Foreign Investment Plunges As Eastern Europe Awaits Second Wind: U.N.

GENEVA (AFP) - Central and Eastern European countries suffered from an unexpected sharp fall in foreign investment during 2003 despite the growing trend for companies to seek cheaper offshore production sites, a UN report said.
Nonetheless, the UN Conference on Trade and Development (UNCTAD) forecast a "second wind" for eastern Europe as earlier foreign investments took hold and the region capitalised on its reputation as a pan-European manufacturing base.
Foreign Direct Investment (FDI) flows into the region plunged by about one-third from a record high of 31 billion dollars in 2002 to 21 billion dollars last year, the UN Conference on Trade and Investment (UNCTAD) said.
"This was an unexpected plunge," Carlos Fortin, Deputy Secretary General of UNCTAD said in a statement.
Experts had forecast that the skilled but relatively cheap workforce available in the eight new central European members of the European Union would help them attract even more investment from foreign companies anxious to gain a foothold in the EU's single market.
Instead, UNCTAD's report found that long-term "greenfield" investment in production plants in the region could not immediately compensate for the plunge in FDI last year in the Czech Republic and Slovakia with the end of privatisation of former state-owned companies.
It also underlined that enlargement had not led to large scale diversion of investment away from older EU members, with France, Germany, Ireland and Spain still ranking as the most favoured destinations for foreign capital.
Recent investment by Japanese firm Toyota, French group PSA-Peugeot-Citroen and South Korea's Hyundai in the Czech Republic and Slovakia, which has added to both countries' status as production hubs for the motor industry, would come on stream only in 2006, UNCTAD forecast.
The eight eastern economies that joined the EU this year, including those two countries, saw their combined inflows fall from 23 billion dollars in 2002 to 11 billion dollars last year.
But the 11 non-EU members in the region saw their slice grow from 23 percent in 2002 to 45 percent as foreign investment inflows there climbed to 9.5 billion dollars in 2003.
Poland took over from the Czech Republic as the principal recipient of foreign investment in the region by attracting 4.2 billion dollars, a marginal increase of 100 million dollars over 2002.
Although Russia suffered a one-third decline in foreign investment to 1.1 billion dollars last year, the report hinted that the region's former Soviet master was regaining some economic status.
Russia has recovered ground as a source of investment in eastern Europe, largely due to Russian industrial multinationals seeking a foothold in the EU, UNCTAD found.
"The Russian Federation is an important factor in providing foreign direct investment to the region and elsewhere," Fortin told journalists later.
FDI outflows from countries in central and eastern Europe rose from five to seven billion dollars, 59 percent of it from Russian firms, UNCTAD said.