Concept note for panel Trade, FDI and Enlargements · As a result, FDI surged and spurred economic growth. Productivity started catching-up fast with the EU average and living conditions

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Concept note for panel ‘Trade, FDI and Enlargements’1

Jorge Durán and Septimiu Szabo

European Commission

Directorate General for Economic and Financial Affairs

Preliminary Draft. Please do not cite or distribute without permission of the authors.

Introduction

Trade and access to international capital markets are often assumed to support countries’

development including by catching-up faster with the technological frontier. This paper

reviews economic developments in EU11 countries (all EU Member States that joined in

2004 or later, excluding Cyprus and Malta (2)) since the late 1990s and links their impressive

take-off to the opening to trade and international funding, notably foreign direct investment

(FDI). Access to FDI has been facilitated largely by the EU accession process. Therefore, the

paper argues that trade and financial markets' liberalisation foster growth when alongside a

strong institutional, legal and regulatory environment.

We can identify three different periods in this economic catch-up process. The first

corresponds to the early and mid-1990s, when EU11 countries started opening their

economies and some started to privatise some of their state-owned enterprises (to various

degrees). Privatisation was seen as a paramount of structural reforms to create market

economies and improve productivity and economic growth. The first foreign firms started

entering these markets, particularly in the manufacturing-intensive countries. The second

period starts in the late 1990s, when most EU11 countries were on the path to EU accession,

incorporating EU legislation at a fast pace. The share of FDI stock in GDP in the region more

than doubled between 1997 and 2002, just before most countries joined the block. As it

became rather certain these countries will join, the region became an El Dorado of foreign

investment with annual inflows as high as 10% of GDP. The final stage starts at the end of

the 2010s when the share of FDI stabilises and inflows drop to below 3% of GDP. This is the

period when investments reach maturity and start providing the very high rates of return.

Most FDI in EU11 comes from other EU member states. In this regard, countries in the

region are more linked with the Single Market then older Member States, which have a much

higher share of non-EU FDI. Furthermore, a lot of the non-EU FDI in EU11 has come

particularly due to the participation of these countries in the Single Market.

1 The views expressed in this paper are those of the authors and should not be attributed in any way to the

European Commission. We thank Istvan Szekely, Jolita Adamonis, Judita Cuculic Zupa, Natalie Lubenets,

Janis Malzubris and Ana Xavier for many discussions, comments, and suggestions.

2 Cyprus and Malta have been excluded from this analysis, as they are outliers in terms of FDI.

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1 Internationalisation in the 1990s

The transition from a planned to a market economy in EU11 countries entailed a deep

internationalisation of these economies. Economic and political integration in the Western

block – EU and NATO - became a strategic priority in the 1990s to modernise and liberalise

the economic structures. Democracy came along with the development of the basic legal and

institutional framework of a market economy. To complement this, EU11 countries opened to

trade with Western partners and to international capital markets.

During the 1990s, most of these countries signed important trade agreements and, with the

EU membership in the horizon, they developed a modern regulatory environment with laws

and regulations being brought in line with EU practices incorporating the Acquis

Communautaire. Once these countries signed Association Agreements with the EU (3), they

started the pre-accession phase and gradually integrated various Acquis chapters into their

national legislation. In other words, ‘Enlargement’ was a process that started well before

2004 when these countries entered the EU.

The opening of these economies to trade and international investment triggered a remarkable

development process and played a key role in the economic take off observed since. Legal

and regulatory improvements in autarchy promote growth but forces development to rely on

domestic demand, local savings, and local equipment. When regulatory changes are

combined with trade and foreign capital, particularly FDI, the effect is magnified as growth

also depends on global forces.

2 EU Accession as a signal of commitment to stability

When democratisation started, the economic and institutional structures in EU11 were very

different from those in Western Europe. The transition process resulted in the closing down

of large, inefficient and uncompetitive industries from the Soviet era overnight as traditional

trade links collapsed. Large-scale privatisation processes took place took place albeit in

different ways. Some of these countries also suffered from hyperinflation in the first half of

the 1990s (4). This traumatic transition left EU11 countries with very low levels of initial

income and subject to very high levels of uncertainty at the institutional, political and

economic level. The political scene was dominated by high internal and geopolitical risks,

including uncertainty about the reaction of the Russian Federation to the dismantling of the

Soviet Union. Perceptions of high geopolitical risk and the high inflation held back domestic

and foreign investment and delayed the economic recovery. Living conditions in certain

countries became worse than during communism.

(3) Poland and Hungary were the first countries to sign the Association Agreements in 1994. Croatia signed

it 2005, the last country in EU11 to do so.

(4) At various times in the 1990s, inflation in Romania or Bulgaria reached more than 300% but Slovenia,

Poland or Czechia also witnessed rates of 30 to 50% in the early 1990s.

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On the positive side, progress in negotiations to join NATO and the EU sent a strong signal

of commitment to democracy, market economy and international trade. This, coupled with a

tight and credible monetary policy, brought down inflation in most countries. At the turn of

the century, the legal and regulatory systems had undergone an important modernisation

process and were in their final phase of incorporating the Acquis Communautaire. All these

developments helped lowering risk perceptions leading to more stability and making EU

countries more attractive for investment. As a result, FDI surged and spurred economic

growth. Productivity started catching-up fast with the EU average and living conditions

improved significantly.

3 Investment and trade boom

At the turn of the 21st century the combination of geopolitical stability, access to foreign

markets and opening to foreign capital played a key role in the convergence process with the

West. The investment rate boomed from 19% to 28% in the Baltics and the Southern

countries—less so for Visegrád countries—compared to 15% of the EU average (5). Less

uncertainty, a better regulatory framework, and some large privatisations attracted massive

investments from abroad, most notably in the financial and trade sectors. The ability to tap

external markets and funding allowed for an unconstrained catching-up and an accelerated

integration in international markets. Net borrowing boomed as well as investment, even

excluding dwellings.

Between 2000 and 2007, real exports per capita increased by a factor of 2 in Southern

countries and by 2.5 in the Baltics and Visegrád region compared to only 1.35 in the EU-15.

This export boom reflected partly the ability to produce goods and services to the standards

of international markets but also their integration into the global value chains. In addition,

joining the EU entailed the prospects of accessing the Single Market, an important point for

non-EU firms looking to gain a market share in the EU. Today, the Baltics are exporting in

real terms almost five times as much as in 2000, whereas Visegrád and Southern countries

have multiplied their exports by a factor of 2.5. During the same period, the EU15 has not

even doubled its exports.

At this point, it may be worth noting that the increase in trade was not only with the Single

Market but with other countries as well. In fact, for some EU11 countries there is a tendency

to trade more and more with non-EU countries. In the Baltics, the share of exports of goods

to the EU has decreased from 80% to 62% over the period 2000-2018, but this trend is less

obvious in Visegrád countries. In other words, the increase in trade with the EU was not a

‘trade diversion’ from other traditional partners, but an absolute increase in trade (6).

5 See annex Annex A with some basic charts. The Baltics are Estonia, Latvia, and Lithuania; Visegrád is

the Czech Republic, Slovakia, Poland, and Hungary; the South is Bulgaria, Romania, Slovenia, and

Croatia.

6 See panel (d) in annex Annex A.

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4 Details of a take-off and a fast catch-up

The GDP of the EU11 region reached almost $1.5 trillion (7) in 2017 (in nominal values),

representing around 8 % of the EU28 GDP. In nominal terms, the GDP per capita is around

one third of the EU15 region. However, there has been a lot of catch-up in the last 25 years.

In 1992, GDP in EU11 was barely $250 billion, behind, for example, Australia, Mexico,

Korea or EFTA. 25 years later, the EU11 economies combined managed to overtake all these

blocs in nominal terms, growing by 470 %. Similar growth patterns as in EU11 can be

noticed in Malaysia (+430 %), Central and Caribbean America (+470 %), the Andean

Community (+440 %), or in the ASEAN (+470 %). On the other hand, EU15 countries or the

EU prospective members (Ukraine, Moldova, Serbia, Montenegro, Bosnia-Herzegovina,

Albania and Georgia) had a cumulative growth of less than 100 % in the past 25 years.

Following the current trend, it can be possible for EU11 countries to reach the nominal GDP

of EU3 (Spain, Portugal and Greece) in the next 5 to 10 years, despite starting at around only

30% in 1992.

In terms of the FDI stock, EU11 countries saw an important increase from barely $10 billion

in 1992 to $777 billion in 2017. It has to be acknowledged, however, that foreign investment

in this region was minimal before 1990, since most countries were functioning as closed

economies. Then Czechoslovakia ($1.3 billion in 1988) and Yugoslavia ($1.6 billion in 1988)

were the first countries in the region to open their economies to foreign investors. In 1992,

two thirds of the FDI stock in EU11 was generated by Czechoslovakia ($3.3 billion) and

Hungary ($3.4 billion). Apart from Slovenia ($1.8 billion) and Poland ($1.4 billion), the stock

of the other countries in the region was below $200 million. By 1997, the stock increased

five-fold and by 2002, just before accession for most EU11 countries, it increased 16 times.

The largest nominal increase was witnessed between 2002 and 2007 when the stock increased

by almost $400 billion. The actual accession to the EU in 2004-2007 encouraged investors in

EU15 to bring in equity to these countries where labour costs were significantly lower and

the EU legal protection of their investments was ensured. As of 2007, the regional stock

stabilised, growing by only 25 %. In 2017, Poland (€180 billion) and Czechia (€116 billion)

had the largest FDI stocks in EU11 (excluding FDI generated via Special Purpose Enterprises

or SPEs (8)), while Latvia (€13 billion), Lithuania (€14 billion) and Slovenia (€13 billion) had

the lowest ones. Including FDI generated via SPEs, Hungary had the highest stock with

around €226 billion. At a regional level, the EU11 FDI stock in 2017 was similar to Brazil,

the Eurasian Union, Australia, the African continent, EU3 and ASEAN (excluding

Singapore).

The stock of inward FDI in the EU28 coming from the EU Member States is only around

65%, with the rest coming primarily from USA, Switzerland and Bermuda. However, the

figure is much higher for EU11 countries, suggesting that, in this regard, they are more linked

7 For consistency with UNCTAD data, we use USD when comparing EU11 with the rest of the world.

8 An SPE is legal entity with no or few non-financial assets and employees, little or no production or

operations and sometimes no physical presence beyond a "brass plate" confirming its place of registration.

Half of EU28 FDI is channelled via SPEs, particularly in Netherlands, Luxembourg and Malta.

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with the Single Market then older Member States. The share of FDI coming from EU28

accounts for at least 80% in almost all EU11 countries, going up to 93% in the case of

Slovakia. Non-EU FDI is the highest in Latvia at 27%, mostly due to Russian investment in

this country. Looking at the (immediate) partner countries, the Netherlands is the biggest

investor in 6 out of the 11 countries, followed by Germany and Austria. Sweden is the biggest

investor in the Baltics while Czechia is a large investor in Slovakia. Apart from the Baltics

and Bulgaria, the share of manufacturing in total FDI stock is significantly larger than the EU

average (13%). The Visegrád countries, plus Slovenia and Romania all have shares above

30%. On the other hand, apart from Estonia, all countries have a lower share of services in

FDI compared to the EU average. Romania is the lowest in this regard having a share of only

47% (Estonia has 79%).

The stock of FDI relative to GDP in EU11 increased from 4 % in 1992 to 53 % in 2017, one

of the largest growths seen in history. The highest increase took place between 1992 and

2007 when the increase was around 45 pps. Between 2007 and 2012, the figure in the EU11

was higher than in the EU28. Currently, the share is almost equal and similar to that in other

regional blocks such as EU3 (Spain, Portugal and Greece), Egypt, Morocco, Thailand,

Vietnam or the MedCaspic region (Israel, Jordan, Lebanon and Azerbaijan). Rather

surprisingly, the share of FDI stock in GDP in the EU prospective countries is significantly

higher (63%), having increased 26 pps since 2012. During the same period, the share in EU11

remained unchanged, suggesting investors have moved their focus to the periphery of the EU.

A similar trend was witnessed in 2002-2007 when the share increased by 17 pps in EU11 and

only by 5 pps in EU3, as investors turned their attention from southern Europe to the new

Member States. The FDI stock per capita, however, gives a different picture. At $7,500,

EU11 still lags behind EU3 plus Italy ($9,800) or EU28 ($18,000) but is significantly ahead

of the EU prospective countries ($2,000) and most Asian and South American regional

blocks. Among the regional blocks having a similar population as EU11 (around 100 million

people), only Egypt (56%) and Vietnam (58%) have a slightly higher share of FDI in their

GDP.

Poland has the largest stock of FDI in nominal terms both in total economy and in most

economic sectors. Only in the sector of hotels and restaurants it is overtaken by Croatia, as

the tourism industry is much larger there. Czechia comes second and although it has a smaller

economy, its nominal stock is similar to the one in Poland for car manufacturing and financial

services. Romania comes in third, with particularly large contributions in energy and

construction. Slovenia, Latvia and Lithuania are the smallest contributors, as their stock in

any sector does not contribute with more than 4% to the total EU11 stock.

In terms of the share of FDI stock (including FDI generated via SPEs) in gross value added

(GVA), there is a mixed picture among the various economic sectors. Contrary to common

belief, in the manufacturing sector the share of FDI in 2015 was higher in the EU28 (91%)

than in the EU11 (74%). That is, however, not the case for automobile manufacturing where

the share of FDI in the EU11 (110%) is almost triple the EU28 level (45%). In the other

manufacturing subsectors, FDI in EU10 (68%) is around 30 pps below the EU level. These

figures clearly show that when excluding the car industry, manufacturing in this region is not

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that FDI-intensive. FDI in energy, transport and financial services is higher in the EU28

while FDI in real estate, construction, hotels and restaurants and ICT is higher in the EU10.

FDI in wholesale and retail is rather similar in both the EU10 and the EU28. The difference is

particularly striking in financial services where due to the inclusion of SPE-generated FDI,

the share of stock in GVA reached 1,226% in EU28, compared to ‘only’ 287% in the EU10.

Increase in the share of FDI stock in GVA between 2004 and 2015 was not particularly

spectacular in most sectors (+5 to 20 pps). Only in ICT (+27 pps), real estate (+46 pps) and

financial services (+99 pps) the increase was more significant. The share in the car industry

increased by around 12 pps, suggesting that the sector was already consolidated by the time

of EU accession. In the other manufacturing subsectors, the increase was even smaller

(+7 pps) suggesting that since EU accession most foreign investors focused on services. It

should be mentioned, however, that there are large sectoral differences between the EU11

countries. The largest difference is seen in the financial sector where the share of FDI stock

in GVA varies from 140% in Romania to 655% in Estonia. All three Baltic countries have a

very high share of FDI in this sector. Large variations are also seen in real estate (from 30%

in Slovenia to 178% in Estonia), car manufacturing (from 25% in Croatia to 134% in Poland)

and wholesale/retail (from 26% in Lithuania to 115% in Estonia). While Croatia has the

lowest share of FDI in car manufacturing, it has the highest one in the whole manufacturing

sector (104%). Nonetheless, the sector is relatively small, representing only 4% of the whole

FDI stock in EU11. Estonia is somewhat an outlier in EU11, having disproportionally high

figures compared to the second country in the rankings in a couple of sectors – finance

(+150 pps), real estate (+103 pps), transport (+33 pps) and wholesale/retail (+20 pps).

Excluding the ICT sector, productivity (GVA per hour of employee) increased more in the

EU11 than in the EU28 in all the analysed sectors. By far, the largest increase is seen in car

manufacturing where it increased by 80% between 2004 and 2015. Still, the level achieved in

2015 (€16) is more than half the EU28 level in 2004 (€35) and more than five times lower the

2015 (€52). The gap in productivity shrank by 2 to 5 pps in most sectors but remains

consistently high. The largest gap (€96 vs €464) is in real estate, which can probably be

explained by the significant price differences between older and newer member states. The

smallest gap is found in wholesale and retail and in transport.

Nominally, excluding real estate, the highest productivity in EU11 in 2015 was in financial

services (€27), energy (€25) and ICT (€24). The lowest was in hotels and restaurants (€8),

wholesale and retail (€12) and construction (€12). As in the case of FDI, there are also high

country differences within the EU11 in terms of productivity. In the analysed sectors, the

difference between the highest figure and the lowest one varies from 133% in ICT (€16 in

Bulgaria vs €38 in Czechia) to 481% in construction (€7 in Bulgaria vs €38 in Slovakia).

Another striking difference in nominal terms is seen in real estate where productivity varies

from €59 in Poland to €628 in Croatia, significantly above even the EU28 value (€464).9

9 At this point, it may be worth noting that real estate is a very (real estate) capital-intensive sector,

displaying typically large levels of labour productivity and with a high variation across regions because of

the different values of the real estate.

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Construction in Slovakia (€38) is the only other instance where the EU28 level (€37) is below

the level seen in a EU11 member state. Despite being a mostly domestic sector (the FDI stock

in GVA was only 8% in 2015), this sector saw an increase of 132% in productivity since EU

accession.

More worrying is that apart from construction and transport, most EU28 levels seen in 2004

are higher than the highest figures seen in EU11 member states. The most dramatic situation

is seen in ICT, where productivity in 2004 in the EU28 was 60% higher than in 2015 in

Czechia, the most productive EU11 country in this sector. Energy (+30% vs Slovenia) and

hotels and restaurants (+33% vs Slovenia) see similar situations. Bulgaria is usually the EU11

country with the lowest values in terms of productivity (in 7 out of the 11 analysed sectors)

while Slovenia seems to be most productive (highest values in 7 out of 11 sectors). Excluding

Romania and Bulgaria, Poland seems to be at the bottom of the rankings in most sectors

(8/11). Despite being a low sector in the economy, Lithuania (32) has the highest productivity

in car manufacturing. Among the large producers, Czechia (27) and Hungary (27) have the

highest figures, around half the EU28 value (52). Slovenia is in top3 most productive EU11

countries in any of the analysed sector. Slovakia comes in second, being in the top3 in 8 out

of the 11 analysed sectors, followed by Czechia in 7 instances. Conversely, Bulgaria is in the

top3 least productive countries in EU11 in all but two analysed sectors. Poland, Hungary and

Romania are flagged in 7 out of the 11 sectors.

Although at EU level, half of the inward FDI stock is created using Special-Purpose Entities

(SPEs), in EU11 this practice is only notable in Hungary. Out of the EUR 226 bn. inward

stock, 150 billion are channelled using these SPEs. A similar figure is seen for the outward

stock, suggesting large quantities of funds are only channelled via Hungary, leaving the

actual investment in the country significantly lower. A limited amount of FDI channelled via

SPEs is also visible in Poland and Estonia, but the quantities are rather negligible.

At the regional (NUTS 2) level (see Annex C), in 2016 the largest stock of FDI in GDP is

seen in the capital regions of the Visegrád countries, namely Prague (164%), Bratislava

(130%) and the Masovian region – Warsaw (101%). Excluding the capital regions, the largest

levels are found in the Hungarian Western Danube (95%) and Central Transdanubia (67%)

and in the Czech Moravian-Silesia (46%). On the other side, the lowest are witnessed in three

Polish regions – Podlaskie (6%), Lublin (8%) and Warmian-Masurian (9%), the Romanian

North West (9%) and Eastern Slovenia (13%). In nominal terms, the highest stock is found in

Masovian Region (Warsaw), followed by Prague, Central Hungary (Budapest), Silesian

Region and Bucharest-Ilfov, all with more than EUR 40 bn. Conversely, the lowest figures

are noticed in the Polish regions of Podlaskie and Warminsko-Mazurskie and the Bulgarian

Northwestern (10), all with a stock below EUR 1 bn.

Looking at the Coface ranking of the largest companies operating in Central and Eastern

Europe in 2017, it is noticeable that many of them are foreign-owned. Among the top15, 9

companies are foreign-owned. These include Skoda Auto (CZ) owned by the German VW

10 Figures for Bulgarian regions only include non-financial FDI.

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(#2), Jeronimo Martins Polska (PL) owned by the Portuguese Jeronimo Martins Group (#4),

Audi Hungaria (HU) owned by VW (#6), VW Slovakia owned by VW (#7), Alpiq Energy

(CZ) owned by the Swiss Alpiq (#11), (CZ) Hyundai Motors (#11) and (SK) Kia Motors

(#12) owned by the Korean Hyundai Group and Dacia (RO) owned by the French Renault

(#14). The other six companies in top15 not considered foreign-owned are from Poland (5)

and Hungary (1). In this regard, the discrepancy between Poland and Romania, the two

largest countries in the region, is noticeable. While in Poland only 3 of the largest 10

companies are foreign-owned, all the top10 Romanian companies are foreign-owned.

Similarly, while most top10 Slovenian are domestic, most Slovak and Czech large companies

are foreign. In Hungary, two out of the top3 companies are domestic but all the rest in the

top10 are foreign-owned.

While the total stock of inward FDI in the EU11 is around 10% of the total EU28 stock

(excluding SPEs), the total stock of outward FDI created by these 11 countries amounts to

only 1.2% of the EU28 total. Estonia (26%), Hungary (21%) and Slovenia (14%) are the most

active in this regard, having a more significant share of outward stock to GDP. On the other

hand, Romania (0.4%), Slovakia (3%) and Bulgaria (4%) have almost negligible levels,

suggesting their domestic companies do not actively operate across borders. Similar to

inward FDI, most outward FDI is mostly done in other EU28 countries, particularly in the

Netherlands, Luxembourg and Cyprus (countries that have a significant amount of FDI

channelled via SPEs). The Baltics also focus on Russia while Slovenia and Croatia focus a lot

on the non-EU countries of the former Yugoslavia. Hungary has a particular interest on

Israel. At the EU level, similar to the inward FDI, most outward FDI goes to the US,

Switzerland and Bermuda.

5 EU membership

As could be seen, both the prospects of joining the EU and, later, actual membership, have

played a key role in the observed economic developments in the EU11. The more obvious

advantage of membership is full access to the Single Market without the tariffs imposed to

non-EU members and with more legal certainty than with any kind of trade agreement. The

Single Market is not only about trade, but also about the Four Freedoms: movement of goods,

services, people and capital. FDI, for instance, is promoted by rules allowing to tax dividends

in the country of origin of a company. In addition, once in the Single Market, any possible

protectionist action from old Member States is precluded by State Aid rules prevent tax cuts

or subsidies to companies under competition of the newly arrived EU11 firms. In general,

joining the EU comes along with adoption of the Acquis Communautaire with implications

that range for the functioning of justice to public procurement rules. This means that EU

membership entails a significant level of regulatory quality. This regulatory framework starts

applying even before the proper accession - for example, many EU11 countries had trade

agreements already in the mid-1990s and to trade with EU implies to comply with all

internal market standards for products, which, in turn, stimulates knowledge transfers. In

the case of EU11 countries, pre-accession Structural Funds with twinning projects for

example, helped modernise infrastructures way before 2004. After 2004, large flows of EU

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structural funds helped among many things modernising the existing infrastructure and

improving population skills, therefore contributing to economic growth and potential.

Already years before the actual Enlargement, most EU11 countries committed to low and

stable inflation, many with a view to joining the euro. Joining the common currency is the

ultimate commitment to eliminate exchange rate risk and lower transaction costs, a

fundamental achievement for countries that were expecting to rely heavily on trade and

foreign funding. In the case of funding, eliminating exchange rate risk also eliminates risk

premia reducing funding costs, particularly in smaller countries with potentially more volatile

currencies.

Last but not least, joining the EU gave these countries a chance to influence the decision-

making process of the Union, no matter how small, rather than being a passive observer as

EFTA countries. As a hypothetical example, if the EU11 countries plus Malta and Cyprus

would vote in the same way in the Council they could block a piece of legislation supported

by all the 15 older Member States (11). While probably not possible in practice, this

mathematical exercise shows how much influence these countries can exert at the EU level.

6 Why foreign direct investment?

Access to external funding was not just a matter of access to capital. Attracting foreign direct

investment in these countries was of paramount importance since it was additional funding,

while acting as a vector of new technologies. FDI is not only an important source of capital

formation but it can also upgrade entire sectors very fast and integrate the economy (and

indirectly many local firms) into global value chains (12).

FDI is highly profitable for investors in the EU11. Whereas the rate of return on FDI in EU15

was as high as 6.7% in Sweden, in EU11, Czechia and Lithuania had as much as 11 to 12%,

followed by Poland, Slovakia and Latvia with around 8 to 10% (Eurostat data from 2015).

Excluding Croatia, where the rate is negative (-0.6%) and the lowest in EU28, all EU11

countries had a rate of at least 6%. These rates may slightly decrease in the near future as

EU11 countries saw significant increases in labour costs in recent years. Since 2012, the total

amount of wages and salaries increased higher than the EU28 average (14%) in all EU11

countries. Apart from Slovenia (15%), the increase in 2012-2018 in each country was

between 24% and 57%, not including the notable case of Romania where the increase was

106.4%. Nonetheless, as Table 1 shows, net earnings in EU11 are still significantly below the

EU28 average, ranging from below 20% the EU average in Bulgaria to roughly 50% in

Slovenia. Thus, even with the high growth of labour costs, EU11 will remain for a while

highly profitable for foreign investors.

(11) As qualified majority in the Council requires the approval of at least 16 countries (and 65% of the

population)

(12) There is a vast literature on FDI. For FDI and long-term growth see, for example, Hansen and Rand

(2006). For a general overview of theory and empirics of technology diffusion see Keller (2004).

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FDI can serve local or international markets. In the case of the EU11 countries, all of them

planned economies until 1989, certain sectors working for local customers like banking or

real estate were less developed. In the case of banking, for example, foreign firms contributed

to build a reputation of solvency that would have been difficult to build for newly created

firms. These sectors attracted considerable amounts of investment in the first years of the

economic liberalisation. The relatively low level of labour costs compared to the average of

the EU15 also spurred large investments in export sectors to serve international markets. The

car making industry is a case in point in some countries but also manufacturing in general or

wholesale trade.

Whether it is to serve local or international markets, FDI is an important source of capital and

jobs as well as a channel of technical change. FDI brings home jobs and wages that would

have remained abroad otherwise, and this in a period in which the entire economic tissue can

be under reconstruction. Hence, FDI can be seen a factor mitigating emigration pressures

with possible important consequences in terms of the human capital stock. FDI is often a

source of capital formation beyond the capacity of local savings. Even in the case of

mergers and acquisitions, FDI flows entail a form of long-term commitment and usually

some form of real investment (in contrast to mere financial investments). Even more direct is

the impact of greenfield FDI, when the investment entails the building of new production

facilities from scratch. More importantly, FDI goes beyond simple capital accumulation and

brings in new technologies in the form of intra-firm technological transfers including new

production techniques and production processes, more management know-how, etc. (13)

Technological upgrading and increased productivity also comes from the integration of the

firm or plant in the new parent company's supply chain.

The benefits of FDI are not limited to the firms directly concerned. Indirect effects or

potential positive spillovers may stem from a variety of mechanisms. Increased competition

of purchased or newly established firms fosters efficiency and innovation in local

competitors. For the same reason, spillovers can arise also up- and downwards the value

chain, exerting pressure to improve quality standards to providers higher up in the value

chain and providing with better goods downwards. The workforce improves its productivity

not only because it operates new, better capital but also because of learning-by-doing in a

more efficient environment. Research shows that FDI often improves the absorptive capacity

of leading firms (close to the efficiency frontier), which in turn spill down to less performant

firms (14).

Unfortunately, these benefits from FDI are at least partially reversible. There is evidence that

disinvestments at the plant level revert productivity gains from past FDI. For reasons easy to

understand, the withdrawal of a multinational enterprise will often lead to the closure of local

(13) This is, of course, not mechanical. Borenszteina et al. (1998) explores the conditions under which FDI

increases productivity more than domestic investment. The formation of human capital turns out to be a

critical factor.

(14) See Chiacchio et al. (2018) for the effect of FDI on the absorptive capacity of frontier firms and the

trickle-down effect on laggards.

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plants and their separation from the multinational supply chain, with the consequent loss of

opportunities and productivity (15). It goes beyond the scope of this note to quantify the

impact of FDI on aggregate productivity but it is likely that the slowdown of productivity

growth in CEE countries after the crisis is at least partially linked to more subdued FDI

inflows seen then despite some recent recovery. Recent research shows that the slowdown of

total factor productivity (TFP) growth since 2010 can be attributed almost entirely to

‘reshoring’, the tendency of some foreign firms to relocate activities back in their home

country.

While global macroeconomic developments are outside the control of governments in the

EU11, the recovery of FDI can be supported improving the institutional environment. In this

respect, the role of the regulatory environment cannot be overemphasised. European

Commission research shows that the cost of enforcing contracts or the ease to pay taxes are

important factors to decide to invest in a country by foreign investors. Further, once the

investment is decided, the size of the project depends on the level of protection of incumbents

(the extent to which competition is limited in certain markets) and other barriers to trade and

investment (e.g. discrimination against foreign firms) (16).

7 Controversies

Despite the notable consensus around its benefits, foreign investment remains a sensitive

issue in many countries. Criticism goes from losing control of national industries to,

repatriated profits, relaxing environmental standards or selling at discount national assets or

natural resources in case of crisis. While some arguments may be seen as clichés or political

propaganda, some others may have some substance behind (17).

In smaller countries, large foreign groups with ‘deep pockets’ may engage in

anticompetitive practices to drive out of the market local competitors. It is a theoretical

possibility but difficult to verify in practice since the difference between anticompetitive

practices and competitiveness (foreign firms often perform better in terms of capital, labour

and corporate governance for example) is not always clear. A similar and common critique is

that some purchases have only the aim of taking over distribution channels and networks.

While it may be true in some cases, it is a legitimate reason to purchase a company. Whether

the purchaser is foreign or not should probably be less relevant.

A common popular concern is the fiscal advantages granted to foreign firms for them to

establish in a given country or region. Competition among US states sometimes helps explain

large subsidies to foreign groups to support their establishment in a federal state and not

another. If competition across regions takes the form or better infrastructures or business

environment, it could serve the general interest; fiscal discounts or subsidies do not. Inside

(15) Javorcik and Poelhekke (2017) show for a sample of Indonesian firms that disinvestment is associated

with a drop in total factor productivity, output, mark-ups, and export and import intensities.

(16) See Canton and Solera (2016).

(17) For a more nuanced view on FDI in general, see Mencinger (2003) and references therein.

12

the EU the risk of this type of behaviour is limited even within regions of the same country

because of State Aid rules. Nonetheless, there may be a competition between countries in

terms of taxation. Hungary (9%) and Bulgaria (10%), for example, have the lowest corporate

tax rate in the whole EU28. In general, corporate tax rates in EU11 are slightly lower

compared to EU15, with a maximum of 21% in Slovakia. On the other hand, some of these

countries imposed special levies on certain sectors such as banking and/or energy and/or ITC.

While such taxes are also common in EU15, in EU11 they focus more on assets rather than

profits and are seen by some politicians as a way of stopping the repatriation of profits.

In the case of extractive industries, a common critique is the looting of natural resources in

exchange of insufficient compensation. It may be fair to say that currently this phenomenon

is probably more common outside the EU, in developing economies with weak institutions

and pervasive corruption. However, it has also been used as an argument by certain

politicians in the pre-accession phase. A related complaint is that foreign firms are granted a

more relaxed interpretation of environmental standards as a form of stimulating establishment

in the country or region. That is surely a risk that is not contained by State Aid rules. In

addition, it is possible that owners that are physically far away from the region may be less

sensitive to environmental considerations. That is yet another reason to strengthen

environmental standards for both domestic and foreign firms.

There may also be a reluctance to give control to foreign powers of national assets. This

might make some sense in the case of strategic industries, notably defence and aerospace, or

when foreign investments are backed by a political motive. If it is not the case, however, an

investment is just an investment whether the investor resides in the country or not. Moreover,

most companies involved in cross-border investment are multinational enterprises with

shareholders spread over many countries. It is doubtful that this kind of enterprises have a

‘nationality’ so that they are going to serve any objective that is not rendering value to their

shareholders.

A variant of this argument is purchases to steal technologies or industrially strategic

companies. Beyond the case of defence mentioned above, this argument is not particularly

solid and the value of the stock of intangible capital of a company—be it know-how, patent

portfolios, organizational capital or alike—is a crucial element of the value of many

companies irrespective of the nationality of the purchaser. In other words, it is perfectly

acceptable to purchase a company for its technology. In some cases, however, some

monitoring may be justified. The European Parliament has recently allowed the EU to

scrutinise investments that represent potential risks to the bloc’s security or public order. The

area remains a national competency but it will enhance cooperation among Member States on

these matters.

13

Finally, there is a frequent complaint about selling at discount national assets or natural

resources during crises, which may be partially true but part of the normal functioning of a

market (18).

Perhaps more reasonable is the claim that foreign plants are the first to go in bad times in

contrast to plants installed in the country of the headquarters of the company. Still,

‘reasonable’ does not mean true, at least systematically. The reshoring mentioned above is a

real phenomenon. Nonetheless, there are important counterexamples in which precisely the

foreign branches survive the consolidation processes. In addition, past research also fails to

prove that a firm with foreign owner is going to be a less reliable employer than a similar

local firm.

Repatriation of profits is also a major criticism brought to FDI particularly in the Visegrád

region, particularly since it leads to a gap between the GDP and GNI of the countries. Since

accession, foreign-owned companies repatriated around EUR 100 billion in profits from both

Czechia and Poland. In Slovakia, for example, 72% of all generated income was repatriated

since 2004. Nonetheless, the overall contribution of FDI to the economies in EU11 has been

significantly positive even if the outflow of dividends has been high. European Commission

research and other suggest that the total amount of wages, salaries and employers' social

contributions paid by foreign firms is substantially higher than the repatriated profits.

Furthermore, in many countries in the region due to increased labour productivity, foreign

firms offer significantly higher wages than the national average and, hence, employ a large

part of the active population. Furthermore, the repatriation of profits is not a region-specific

phenomenon. Brada and Tomšík (2009) divide the profitability life cycle of FDI in three

steps. At the entry stage foreign firms are usually losing money and do not distribute

dividends. Moving into the growth stage, most earnings are reinvested in order to increase the

market share. Finally, at maturity, the focus shifts to profit repatriation, either as dividends

for shareholders or as seed money for other markets where investments are still in an early

phase. After all, FDI is an investment and, as any investment, it has to render a yield to

investors. Country-specific and sector-specific of course, this profitability life cycle can last

anywhere from 10 to 20 years.

Finally, it is sometimes claimed that foreign plants bring with them their own network of

suppliers, often foreigners themselves, which mitigate the potential channels for positive

spillovers up- and downwards the value chain. Even if the new company would source

locally, there would be inevitably a transition period in which there would be winners and

losers among the local industry. Nevertheless, while foreign firms could indeed resort to

foreign providers, casual empiricism does not support that this is a generalised phenomenon.

Much of the reservations concerning FDI do not seem to have a solid base. However, it is

probably fair to say that the positive effects of FDI are conditional on a series of

characteristics of the recipient country, such an effective and transparent regulatory

(18) Contessi et al. (2013) note that FDI inflows are countercyclical in developing countries most likely

because of the low price of local firms for potential foreign owners during recessions, particularly during

large devaluations or depreciations of the local currency

14

environment, absence of corruption, and a functioning rule of law and trade openness. In

relatively advanced economies, as it is the case in the EU11, FDI is more likely than not a

source of productivity growth.

8 Elements for discussion

Has FDI peaked in EU11 and are new investors really moving towards the periphery of the

EU (Serbia, Ukraine, Morocco, etc.)?

Are the benefits of the Single Market enough for investors to compensate for the increasing

labour costs in the new Member States?

Is it still normal to discuss about FDI between Member States within the Single Market?

What is the actual difference between a Californian company investing in Ohio and a German

company investing in Slovakia?

Why are foreign companies being increasingly attacked by certain politicians in the new

Member States?

15

References

Brada, J. and Tomšík, V. (2009) ‘The Foreign Direct Investment Financial Life Cycle:

Evidence of Macroeconomic Effects from Transition Economies.' Emerging Markets Finance

and Trade, 45(3), 5-20.

Borenszteina, E., De Gregorio, J. and Leec, J-W. (1998) ‘How does foreign direct investment

affect economic growth?’ Journal of International Economics, 45(1), 115-135.

Canton, E. and Solera, I. (2016) ‘Greenfield Foreign Direct Investment and Structural

Reforms in Europe: what factors determine investments?’ European Commission, European

Economy Discussion Paper 33.

Chiacchio, F., Gamberoni, E., Gradeva, K. and Lopez-García, P. (2018) ‘The post-crisis TFP

growth slowdown in CEE countries: Exploring the role of Global Value Chains.’ European

Central Bank Working Paper No. 2143.

Contessi, S., De Pace, P. and Francis, J.L. (2013) ‘The cyclical properties of disaggregated

capital flows,’ Journal of International Money and Finance, 32, 528–555.

Javorcik, B.S. and Poelhekke, S. (2017) ‘Former Foreign Affiliates: Cast Out and

Outperformed?’ Journal of the European Economic Association, 15(3), 501-539.

Keller, W. (2004) ‘International technology diffusion,’ Journal of Economic Literature,

42(3), 752-782.

Hansen, H. and Rand, J. (2006) ‘On the causal links between FDI and growth in developing

countries,’ The World Economy, 29(1), 21-41.

Mencinger, J. (2003) ‘Does Foreign Direct Investment Always Enhance Economic Growth?’

Kyklos, 56(4), 491–508.

16

Annex A. Some basic figures

Figure. Trade and investment in CEE countries

Notes: (i) The Baltics are Estonia, Latvia, and Lithuania; Visegrád is the Czech Republic, Slovakia,

Poland, and Hungary; the South is Bulgaria, Romania, Slovenia, and Croatia.

Source: AMECO database except UNCTAD for FDI flows.

17

Annex B. Some tables with detailed data

Table 1. Detailed data on inward and outward FDI in EU11 in 2016

MS

Pop

(mil.)

GDP EU Funds Earnings R&D Inward FDI Outward investment

Nominal

(bn.)

Per capita

(PPS)

Allocation

07-13 (bn.)

Net

annual (€)

BERD per

capita (€)

Stock

(via SPEs) (bn.)

Stock/ GDP

(excl. SPEs) (bn.)

Stock from

EU28/ RoW

Share of

manufacturing

Share of

services 1st 2nd 3rd

Return

rate 2015

Stock (via

SPEs) (bn.)

Stock/GDP

(excl. SPEs)

Stock in

EU28/ RoW

1st 2nd 3rd

Return

rate

2015

BG 7.2 48.1 48 6.7 4,333 38 40.8 (0) 85% 78% 17% 63% NL CH DE 5.5% 2.1 4% 52% N/A N/A N/A -1.1%

CZ 10.6 176.4 88 26.5 8,940 172 115.6 (0) 66% 84% 32% 60% NL DE LU 12.2% 17 10% 92% NL SK CY 9.4%

EE 1.3 21.7 77 3.4 10,638 106 18.7 (0.5) 86% 83% 13% 79% SE FI NL 6.8% 6.1 (0.5) 26% 92% LT FI RU 5.1%

HR 4.2 46.6 61 0 8,841 44 26.2 (0) 56% 87% 21% 70% NL AT IT -0.6% 4.8 10% 48% NL BiH SL -4.0%

LV 2 25 64 4.5 6,814 14 13.5 (0) 54% 73% 12% 68% SE RU CY 7.6% 1.5 6% 68% LT EE RU 12.9%

LT 2.9 38.8 75 6.8 6,651 40 13.9 (0) 36% 80% 19% 73% SE NL DE 11.2% 2.5 7% 89% NL CY LV 3.5%

HU 9.8 113.9 67 24.9 6,702 103 225.9 (149.5) 67% 79% 30% 62% DE NL AT 6.0% 183.1 (159.4) 21% 71% BE IL CY 2.6%

PL 38 426.6 68 67.2 8,967 71 179.8 (0.9) 42% 92% 31% 61% NL DE LU 9.7% 26.8 (0.4) 6% 68% LU CY CH 3.0%

RO 19.8 170.4 59 19.2 5,119 23 70.1 (0) 41% 90% 32% 47% NL DE AT 5.8% 0.7 0.4% N/A N/A N/A N/A -13.8%

SI 2.1 40.4 83 4.1 12,062 298 13.0 (0) 32% 85% 33% 61% AT LU CH 8.5% 5.7 14% 43% HR SRB BiH 0.9%

SK 5.4 81.4 77 11.5 8,200 60 45.1 (0) 56% 93% 32% 58% NL AT CZ 8.2% 2.5 3% 81% CZ NL PL 7.7%

EU28 509 14,958 100 347 24,183 390 14,385

(7,007) 49% 65% 13%

81%

(SPEs) US CH BMU 3.8%

16,960

(7,845) 61% 57% US CH BMU 4.4%

Source: European Commission, Eurostat, OECD, BoP data available at the national level (central bank and/or statistics institute)

Table 2. Breakdown of the FDI stock in EU11

BG CZ EE HU LV LT PL RO SI SK HR Total EU11 (mil. EUR)

Manufacturing 4% 23% 2% 5% 1% 2% 35% 13% 3% 9% 4% 155,921

Car manufacturing 1% 29% 0% 14% 0% 1% 32% 12% 1% 9% 0% 123,771

Other manufacturing 5% 21% 2% 3% 1% 2% 36% 13% 3% 9% 5% 32,150

Energy 12% 15% 1% 10% 2% 1% 25% 24% 2% 7% 1% 26,028

Construction 4% 7% 1% 4% 3% 2% 50% 21% 1% 3% 5% 17,008

Wholesale/Retail 6% 15% 3% 11% 2% 2% 37% 11% 3% 5% 3% 71,341

Transport 4% 16% 8% 12% 4% 3% 21% 11% 3% 15% 3% 11,204

Hotels Restaurants 14% 12% 2% 11% 2% 1% 19% 11% 2% 1% 23% 4,582

ICT 5% 19% 2% 16% 1% 4% 29% 11% 2% 7% 4% 32,731

18

Finance 6% 24% 4% 11% 3% 3% 25% 7% 2% 8% 7% 122,034

Real Estate 7% 17% 7% 11% 4% 4% 30% 9% 1% 6% 3% 46,610

Source: European Commission, Eurostat, BoP data available at the national level (central bank and/or statistics institute)

Table 3. The share of FDI to GDP in different regional blocks around the world.

FDI stock/GDP 1992 1997 2002 2007 2012 2017 pps increase Population (million) FDI/capita in 2017 ($)

Japan 0% 1% 2% 3% 3% 4% 4 127 1,634

Bangladesh 2% 3% 5% 6% 6% 6% 4 165 88

China (mainland) 7% 16% 15% 9% 10% 12% 5 1,409 1,058

Mercosur-* (excl. BR) 7% 16% 38% 21% 16% 14% 6 87 1,548

India 1% 2% 5% 9% 12% 15% 14 1,340 282

South Korea & Taiwan 3% 4% 10% 11% 13% 15% 12 75 4,232

Turkey 6% 6% 8% 23% 22% 21% 15 80 2,259

Philippines 7% 10% 14% 14% 15% 25% 18 105 750

EU4S (IT, ES, PT, GR) 7% 11% 20% 27% 30% 34% 27 126 9,791

Eurasian Union 0% 4% 22% 37% 23% 34% 34 182 3,427

ASEAN-* (excl. SG) 11% 18% 21% 27% 31% 36% 25 645 1,360

Brazil 13% 8% 20% 22% 30% 38% 25 209 3,724

NW Africa (MA,TN,DZ) 14% 18% 26% 30% 29% 38% 24 88 1,369

Africa 12% 13% 26% 28% 28% 40% 28 1,225 708

NAFTA 11% 19% 20% 29% 28% 42% 31 490 19,144

Mexico 9% 11% 21% 30% 38% 42% 34 130 3,763

Andean Community 7% 16% 24% 27% 29% 47% 39 101 3,050

Malaysia & Thailand 17% 22% 32% 37% 43% 47% 30 101 3,554

Australia 24% 24% 35% 40% 39% 47% 23 24 27,596

Central & Caribbean America 8% 10% 22% 28% 37% 48% 40 80 2,436

EU3S (ES, PT, GR) 11% 17% 32% 37% 44% 48% 37 67 12,245

EU15 11% 17% 28% 39% 43% 50% 39 410 19,312

MedCasp (AZ,IL,JO, LB) 6% 11% 27% 42% 40% 52% 46 35 7,313

EU28 11% 17% 28% 40% 46% 53% 42 513 17,786

EU11 4% 14% 32% 49% 53% 53% 49 103 7,541

Egypt 26% 20% 24% 38% 28% 56% 31 95 1,154

Vietnam 11% 39% 50% 41% 47% 58% 47 95 1,363

EU prospective (AL,BA,GE,ME,MK,UA,RS) 0% 3% 12% 24% 37% 63% 62 70 2,005

EFTA 11% 18% 37% 63% 84% 110% 99 14 87,086

OFC8 (BM,HK,KY,IE,LU,NL,SG,VG) N/A N/A 126% 185% 229% 333% 207 36 178,160

19

Source: own calculations based on UNCTAD and UN statistics

Table 4. Productivity in EU11 (GVA/hour worked of employees in EUR)

EU11 EU28 min EU11 min EU8 max EU11

2004 2015 growth 2004 2015 growth 2015

Manufacturing 8 13 62% 29 41 39% BG 7 PL 11 SI 26

Car manufacturing 9 19 112% 29 39 51% BG 6 PL 11 SI 32

Other manufacturing 9 13 51% 35 52 37% BG 67 PL 11 LT 26

Energy 17 25 48% 55 76 38% RO 17 LT 20 SI 43

Construction 9 12 39% 28 37 33% BG 7 HU 9 SK 38

Wholesale Retail 9 12 30% 27 33 21% RO 6 HU 10 SI 24

Transport 9 14 52% 29 38 31% BG 10 PL 12 SI 29

Hotels Restaurants 6 8 29% 24 27 12% BG 5 PL 6 SI 18

ICT 23 24 5% 60 65 8% BG 16 PL 20 CZ 38

Finance 17 27 56% 59 78 32% PL 18 PL 18 SK 55

Real Estate 60 96 60% 382 464 22% PL 59 PL 59 HR 628

Source: European Commission, EUROSTAT, EUKlems

Table 5. FDI stock as a share of GVA

EU11 EU11 EU11 EU28 Min EU11 Max EU11

2004 2015 growth (pps) 2015 vs EU28 (pps) 2015 2015

Manufacturing 65% 73% 9 91% -18 HU 38% 104% HR

Car manufacturing 98% 110% 12 45% +65 HR 25% 134% PL

Other manufacturing 61% 67% 7 97% -30 HU 24% 107% HR

Energy 42% 61% 18 71% -10 HR 21% 147% BG

Construction 9% 25% 16 11% +14 SI 5% 44% BG

Wholesale Retail 35% 51% 16 47% +5 LT 26% 115% EE

Transport 12% 17% 5 25% -8 LT 9% 66% EE

Hotels Restaurants 16% 26% 11 13% +13 SK 7% 70% BG

ICT 43% 70% 27 55% +15 LV 40% 114% HU

Finance 189% 287% 99 1,226% -939 RO 140% 655% EE

Real Estate 24% 63% 39 23% +40 SI 30% 178% EE

Source: European Commission, EUROSTAT, BoP data available at the national level (central bank and/or statistics institute)

20

Annex C. Regional details

Table 5. Value added, productivity, and FDI in NUTS3 regions

1st sector 2nd sector GVA/h IndustryConstructi

on

Wholesale,

retail,

transport,

hotels&rest

ITC Controling groupFro

m

Rank

Cofac

e500

BG31 Northwestern Pleven 301+ Textiles Food 2.4 15.3 2,982 2,714 1,851 N/A Great Wall Motors CN N/A 521 3,486 15% 918

BG32 Northern Central Ruse 301+ Textiles Food 5.0 15.3 3,818 1,976 2,614 2,923 HSE SI N/A 1,023 4,017 25% 1,068

BG33 Northeastern Varna 301+ Food Textiles 4.3 16.7 4,495 3,269 2,563 5,000 Energo Pro CZ N/A 2,568 5,457 47% 920

BG34 Southeastern Burgas 301+ Food Metals 9.8 17.2 5,419 3,333 2,582 2,339 Lukoil RU 35 2,983 6,685 45% 1,529

BG41 Southwestern Sofia 47 Textiles Food 11.5 26.0 5,958 4,638 5,902 14,901 Aurubis DE 43 14,496 24,742 59% 2,234

BG42 Southern Central Plovdiv 301+ Textiles Food 4.9 14.8 4,023 1,789 2,409 5,411 Molson Coors US N/A 2,842 7,258 39% 1,627

CZ01 Prague Prague 3 Wood Metals 2.7 67.5 16,909 10,532 18,169 27,208 Alpiq CH 11 80,185 48,751 164% 1,788

CZ02 Central BohemiaMlada Boeslav 301+ Motor Metals 2.8 47.3 11,461 3,842 6,525 2,344 VW DE 2 10,306 22,784 45% 3,427

CZ03 Southwest Plzeň 105 Metals Motor 4.0 42.8 9,261 5,746 6,298 7,968 Robert Bosch DE 209 7,399 19,090 39% 3,720

CZ04 Northwest Ústí nad Labem 251+ Metals Plastics -1.2 38.8 8,724 4,591 4,729 5,309 PKN Orlen PL 16 4,186 14,315 29% 3,034

CZ05 Northeast Liberec 118 Motor Metals 4.3 41.3 8,807 4,643 6,277 7,540 IVECO IT 234 6,727 22,981 29% 3,229

CZ06 Southeast Brno 11 Metals Machinery 8.2 44.2 9,321 6,209 7,431 18,170 Automotive Lighting DE 334 8,364 27,760 30% 4,486

CZ07 Central Moravia Olomuc 46 Metals Plastics 8.0 40.0 8,665 5,348 6,061 9,940 Continental DE 58 4,484 18,024 25% 3,601

CZ08 Moravian-Silesia Ostrava 76 Metals Motor 6.8 43.7 9,927 4,963 6,649 9,635 Hyundai Motor Group KR 12 8,334 18,017 46% 3,653

EE00 Estonia Tallin 5 Wood Food 5.7 43.1 11,558 8,130 10,286 13,485 Ericsson SE 245 19,924 23,615 84% 3,956

HR03 Adriatic Croatia Split 97 Food Metals -2.8 36.5 10,965 8,226 7,956 11,053 OTP HU N/A 15,750 0

HR04 Continental CroatiaZagreb 38 Food Wood -0.3 36.5 10,670 7,937 9,373 15,156 Deutsche Telekom DE 239 33,240 0

LV00 Latvia Riga 50 Wood Food 7.3 35.6 8,434 6,446 8,013 14,510 Uralchem RU 226 14,605 27,033 54% 5,584

LT00 Lithuania Vilnius 17 Wood Food 15.0 38.4 8,278 6,758 7,390 14,678 PKN PL 20 14,816 42,191 35% 8,538

HU10 Central Hungary Budapest 20 Food Metals 2.3 38.3 10,836 5,583 9,535 19,548 General Electric US 55 43,261 53,045 82% 4,498

HU21 Central TransdanubiaSzékesfehérvár 161+ Motor Metals 8.4 34.4 9,233 3,309 5,235 6,000 Suzuki JP 66 7,795 11,646 67% 3,105

HU22 Western Danubia Gyor 201+ Motor Wood 15.2 37.4 10,093 3,795 6,035 9,333 VW DE 6 11,846 12,452 95% 3,122

HU23 Southern Danubia Pecs 53 Food Electronics 3.9 30.0 6,636 3,774 5,419 12,139 Flex US 74 1,002 6,847 15% 2,739

HU31 Northern HungaryMiskolc 125 Electronics Metals 6.4 31.8 7,737 3,691 5,276 9,633 Robert Bosch DE 23 3,489 8,732 40% 4,498

HU32 Northern Great PlainDebrecen 30 Food Electronics 5.3 29.1 6,136 3,366 5,205 8,506 Teva IL 215 4,545 10,801 42% 5,326

HU33 Southern Great PlainSzeged 26 Food Plastics 8.5 30.5 6,811 4,047 5,273 8,485 Mercedes DE 25 2,776 10,374 27% 4,883

CodeNUTS 3

Region

Most

important city

Universities

ranking in top

250 CEE

Top employersChange of

GDP vs EU

2007-2016

Wages and salaries per number of employees Largest foreign investor

FDI stock

(mil. EUR)

GDP (mil.

EUR)

EU Funds

payments 07-

13 (mil EUR)

28,108 57%

FDI stock/

GDP

21

Table 5. (cont.)

Source: European Commission, Eurostat, Coface Group, BoP data available at the national level (central bank and/or statistics institute), QS Ltd.

Note: Most recent data. Data for Bulgarian regions excludes FDI in financial services. No FDI regional data for Croatia.

1st sector 2nd sector GVA/h IndustryConstructi

on

Wholesale,

retail,

transport,

hotels&rest

ITC Controling groupFro

m

Rank

Cofac

e500

PL12 Masovian Warsaw 6 Food Wood 26.4 42.1 7,811 6,050 11,524 15,734 Orange FR 40 95,721 94,978 101% 11,210

PL21 Lesser Poland Krakow 7 Metals Food 14.7 33.4 7,905 4,166 6,207 14,380 Tesco UK 36 8,106 33,943 24% 5,932

PL22 Silesian Katowice 79 Metals Motor 14.8 36.7 10,298 5,570 5,358 8,553 ArcelorMittal LU 21 18,718 52,498 36% 6,833

PL31 Lublin Lublin 151+ Food Wood 10.0 20.4 4,276 3,071 2,895 4,586 Maxima Group LT 348 1,386 16,334 8% 5,436

PL32 Subcarpathian Rzeszów 201+ Plastics Wood 10.7 27.8 8,389 3,970 3,704 6,971 Goodyear US 466 3,619 16,631 22% 5,590

PL33 Holy Cross Kielce 301+ Metals Plastics 6.8 21.8 6,531 2,968 3,348 N/A CELSA Group ES 327 1,665 9,957 17% 3,319

PL34 Podlaskie Białystok 171+ Food Wood 9.1 23.3 6,118 3,796 4,087 4,889 BAT UK 128 514 9,335 6% 2,706

PL41 Greater Poland Poznan 64 Wood Food 18.5 39.0 9,440 4,932 9,102 12,797 Jerónimo Martins PT 4 15,842 42,120 38% 5,211

PL42 West PomeranianSzczecin 301+ Wood Food 10.3 36.0 7,148 3,815 5,202 13,136 IKEA SE 163 3,530 15,899 22% 3,261

PL43 Lubusz Zielona Góra 171+ Wood Motor 10.0 29.6 7,161 2,203 3,668 N/A Krono Holding CH 435 1,795 9,476 19% 2,042

PL51 Lower Silesian Wroclaw 44 Motor Plastics 17.9 39.3 10,126 4,628 6,294 10,287 Schwarz Gruppe DE 49 9,970 35,712 28% 5,429

PL52 Opole Opole 301+ Metals Food 9.9 30.5 7,150 3,792 3,734 N/A Brenntag DE 482 1,396 8,786 16% 1,642

PL61 Kuyavian-PomeranianBydgoszcz 88 Wood Metals 10.1 27.5 7,031 4,098 4,327 3,636 Framondi NL 264 2,605 18,872 14% 3,725

PL62 Warmian-MasurianOlsztyn N/A Wood Food 9.5 24.7 6,712 3,288 3,208 N/A VH Group CN 130 993 11,373 9% 3,726

PL63 Pomeranian Gdansk 81 Wood Metals 13.7 30.3 7,172 4,126 4,880 12,598 Glencore CH 200 6,415 24,855 26% 4,489

RO11 North-West Cluj 34 Textiles Wood 9.7 21.8 4,350 2,515 2,965 12,343 MOL HU 148 4,108 20,065 20% 2,410

RO12 Centre Sibiu 171+ Textiles Motor 10.2 26.6 5,406 2,432 3,626 5,292 Daimler DE 102 6,379 19,255 33% 3,036

RO21 North-East Iasi 59 Textiles Food 8.1 14.8 3,579 1,318 2,378 6,192 Delphi Technologies UK 498 1,606 17,180 9% 3,830

RO22 South-East Constanta 161+ Textiles Food 14.1 24.2 4,386 2,497 3,440 6,280 KazMunayGas KZ 51 3,477 17,789 20% 3,562

RO31 South Muntenia Ploiesti 301+ Motor Textiles 10.4 23.9 5,189 1,693 2,514 3,973 Renault FR 14 4,837 20,859 23% 2,989

RO32 Bucharest-Ilfov Bucharest 37 Food Textiles 37.2 50.0 11,414 6,121 6,895 16,954 OMV AT 31 42,021 46,262 91% 2,189

RO41 South-West OlteniaCraiova 181+ Textiles Food 9.5 20.2 5,009 3,095 3,231 5,880 Ford US 181 2,080 12,328 17% 2,427

RO42 West Timisoara 72 Motor Textiles 12.4 27.8 4,916 3,680 3,478 14,536 Louis Delhaize BE 187 5,605 16,539 34% 2,923

SI03 Eastern Slovenia Maribor 67 Metals Wood -2.9 54.5 17,185 13,477 11,642 9,629 Renault FR 98 2,205 17,092 13%

SI04 Western SloveniaLjubliana 32 Metals Electronics -7.8 64.5 19,327 16,053 17,957 19,319 Mercator HR 144 9,121 21,772 42%

SK01 Bratislava RegionBratislava 45 Motor Other&repairs 25.9 73.5 19,652 11,677 17,843 30,268 VW DE 7 29,041 22,283 130% 1,439

SK02 Western Slovakia Trnava 161+ Metals Plastics 7.0 46.0 7,542 2,678 4,737 3,883 Peugeot FR 41 5,995 24,663 24% 4,019

SK03 Central Slovakia Žilina 151+ Metals Wood 8.6 43.0 7,658 2,293 5,322 4,386 Hyundai Motor Group KR 13 3,836 15,696 24% 3,570

SK04 Eastern Slovakia Košice 100 Metals Motor 7.9 45.7 6,659 2,433 3,252 7,217 US Steel NL 489 3,392 16,497 21% 3,368

Change of

GDP vs EU

2007-2016

Wages and salaries per number of employees Largest foreign investor

FDI stock

(mil. EUR)

GDP (mil.

EUR)Code

NUTS 3

Region

Most

important city

Universities

ranking in top

250 CEE

Top employers

FDI stock/

GDP

EU Funds

payments 07-

13 (mil EUR)

5,013