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Importance and promotion of foreign direct investment in central and eastern europe

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    To become a regional block of economic power, European Union leaders have taken the correct decision for integrating the economies of Central and East European countries (CEECs) into the European Union (EU). This would involve the addition of transitional and developing economies into the EU. However, there are special needs and concerns that are bothering the economic analysts; the most important being the Foreign Direct Investment and the ability of this region to sustain its promotion.

    ROLE OF FOREIGN DIRECT INVESTMENT

    Overcoming Recession

    Several UN agencies and international commerce institutions have highlighted that FDI investments in the CEE countries will help them to overcome recession that they faced on dilution of communist regimes. Another benefit for trading partners of these nations is a high return on FDI. High return on FDI is likely to be associated with a high rate of domestic output growth, making repayments of foreign debt more affordable. The UNCTAD survey painted an optimistic prospect for inward FDI flows for this region in 2002. The UNCTAD reported improvements in the region’s physical and financial infrastructure. Better in-flow of capital meant increased economic integration with investor countries, which further enhances the possibility of wider regional markets would improve prospects for market-seeking, and possibly efficiency-seeking, investment.[1]

    Reducing Disparities

    Having closed communist policies for decades under Soviet clout had significantly eroded the economic capability of CEE countries. The only positive that they gained was know-how of few industrial processes. Then the first major impact of Foreign Investment in-flows has been to reduce the disparities in GDP (Gross Domestic Product) and PPP (Purchasing Power Parity), between these countries and the developed EU-15 (group of large economies like UK, Germany, and France etc) countries. Some of the former states of Soviet Union like Latvia, Estonia and also Eastern region of Russia have seen lot of investment in the sector of infrastructure and exploration of natural resources. EU and USA have been the main trade-partners with US focusing primarily on buying equity and shares. FDI in-flows have helped these countries to slowly reach the levels of prosperity enjoyed by the Western Europe. The foreign debt and external liabilities that most of these nations are reeling under, has seen consistent drop with the revenue pouring in through FDI.[2] This has further enabled the consumers to improve their earning and spending as FDI invariably brings large number of employment opportunities.

    Improving the Workforce

    The second important outcome of FDI in-flow has been the creation of large pool of workers for the developed countries of Europe and developing technical training opportunities. Of course the levels of unemployment have been reduced with the availability of jobs created by foreign investment. On the other hand, sustained FDI has helped to improve the standards of living which include education and training infrastructure. In order to regain profitability edge that American corporate organizations tapped in India and China, West European nations could now successfully outsource their operations to the countries like Romania, Bulgaria, and Czech Republic. “The present differences in wage levels give these countries a comparative advantage in labor-intensive products, it can been argued that their inherited industrial structures give them a comparative advantage in capital intensive goods and that the level of their human capital is likely to accelerate their catching-up process in technology intensive industries” . [3] Hence, sustained FDI not only helped to generate financial capital but also human capital in the form of building a technically skilled workforce. Companies in CEE countries were lagging in terms of productivity as they were isolated from international competition. However, the fabric of human capital and its competence have improved considerably over the last decade.

    STEPS TO IMPROVE PROSPECTS OF FDI

    Continue Reforms

    The CEE countries must continue the free trade policies and market reforms at a substantial rate. Removal of duties for import of goods will help in building long term trade partnerships with countries outside the EU as well. There would be an onus on the local industry to innovate and improve their product and manufacturing practices to match the quality of international markets. And this would further help to instill confidence in their trade partners for making further investments. The “level-playing-field” for trade, is a requisite for economic superpowers like USA, Japan and Western Europe, to supply this region, benefits of technology, management strategies and capital. A clear example of how government control can stifle the FDI is Poland. Poland, the region’s leading recipient since 1996, suffered a decline in 2001, from $9.3 billion to $8.8 billion. The reasons lie in the Polish economy: privatization is coming to an end.[4]

    Improve Infrastructure

    In recent years most of the economic progress and growth has been technology-driven. Hi-tech manufacturing units require the government contribution in providing better infrastructure like reliable electricity supply, improved transportation facilities, security for employees and telecommunication infrastructure. For instance Indian government has set-up special economic zones to attract FDI. These zones have special infrastructure developed to meet the needs of potential foreign investors. Hence, the initial FDI plan must focus on improving the infrastructure that will lead to better potential for investment.

    Investment Promotion Agencies

    The global economy has resulted in the need of setting up facilitating agencies for promoting FDI. The functions and goals of such agencies can be clearly defined by trade or commerce department of the government. The UK Trade and Investment is a perfect example of a government agency that helps local firms to invest abroad and also assist foreign enterprises to set up business in UK. Even UNCTAD had done a survey in CEE countries to measure the capability of foreign investment promotion agencies of the region. Assisting local manufacturers to invest abroad will help to bring competitiveness in their processes and operations. Single window or single portal assistance provides a great boost to businesses to relocate, expand and diversify as well.

    References

    Centre for Economic Policy and Research, “Monitoring European Integration”, 1990.

    Euractiv. UNCTAD Report : “Eastern Europe remains top FDI destination”. 2005. <http://www.euractiv.com/en/enlargement/eastern-europe-remains-top-fdi-destination/article-143913>

    Milesi-Ferretti, Gian Maria and Lane, Philip R. “Capital Flows to Central and Eastern Europe” IMF Working Papers 06/188, International Monetary Fund. 2006.

    United Nations Conference on Trade and Development. World Investment Report 2002: “Transnational Corporations and Export Competitiveness”. 2002.

    [1] Euractiv. UNCTAD Report : “Eastern Europe remains top FDI destination” September 2005. < http://www.euractiv.com/en/enlargement/eastern-europe-remains-top-fdi-destination/article-143913>
    [2] Milesi-Ferretti, Gian Maria and Lane, Philip R. “Capital Flows to Central and Eastern Europe,” IMF Working Papers 06/188, International Monetary Fund. 2006.
    [3] Centre for Economic Policy and Research, “Monitoring European Integration”, 1990.
    [4] United Nations Conference on Trade and Development. World Investment Report 2002: “Transnational Corporations and Export Competitiveness”. 2002.

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