Direct investment in the future Member States from Central and Eastern Europe: what could change aft

The study states that the Union may have to intervene in the functioning of the market in order to help the future Member States to fully benefit from the opportunities created by their accession to the EU.

The study examines the flow of foreign direct investments (FDI) to Central and Eastern Europe during the Union’s enlargement process. It states that FDI has generally had positive effects, such as providing the financial resources that the transition economies were unable to provide by themselves, modernising the industry, developing the service sector and facilitating these countries’ integration into the world trade system. The Association Agreements also contributed towards deeper integration between Western and Eastern Europe.

The main question now is what will change with the accession of the eight Central and Eastern European countries on 1 May 2004. The barriers to trade have all but disappeared. The main change will be the enormous transfer of subsidies from Brussels to the new Member States. These financial flows that are expected to reach 4 percent of the GDP of the eight new members in 2006 will have a direct impact on internal consumption. If they are used for financing the research and development, education and infrastructure, they will indirectly support FDI flows by creating an investment-friendly environment. Enlargement should therefore have a positive effect on the flow of FDI towards the new Member States.

But the quality of FDI is not guaranteed: after enlargement, FDI will not necessarily contribute to accelerated economic convergence of the new Member States with the rest of the Union. In order to achieve this effect, the Central and Eastern European countries should use foreign investment to foster development, similarly to the example of Ireland after its accession. The national authorities therefore have an important role to play by encouraging FDI flows into creating new companies and attracting high value-added multinationals.

FDI could also cause enormous regional disparities among the Central and Eastern European countries. The intervention by public authorities would be justified to remedy such inequalities.

Read the full study (in French) on the

the Notre Europe website.