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Investments in CESEE decline but less so than in developed economies

posted onDecember 28, 2020
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In the first half of 2020, FDI inflows to Central, East and Southeast Europe (CESEE – 23 economies) declined by 58% - more sharply than globally, but smaller than the setback faced by the developed economies (75%), the Vienna Institute for International Economic Studies (wiiw) said in its latest FDI Report.

East European country groups have been unevenly affected: the decline has amounted to 35% in the eastern EU member states (EU-CEE), only 8% in the Western Balkans, and about 40% in both the Commonwealth of Independent States (CIS) as well as in Ukraine and Turkey. 

The capital pledged in greenfield investment projects in CESEE fell by 23% – less than the global decline of 34% and also less than the plunge in FDI inflows in the first half of 2020. Low commitments in greenfield investments continued also in the third quarter and amounted to41% lower in the first three quarters of 2020 than in the previous year. 

FDI CESEE

Manufacturing was more vulnerable to the recession than other sectors – in terms of both FDI flows and greenfield investments. Participation in global value chains has suffered from demand and supply shocks, and from disruptions of production, trade and supply networks. This may yet provide an impulse to shorten value chains, relocate and ‘back-shore’ cross-border production in the future, which may also depress FDI, wiiw said.

Most prominently, the automotive industry has been under pressure to reduce the burden on the climate and to introduce profound technological changes, even while suffering a drop in demand during the COVID-19 crisis.

The automotive industry accounted for 20% of manufacturing production in the EU27 in 2018, but 38% in Slovakia, 28% in the Czech Republic, 26% in Hungary and 23% in
Romania (less in the rest of EU-CEE). The main current challenges to the automotive industry include the rise of electric cars, CO2 fleet emission targets, autonomous and connected driving, according to the report.

Post-COVID-19 recovery may see FDI return to close to the previous levels along the business cycle in about two years. Technological change will modify the structure of value chains and may result in a slow process of back-shoring, wiiw concluded. 

The wiiw FDI Report is an annual publication based on the freshly updated online wiiw FDI Database. Half-year 2020 preliminary data have been added this time to track the impact of the COVID 19 pandemic in Central, East and Southeast Europe (CESEE), comprising 23 countries of the region.

The Vienna Institute for International Economic Studies – wiiw – is one of the principal centres for research on Central, East and Southeast Europe with more than 40 years of experience.