Location Trends for Foreign Direct Investment in East Central Europe

Abstract

East European industry is making radical adjustments as a result of the transition to a market economy. After some four decades of centrally planned development geared to large-scale production for a relatively undemanding Comecon network, private domestic entrepreneurs now have access to a global market. But there are major constraints, notably through the difficulty in raising capital at sustainable rates of interest. Consequently foreign direct investment (FD1) is of crucial importance both for the restructuring of old industries and for the development of new projects with export potential. However, FD1 is highly uneven, both within and between countries, and it is important to consider the reasons for this discrimination. The author discusses the location decisions of foreign companies, especially with regard to the large urban centres which are attracting the bulk of the investment. Reference is made to urban entrepreneurialism, industrial estates and special fiscal regimes, infrastructure, and environmental quality. Although some cities are particularly well endowed, most have only limited strengths to highlight as trade-offs against deficiencies. The question therefore arises as to whether all cities and their regions can exploit their strengths—and make positive use of spatial unevenness—to restructure their industrial sectors and provide gateways into the rural areas. Here there are both positive and negative views. Optimists see good prospects over the longer term through overspill and ‘trickling down’ through East Central Europe and indeed the Confederation of Independent States, whereas pessimists doubt whether even the more successful cities can attract sufficient FD1 and generate enough indigenous small and medium-size enterprises (SMEs) to eliminate unemployment and deliver growing prosperity.