Written by: Dusan Soltes

KEPS Bratislava, March 2004

This final research report “Global Trends in Foreign Direct Investment and Regional Integration: Inflows, Impacts and Public Policies in Central and Eastern European Countries, Especially in Slovakia and the Visegrad Four” has been prepared under the framework of the particular NASPAA - NISPAcee Project funded by the USAID Grant.

The text of this final research report has not undergone any language or editing procedures.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the author or the above sponsors of the project.

Copyright © 2004 by Dusan Soltes & the Project sponsors
Published by KEPS Bratislava, Slovakia
First edition 2004

ISBN 80-968606-1-5
Bar code: EAN 9788096860616


The main aim of this project in general and of this Final Report in particular has been to identify and analyze current global and regional trends in the FDI, their relation with the regional economic integration and to identify their synergic impact on regional context regarding the countries of the V4 grouping and in particular in this way to find out the ways and means how to increase the inflow of the FDI in the Slovak Republic.
For this purpose, the scope of our research has been to some limited extent covering also the so-called periphery of the NAFTA and in particular of the EU as comparative bases. In the latter case, it means also countries that in time of their accession to the EU (Ireland, Spain, Greece, Portugal) and/or in the case of Mexico regarding its joining the NAFTA, were - regarding their overall development - in about the same position as are current candidate countries vis-a-vis the existing member states of the EU. And right their integration into the particular regional groupings of states together with an increased inflow of the FDI have changed them into the prospering countries.
On the basis of such a definition of the scope and the main goal of our research we have to some extent focused our analyses and comparisons also towards an overall macroeconomic development, performance and/or historical trends in the inflow of the FDI into these peripheral regions. However, on the basis of this rather general macroeconomic background first of all we have been interested in identifying those specific features of their development which in general have attracted potential FDI to such an extent that the investors finally decided in some cases to invest in those peripheral - and thus less developed - economies than in other, more centric positioned and much more developed countries in the particular regions.
In view of our above general approach, we could characterize our research within the framework of this particular project in general as one focused and based not so much on conducting a kind of rather sophisticated academic studies and analyses of official statistics. Hence, our main goal was not to produce an another statistical "yearbook" on the global, regional, national and/or intra-national trends in FDI and on the basis of that preparing prognoses of their future development but rather to concentrate mainly on:
- exploring invaluable empirical material and experiences gathered over the years directly by the investors themselves and also by their national partners in the host countries i.e. researching their considerations, motivations and preferences when finally deciding on their investing in one or other region, countries, etc. as well as their positive or negative experiences and consequences of their investments decisions
- studying the best practices applied and utilized by the host countries and their particular agencies, institutions, etc. in order to "lure" and/or attract investors into their particular region, country, localities, etc.
- identifying basic comparative advantages among and between individual V4 countries that in spite of their rather long common history including that of their former socialist past have still preferred more their national interests than regional ones. Thus they managed to develop also their relatively independent competitive edges and advantages as far as the FDI inflows are concerned. These differences are even more interesting if we realize that after their recent common socialist history they in principle continued in the same common way towards their future accession to the EU. Thus also their particular national legislations on FDI have to be harmonized in general according to the same principles due to the ongoing processes of approximation and harmonization with the "acquis communautaire" of the EU in all candidate countries of the V4. In spite of all that, unfortunately there has still been more regional competition than regional cooperation and integration.
On the basis of such priorities and approaches of our research, we have, as one of the main methods, chosen the fact finding missions and visits to the FDI sites, governmental and regional authorities, agencies and institutions concerned in all V4 countries including Slovakia as the main focus of our research. The Czech Republic has been the second main focus in this respect mainly due to the fact that until 1993 both countries were linked together in a common federation. However, in spite of so many common features and historical development, there are quite evident differences in attractiveness of both countries for the FDI inflows. With the Czech Republic being one of the most attractive and successful countries in the region regarding FDI inflows. Hungary and Poland as another two V4 countries served as another objects of our research especially as far as the some comparative analyses, best practices, etc. are concerned. Slovenia and especially Austria have served as another and rather independent sources of information for various kinds of comparative analyses among the V4 countries.
In all these countries, the international research team has - within its rather limited budget especially as far as the travel costs are concerned - completed numerous fact finding missions, has visited various FDI sites, investors, governmental and private agencies as well as central, regional and local authorities and institutions involved. In all of them, the team has conducted many interviews and gathered documentary evidence on various issues and aspects of the FDI in order it could analyze them and on the basis of that to prepare the particular research conclusions and recommendations. These primary sources of information have further been supplemented by various other information sources. For example as an another important source of information - in addition to various official statistics and other publications on the FDI - has served Internet and various web sites dedicated to FDI, etc. A lot of first hand information on various aspects of FDI were gathered by the international team members during their previous activities in the FDI and related areas. In this connection we have to mention their former project assignments under various United Nations agencies and their development programmes and/or projects of technical assistance to various countries in the world. Similar programmes and projects of various other organizations and agencies as e.g. those of the European Union, USAID, USIA, OECD/SIGMA, etc. in which the team members used to be involved as well, served also as invaluable sources of the particular know how and information used for this specific project on the FDI.

Table of Contents

Research team
Table of Contents
Chapter 1: Some basic definitions and methodological concepts related to foreign direct investment
1.1. Foreign direct investment – some basic concepts
1.2. Some qualitative considerations on FDI
1.2.1. Main contributions and advantages related to FDI
1.2.2. Summary of the main potential benefits from FDI
1.3. Some additional important considerations regarding FDI
1.3.1. Natural limitations in benefits from FDI depending upon their share
1.3.2. Concept of a foreign direct investor
1.3.3. “Green field” and “brown field” investments
1.3.4. Some proper interpretation of potential contributions expected from FDI
Chapter 2: Global and regional trends in foreign direct investment
2.1. The total amount of FDI has substantially increased, but
2.2. But, the numbers of destinations for FDI have also substantially increased
2.3. The globalization itself has been creating new investment opportunities
2.4. Key role of global foreign trade and services in attracting FDI
2.5. Especially regional economic integration has been creating new opportunities for FDI
2.6. A changed role in domination of the sources for FDI from the state to private sector and importance of a growing role of transnational corporations (TNC)
2.7. Shift in FDI from their previous production orientation to tertiary (services) sectors
2.8. Some other important regional, sub-regional and countrywide developments effecting current global trends in FDI
2.8.1. Unification of Germany has become an another important factor in the worldwide flow of FDI with the specifically strong impact especially on some regions in Europe including the CEEC
2.8.2. China has become a “paradise” for the inflow of FDI in spite of…
2.8.3. The Former Soviet Union and the role of international organizations and TNC has been an another specific case in inward FDI
2.8.4. Various other problems in the world and their effects on the FDI
2.8.5. Reality and some "fairy tales" regarding FDI
2.9. Summary of some main factors regarding FDI global and regional flows in the era of the contemporary globalization and regional integration
2.9.1. Summary of some of the main factors effecting FDI global and regional flows
2.9.2. A brief summary of various other factors but also misconceptions traditionally considered as important for FDI
Chapter 3: Place of the CEEC – Central and Eastern European countries and the Visegrad Four in the context of the global and regional trends in FDI
3.1. The CEEC in the context of the contemporary FDI global and regional flows
3.2. The Visegrad Four countries as the regional CEEC front runners in the FDI inflows and their comparison with some other similar regions including those on the periphery of the EU and NAFTA
3.2.1. Place of the V4 countries in the FDI global and/or regional inflows trends
3.2.2. Comparison of the V4 countries with some other countries notably those on the periphery of the EU and NAFTA Comparison of the V4 countries with the EU periphery consisting of Ireland, Spain and Greece The absolutely successful case of Ireland as the so-called “Celtic tiger” The successful case of Spain, but… So far not so successful case of Greece, although… Comparison of the V4 with some other regions/countries and notably with Mexico as the NAFTA periphery The investment paradise of Singapore within the ASEAN and APEC The show case of Mexico within the NAFTA
3.3. Summary of some basic conclusions and recommendations for the CEEC and the V4 countries regarding the current and mainly future global and regional trends in FDI
3.3.1. Place of a country (region) in the globalization and regional integration
3.3.2. Image of the country
3.3.3. Successful national pro-investment strategy
3.3.4. A sound macroeconomic and overall political and socio-economic development
Chapter 4: Comparison of the V4 countries´ best practices and comparative advantages regarding global and regional trends in FDI flows
4.1. The Czech Republic - the CEEC leader in FDI per capita inflows
4.1.1. The Czech Republic and its right place in the ongoing process of globalization and regional integration
4.1.2. Very good image of the country is also the result of a very good diplomacy
4.1.3. A sound macroeconomic, political and socio-economic development in the country
4.1.4. Positive pro-investment national strategy and overall business environment
4.1.5. Conclusions regarding the Czech Republic and global and regional trends in FDI
4.2. Hungary - a very good image of a traditional front runner in reforms and innovations
4.2.1. Hungary and its place in the ongoing processes of globalization and regional integration
4.2.2. Impressive image of the country, often even much better than the reality itself, mainly thanks to the efficiency of its strong and very active diplomacy
4.2.3. After some turbulences, the macroeconomic development has been stabilized, although not without some negatives
4.2.4. Very active and always innovative pro-investment national strategy and positive business environment in Hungary
4.2.5. Conclusions regarding Hungary and its place in the global and regional trends in FDI
4.3. Poland - a real power in the V4 and the CEEC and not only in terms of the total volumes of FDI inflows
4.3.1. Poland and its corresponding place in the ongoing processes of globalization and regional integration
4.3.2. Poland and its permanently unshakable positive image with a correspondingly strong and active diplomacy
4.3.3. A slowing down macroeconomic development and some resulting political and socio-economic tensions
4.3.4. Special economic zones: A real and successful backbone of the pro-investment strategy of Poland and their support to creating a positive business environment
4.3.5. Conclusions regarding the place of Poland in the context of the regional and global trends in FDI
Chapter 5: “Slovakia, a regional laggard in attracting foreign capital” but unfortunately not only in the FDI inflows
5.1. The country has still some problems to present itself properly in the international context
5.2. The Slovak Republic and its seemingly still not quite clear understanding of its own place in the ongoing processes of regional integration and globalization
5.3. The image of the country has unfortunately been almost as bad as weak is its diplomacy
5.3.1. What are the reasons for such a rather unfavorable image?
5.3.2. Why is the Slovak diplomacy not as efficient as in all other CEE countries The modern diplomacy has to be very active but in case of Slovakia "The economic dimension" and "business orientation" of the Slovak diplomacy is still more than questionable Multilateral dimension of the Slovak diplomacy has not have quite a clear orientation and especially not adequately skilled diplomats Where is the multi-layer dimension of the Slovak diplomacy? Modern diplomacy requires very high level of qualification and professionalism also in case of Slovakia
5.4. Macroeconomic performance of the Slovak Republic is not much better than its overall image or diplomacy
5.5. Slovakia as a destination for FDI inflows and the main pillars of its pro-investment strategy
5.5.1. A brief history of changing attitudes towards FDI in Slovakia The pre-independence period of years 1989-1992 First years of the independent Slovak Republic
5.5.2. The main pillars of the pro-investment strategy of the Slovak Republic towards FDI inflows SARIO - Slovak National Agency for Development of Investments and Trade Industrial, technological and various other parks and special zones are an another important pillar of the national pro-investment strategy, but again…not in Slovakia Incentives and/or stimuli for foreign investors in Slovakia as the third pillar of its pro-investment national strategy
5.6. Assessment of the pro-investment strategy of the Slovak Republic according to the main benefits expected from FDI
5.6.1. FDI as a source of the readily available capital
5.6.2. FDI as a source of new technologies
5.6.3. FDI and the R&D
5.6.4. FDI and new, especially foreign markets
5.6.5. FDI and integration into the TNCs
5.6.6. FDI and creation of new jobs
5.6.7. FDI as a stabilizing factor for sustainable macroeconomic development
5.6.8. FDI as a vehicle for clustering, concentration, matching and various other programs with local businesses
5.6.9. FDI and an increase in the quality of locally produced goods and services
5.6.10. FDI and respect for intellectual property rights
5.6.11. FDI and creation of a better and healthier business environment
5.6.12. FDI and new modern management style and business ethics
5.6.13. FDI and the transfer of the latest know how
5.6.14. FDI as an important tool for "physical integration" of the host country into ongoing globalization, regional economic integration
5.6.15. FDI and the cross-border cooperation and integration
5.6.16. FDI and their contribution to higher respect for environmental standards and protection
5.6.17. FDI as the most important vehicle for regional development
5.6.18. FDI has always to be an important source for higher standard of living, but again…
Chapter 6: What is needed in order to increase FDI inflows to the Slovak Republic and the V4?
6.1. Conclusions and recommendations regarding FDI on the regional level of the whole V4 group from the prospective of the Slovak Republic
6.2. Conclusions and recommendations for the future increased FDI inflows into the Slovak Republic on the country level
6.2.1. There is an urgent need for achieving a real sustainable economic and of course also social development.
6.2.2. Public policy instruments to create sustainable development
6.2.3. Attracting FDI – “European Experience”
6.3. Regional guide on FDI or conclusions and recommendations regarding the regional dimension of the pro-investment policy of the Slovak Republic
6.3.1. Regional development strategy
6.3.2. Regional “visibility”
6.3.3. Regional certainty
6.3.4. Regional commitment
6.3.5. Regional financial and other incentives
6.3.6. Coordination of local (regional) actors
6.3.7. Role of pilot and/or strategic investor in a region
6.3.8. FDI inflows and "learning" regions
Final Remarks

Final Remarks

In the previous chapters of this final report we have - according to the approved layout and structure of the project - been dealing with various aspects of FDI viz, with:
- Explanation of some basic terms and methodological concepts related to FDI (Chapter 1)
- Global trends in FDI (Chapter 2)
- Place of the CEEC - Central and Eastern European Countries in general and the Visegrad Four in particular in the context of the global and regional trends in FDI (Chapter 3)
- Comparison of the V4 countries´ best practices regarding their ability to adjust themselves to the global and regional trends in FDI flows (Chapter 4)
- Slovakia - a traditional V4 laggard and unfortunately not only in FDI inflows (Chapter 5)
- What has to be done in order to improve situation with FDI inflows into the Slovak Republic as well as the V4 in view of their future membership in the EU? (Chapter 6) 
In principle the chapters above have fully confirmed that in the era of ongoing globalization and regional integration, FDI have really become not only an integral part of these processes but also one of their most visible and desired outcomes and various, mostly positive consequences. Practically every country and/or region in the contemporary globalizing world has tried - in some cases more successfully, in some others less successfully - to attract FDI inflows into their territories.
However, at the same time our research has also fully confirmed that there is not any universal "recipe" that could guaranty any whatever much desired success in attracting record high FDI inflows. In this respect as we have also demonstrated on the results of our research, even such widely believed guaranty of the success in FDI inflows as is e.g. a membership in some prestigious global institutions like the OECD or in otherwise successful regional integration groupings including such as the European Union cannot be overestimated. Just a formal membership in them has no positive effect on the increase of FDI inflows. 
Further on, our research has also confirmed that it is also completely unrealistic to believe that FDI could become and serve as an almost "miraculous" medicine for curing all various economic illnesses and/or misdeeds especially in the countries with some serious macroeconomic problems.
An another important conclusion of our research has been also one on the so-called "quality" of FDI. As in various other areas also in investments it is evident that not their pure quantitative volumes of inflows into the particular country or region are the most important factors. In this respect mainly their "quality" i.e. what kind of investment we are dealing with, what is the object of investment and what is their composition, etc. It is more then clear that in this respect FDI inflows coming e.g. through privatization and especially into the banking and generally financial sectors belong among the least valued investments and also benefits from them are relatively very low.
Hence, in summary we could conclude that any generalized and simplified overestimations of the potential benefits and/or unrealistic expectations from the FDI inflows for the recipient countries are absolutely incorrect.
In order just to illustrate these unjustified expectations in connection with FDI we would use the following two authors:
Professor Dr. Paul J.J. Welfens of the European Institute for International Economic Relations (EIIW) at the University of Postdam has in connection with the Foundations of Economic Growth [96] identified several main factors effecting directly or in mutual interaction the particular growth:

At this place it is not our intention to make any more deep analysis of the above factors of the particular foundations of the Economic growth. However, in connection with the main goal of this final report i.e. to find out the main ways and means how to increase FDI inflows into the V4 region in general and to the Slovak Republic in particular it is considered to be worth to highlight at least the following most significant aspects. In view of what has been presented on the subject of FDI in the previous parts of this final report, especially regarding the situation in the Slovak Republic and its perspectives for potential increases in FDI inflows and their importance we believe that at least several of the following our observations have to be taken into account:
- FDI is certainly one of the important factors of the Economic growth and as such deserves all the attention from all involved i.e. governments, politicians, regional authorities, experts, etc.
- but from the above schema it is also clear that the importance of FDI vis-a-vis the Economic growth has in no way to be overestimated as it is only one of 12 (twelve!) factors that have some effect on the particular overall Economic growth
- not only it is just one of twelve factors but from its position in the above figure it is clear that it is not even one of the three most direct components of the Economic Growth being represented by three factors presented in the "top line" of the above figure such as the Investment-output ratio, Market transaction costs and the Capital market efficiency or Productivity growth
- FDI itself is only one of the five "second line" factors with about the same significance and/or importance for the sound Economic growth as have e.g. also Home investments, R&D, Infrastructure or Openness and intensity of competition
- In order to place the role of FDI even more precisely among all the factors of the Economic growth it is necessary to take into account also an another important fact and that being that the Saving ratio, the Current account position and the Trade volume from among the "third line" growth factors have about the same indirect significance as have all other factors of the "second line" including FDI (!) as a factor of whose importance has been so much and so often overestimated especially in some not so successful countries regarding their overall socio-economic development.
In this connection and in view of the above, we have again just to stress, that any overestimation and/or over-evaluation of the role of FDI inflows regarding the sound macroeconomic growth and overall socio-economic development is not correct. From the above it is clear that about the same positive effect on the above overall growth and development like through FDI inflows could be achieved by the particular countries and especially by their governments also through their more adequate support to: 
- home investments e.g. through more liberal and less restrictive policies of the governments in taxation and various fiscal fees and payments that just restrict any potential funds that otherwise could be used by businesses for home investments
- R&D especially in the most important areas of the contemporary globalized world i.e. in modern ICT, giving it more free hands in utilization of its creativity and innovative potential, with less administrative restrictions and overall bureaucracy
- building modern infrastructures that to the large extent - as we have argued in the previous parts of this final report - effect and positively not only FDI inflows into the particular country and its regions but as we see also from this figure it is also an important factor by itself regarding the overall macroeconomic growth
- creating a truly open and intensive competition on the internal market of the particular country without any more or less hidden favoritism, clientelism, state aid and support to some business subjects being e.g. more close to some parties than some others and thus removing any restrictions for truly free market
- savings of the citizens but also business subjects as only in such way accumulated funds can be utilized by the responsible banks for supporting economic growth through "cheap" loans, credits, etc.
- creating such a situation in their current account that its overall balance would be positive in that sense that any responsible government will be spending only to such an extent that corresponds to its real needs and collected revenues. Otherwise, it means that such a country is living on the debt or otherwise it has been spending what could be more effectively used by individual businesses for home investments or by citizens for their consumption and thus creating an adequate domestic or internal demand
- foreign trade and especially to export as in the contemporary globalizing and integrating world it is especially the foreign trade that can help to its home country to find its proper place on the contemporary much demanding global world market. Especially small and not so rich countries as are still also V4 countries should devote all their effort including their diplomacy to this goal i.e. increase in their export capabilities as otherwise, all whatever record high FDI inflows are mostly used only to eliminate the direct losses from the foreign trade as unfortunately it has also been a case of the Slovak Republic during the last two 2001-2 years.
From the above figure regarding the factors of the Economic growth it is clear that every country and especially its government has in its hands much more various tools and means how to achieve a sound macroeconomic growth and overall socio-economic development than just dreaming about the record high FDI inflows as the last resort and "miraculous medicine" for healing and curing all the deficiencies of their governing. That the success or failure of the particular country regarding its overall Economic growth - including the role of FDI in the whole that process - is mainly the responsibility of individual governments we could bring a long list of various quotations from the most internationally recognized authors. Especially in countries in transition the positive and crucial role of FDI has not be exaggerated and especially not their mere volume only. It is mainly because of the fact that these countries in many cases are not able to be a corresponding partner to worldwide experienced and globally operating TNCs. Then also the expected benefits from FDI are not coming in a very reduced form if coming at all. That is especially the case of FDI coming through privatization and in particular those to banking and generally financial sector but also to the so-called natural monopolies where foreign investors know very well how to utilize their newly and often very cheaply acquired property as sources for very quick return of their own original investment. As mentioned in this connection by J. Olenski, the member of this research team [107]:“Summarizing the effects of last 12 years of extensive FDI in the CEE countries, most important consequences are following:
- increase of unemployment
- elimination of high-tech production
- „primitivisation“ of profile of production in former high-tech industries
- increase of imports
- excessive transfer of profits
- destruction of some branches of national economy
- destruction of R&D sectors
- „marginalization“ of the economies of the CEE countries in the branches which are not complementary to the economies of the EU
The FDI in general have not helped in the restructuralization of the CEE countries... To the contrary, the total balance of the FDI penetration seems to be (at least so far, added by this author} negative for the future social and economic development of the CEE countries“.
In support of this an another rather critical statement we could bring many more authors who very objectively assess the role of FDI for the overall sustainable socio-economic development. Definitely, FDI is not a „manna“ falling down from the Heavens, but one of the factors that can help but also not in achieving such a positive development. In this connection the most crucial role belongs to national governments of the recipient countries for FDI.
Instead of all of them in support of the above thesis on the primary responsibilities of the governments also for the success in FDI inflows we cannot find any better support and justification than again as in the beginning of this final report from Kofi A. Annan, Secretary-General of the United Nations who in this connection has in Introduction to one of the UNCTAD Reports on FDI (2000) very clearly stated:
"…FDI can indeed contribute to economic growth and development… It can complement and catalyze economic activities and the performance of domestic enterprises, but in some circumstances it may also hinder them…It is important in creating the conditions that attract foreign direct investment. And it is important for enhancing its benefits. To promote the development of their own countries, Governments need to maximize the positive contribution foreign direct investment can make to development - and to minimize any negative effects it may have…"(underlined by the author).
From the above statement it is clear that no "invisible" hand of the market neither globalization nor regional integration, not at all membership in various international organizations or groupings but a national government is that main and the most responsible subject that only can create for FDI inflows such conditions that would attract them, enhance and maximize their benefits and at the same time minimizing any negative effects it may have!

This final research report “Global Trends in Foreign Direct Investment and Regional Integration: Inflows, Impacts and Public Policies in Central and Eastern European Countries, Especially in Slovakia and the Visegrad Four” has been prepared under the framework of the particular NASPAA - NISPAcee Project funded by the USAID Grant.

USAID - United States Agency for International Development

ISBN 80-968606-1-5

Author: Mr. Dusan Soltes
Tel.: +421 2 50 117 483
Fax: +421 2 50 117 527