FDI-Flows and Relocation of Economic Activities

Academic Research paper and Study of the Economy of Romania and Romanian Business

FDI-flows to the Central and Eastern European Countries have grown significantly beginning in the midnineties. From being “virtually residual” (EC 2006 b: 69) they reached a level of 40 % of the local GDP in Eastern Europe by 2004. Firms from the EU-15 states are main investors (77.5 % in 2004), followed by US and Swiss firms (ibid: 71, Table 7). Nevertheless, the EC emphasizes that this devel­opment should not be seen as a relocation of factors from the OMS to the NMS. This notion is based on two arguments (EC 2006 b: 74): First, despite the growing FDI-flows towards the New Member States (NMS), their share of the EU-15 outflows amounted only to 4 % in 2004. Thus, the EU-15 re­mains with a share of 53 % from all FDI-outflows the most important destination for FDI-activities, followed by the USA (12 %). Second, few of the FDI-flows toward Eastern Europe are “substitutions of activities carried out previously in the home country” (ibid: 74) but rather based on market access considerations as also stressed by Boeri and Brucker (2001: 10). This optimistic view is generated from the findings of five studies (cf. Table 9 in EC 2006: 74). Two of them surveyed e.g. that only few (1 % to 1.5 % for the Netherlands) of all the jobs lost in the past years were lost due to relocation of economic activities and only the half of those relocated economic activities moved towards the CEECs (from the Netherlands).

On the other hand, relocation activities from Germany and Austria created from 1990 to 2001 a total of 660,000 new jobs abroad, while the share of the domestic job loss was marginal (0.3 % for Germany and 0.7 % for Austria). The other three studies estimated substitution effects between wage differences in the OMS and the NMS as being nearly neglectable. Overall, few of these FDI seem to be a movement of existing capital but new investments, which augment the overall capital stock of the EU-25. This notion is likewise reflected in Figure 2.4.

Image 2.4:Annual FDI-Inflows for the EU15 and the Central and Eastern European Countries 1998 – 2006
FDI Flows in the EU: Eastern Europe and Western Europe

Source: IMF Statistics Online (BOP); own graphic, own calculations[1]

First, the FDI-inflows to the CEECs (EU10) recorded a growth in the covered period, especially beginning one year before the accession of the first eight CEECs (violet line, millions of US$, lefthandside). A short decrease of the annual FDI-inflows to the EU-15 between 2000 and 2004 (blue line, millions of US$, lefthandside) is to be explained by an overalldecrease of FDI-inflows caused by an economic downturn worldwide (cf. BACA 2004: 4). The CEECs were likewise affected, though they recovered somewhat earlier than the aggregate trend (red line, millions of US$, lefthandside). It was caught up in the following years, anyway. On the one hand, it is true, that the share of total FDI-inflows in the EU decreased slightly after 2004 for the EU-15 (light blue area, righthandside). But, likewise, it is true that by far most of the FDI is still destinated to the EU-15 and even augment the capital stock there.


[1] Data for Greece was missing for 1998 and for Slovakia for 2001 and from 2004 to 2006. Cyprus and Malta are not considered in the calculations and the figure.