Austrian foreign direct investment (FDI) in Central, East and Southeast Europe (CESEE) declined in 2018, but continued to earn relatively high profits, a new report from the Vienna Institute of International Economic Studies (wiiw) found.
The decrease in Austrian FDI in the CESEE region comes in the context of a global decline in FDI that is expected to worsen as international trade wars continue, risking heavy toll on growth.
Global FDI flows declined in 2018, reflecting faltering economic growth and policies in the US, China and to some extent in Russia to discourage outward FDI, the Austrian economic institute stated.
In the US, a significant cut to the corporate tax rate, and temporary incentives to repatriate accumulated overseas earnings, prompted American parent firms to withdraw funds from foreign affiliates.
In Europe, Ireland and Switzerland in particular experienced strong disinvestments (negative FDI inflows) as a result of these repatriations. Similar to the US, Austrian outward FDI also turned negative due to asset restructuring by multinational investors, the wiiw's latest FDI analysis said.
Austrian FDI in CESEE
The share of CESEE in Austrian FDI shrunk, in favour of Asia and the US. Austria slipped to rank 4th in EU-CEE, after the Netherlands, Luxembourg and Germany (9%; 3rd in 2016) - 2nd in the Western Balkans (12%). However, the profitability of Austrian FDI in CESEE is above average: the region accounts for 28% of the total stock of outward Austrian FDI, but 36% of the global FDI income earned.
The Vienna-based institute noted that Germany and the US are the most important ultimate sources of FDI in CESEE. Tax havens – in particular the Netherlands, Cyprus and Luxembourg – are among the largest immediate investors, but not among the important ultimate investing countries for CESEE. This confirms that these countries serve mainly as intermediaries and headquarters of holdings.
Services account for the bulk of FDI in most countries in CESEE. In particular, producer-related business activities such as information and communication technology (ICT), business process outsourcing and shared service centres expanded across the region. These are not capital intensive, and thus are barely reflected in FDI data. However, the increasing share of services in announced greenfield FDI projects, and of commercial services in total exports, both point to a growing importance for foreign investors in these sectors.
Outlook for FDI in 2019
Several trends shaping the future of FDI are given special attention in the wiiw’s 2019 FDI Report. First, wiiw finds that the link between FDI inflows and GDP growth has become less strong since the 2008 global financial crisis.
Second, FDI inflows and participation in global value chains are strongly and positively correlated. Third, the report highlights several CESEE countries attracting FDI at a level above that which would be consistent with their macroeconomic fundamentals, particularly Montenegro and Bulgaria. By contrast, Belarus and Moldova could attract more FDI if business conditions improve.
Finally, wiiw notes that business sentiment has a significant impact on greenfield investment decisions.
Given that economic confidence across EU-CEE11 countries appears to be declining, wiiw anticipates lower FDI inflows in 2019, which could lead to lower GDP growth on account of faltering global and European economic activity.