovenia and sec-
ond in Bulgaria, Romania and Slovakia. Here geographic proximity plays
a role. The situation is similar in Portugal, where Spain is the second
largest investor.

The statistics paint neither a complete nor a totally realistic picture, as

the host countries record only immediate investors and fail to identify
the ultimate owner. Therefore, it is natural that home and host country
statistics differ regarding bilateral FDI flows and stocks. The discrepancy
between the two sets of data is especially large in the case of the
Netherlands. The host countries report FDI stocks several times larger
than the Dutch statistics, as illustrated in Table 3.

Foreign investment in eastern and southern Europe 55

Gábor Hunya

Table 3 FDI stocks of the Netherlands and Austria by home and host country
statistics, 2010 (EUR million)

Host Netherlands Host Austria Host

country outward inward outward inward

Bulgaria 129 7,327 4,116 5,553

Czechia 4,318 28,465 10,615 12,443
Estonia 210 1,098 159 140
Hungary 4,451 11,638 7,621 8,731
Latvia 31 551 146 163
Lithuania 116 904 26 61
Poland 8,164 26,817 3,910 5,562
Romania 1,306 10,903 7,107 9,346
Slovakia 486 9,770 5,175 6,010
Slovenia 94 553 2,344 5,163
Greece 1,482 4,384 330 746
Portugal 2,779 17,152 215 609

Sources: Eurostat and national statistics

Investing via a holding company in the Netherlands can be of advantage

to investors from third countries, and not only in the form of SPEs:

In the current international fiscal environment, the Dutch holding

company regime is still the most popular holding regime in the
world. The primary reason for this popularity is its tax efficiency
(mostly 0% tax), the flexibility of Dutch corporate and tax law and
its relatively low cost of incorporation and annual maintenance.
(Tax Consultants International2)

Overseas investors in particular often enter the EU via subsidiary

holdings in the Netherlands, which thus hides a lot of US and other third
country FDI in the new member states and Portugal. Austrian FDI, too,
is reported as higher in new member states statistics than by the Austrian
National Bank (OeNB), but the discrepancy is relatively modest. Drawing
on home country statistics, one could conclude that Dutch FDI is lower
than Austrian FDI.

2. Tax Consultants International:

www.tax-consultants-international.com/read/_dutch_holding_Company

56 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

7. Greenfield investment projects

Apart from a country’s balance of payments and international investment
position, one can obtain FDI-related information from project announce-
ments and press reports. These refer to two types of project: mergers and
acquisitions and greenfield investments. The distinction of the two major
investment forms provides additional insight into the behaviour of
foreign investors during the crisis.

The development in the deal value of cross-border mergers and

acquisitions (based on UNCTAD 2013b, Annex tables) showed a
substantial decline, from USD 15.7 billion in 2008 to USD 6.9 billion in
2009 and USD 3.4 billion in 2010 – the fall was thus much more rapid
than that of FDI. Meanwhile, value of greenfield investments fell only
half, from USD 117 billion in 2008 to some USD 60 billion in 2009 and
2010 (UNCTAD data, based on fdimarkets.com).3 It must be noted,
however, that the two entry modes of FDI cannot be taken as parts of the
amount of inflows registered in the balance of payments due to significant
methodological differences. The conclusions from the different datasets
can rather give complementary insights.

After the first years of the crisis, the mergers and acquisitions value
recovered and in 2011 reached the same amount as in 2008, due mainly
to foreign takeovers in Poland. In the absence of such a deal in Poland in
2012 the value of transactions was still USD 10 billion for the 13 countries
– this time it was Portugal that stood out with a record transaction level.
Disregarding these two outliers, the value of transactions was much lower
in 2012 than in 2008 in all other countries. At the same time, the value
of greenfield investment projects recovered less than that of mergers and
acquisitions transactions in 2011, to USD 63 billion and fell to its lowest
level, USD 38 billion in 2012.

In what follows we concentrate on the trends in greenfield investments

based on downloads from the fdimarkets.com database (Financial
Times). (See Box 2 for the methodological explanation of the database.)

The two main victims of the crisis were capital investment and employ-
ment; the number of projects fell much less (Figure 8). The size of projects

3. For comparison, UNCTAD reported FDI inflows to the 13 countries in the value of USD 78
billion in 2008 and some 35 billion in 2010.

Foreign investment in eastern and southern Europe 57

Gábor Hunya

did decrease, however, and shifts between industries took place. It seems
that investors did not cancel their plans for good, but rather scaled them
down to match the new market conditions. After some recovery in 2010,
the number of projects fell again, as did employment, while in 2012 the
amount of invested capital also declined. The decline continued and 2014
was the worst of the seven years by all three indicators, which indicates
investors’ lasting uncertainty about the region’s economic prospects. This
is a more negative conclusion than what we obtained from the FDI inflow
data. The 2013 decline was, in turn, less severe than indicated by FDI
inflow data, but the preliminary result for 2014 was much worse.

Box 2 Database on greenfield FDI projects

The data from fDi Markets a division of Financial Times Ltd (www.fdimarkets.com) used in
this paper are based on media reports referring to individual investment projects. The
database includes the number of registered projects and (often estimated) data on the
amount of investment commitments and the announced number of jobs. Compared with
the balance of payments, which records financial flows in a given period of time, fDi
Markets data refer to new investment projects, to be realised over a longer period of time.
Data exclude retail project which are often single shops.

Figure 8 Number of projects, capital investment, number of jobs in NMS11,

Greece and Portugal
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
2008 2009 2010 2011 2012 2013 2014
Project number Capital investment EUR 10 mn 100 Jobs
Source: fdimarkets.com

58 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

Figure 9 Number of greenfield projects by year and country

450

400

350
300

250

200

150

100
50

0
Bulgaria

Croatia

Czechia

Estonia

Hungary

Latvia

Lithuania

Poland

Romania

Slovakia

Slovenia

Greece

Portugal
2008 2009 2010 2011 2012 2013 2014
Source: fdimarkets.com

The large new member states – Poland and Romania – received the
highest number of projects and also the largest level of investment
commitment and number of jobs (Figures 9 and 10). In terms of the
number of projects per inhabitant, Czechia, Hungary and Slovakia were
the main beneficiaries, but all with declining numbers of new projects
over time. The strong increase in FDI activity suggested by balance of
payments data in 2012 for Czechia, Hungary and Portugal cannot be
underpinned by greenfield project statistics. The number of projects in
2012 declined by 30–35 per cent in these countries and there were similar
declines in terms of capital investments. These data confirm our reluc-
tance to accept the large FDI recovery indicated by inflow data for 2012.

The number of new projects fell sharply also in Bulgaria and Slovakia in
2012. In the latter country it followed two fairly strong years. Greenfield
activity in Poland almost reached the level of the previous year, which is
against the general trend, thus confirming the country’s favoured position
as location for new investments. Portugal suffered a large setback in terms
of invested capital, less so in terms of number of projects, but the decline
was continuous with no recovery in 2010 or 2011. Greece has been a
marginal recipient of greenfield projects since the outset of the crisis and
even before, similar to Estonia, Croatia and Slovenia. In 2013 there was a

Foreign investment in eastern and southern Europe 59

Gábor Hunya

Figure 10 Amount of capital investment commitment (million EUR)

16000

14000

12000

10000

8000

6000

4000

2000

0
Bulgaria

Croatia

Czechia

Estonia

Hungary

Latvia

Lithuania

Poland

Romania

Slovakia

Slovenia

Greece

Portugal
2008 2009 2010 2011 2012 2013 2014
Note: 2008 for Poland – 24991; for Romania – 26911.
Source: fdimarkets.com

slight recovery in the number of new projects in eight countries and in

terms of investment commitment in six countries. In 2014, a slightly higher
number of projects than in the previous year was registered in Hungary,
Lithuania and Slovenia, and a lower number in all other countries. The
value of investment in all 13 countries was lower than in the previous year.

The main target of greenfield investments over the whole period was
wholesale and retail trade, with much higher shares than in the FDI
statistics. This is due to the content of the database in which shops and
shopping centre projects are counted individually. The shift to projects in
distribution and trade indicated that in crisis years there is a stronger
desire to sell than to increase underutilised production capacity. The
financial sector, on the other hand, is underrepresented in the greenfield
statistics as banks do not establish new branches very often and in the
period under discussion they tended rather to streamline their networks.

The second most significant activity for greenfield projects was manufac-
turing, whose share increased in the wake of the crisis by all three indica-
tors (Figures 11 and 12). The temporary decline in terms of project numbers
and investment value was marginal in 2009 and 2010. A recovery was

60 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

achieved in 2011 in terms of project number and jobs but was followed by
a setback in 2012, while in terms of capital investment manufacturing
continued to expand its share. The year 2013 brought a decline in the share
of manufacturing projects and investment values in a declining overall num-
ber of projects, followed by recovery in 2014. In this latest year the share of
manufacturing reached an all-time high, but the absolute number of manu-
facturing projects was lower than in four of the seven years since 2008.

Figure 11 Share of manufacturing in greenfield investments by number of

projects, amount of capital investment (CAPEX) and number of jobs
by year, 13 countries (%)
40

35

30

25

20

15
2008 2009 2010 2011 2012 2013 2014
Project number Investment capital Number of jobs
Source: fdimarkets.com

Among the 13 countries the share of manufacturing was highest in

Hungary and Slovakia in all years. It was about average in Czechia,
Estonia and Poland, while Greece, Croatia and Latvia received a relatively
small share of the number and value of projects in manufacturing. The
setback in 2012 was due mainly to the declines in Poland and Romania.
The 2014 numbers were below those in 2012, except in Hungary and
Romania. These indicators are useful for correcting the shortcomings of
the FDI stock statistics, showing the relatively high significance of
manufacturing FDI in Hungary.

Beyond the leading industries, there was an increase in shares in the

number of projects and generally also in capital and employment in the
following activities in 2011–2012 compared with 2008–2009: electricity,
design, development and testing, ICT and internet infrastructure, shared

Foreign investment in eastern and southern Europe 61

Gábor Hunya

Figure 12 Share of manufacturing in greenfield investments by number of

projects, amount of capital investment and number of jobs by
country, 2008–2014 (%)
50
45
40
35
30
25
20
15
10
5
0
Bulgaria

Croatia

Czechia

Estonia

Hungary

Latvia

Lithuania

Poland

Romania

Slovakia

Slovenia

Greece

Portugal

Total
Project number Capital investment Number of jobs
Source: fdimarkets.com

services centres, maintenance and servicing, and customer contact

centres. Electricity sector investments were first of all wind parks in
Romania and Bulgaria, which received high subsidies in the course of
shifting to renewable energy. Beyond these countries, Lithuania, Latvia,
Portugal and Greece received more capital in the energy sector than in
manufacturing.

Projects in the area of design, development and testing were launched

primarily in Poland and Romania, but Czechia and Hungary also
benefited. Hungary was the most important location for ICT and R&D
projects in terms of both project number and invested capital. Poland was
the primary target for shared services and business services. The general
shift to services also affected the smaller countries, especially Estonia.

Advanced services (design, development and testing, ICT and internet

infrastructure, shared services centres, headquarters, customer contact
centres) increased their combined share in the number of projects, from
6 per cent in 2008 to over 12 per cent in 2012 and there was also an
increase in the number of projects in absolute terms. (fdimarkets.com

62 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

uses its rather detailed classification for economic activities not in line
with NACE.) The number of jobs in newly created activities of this kind
fell somewhat, but their share increased from 4 per cent to 8 per cent.
Most governments support the settling of services companies in their
territory, which, together with manufacturing, are considered primary
activities for future development.

8. Size and importance of the foreign sector

The descriptions given above highlight the changes in terms of FDI
attraction and project location. Obvious, there are countries in the group
in which the importance of foreign investment differs considerably. But
balance of payments or greenfield investment data cannot really highlight
the role of the foreign sector in production. This can be done based on
the Eurostat foreign affiliates statistics (Eurostat inward FATS) which are
available for the years 2008–2011 (for Croatia and Portugal not all years),
although not for Greece.4

The number of foreign affiliates (majority foreign-owned firms in non-

financial business corporations 5) has been highest in Hungary (18,600
in 2011), followed by Czechia (15,400) and Bulgaria (12,800); it is
extremely low in Poland (6,500) and mostly in line with size of country
in other cases. Differences in the size thresholds for companies in

4. ‘Inward FATS describe the overall activity of foreign affiliates resident in the compiling
economy. A foreign affiliate within the terms of inward FATS is an enterprise resident in the
compiling country over which an institutional unit not resident in the compiling country has
control. In simpler terms, inward FATS describe how many jobs, how much turnover, etc.
are generated by foreign investors in a given EU host economy. While FDI statistics give an
idea of the total amount of capital invested by foreigners in the EU economy, FATS add to
that information by providing insight into the economic impact those investments have in
the EU in terms of job creation, etc. FDI and (outward) FATS are closely related statistical
domains. Their subject of interest is the same – businesses investing abroad in other
business units, existing ones and/or newly founded ones. This similarity in substance is also
expressed in compilation practice, as outward FDI stock and outward FATS data are often
compiled with the help of the same survey. Yet, despite all these similarities, there are a
number of important methodological differences between them. These differences limit the
scope of comparability between the two datasets. FATS comprise all affiliates that are
foreign-controlled (where foreign investors have more than 50 per cent of the voting rights),
while FDI statistics include all foreign interests amounting to 10 per cent or more of the
voting power. Broadly speaking, it could be said that the outward FATS population is a sub-
group of foreign direct investments relevant for FDI statistics. FATS applies the principle of
the Ultimate Controlling Institution (UCI) versus immediate counterparty country in the
FDI statistics.’ Eurostat.
5. Defined as: total business economy; repair of computers, personal and household goods;
except financial and insurance activities.

Foreign investment in eastern and southern Europe 63

Gábor Hunya

different countries may influence these data. Small companies are most
numerous and, if not covered, the total number of companies in a country
tends to be low. But small companies are less significant in terms of
production value and thus their absence does not influence production
data much. Therefore the production value of foreign affiliates is highest
in Poland, closely followed by Czechia and, at some distance, by Hungary,
Romania and Slovakia.

By comparing the foreign affiliate statistics with the structural business

statistics of Eurostat one can derive the share of the foreign sector in the
non-financial business economy. Results show the differences in the
significance of the foreign sector between countries in 2011 (Figure 13).

Figure 13 Share of foreign affiliates’ production value in the non-financial

business sector, 2008 and 2011 (%)
80

70

60

50

40

30

20

10

0
Czechia
Bulgaria

Estonia

Croatia

Latvia

Lithuania

Hungary

Poland

Portugal

Romania

Slovenia

Slovakia

2008 Total 2011 Total 2008 Manufacturing 2011 Manufacturing

Source: Eurostat inward FATS

The share of foreign affiliates in production is highest in Slovakia and

Hungary, with over 57 per cent, followed by Czechia and Romania.
Foreign shares in manufacturing production are even higher than in the
economy as a whole, reaching almost 80 per cent in Slovakia, close to 70
per cent in Hungary, 67 per cent in Czechia and 60 per cent in Romania.
More than half of manufacturing production is produced by foreign
affiliates also in Bulgaria, Estonia and Lithuania. Another group of

64 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

countries has significantly lower foreign shares, namely Croatia, Portugal,

Latvia and Slovenia (about 20 per cent for the whole corporate sector and
about 30 per cent for manufacturing). These results are in line with those
we obtain by comparing per capita or per GDP FDI stocks, but indicate
more directly that some of the countries’ industrial production does in
fact depend on a few large foreign subsidiaries.

In what follows, data for 2011 are compared with 2008 to demonstrate
the impact of the crisis (comparison is blurred by a break in data for
Romania, Croatia and Portugal). The number of foreign affiliates was
higher in 2011 than in 2008 in almost all countries except Bulgaria,
Czechia, Estonia and Hungary. The production values of foreign affiliates
were higher in 2011 than in 2008 in all countries despite temporary
setbacks in the years in between (in current euro terms). In the whole
non-financial sector production increases were registered only in
Slovakia, Estonia, Czechia and Poland, while declines in the range of 8–
10 per cent hit the other countries. No wonder that the share of foreign
affiliates increased over the period under discussion; thus the foreign
sector proved to be a stabilising factor in the economy and especially in
industry.

Foreign affiliates in the manufacturing sector fared better than the total
of non-financial corporations. The number of affiliates increased, beyond
Romania, also in Croatia, Czechia, Latvia, Slovenia, Bulgaria and Poland.
The most significant declines were recorded in Estonia, Lithuania,
Portugal, Slovakia and Hungary. Contrary to this trend, the fdimarkets
database indicated a significant number of newly established foreign
subsidiaries in Hungarian manufacturing. Probably an even larger
number of subsidiaries were closed down. The production value of
manufacturing subsidiaries was higher in 2011 than in 2008 in all
countries under survey, most notably in Romania and Croatia, with a shift
of production to the foreign sector.

The overwhelming and growing significance of foreign subsidiaries in the

new member states underlines these countries’ dependence on interna-
tional production networks and also reveals the weakness of domestic
companies. Outliers to this rule are Greece, Portugal, Croatia and Slovenia,
where mainly the domestic sector controls the economy, including
manufacturing. Among these countries only Slovenia has an internationally
integrated manufacturing sector, while industrial production and exports
are relatively small in the other countries. Three out of the four outlier

Foreign investment in eastern and southern Europe 65

Gábor Hunya

countries in terms of foreign penetration were also those with the steepest
GDP decline in Europe in the wake of the financial crisis. Slovenia only had
the advantage of entering the downward spiral later than the others.

9. FDI hit by the crisis: conclusions

In this chapter we presented several aspects of the impact of the crisis on
FDI in the period 2008–2012 or beyond. Some of them are of a technical
nature, which may dampen enthusiasm for taking FDI inflow as an
indicator of success.

The decline of FDI flows following 2008 has proved to be a lasting

phenomenon. A boom of inflows in 2012 reported by some national banks
could not be confirmed by other FDI-related data. The subsequent FDI
decline in 2013 was deeper than the one in 2009. In the course of global
deleveraging, FDI measured in balance of payments did not constitute a
lasting commitment.

Financial flows recorded as FDI in the balance of payments but not

constituting lasting investments has become more frequent than before.
This is reflected in and explained by:

— transitory FDI flows and large-scale asset restructuring not

tracked by all national banks;
— the rising share of financial centre home countries such as the
Netherlands, Luxembourg and Caribbean tax havens in FDI;
— higher shares of FDI in the form of other capital than equity or
reinvested earnings;
— increasing share of FDI inflows in financial services and in other
business activities.

There is a general correlation between GDP growth and FDI for the
period as a whole. The best performance in both terms was that of Poland
and, after a temporary setback, Slovakia. Among the worst performers
by both indicators we find both countries with high FDI penetration
(Estonia) and others where the importance of FDI has been marginal
(Greece). But economies with high FDI penetration, such as Estonia, were
faster to experience a GDP decline but were also faster in recovery than
countries with little FDI and a delayed outbreak of the crisis. Resumption
of economic growth in the latter – including Slovenia and Greece – seems

66 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

to be more drawn out than what it was for Slovakia or Estonia. For the
former two, attracting more FDI into the restructuring and privatisation
of uncompetitive activities may be a useful policy, although not very
promising in a risk-loaded environment.

The current slow economic growth in the 13 countries, but also in Europe
as a whole, is linked to low investment activity, both domestic and
foreign. Cross-border investments declined even more than domestic
investments. The ratio of FDI to gross fixed capital formation was about
25 per cent in 2005–2007, declining to 10 per cent in 2009–2010 and,
after some recovery, falling back to 6 per cent in 2013.

Many features of the drawn-out crisis or slow growth period are not
related to FDI, such as high public debts in Hungary or excessive self-
imposed fiscal austerity in Czechia. Such countries may enjoy robust
performance on the part of foreign affiliates, but still have low economic
growth. It is also possible that bad economic performance necessitates
more FDI, such as equity, to improve the balance sheets of banks, which
does not translate into real investments.

During the first years of the crisis, a number of foreign affiliates went out
of business but there were also a number of new greenfield projects
established, albeit fewer than earlier. The partial recovery in 2010/2011
over the previous year in terms of production in the non-financial sector
was due mainly to the better performance of foreign affiliates.

The causes of the FDI setback during the recent crisis are manifold. The
economic decline triggered a drop in FDI just as in fixed capital
investments as a whole, due to falling global demand, excess capacities,
difficulties in investment financing and the decline in subsidiary profits.
Overcapacity has made new investments both in the home and host
countries unnecessary. The export-oriented industries in particular cut
output and left capacity idle. FDI in the oil, gas and metal industries
declined also due to low commodity prices. Tight credit conditions have
curtailed FDI as the bank-financing of investments became more costly.
FDI projects were thus cancelled, delayed or scaled down due to the lack
of affordable financing. Another important part of FDI, reinvested profits,
contracted as foreign investors’ profits shrank. In addition, profits were
withdrawn by parent companies from more successful locations to
finance losses in the home country. Still, the countries with high FDI
penetration – especially in manufacturing and advanced services –

Foreign investment in eastern and southern Europe 67

Gábor Hunya

remained attractive to new investment projects, and those countries that

did not have many projects in the past could not improve their position.

It seems unlikely that imported capital will jump-start economic growth

in the new and southern EU members in the next future. Other sources
of growth including domestic savings and EU transfers have increased in
importance in recent years. No return to the pre-crisis role of FDI can be
foreseen; even if gross capital formation recovers it is unlikely that
investors’ risk appetite will return to pre-crisis levels.

References
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Dez13.pdf
Eurostat (all years) FDI statistics. http://ec.europa.eu/eurostat/statistics-
explained/index.php/Foreign_direct_investment_statistics
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explained/index.php/Foreign_affiliates_statistics_-_FATS
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2572.html
Hunya G. (2014) wiiw database on foreign direct investment in Central, East and
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International Economic Studies. http://wiiw.ac.at/hit-by-deleveraging-p-
3261.html
IMF (2007) Balance of payments manual, 5th ed., Washington, DC, International
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IMF (2013) Balance of payments and international investment position manual,
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external/pubs/ft/bop/2007/bopman6.htm

68 Foreign investment in eastern and southern Europe

 Mapping flows and patterns of FDI

OECD (2010) Measuring globalisation: OECD economic globalisation indicators

2010, Paris, Organisation for Economic Co-operation and Development.
http://www.oecd.org/sti/ind/oecdhandbookoneconomicglobalisation
indicators.htm
UNCTAD (2013a) Global Investment Monitor, No. 11, 23 January 2013.
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All links were checked on 15 June 2015.

Foreign investment in eastern and southern Europe 69