Foreign diect investment incentral and eastern europe

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FOREIGN DIRECT
INVESTMENT IN
CENTRAL AND
EASTERN EUROPE
Post-crisis Perspectives
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Edited by

Balázs Szent-Iványi
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STUDIES IN ECONOMIC TRANSITION
General Editors: Jens Hölscher and Horst Tomann

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Studies in Economic Transition

Series Editors

Jens Hölscher
The Business School
Bournemouth University
Bournemouth, United Kingdom
Horst Tomann
Department of Economic Policy and Economic History
Freie Universitaet (FU) Berlin
Berlin, Germany


This series brings together theoretical and empirical studies on the transformation of economic systems and their economic development. The
transition from planned to market economies is one of the main areas of
applied theory because in this field the most dramatic examples of change
and economic dynamics can be found. It is aimed to contribute to the
understanding of specific major economic changes as well as to advance
the theory of economic development. The implications of economic
policy will be a major point of focus.

More information about this series at
/>

Balázs Szent-Iványi
Editor

Foreign Direct
Investment in Central
and Eastern Europe
Post-crisis Perspectives

Editor
Balázs Szent-Iványi
Aston Centre for Europe
Aston University
Birmingham, UK
Institute of World Economy
Corvinus University Budapest
Budapest, Hungary

Studies in Economic Transition
ISBN 978-3-319-40495-0
ISBN 978-3-319-40496-7 (eBook)
DOI 10.1007/978-3-319-40496-7
Library of Congress Control Number: 2016956076
© The Editor(s) (if applicable) and The Author(s) 2017
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the
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To Benedek, Aron,
and Gyöngyi


Contents

1

Introduction: The Changing Patterns of FDI
Balázs Szent-Iványi

2

Post-crisis Crossroads for FDI in CEE
Kálmán Kalotay

3

Czech FDI Performance: Between Global Value
Chains and Domestic Reforms
Tereza De Castro and Pavel Hnát

51

Foreign Direct Investment in Slovakia: The Tatra Tiger
Gone Tame?

Martin Grancˇay and N
ora Grancˇay

77

Latecomers May Be Admitted: Foreign Direct Investment
Between the CEE Countries
Magdolna Sass

99

4

5

1

23

vii


viii

6

7

8

9

10

11

Contents

Upgrading and Value Capture in Global Value Chains in
Hungary: More Complex than What the Smile Curve
Suggests
Andrea Szalavetz

127

Inequalities of Accumulation: The Case of Central and
Eastern Europe
Annamaria Artner

151

Multinational Banks: Protective Factors of Financial
Stability in Central and Eastern Europe?
Gábor Kutasi

171

Investment Promotion in the Visegrad Countries:
A Comparative Analysis



 Dani
Agnes
Tőrös, Adám
Me´száros, and Akos

193

Competitiveness and Investment Promotion in Bulgaria
and Romania
Sorin Gabriel Anton

219

Conclusions: Prospects for FDI-Led Development
in a Post-crisis World
Balázs Szent-Iványi

241

Index

259


Notes on Contributors

Sorin Gabriel Anton is Associate Professor of Finance at Alexandru Ioan Cuza
University of Iasi, Romania. His research interests are in the fields of international finance, financial risk management, and corporate finance.
Annamária Artner is a senior research fellow at the Institute of World Economics, Centre for Economic and Regional Studies of the Hungarian Academy of

Sciences, Budapest, Hungary. Her main research interests are labour markets,
crises, and the global accumulation of capital.
Tereza De Castro is Lecturer in Global Economy and Development Economics
at the Faculty of International Relations, University of Economics, Prague,
Czech Republic. She specializes in trade and investment relations between
Europe and the BRICS countries.
Ákos Dani is a PhD candidate at Corvinus University Budapest, Hungary. His
main research area is the international monetary system.
Martin Grančay is the Director of the Project Center at the Faculty of Chemical
and Food Technology at the Slovak University of Technology in Bratislava,
Slovakia, and an independent researcher. His work focuses primarily on gravity
models of trade and the economics of international civil aviation.
Nóra Grančay is an independent researcher. She holds a PhD degree from the
University of Economics in Bratislava, Slovakia.
ix


x

Notes on Contributors

Pavel Hnát is Associate Professor of World Economy and European Integration
at the Faculty of International Relations, University of Economics, Prague,
Czech Republic. His latest monograph examines the Political Economy of Global
Imbalances.
Kálmán Kalotay is an Economic Affairs Officer at the United Nations Conference on Trade and Development (UNCTAD) in Geneva, Switzerland, and
Honorary Professor of Corvinus University Budapest, Hungary.
Gábor Kutasi is an associate professor at the Institute of World Economy,
Corvinus University Budapest, Hungary.
Ádám Mészáros is an assistant professor at the International Business Research

Centre, Corvinus University Budapest, Hungary. His main research interests are
foreign direct investment and research, development, and innovation policy.
Magdolna Sass is a senior research fellow at the Centre for Economic and
Regional Studies of the Hungarian Academy of Sciences, Budapest, Hungary.
Her main research areas are international trade, foreign direct investments, and
related policies, with special attention to the East Central European region.
Andrea Szalavetz is a senior research fellow at the Centre for Economic and
Regional Studies of the Hungarian Academy of Sciences, MTA MRTK, Budapest, Hungary. Her research areas are global value chains and international
business.
Balázs Szent-Iványi is Lecturer in Politics and International Relations at the
Aston Centre for Europe, Aston University, Birmingham, UK. He also holds an
associate professor position at the Institute of World Economy, Corvinus University Budapest, Hungary. His work focuses on international development
politics and the relations between multinational corporations and the state.
Ágnes To˝rös is an economic analyst, who received her PhD degree from
Corvinus University Budapest. She gathered professional experience in governmental institutions and spent several years in positions dedicated to investment
promotion.


List of Abbreviations

ARIS
BAC
BPO
BRIC
BRICS
CDS
CEE
CNB
CoE
CUSUM

DBR
DIAE
ERT
ESI
ESPRIT
ETA
EU
EU-15
EU-11

Romanian Agency for Foreign Investment
Business Advisory Councils
Business process outsourcing
Brazil, Russia, India, China
Brazil, Russia, India, China, South Africa
Credit default swaps
Central and Eastern Europe
Czech National Bank
Compensation of employees
Cumulative sum sequential analysis
World Bank Doing Business Report
Division on Investment and Enterprise (of UNCTAD)
European Round Table of Industrialists
Export similarity index
European Strategic Program on Research in Information
Technology
Equity to total assets
European Union
The 15 member states of the European Union prior to the 2004
enlargement

The 11 Central and Eastern European member states of the
European Union
xi


xii

EXPY
FDI
FX
GDP
GIPB
GNI
GOSMI
GVC
HIPA
HITA
ICT
IDP
IFDI
IPA
ITD
LIBOR
LLRGL
M&A
MNC
NACE
NAFTA
NBS
NOIP

NPL
OECD
OFDI
OLI
OLS
PAIiIZ
PIIGS
PPI
R&D
SARIO
SEZ
SME

List of Abbreviations

Measure of the productivity level associated with a country’s
export basket
Foreign direct investment
Foreign exchange
Gross domestic product
Global Investment Promotion Benchmarking
Gross national income
Gross operating surplus/mixed income
Global value chain
Hungarian Investment Promotion Agency
Hungarian Investment and Trade Agency
Information and communication technologies
Investment development path
Inward foreign direct investment
Investment promotion agency

Hungarian Investment and Trade Development Agency
London Interbank Offered Rate
Loan Loss Reserves/Gross Loan
Mergers and acquisitions
Multinational corporation
Statistical Classification of Economic Activities in the European
Community
North American Free Trade Area
National Bank of Slovakia
Net outward investment position
Non-performing loans
Organisation for Economic Co-operation and Development
Outward foreign direct investment
Ownership, location, internalisation
Ordinary least squares
Polish Information and Foreign Investment Agency
Portugal, Italy, Ireland, Greece, Spain
Producer price index
Research and development
Slovak Investment and Trade Development Agency
Special economic zones
Small and medium enterprise


List of Abbreviations

SSC
TBTF
TCR
TNC

ULC
UN
UNCTAD
VAT
V4
WEF
WIIW

xiii

Shared service centre
Too-big-to-fail
Total capital ratio
Transnational corporation
Unit labour cost
United Nations
United Nations Conference on Trade and Development
Value added tax
The Visegrad Four (Czech Republic, Hungary, Poland and
Slovakia)
World Economic Forum
The Vienna Institute for International Economic Studies


List of Figures

Fig. 2.1
Fig. 2.2

Fig. 2.3

Fig. 2.4

Fig. 3.1

Fig. 3.2

Fig. 3.3
Fig. 4.1

FDI inflows and inward FDI stock of the 11 CEE
states, 1993–2013 (in billion dollars)
Share of the 11 CEE countries in world GDP, exports
and FDI inflows and inward stock, 1993–2013
(in percentages)
FDI inward stocks of the 11 CEE countries and the top three
hosts, 1993, 2003 and 2013 (in billion dollars and share
of total)
GDP per capita of selected CEE countries as a
percentage of German GDP per capita, 2000, 2007
and 2013
Inward and outward FDI flows in the Czech Republic,
1993–2013 (US dollars at current prices and current
exchange rates, in millions)
Inward and outward FDI stock of the Czech Republic,
1993–2013 (US dollars at current prices and current
exchange rates in millions)
The Czech Republic’s current account balance,
1993–2013 (in percentage of GDP)
Per capita FDI flows in Slovakia and the Visegrad 4,

2004–2013 (in US dollars)

25

26

35

44

55

56
58
83
xv


xvi

Fig. 4.2
Fig. 4.3
Fig. 4.4
Fig. 4.5
Fig. 4.6
Fig. 5.1
Fig. 5.2
Fig. 6.1
Fig. 6.2
Fig. 7.1

Fig. 7.2
Fig. 7.3
Fig. 7.4
Fig. 8.1
Fig. 9.1
Fig. 10.1

Fig. 10.2

Fig. 10.3

List of Figures

Per capita FDI stock in Slovakia and the Visegrad 4,
1993–2007 (in US dollars)
Weighted gross-value-added-to-output ratios for FDI
flows and stock 2000–2013
Weighted gross-value-added-to-output ratios for FDI
flows and stock in manufacturing, 2003–2013
Hypothetical weighted capital intensity of FDI flows and
stock, 2000–2013
Unit price indices of Slovakia’s major export
commodities, 2000–2013
NOIP and GNI per capita of CEE countries, 2005
NOIP and GNI per capita of CEE countries, 2013
Smile curve economics
Functional upgrading modifies the position and the shape
of the smile curve
Characteristics of FDI income in CEE, 2002–2013
(per cent)

Real unit labour cost, 2004–2013 (percentage change)
Share of the compensation of employees within gross
national income 2004–2013 (per cent)
Gross operating surplus and mixed income per compensation
of employees (rate of exploitation), 1998–2013 (per cent)
Relationship between capital adequacy ratios and the
LLRGL
Framework for evaluating V4 IPAs
Flows of foreign direct investment to Romania and
Bulgaria, compared with selected countries from
Central and Eastern Europe, 1990–2013 (million
dollars)
Activities carried out by InvestBulgaria Agency and
the Romanian Department for Foreign Investments
and Public-Private Partnerships
The relationship between FDI performance and
openness in selected EU members, 2013

85
87
90
92
93
118
119
129
139
161
163
164

165
184
208

221

228
234


List of Tables

Table 2.1
Table 3.1
Table 3.2
Table 3.3
Table 3.4
Table 3.5
Table 3.6
Table 4.1
Table 4.2
Table 4.3
Table 5.1

FDI Contribution Index versus Inward FDI stock,
2009 and 2011
Czech inward FDI flows by home country,
1993–2012 (in percentage)
Czech inward foreign direct investment stock by
sector, 2000–2012 (in percentage)

Inward FDI flows to the Czech Republic flows from
the BRIC countries, 2000–2014 (in thousand USD)
Investment incentives granted to foreign companies,
by country of origin (up to March 2015)
Czech investment incentives granted to Chinese and
Indian companies (up to March 2015)
Selected investors from the BRICs in the Czech Republic
Structure of FDI flows to Slovakia 2000–2013
(in percentage of total FDI)
Reinvested earnings in services, 2003–2011
FDI flows to Slovakia 2000–2013—selected
manufacturing industries (in percentage of total)
Various indicators of IFDI originating from other CEE
countries (2005 and 2012)

32
54
57
64
65
66
67
86
88
89
109

xvii

xviii

Table 5.2
Table 5.3
Table 5.4
Table 8.1
Table 8.2
Table 8.3
Table 9.1
Table 9.2
Table 10.1
Table 10.2
Table 10.3
Table 10.4
Table 10.5
Table 10.6

List of Tables

Various indicators of OFDI realised in other CEE
countries (2005 and 2012)
Hirschman-Herfindahl indices of CEE IFDI
and OFDI stock (percentage)
Fixed effects estimation of the IDP model for CEE
countries. Dependent variable: NOIP
Overview of regression results
Collinearity indicators
OLS regression results on the determinants of capital
adequacy ratios in CEE banks
Summary of the most important eligibility criteria for

selected forms of state aid in the V4 countries (2014)
Checklist for nation branding promotional videos
Inward FDI in Romania and Bulgaria, 1990–2013
Examples of investors in Bulgaria, 2008–2010
Examples of investors in Romania, 2008–2010
Incentives for foreign direct investments available in
Romania and Bulgaria after 2007
OECD FDI Regulatory Restrictiveness Index
for selected CEE countries (1997–2013)
Ease of Doing Business rankings for Romania
and Bulgaria, 2006–2014

111
114
120
186
186
187
204
210
223
225
226
231
233
236


1
Introduction: The Changing Patterns of FDI

Balázs Szent-Iványi

Transition, Development, and Foreign Direct
Investment
The Central and Eastern European (CEE) countries embarked on their
intertwined processes of democratic transition, economic transformation,
and integration in the European Union close to 30 years ago. In 1989,
after decades of state-run command economies, these countries faced huge
challenges in creating markets, due to the lack of larger domestic private
firms, market institutions and regulations, technology, and knowledge.
Increasing imports driven by pent-up consumer demand, coupled with
decreasing exports due to the collapse of “traditional” markets in the
countries of the Council for Mutual Economic Assistance, as well as
competitiveness problems of state-owned enterprises quickly led to

B. Szent-Iványi (*)
Aston Centre for Europe, Aston University, Birmingham, UK
Institute of World Economy, Corvinus University Budapest, Budapest,
Hungary
© The Author(s) 2017
B. Szent-Iványi (ed.), Foreign Direct Investment in Central and
Eastern Europe, DOI 10.1007/978-3-319-40496-7_1

1


2

B. Szent-Iványi

widening gaps in current accounts (Kornai 1994). Government budgets
could not cope with the inefficiencies of the state sector, leading to layoffs
and increasing unemployment. Shrinking economies in transformational
crises put state budgets under further pressure, making them unable to
cope with the high expectations citizens had towards the material benefits
democracy would deliver in the relatively short term (see, e.g. Lipton et al.
1990).
For many of the first democratically elected governments in the region,
opening up to foreign direct investments (FDI), and encouraging the
entry of multinational corporations (MNCs) seemed a rational decision in
order to quickly fill these gaps. FDI was seen as a key source of funding to
address short-term needs and avoid crises in the balance of payments,
government budgets, and the labour market (Radosevic et al. 2003). In
the long term, FDI would help the modernisation and transformation of
the CEE economies by providing new technology and knowledge, norms
on effective and acceptable business behaviour, and integrating them into
the global economy by revitalising and reorientating exports (Hoekman
and Djankov 1997; Holland and Pain 1998; Kornai 2006). These effects,
it was hoped, would spill over to a gradually strengthening, domestically
owned corporate sector, the representatives of which would soon become
internationally competitive themselves. Privatisation, although taking
very different shapes and trajectories in the region (see Baltowski and
Mickiewicz 2000; Soós 2010), was perceived as one of the main tools to
attract MNCs, but many CEE countries also implemented generous
incentive schemes, including full corporate tax breaks and special economic zones, to attract greenfield investments.
Indeed, many of the CEE economies have emerged as new destinations
of FDI during the 1990s, with Hungary, Poland, and the Czech Republic
being the clear front runners. While not all countries joined the initial wave
of opening up to FDI, latecomers like Slovakia and Romania were also able
to catch up after the turn of the Millennium. Between 1993 and 2007, the

share of the CEE region in the global FDI stock increased from 0.6% to
3.5%, a clear indication of the region’s growing importance on the maps
of multinational corporations, although the region did not benefit disproportionately from FDI, and the FDI stock seemed to diverge little from
what would be expected based on the literature on FDI determinants


1

Introduction: The Changing Patterns of FDI

3

(Brenton et al. 1999). There has also been little evidence of substantial
corporate relocation from the older EU member states to the CEE countries (Rojec and Damijan 2008; Sass and Hunya 2014). The main competitive advantage of the CEE countries, and thus their attractiveness for
multinationals, lied in their relatively cheap, yet relatively skilled and
productive workforce, and their geographic proximity to European markets. While other factors, like access to domestic markets (and indeed,
market-seeking investments were dominant early on; see Holland et al.
2000), also played a role, the CEE countries mainly joined the global value
chains of multinationals as cheap, export-oriented manufacturing bases (see
also Carstensen and Toubal (2004) for one of the most comprehensive
econometric overviews of the determinants of FDI to CEE).
Much academic work has been carried out in the past decades with the
aim of evaluating the transition process in CEE and the impacts of FDI in
the region in particular. One of the great theorists of the transition from
Communism to a market economy, János Kornai (2006), argued that the
FDI-aided transition in CEE was an unparalleled success story in a historical perspective, but most of the population in these countries did not see it
as such. László Csaba (2007) also argued that the countries in the region
which opened to FDI tended to be more successful in the transition and
EU integration processes. Public perceptions however have often tended to
focus on the harm that the profit motivations of investing multinationals

have caused in terms of increasing income gaps and social tensions.
Briefly reviewing the academic research on the topic however provides
more mixed results. On the positive side, multinationals have contributed
to technological modernisation and an upgrading of the skills base in the
region, allowing the CEE countries to integrate into the global economy
and global value chains, mostly as a cheap manufacturing base. FDI has
also clearly supported the economic transition process, promoted growth,
and has greatly contributed to raising overall labour productivity in the
CEE economies, due to fixed capital investments, but also the transfer of
intangible assets (Barrell and Holland 2000; Hunya 2002; Bijsterbosch
and Kolassa 2010). These increases are mostly associated with higher
productivity in the affiliates however, and not with spillovers to domestic
companies (Lipsey 2006). Evidence of the existence of spillovers to
domestic firms is indeed rather sparse. Hunya (2002) argued that no


4

B. Szent-Iványi

such spillovers were identifiable, a view which may others shared as well,
and some authors have even argued for negative spillovers (Konings
2001). Hanousek et al. (2011) on the other hand, based on a comprehensive review of the literature, argued that the choice of methodology
matters, but they also struggled to show strong evidence for spillovers.
FDI has also been shown to intensify regional differences within CEE
countries with investors tending to shun less developed regions (Pavlínek
2004), leading to a dualisation of the CEE economies. The increasing
presence of multinationals has also been cited as the main cause behind
increasing trade deficits and outflows of income (Hunya 2002). Just how
much the FDI-led model of development is actually working for the CEE

countries has therefore clearly been questioned. Indeed, there are clear
arguments that “FDI cannot operate as a complete substitute for
domestic-led restructuring” (Radosevic et al. 2003, 84).
Scholarly interest towards FDI in CEE seems to have ebbed in recent
years; however, the eruption of the global financial and economic crisis in
2007, or as some chapters in this volume term it, the Great Recession, has
created a new impetus to study how exactly the trends in FDI and
government policies have changed after the crisis and what impacts
these changes can have on the development of the region. More specifically, it is likely that the global financial and economic crisis has had
profound effects on the flows of FDI to the region, leading to changes in
the volume and structure of foreign investments, as well as its potential
development impacts. These effects of the crisis have, however, not been
studied in detail. While a small number of papers have studied the
relationship between the crisis and FDI with a focus on the CEE region
(see, e.g. Filippov and Kalotay 2011; Pavlínek 2015), many dynamics
have been left uncovered.
This book contributes to filling this gap. The chapters in this volume
examine how FDI flows to the CEE countries have changed after the crisis
in terms of volume and structure, and how these changes impact the
region from a developmental perspective. A key related issue is how
investment promotion policies have changed to reflect the new realities,
and, form a normative perspective, how they should change to ensure that
the development impacts of FDI are maximised in the post-crisis era.


1

Introduction: The Changing Patterns of FDI

5

Overview of the Argument
The main message of this book is that beyond its cyclical effects, the Great
Recession and the changing competitiveness of the CEE countries have
had structural impacts on FDI to the region, and FDI promotion policies,
as well as wider national development policies, need to adapt to this new
reality.
It is not so much the volume of FDI inflows which has been impacted
by the crisis, but their structure. In terms of FDI volume, annual FDI
flows have shrunk globally and are still below their record volume seen in
2007, but this moderation is less visible in CEE. Indeed, there is some
divergence between the CEE countries. Countries like Slovakia and
Romania seem to have transitioned to a “new normal” of lower inflows
as opposed to the pre-crisis years. Levels of FDI in the Czech Republic on
the other hand have reached pre-crisis levels, and Hungary experienced
record high inflows in 2012 (although such data must be treated with
caution, see Antalóczy and Sass 2015).
The structure of incoming FDI however has clearly shifted, in almost
all countries. This shift is evidenced by the fact, unanimously pointed out
in the chapters of this book, that efficiency-seeking FDI, in search of
relatively cheap, semi-skilled labour has lost its relevance, especially in the
manufacturing sector. New large-scale manufacturing investments have
all but disappeared, and the bulk of FDI in the region is now composed of
reinvested earnings. The share of manufacturing has declined, with the
service sector now accounting for most investments. The fact that multinational subsidiaries already present in the region account for most new
investments can hint at structural upgrading towards higher value-added
activities taking place, and indeed many of the chapters provide evidence
on this. The mass creation of employment associated with FDI in the
1990s and for countries like Slovakia, Romania, or Bulgaria well into the
mid-2000s is now a thing of the past. The CEE countries need to search

for new ways of attracting FDI, which need to focus primarily on a
redefinition of what their competitive advantages are as compared to
other investment locations.


6

B. Szent-Iványi

Interestingly, FDI policies have changed much less since the crisis than
one would expect based on these developments, and states seem to rely on
old tools and methods. Investment promotion strategies often seem ad
hoc with few links to national development or other economic strategies,
making it difficult to assess how a country chooses the types of investments it targets and how it promotes them. Most strategies in the region
still seem to focus on providing large-scale financial incentives to new
investors, even though such investments are on the decline. Outward FDI
is given little incentives. The fact that FDI promotion strategies are not
integrated into wider national development strategies seems to imply that
most CEE countries treat attracting FDI as an end in itself.
It has been a mantra among both policymakers and the academic
community for more than a decade that countries like those in CEE
need to focus on constantly reinventing their locational advantages to
balance rising labour costs and the increasing competition from other
emerging regions. This process of “reinvention” was seen to allow the
CEE countries to upgrade their positions in the global value chains of
MNCs and attract better quality FDI activities, which generate higher
value added, create better jobs (in terms of pay, working conditions, the
sets of skills required, and the prospects for upgrading employee skills) and
generate more forward and backward linkages and potentials for spillovers. However, the chapters in this volume show that upgrading is not all
what it’s hyped to be. First, while there is evidence of upgrading, it is

rather slow and inconsistent. Second, upgrading is not necessarily the best
indicator of development. The literature is increasingly focusing on value
capture instead (see Coe and Yeung 2015), referring to the share of the
value created along the value chain which is actually appropriated by local
subsidiaries. There is evidence that despite upgrading happening in CEE
subsidiaries, their share of the value captured can actually decrease due to
cost reduction pressures from the headquarters. Third, profit repatriation
has increased after the crisis. This has many potential causes ranging from
the maturing of investments in the region to risk-averse corporate strategies focusing on building cash reserves, but can also signal that there may
be much greater scope for reinvestment and upgrading than what is
currently the case. And, profit repatriation may be the tip of the iceberg
only, as there is very little information on how much of their potential


1

Introduction: The Changing Patterns of FDI

7

profits multinationals take out from the CEE region through their “tax
optimisation” practices involving transfer pricing between affiliates, and
related techniques like paying management fees and royalties between
each other, as well as the usage of offshore tax havens.
Thus, while targeting higher value-added investments and incentivizing
reinvestment is a worthwhile goal for investment promotion policies (and
indeed there is movement in this direction), it will not solve development
and catching-up related dilemmas of the CEE region. The concluding
chapter of the volume instead calls for a more holistic approach towards
development driven by global integration, one which focuses on the

nurturing of innovative, CEE-based global value chains.
CEE countries can be seen to be stuck in what the concluding chapter
calls a “low value capture trap,” basically a version of the middle trap (see,
e.g. Kharas and Kohli 2011). Upgrading alone is unlikely to allow these
countries to escape this trap, and they need to concentrate on (further)
developing CEE-based multinational corporations which locate their key
value chain elements, like technology and product development, design
and ownership of intangible assets in the region. Preferably, these companies need to be in high value-added, research-driven industries like
information technology or pharmaceuticals. This requires a holistic
approach building on elements of industrial policy, education policy,
research and development policy, small and medium enterprise support,
as well as refocusing FDI promotion policies. There are several difficulties
and potential pitfalls in doing this right; most importantly, countries need
to refrain from “picking winners” and instead focus on creating environments where new “national champions” can emerge, thrive, and grow.
These policies need to avoid “national capitalist” approaches, in which
perhaps Hungary has gone the farthest. This has resulted in a situation
which is better characterised as corrupt crony capitalism (Benczes 2016;
Kornai 2015), rather than strategic, development-focused industrial policy. The issue of what exact forms policies aimed at supporting the
development of CEE-based global value chains most definitely requires
further research beyond this book.
There is a second policy issue, which, although less emphasised in the
chapters of the book, but clearly important in the light of the 2016
Panama Papers leak, is how multinationals need greater global regulation,


8

B. Szent-Iványi

especially in terms of taxation. MNCs are able to shift their profits across

jurisdictions using transfer pricing, and a good deal of these profits end up
in tax havens. The fiction that MNCs are networks of companies trading
with each other at arm’s length prices, on which the global regulation of
transfer pricing is based on, needs extensive rethinking. The profits of
individual subsidiaries are also entirely fictional artefacts of accounting.
MNCs, despite legally being composed of several different companies, act
as a single company, and thus their profits should also be treated as such.
The profits of an entire MNC would need to be determined globally and
then shared among the countries in which it is active (however defined)
for taxation purposes. This would allow CEE (and other) emerging
regions to reap greater benefits by properly taxing multinationals active
within their jurisdictions. The Panama Papers scandal may give some
impetus for stricter global regulation, especially on tax havens, but the
CEE countries should also seize the moment and emerge within the EU
and other forums as strong advocates of substantial reform in the area.

The Structure of the Book
The chapters in this volume are organised into three clusters. The first
cluster (Chaps. 2, 3, 4 and 5) primarily addresses macro-level trends in
foreign direct investment after the crisis, and the chapters broadly examine
whether the economic crisis can be seen as a critical juncture in these
trends. The chapters in the second cluster (Chaps. 6, 7 and 8) focus on the
effects of FDI in the region, both on the macro and the micro level. They
also examine how the CEE countries are integrated into multinational
corporate value chains, and what impacts this particular form of integration has, especially for future development prospects, but also in terms of
weathering the crisis itself. The final cluster (Chaps. 9 and 10) turns to
examining government policies aimed at attracting FDI, and the two
chapters in this part investigate the effectiveness and relevance of these
policies in the face of the need to re-invent the competitive advantages of
the region. The concluding chapter synthesises the results of the three

clusters and examines FDI-led development prospects for the CEE region
in the post-crisis era.