Chart 2: Comparison of Stock of FDI in Russia and Cumulative Inflows, 1994- 1998, US-$ mill
5. Conclusions
FDI is associated with the positive impact on economic growth in terms of additional capital but foremost in consideration of technology transfer and knowledge spillovers, which bring productivity gains to the economy as a whole.
From the other side economic growth would in turn lead to more FDI as one of the major factors distinguishing FDI inflows between countries. FDI may, under circumstances of insufficient competition policy, lead to negative effects on domestic firms where it limits, first of all, access to the domestic market, reduces competition and hence possibilities for technology transfer. Thus domestic countries should look for a balanced competition policy between MNCs and domestic firms.
FDI patterns vary considerably between more advanced transition economies like Hungary and Poland and the investigated CIS countries. Cumulative FDI inflows in CIS countries do not correspond to the size and demand of these markets, although official statistics tend to even overestimate actual FDI inflows.
To create favorable conditions for attracting FDI, privatization is expected to play a decisive role. In this respect, it is especially important to make privatization-objects
available to strategic foreign investors since the evidence shows that FIEs are more productive and efficient than domestic firms. In order to make FDI successful it should be directed to the ”right” sectors of the economy. Sectoral analysis for more advanced transition economies witnesses that they have already surpassed the first stage associated with the investments in the traditional sectors of the economy and moved up to the sectors that contribute considerably to the restructuring of the economy. Thus in Hungary the FDI grows in machinery, equipment industry and chemical industry which are the most skill- and technology intensive ones. FDI made in CIS up until now is predominately directed towards traditional sectors.
Little remains of the FDI share in machinery and equipment while food, textile industries and, in particularly in Russia’s case, fuel industry still prevail.
This paper also examines potential of FDI inflows into investigated transition economies with the gravity model. The gravity model results for Hungary and Poland reflect unequal distribution of FDI between EE countries. Thus, Hungary according to the gravity model has already exhibited it’s potential. Gravity model results point to a considerable potential in FDI inflows for the CIS countries.
But the contribution of FDI to gross fixed capital formation in the long run according to the gravity model tends to be moderate.
One should take into account the static character of the model, which does not cover policy decisions of the country to attract FDI. Thus, the intense need of the country to attract more FDI e.g. though privatization policy can considerably stimulate FDI inflows; the opposite is valid for restrictive policy. Thus the contribution of FDI to gross fixed capital formation and hence to the restructuring of the economy during the period of transition can be high once the countries create attractive conditions for foreign investors but in the long run the contribution of FDI to the gross fixed capital formation will be moderate and the saving rate of a country is supposed to play a more decisive role. Even with very optimistic projections for GDP growth, the role of FDI, although important, can not initiate a process of sustained growth in the long run and the considerable share of capital formation should still be financed through domestic savings.
Appendix
Table A 1: Trade Exposure to Russia (in per cent)
Central and eastern Europe and the Baltic states1
Share of exports of
goods to Russia2
Share of exports of
goods to Ukraine2
Share of ex- ports of goods
to Belarus2
Total Share of exports in
GDP2
GDP exposure3
Bulgaria 7 3 0 10 47 5
Croatia 4 0 0 4 22 1
Czech Republic 2 1 - 4 43 2
Estonia 6 5 2 13 49 6
FYR Macedonia 2 8 1 11 36 4
Hungary 5 1 0 7 43 3
Latvia 21 4 3 28 32 9
Lithuania 7 9 12 28 44 12
Poland 4 5 1 10 20 2
Romania 3 1 0 4 28 1
Slovak Republic 3 3 - 6 45 3
Slovenia 4 1 - 5 47 2
Average 6 4 2 11 38 4
Commonwealth of independent States
Armenia 23 2 1 26 14 4
Azerbaijan 23 4 0 28 21 6
Belarus 59 15 - 74 55 41
Georgia 30 4 0 34 9 3
Kazakhstan 39 3 - 42 30 13
Kyrgyzstan 21 1 1 23 37 9
Moldova 63 5 2 70 38 26
Russia - 9 6 15 20 3
Tajikistan 8 1 1 10 60 6
Turkmenistan 5 - - 5 41 2
Ukraine 22 - 5 27 31 8
Uzbekistan 31 6 2 39 26 10
Average 29 5 2 33 32 11
1 Data for Albania and Bosnia and Herzegovina were not available from the IMF. National sources for Albania indicate only minor trade exposure to Russia.
2 Exports of merchandise only. Figures from national authorities for total exports give considerably higher figures for all three Baltic countries.
3 Calculated as the total share of exports of goods to Russia, Belarus and Ukraine multiplied with the share of exports of goods in GDP.
Source: IMF. Direction of Trade Statistics Yearbook, 1997: and EBRD staff calculations
Table A 2: Foreign Direct Investment (net inflows of equity capital recorded in the balance of payments)
(in millions of US dollars) (in US dollars) 1993 1994 1995 1996 1997
(revised)
1998 (projected)
Cumul- ative FDI- inflows 1989-98
Cumulative FDI-inflows 1989-97 per
capita
FDI- inflows
per capita in
1997 FDI- inflows as % of GDP in 1997 Albania 45 65 89 97 42 95 473 148 13 1.9 Bulgaria 40 105 82 100 497 300 1,222 147 60 4.8 Croatia 77 95 83 509 196 450 1,422 297 41 1.0 Czech
Republic
552 749 2,526 1,388 1,275 1,000 8,473 823 124 2.4 Estonia 157 215 199 111 128 200 1,010 695 88 2.7 Hungary 2339 1,097 4,453 1,986 2,100 1,500 16,903 1,667 207 4.6 Latvia 40 238 180 210 347 300 1,358 543 139 6.3 Lithuania 30 31 65 127 218 800 1,271 344 59 2.3 FYR
Macedonia
na 24 13 12 30 45 124 59 14 0.9 Poland 580 542 1,134 2,741 3,044 4,000 12,442 321 79 2.2 Romania 97 341 417 263 1,224 900 3,370 149 54 3.5 Slovak
Republic
107 236 194 199 51 220 1,223 227 9 0.3 Slovenia 111 128 176 186 321 200 1,274 639 161 1.8
CEEC and Baltic states
4,175 3,866 9,610 7,928 9,473 10,010 50,566 439 82 2.4 Armenia na 3 19 22 51 170 265 72 14 3.1 Azerbaijan 20 22 282 661 1,093 1,155 3,233 425 144 28.4 Belarus 18 11 7 70 190 50 346 34 19 1.4 Georgia na 8 6 54 189 255 512 95 35 3.6 Kazakhstan 473 635 964 1,137 1,320 1,200 5,729 365 84 5.9 Kyrgyzstan 10 45 96 46 83 29 309 67 18 4.9 Moldova 14 18 73 56 64 100 342 80 15 2.9 Russia na 539 1,710 1,700 3,752 1,500 9,201 63 25 0.8 Tajikistan 9 12 17 20 11 18 87 15 2 1.0 Turkmenistan 79 103 233 129 108 110 762 162 23 5.9 Ukraine 200 100 400 526 600 700 2,696 53 12 1.2 Uzbekistan 48 73 -24 90 167 60 423 18 7 1.2 CIS 871 1,569 3,783 4,511 7,628 5,347 23,905 84 27 1.3 Total 5,046 5,435 13,39
3 12,43
9
17,101 15,357 74,471 187 43 1.8
Note:
For most countries, figures cover only investment in equity capital and in some cases contributions-in-kind. For those countries where net investment into equity capital was not easily available (e.g. Estonia and the Slovak Republic), more recent data include reinvested earnings as well as inter-company debt transactions.
Source: IMF, central bank and EBRD estimates
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