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22nd May 2022

Investment in new member states jumps by 70 percent

Foreign investment in Central and Eastern Europe jumped by 70 percent last year, new UN figures have revealed – while sluggish "old" Europe experienced a decrease.

The annual World Investment Report, issued by the UN economic think-tank UNCTAD on Thursday (29 September), shows that foreign direct investment in the EU as a whole dropped by 36 percent to 216 billion dollars.

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  • Car production in Slovakia - EU membership has boosted investor confidence (Photo: European Commission)

Foreign direct investment (FDI) refers to the inflow of foreign capital into a country.

It can entail, for example, investments through cross-border mergers, but also to so-called "greenfield investments" – such as the setting up of a completely new factory by a foreign company.

The UNCTAD researchers state that there are "large differences" in investment trends between the EU-15 (the "old" member states) and the new member countries that entered the bloc in April 2004.

In the EU-15, FDI in 2004 dropped by 40 percent to 196 billion – the lowest level since 1998 – while foreign investment in the new states jumped by almost 70 percent.

In the old member states, traditionally large FDI recipients Germany, the Netherlands and Luxembourg, accounted for 95 percent of the decline.

UNCTAD stresses that FDI figures are very volatile, and they can easily give a distorted picture by the impact of single transactions or by statistical effects.

Nevertheless, the UN body also highlights that weak German and Dutch economic growth were important factors in the declining figures.

Seen over a medium-term period, UNCTAD notes that the UK and France have in recent years been the largest recipients of FDI, as they performed relatively well in terms of economic growth.

By contrast, sluggish Germany and Italy have seen less FDI in recent years.

The UK experienced an upsurge in FDI in 2004, and became the second largest recipient of FDI worldwide, after the US but before China.

But the 2004 upsurge was primarily due to large one-off international merger deals, UNCTAD notes – such as the take-over by the Spanish bank Santander Central Hispano of Britain’s Abbey National.

Meanwhile, most new EU countries reported marked increases in investment from abroad.

FDI flows to Lithuania quadrupled, while in Latvia they doubled.

As in previous years, however, Poland, the Czech republic and Hungary got most foreign cash pumped into their economies.

Between 1995 and 2004, FDI to the new member states grew five-fold, which is almost twice as fast as world-wide investment growth.

Although only 9.4 percent of FDI in the European Union takes place in the new member states, foreign investment is a relatively important factor in the national income of the new countries.

The region of Central and Eastern Europe is set to remain an attractive location for foreign investment in the near future, UNCTAD adds.

Labour costs in the region are substantially lower than in the EU-15, the workforce is highly skilled, and productivity is improving fast.

Meanwhile, EU membership has boosted confidence of investors in the region.

Germany, The Netherlands, Austria and France are the biggest investors in Central and Eastern Europe.

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