This article delves into the critical role of Foreign Direct Investment (FDI) in the economic transformation and integration of Central and Eastern European (CEE) countries into the European Union (EU) over the past two decades. The study considers FDI not only as a measure of economic integration but also as a driver of growth, technological advancement, and participation in global value chains (GVCs). Using Slovenia and Hungary as case studies, the article highlights how FDI has shaped these countries’ developmental trajectories and the challenges they face.
FDI as a Catalyst for Growth
FDI in CEE countries emerged as a solution to overcome the limitations of small domestic markets, low purchasing power, and outdated technologies in the 1990s. It was considered as a shortcut to an operational market economy, to modernizing economies and aligning them with developed Western European economies. Beyond badly needed financial capital, FDI brought other important assets also required largely in the economies in question: managerial expertise, technological transfers, and a boost to productivity, significantly enhancing the export capacities of these countries. European integration acted as a catalyst, enhancing the attractiveness of CEE markets by harmonizing trade and investment regulations, expanding market access, and offering institutional stability. These factors have attracted investors and accelerated economic integration.
The Role of EU Enlargement in Shaping FDI
The EU’s 2004 enlargement, which included several CEE countries, led to a substantial increase in FDI inflows even before it was actually happening. The integration process created a stable environment for investors and opened opportunities for participation in EU-wide supply chains. Studies indicate that EU membership increases FDI inflows by as much as 60%, with a notable premium observed across sectors like manufacturing, trade, and R&D. However, disparities emerged within the region. Countries with better institutional frameworks and innovative policies captured a larger share of FDI, while others struggled to maintain competitiveness.
Case Studies: Slovenia and Hungary
Despite its early exposure to FDI during the socialist period and an export-driven economy, Slovenia has underperformed in attracting FDI relative to other CEE countries. By 2023, FDI stock amounted to 34% of GDP, significantly below the EU average. Challenges include a small domestic market, slower privatization, and institutional constraints, which limited Slovenia’s ability to leverage FDI for broader economic transformation.
In contrast, Hungary embraced an aggressive FDI strategy during its transition to a market economy, partly driven by its need for convertible currencies to service its large foreign debt in regional comparison and partly by the belief that FDI may quicken up the advancement of the operational market economy and the modernisation of the economy. It attracted global companies through privatization and fiscal incentives, becoming a regional hub for manufacturing and R&D. Hungary’s FDI stock grew significantly, supported by its participation in GVCs led by European and Asian firms. However, Hungary’s FDI-driven model has also faced criticism for fostering a dual economy, where foreign-owned firms dominate without strong linkages to domestic businesses.
Sectoral and Geopolitical Dimensions
Manufacturing, particularly high-tech industries, has been a major focus for FDI in CEE. Integration into Global Value Chains (GVCs) is a major development. CEE countries, particularly Hungary, have become integral players in GVCs, attracting investment in manufacturing and technology-driven industries. The automotive sector and emerging fields like electric vehicle production have positioned the region as a critical hub for European and global industries. Slovenia and other smaller economies have struggled to capitalize on trends like nearshoring, which gained momentum during the COVID-19 pandemic. Rising geopolitical risks, including the Ukraine conflict, have further complicated the FDI landscape. CEE countries have shown resilience by diversifying supply chains and fostering regional cooperation, but smaller economies face increased costs and limited benefits from global shifts in investment patterns.
Challenges and Opportunities Ahead
The region’s reliance on FDI has exposed vulnerabilities, such as dependence on foreign firms and limited domestic economic development. For example, Hungary’s dual economy highlights the limited spillovers from FDI to local businesses, while Slovenia’s slow reforms have hindered its ability to attract and sustain high-quality investments. Despite the influx of FDI, domestic firms often struggle to benefit from technology transfer and skill development. Overall, limited backward linkages and dependency on foreign investors have hindered the broader development of domestic economic capabilities in many CEE countries.
Geopolitical tensions, protectionist policies, and evolving GVC configurations present both risks and opportunities. The rise of protectionism and trade barriers, along with shifts in global capital flows, have forced CEE economies to adapt. Countries like Hungary have benefited from relocations under the “China+1” strategy, but smaller economies like Slovenia struggle to compete.
The future competitiveness of CEE economies depends on their ability to implement institutional reforms, foster innovation, and leverage EU support. Enhancing labour skills, infrastructure, and governance will be critical to maintaining their position as attractive investment destinations.
Conclusion
FDI has been a cornerstone of economic integration and growth for CEE countries, facilitating their transition into market economies and embedding them in the EU’s economic fabric. The experiences of Slovenia and Hungary illustrate both the opportunities and complexities of leveraging FDI for development. While Hungary has maximized its FDI-driven model and thus has to deal with its accompanying problems as well, Slovenia’s cautious approach has limited its potential benefits.
Jaklič, Andreja és Tölgyessy Péterné Sass, Magdolna (2024) Foreign Direct Investment in Central and Eastern Europe After Two Decades of EU Enlargement: Slovenian and Hungarian Perspectives. ACTA HISTRIAE, 32 (3). pp. 321-340. ISSN 1318-0185
