Resumen Servicios Sociales

This section reviews the pattern and trends of FDI transactions based on the countries of origin. I also investigate whether there is a special linear association between FDI transactions and the origin of FDI (Tables 3-7 and 3-8). Hunya (2000a) suggests that the characteristics of foreign multinationals can be better understood through a comparison between countries of origin. The previous literature also sheds light on the importance of both national ideology (Dresmus et al., 1998) and social networks (Bandelj, 2002, 2004) which tend to shape the actions of foreign multinationals irrespective of the dynamic complexity of globalisation. Additionally, cultural ties (Bandelj, 2008) and geographic proximity to neighbouring countries (Hunya, 2000a) have a defining effect on the patterns of foreign capital inflows. The time-series data is more appropriate, but the limitation of data availability deters detailed analysis of the interaction of the country of origin with recipient countries. Tables 3-7 and 3-8 describe the variation between home countries with respect to the intensity of foreign direct investment stocks in European transition economies. Data for 10 countries (the Czech Republic, Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia), except for the Balkan countries were presented. The data were collected by the author from the central bank or statistical office of each host country.

Investments from Germany, Austria and the Netherlands have been of great relevance for most CEECs. Foreign investors from North America, Asia and old EU periphery countries such as Spain and Portugal have had a minor presence in the local markets of the region. Accordingly, it seems that geographical proximity is a critical predictor in the explanation of the intensity of FDI.

Austria

Austria has traditionally been considered to be the critical intersection between Western Europe and CEE in geographical terms. Austrian investors are active in Hungary and the Czech Republic, notably in the manufacturing sector, while their economic involvement is relatively weak in Poland (Hunya, 2000c: 100-101). Austrian investors made maximum use of the first mover advantage in the early phase of economic transition (Hunya, 2000c: 93) because of the country’s geographical centrality, cultural ties and human networks in the region. As already confirmed by Hunya (2000c) in a study of the FDI characteristics of countries of origin in CEE during the second half of the 1990s, our data also reveals that the intensity of the stock of Austrian FDI has been extensively high in the neighboring transition countries such as the Czech Republic

(10.2 percent), Hungary (11.1 percent), Slovakia (32.3 percent), Slovenia (14.8 percent), Bulgaria (21.3 percent), Romania (23 percent) and Slovenia (32.3 percent). The underlying motive of Austrian FDI has been to aim at serving emerging local demand (Hunya, 2000c).

Table 3-7: FDI Inflows by Country of Origin in CEECs (Unit: million Euro)

Germany

Germany has been the leading source of foreign investment in many CEE countries. Particularly notable is that German FDI has been dispersed across the region. German investors established themselves in various former command-type economies in the Czech Republic (24.9 percent), Hungary (27.8 percent), Poland (16.4 percent) and Slovakia (18.2 percent). The strong presence of German investors in these Visegrád-4 countries was attributed not only to their geographical proximity but also to their historical involvement. As a matter of fact, the economic system and institutional infrastructure of many of European transition economies have been influenced by Germany. CEECs usually follow the German legal framework in terms of corporate and competition laws. According to Hunya (2000c: 103), CEEC’s economic growth is dependent on the state of the German economy; a decline of the German economy in 1998 exerted a more detrimental effect on CEECs trade performance than did the Russian financial crisis. It should be noted that German car producers have strengthened their economic involvement in CEE. VW’s acquisition of Skoda in the Czech Republic has been considered as an encouraging role in revitalising the Czech automobile industry (Meyer, 2000). Besides large multinational firms such as VW, Siemens and Region Origin CZ EST HUN(a) LAT LIT(b) POL(a) SLK(a) SLV BUL ROM(a)

Austria 6,377 41 5,184 170 97 3,462 1,693 2,188 5,268 7,942 Belgium 2,347 -30 886 40 36 3,002 – 249 559 – Denmark 594 256 181 641 949 2,365 – 95 193 – Finland – 1,889 966 447 495 940 – 0 6 – France 4,500 62 2,175 30 126 10,822 – 588 341 2,766 Germany 15,470 169 12,959 624 642 15,508 2,082 537 1,058 3,473 Italy 418 -57 746 22 8 4,122 1,413 374 347 2,322 Netherlands 9,623 30 6,950 420 279 18,836 2,221 619 4,088 5,887 Portugal – 22 32 0 0 467 – – 28 – Spain – 13 826 3 24 2,560 – 7 644 – Sweden 932 4,225 680 1,008 1,137 3,636 – 29 60 – UK 2,234 221 3,181 224 129 3,792 602 127 1,962 – Europe Switzerland 2,943 69 834 – 244 2,450 – 933 673 2,372 CIS Russia – 165 -5 340 998 502 – 2 448 – USA 3,318 -63 1,824 347 164 6,889 380 147 897 628 Canada – 53 118 3 34 184 – 0 34 – Asia Japan 951 6 723 0 0 808 – 20 79 – Korea – – 257 6 10 940 409 – 16 – China – -3 19 – 3 69 – 0 3 – 62,242 8,199 46,670 7,226 5,393 94,472 11,406 6,775 24,743 34,512 EU North America Total

Source : Own calculation based on national statistics. Note : (a) indicates data for 2006. (b) inicates data for 2008.

Bosch, German medium-sized firms have also been active in order to capitalise on cheap factor endowments such as labour and real estate (Cieślik and Ryan, 2002). German investors have been extensively involved in various industries such as manufacturing sectors, retailing, and financial intermediation in Poland (Wada, 2005). With the use of the ordered probit model to explore the association between proximity and involvement in West-East business, Meyer (1998) presents evidence that German multinationals are relatively active in the neighbouring countries such as the Czech Republic and Hungary compared to British counterparts. The strong presence of German capitalists appears to be an indication of the emergence of Germany’s new imperialism in the eastern periphery of the EU territory.

Table 3-8: FDI Inflows by Country of Origin in CEECs (Unit: percent)

France

France has also been one of the leading sources of FDI inflows in some CEE countries although its involvement is not as strong as that of its German and Austrian counterparts. French investors comprised only the third-largest group of investors in Poland, Romania and Slovenia at the end of 2006. French FDI accounted for 11 percent of the total foreign capital in Poland. One of the reasons for the significant involvement of French investors lies in the fact that French Telecom invested US$450 million to buy a local telecommunication company in Poland in 2004. This investment value was the second largest recorded, after the US$800 million invested by an American real estate company, Apollo Rida (Karpińska-Mizielińska and Smuga, 2005: 68).

Region Origin CZ EST HUN(a) LAT LIT(b) POL(a) SLK(a) SLV BUL ROM(a)

Austria 10.2 0.5 11.1 2.3 1.8 3.7 14.8 32.3 21.3 23.0 Belgium 3.8 – 1.9 0.6 0.7 3.2 – 3.7 2.3 – Denmark 1.0 3.1 0.4 8.9 17.6 2.5 – 1.4 0.8 – Finland – 23.0 2.1 6.2 9.2 1.0 – 0.0 0.0 – France 7.2 0.8 4.7 0.4 2.3 11.5 – 8.7 1.4 8.0 Germany 24.9 2.1 27.8 8.6 11.9 16.4 18.2 7.9 4.3 10.1 Italy 0.7 – 1.6 0.3 0.1 4.4 12.4 5.5 1.4 6.7 Netherlands 15.5 0.4 14.9 5.8 5.2 19.9 19.5 9.1 16.5 17.1 Portugal – 0.3 0.1 0.0 0.0 0.5 – – 0.1 – Spain – 0.2 1.8 0.0 0.4 2.7 – 0.1 2.6 – Sweden 1.5 51.5 1.5 13.9 21.1 3.8 – 0.4 0.2 – UK 3.6 2.7 6.8 3.1 2.4 4.0 5.3 1.9 7.9 – Europe Switzerland 4.7 0.8 1.8 – 4.5 2.6 – 13.8 2.7 6.9 CIS Russia – 2.0 0.0 4.7 18.5 0.5 – 0.0 1.8 – USA 5.3 – 3.9 4.8 3.0 7.3 3.3 2.2 3.6 1.8 Canada – 0.6 0.3 0.0 0.6 0.2 – 0.0 0.1 – Asia Japan 1.5 0.1 1.5 0.0 0.0 0.9 – 0.3 0.3 – Korea – – 0.6 0.1 0.2 1.0 3.6 – 0.1 – China – 0.0 0.0 – 0.1 0.1 – 0.0 0.0 – 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 North America Total

Source: Own calculation based on national statistics.

Note : (a) indicates data for 2006. (b) inicates data for 2008. EU

Netherlands

Dutch firms have also established themselves in almost all local markets, other than those in the Baltic countries. Among the European transition economies, the proportion of Dutch FDI relative to the total FDI in Poland and Slovakia accounted for roughly 20 percent. In particular, the value of 18,836 million Euros in Poland was remarkable.

Nordic countries

The Baltic countries are generally targeted by neighbouring Western European countries such as Sweden and Finland. The FDI stock of Sweden in Estonia and Lithuania accounts for 51.5 percent and 21.1 percent, respectively. Likewise, Finland has strengthened its presence in Estonia (23 percent).

Russia

The value and share presented in Table 3-7 and 3-8 do not demonstrate the importance of the potential performance by Russian-based enterprises in the CEE region. The market presence and strategic investing patterns of Russian multinational firms are substantially prominent in the natural resource sector including natural gas and crude oil. Three major Russian-based multinationals - such as Gazprom, Rosneft, Yukos and Lukoil – have made resource-seeking and strategic asset-seeking FDI frequently in the form of cross-border M&A deals. The central intention of entering the market is explained by the desire to build a foothold to access US and EU markets and for diversifying the range of production (Weiner, 2006: 7). Interestingly, it appears evident that the geographical distribution of Russian capital has been concentrated in certain CEE countries, rather than dispersed. The Baltic nations have succeeded in luring Russian-based multinationals, while the presence of those same multinationals has been marginal in Visegrád-4 countries. The reason for this geographical asymmetry may lie in historical and cultural ties, and memories of these two sub-groups. According to CIA World Factbook (http://www.cia.gov), there is the large population of Russian speaking citizens (Estonia: 29.7 percent; Latvia: 37.5 percent; Lithuania: 8 percent) and of Russian ethnicity (Estonia: 25.6 percent; Latvia: 29.6 percent; Lithuania: 6.3 percent) in the three Baltic nations. According to Weiner’s study (2006: 21-23), the absence of favouring Russian capital by Visegrád-4 countries and other CEE economies can be attributed to seven underlying factors: (1) memories of Soviet politics; (2) fear of losing control over strategic industries; (3) lack of transparency; (4) radical and strong pressures on host governments of CEE countries in the cross-border M&A negotiation procedure; (5) high uncertainties and risks involved (e.g., potential violation of property rights); (6) bribery and corruption; and (7) potential decline in productivity and efficiency in the post-M&A period. Despite these discouraging grounds, the roles and tasks played by Russian-based multinationals are estimated to become more crucial in the future (Weiner, 2006: 25).

North America

North American investors have been an insignificant source of foreign investment in the region. US FDI was relatively dispersed and its presence was not as crucial as inbound FDI from other European countries. The reason for the high intensity of American FDI in Poland is related to the presence of large Polish communities in the United States (Bandelj, 2008). Food processing, financial intermediation and chemical-related investments accounted for the majority of the US investment in Poland (Wada, 2005: 47). Major US firms such as GE, GM, McDonalds, and Coca-Cola have promoted their market presence in the region to target the local and EU markets. Shama (1995) presents evidence that US investors have a strong tendency to form joint ventures with local firms when entering emerging markets in the former Soviet bloc. This suggests that entry strategies of US MNEs are characterised as more risk-averse than risk-preferring. The proportion of Canadian FDI in each host economy accounted for less than 1 percent. Their underrepresentation can be explained by geographical distance.

Asian countries

Asian investors did not account for a large proportion of the FDI inflow to each country in the former Soviet-type economic bloc as of 2006, compared with Western European investors (Cieślik and Ryan, 2002; Meyer, 1995, 1998).

In the above listed CEECs, the stock of inward Japanese FDI did not exceed even two percent. This minor presence of Japanese multinationals is somewhat surprising despite their established global and European business networks. Although the tables capture weak economic involvement of Japanese multinationals in the form of foreign investment, Japanese FDI has been perceived among host governments of CEEs as important investors in recent years. One major reason is that various forms of Japanese lean and flexible production strategies and their cutting-edge technologies are expected to contribute to boosting industrial modernisation of the local economy. Another is that Japanese FDI is thought to stimulate a reduced dependency on capital imports from certain countries (Bakos, 1992).

Korean firms were considered as “outliers to the gravity rule” (Hunya, 2000c: 92) during the 1990s due to their first-mover advantages (Linden, 1998; Ruigrok et al., 2004). Korean investors were surprisingly active in the region despite the lack of historical ties, large geographic distance and linguistic obstacles. Since the mid-1990s Daewoo Motors, a pioneer of Asian FDI in CEE, has invested heavily in the automotive sector and has developed its own overarching sourcing linkages with local suppliers in CEE (Pavlínek, 2006). Daewoo also acquired 51.0 percent of a Romania car producer, RODAE, in November 1994 and 50.2 percent of a Czech truck maker, AVIA, in August 1995 (Hyun, 2003) aiming to produce relatively cheap products for the local and the European markets” (Hunya, 2000c: 103).

As of December 1994, the stock of Korean FDI in Romania became higher than Western European FDI because of a large-scale investment by a Korean chaebol, Daewoo, to set up an automobile joint venture firm with Craiova (Nishimura et al., 1998). Of significant relevance is that the value of Korean FDI in CEE was rather large, while the number of projects was quite limited. For instance, only 33 investment projects were carried out by Korean investors, while the value was 573 million Zloty. The investment size per project of 17.4 million Zloty for Korean firms was much greater than that of 0.5 million Zloty for German firms as of 1996 (Nishimura et al., 1998: 348). Contrasting the stock of German FDI in Romania with that of Korean FDI in Romania as of February 1998, the former amounted to US$353.4 million in value and a total of 7,045 projects, while the latter US$234 million in value and a total of 45 projects (Nishimura et al., 1998: 356).

As of the mid-1990s, Chinese investors were seen in Hungary and Romania but it in rather small numbers and their investing motives may have been driven by “political reasons escaping the home environment” (Meyer, 1995: 312). Chinese multinationals are more active in Russia and Central Asia due to geographic proximity and historical and cultural ties. Asian firms are generally in favour of establishing wholly owned enterprises over joint ventures with local partners.

According to the CzechInvest, Japanese manufacturing FDI amounted to US$3.219 billion and created 23,420 job opportunities at the end of March 2007. In Slovakia, four Japanese manufacturing firms (e.g., Yazaki, Sumitomo, Matsushita and Sony) and three Korean manufacturing firms (e.g., Samsung, Kia Motors and Hyundai Mobis) were ranked within the top 20 foreign investors in terms of job creation (SARIO, 2007: 16). Encouraging signs and binding commitments by some CEE investment promotion agencies such as CzechInvest and PAIiIZ to attract more Asian investors are reflected in the availability of their websites in Japanese and Korean versions. Moreover, a Japanese investment advisor has been hired in each IPA (the CzechInvest, PAIiIZ, and Hungarian Investment Promotion Agency). In order to contribute to attracting more investment projects from Korea, the Korea Exchange Bank promised to dispatch a Korean advisor to the Czech Republic in 2006 in line with a partnership with CzechInvest (CzechInvest, November 2, 2006).

To sum up, our descriptive statistics confirm a high concentration of investment by Western European investors in the former Soviet-type economies. Geographical and cultural proximity between an invested country and an investing country seems likely to determine the size and destination of foreign capital. Neither U.S. nor Asian investors have established themselves yet at least from the perspective of FDI distribution by the nationality of origin. Nevertheless, it is important to note that scholars of economics in transition are inclined to reappraise the dynamic trend of Asian FDI and its role in modernising the local economy.