The EU’s Dabbling Direct Investment Detours
With mixed stock market performance among the eighteen new and prospective EU members as Western Balkan candidates prepare applications, an IMF working paper traces FDI trends prominent in their growth and productivity narratives the past decade and a half. The gross figure came to $700 billion in the main Eastern Europe tier that joined since the early 2000s, while the Balkans group take is around $50 billion after prolonged conflict and financial crisis. Lower wages and geographic proximity to developed Europe remain advantages, but aging populations and technology shifts have eroded them. Market size and stability explain two-thirds of inflows into the Czech Republic, Hungary and Poland, with banking a key target in privatization sales. Other services and manufacturing, in autos and chemicals in particular are also popular. Serbia accounts for half the Balkans stock with a similar industry profile, and advanced economy neighbors are the leading sources: Germany in Central Europe; Scandinavia in the Baltics; and Italy and Eastern Europe into Albania, Bosnia, and Macedonia. Tax holidays and investment credits, and Brussels infrastructure and project aid, enter the mix to boost exports, while domestic value-added has been largely flat over time. Car pre and post-production is almost entirely at parent companies, with local units confined to assembly and limited research and development. From more to less advanced emerging economies manufacturing outflows have linked onward as “flying geese,” but the pattern is far less pronounced than in other regions. The latest World Bank literature surveying 750 multinational firms points out that 80 percent weigh legal and regulatory protection above incentives offered by half the emerging world. Outside the institutional and policy environment the most influential factor is supplier quality, which comprises automation and skills depth.
Business climate and governance gains are noticeable with EU accession, and translate into bilateral FDI increases in the immediate aftermath, but will fade barring labor competitiveness and related reforms, according to historic statistical analyses. The Balkans should extend geographic outreach to realize benefits and has already joined China’s Belt and Road Initiative. Education and logistics spending should ramp up there paid for with reduced fiscal breaks, and officials should insist on domestic content within efficiencies of scale especially if cutting-edge technology applies.
Second quarter GDP growth was solid in the CE-4, with Hungary and Poland at the front in the 5% range. Czech wages were up almost 10% in nominal terms with a tight labor market, as the central bank continues with 25 basis point hikes, while the currency slips since cap removal. Hungary is trying to keep inflation within the 4% target, under ultra-loose monetary policy with negative rates as Prime Minister Orban works to maintain small business loyalty. Poland as the largest equity market is down 5% with the banking sector now majority locally-owned. Warsaw may face cohesion aid suspension as punishment for judicial interference, with the ruling party appointing its own supporters to the highest court. Romanian 10-year bond yields rose 50 basis points with budget overshoot and a cascade of corruption scandals upending the government and sparking mass street unrest. Proposed integrity laws were again diluted and investigators are under threat themselves from shadowy forces darkening the FDI takeoff threshold.
