20 May 1999 • Austrian FDI in Eastern Europe • Jan Stankovksy

It was not until the late 1980s that Austria began to emerge as an international investor, in consequence of ongoing and deepening European integration and the opening of the East. Austrian companies were among the first to exploit the new opportunities available in the CEECs after 1989, and to invest in local companies. Drawing on their information edge, they were able to assess the risks of investing capital better and faster than their competitors. Their long-standing contacts were found to be highly useful, especially in the first phase. The growth of FDI in Eastern Europe was further helped by innovative aid schemes. Already in 1990, Austrian direct investments in the CEECs made up ATS 4.8 billion. The impressive start, however, was not followed up. Until 1996, annual investment flows remained in the range of ATS 5 to 6 billion. It was only in 1997 that a new upturn was recorded (ATS 11.9 billion), which appears to have continued in 1998 (ATS 5.8 billion in the first six months).

The stock of Austrian FDI in Eastern Europe grew almost tenfold within just seven years: from ATS 5.0 billion in 1990 to ATS 48.8 billion in 1997. Of this, 41 percent were in Hungary, 26 percent in the Czech Republic, 10 percent in Poland, and about 7 percent each in Slovakia and Slovenia. In 1997, fully 93 percent of FDI stock in Eastern Europe was held in the ten EU applicant states, and 85 percent in the five first-round candidates.

In rapidly and courageously seizing the opportunities offered by the eastern opening, Austria secured itself an excellent starting position for direct investment in the CEECs. In 1990, 34 percent of all new foreign direct investment in the East was made by Austria. Yet Austria could not quite keep pace with subsequent growth rates, recording its most pronounced dent in 1995. By 1996, the Austrian market share of new investment had declined to 3.6 percent. It temporarily rose to 4.9 percent in 1997, only to shrink to 4 percent in 1998 (first 6 months).

Austria's market share in FDI stock in the East reached its highest level in 1991, at 17 percent. By 1996 it had declined to 6.4 percent, and by 1997 to 5.1 percent.

Several partial explanations have been forwarded for the significant displacement of Austrian investors: inadequate financial clout; insufficiently intense investment promotion schemes; the tendency of Eastern European headquarters of multinationals to bypass Austria when investing in the CEECs; weaknesses in the Austrian service industries (such as the lack of high-capacity telecoms companies in Austria while industry was privatised in the East). The assumption that Austrian companies concentrated on the EU is not corroborated by the statistical figures.

Austria has its strongest position in Eastern Central Europe. In 1997 it was able to boost its share of new FDI to 10.7 percent, primarily due to major commitments in Poland and the Czech Republic. Its position seems to have deteriorated again in 1998, according to data available so far. In 1991 Austria held 29 percent of the FDI stock in Eastern Central Europe. In 1997 it at least managed to hold 7.9 percent.

Austrian investments in CEE companies are made primarily with a view to accessing and developing local markets, and in many cases also for the purpose of moving production. The transfer of manufacturing must not, however, be viewed as an "export of jobs". As a rule, the Austrian parent ensures that it will be the key supplier of components to the foreign subsidiary. By moving the wage-cost-intensive parts of production from Austria to Eastern Europe, a company can make its product more competitive internationally and is thus able to secure or create jobs in Austria as well. The number of employees working for Austrian companies in the East has risen from 10,800 to 85,400. Domestic employment of Austrian CEE multinationals has also risen steadily, from 70,800 (in 1990) to 190,400 – an indication of the positive employment effect of investing in the CEECs.

Compared to Austrian subsidiaries in other countries, those in the East employ about twice as many persons, while average investment per company and capitalisation per worker are only half the respective levels. At ATS 0.7 million in 1996, productivity (turnover per worker in manufacturing) of Austrian subsidiaries in the East was less than one third of the rate in other countries. The critical role played by FDI in helping economies in Eastern Europe to catch up is underlined by the figures of recent years: productivity of Austrian subsidiaries in the East tripled between 1990 (ATS 0.2 million) and 1996.

Unearned income accruing to Austria from direct investment in CEE countries was ATS 1.9 billion in 1996, and ATS 2.6 billion in 1997 (of which ATS 1.8 billion came from Hungary), which translates into a "profitability" of 5.3 percent (Hungary 9.3 percent) in terms of 1997 stock.

Companies associated by capital tie-ups are usually closely linked by mutual deliveries. Deliveries made in 1996 by Austrian parents to their subsidiaries in the four eastern neighbours amounted to ATS 8.4 billion, or 14 percent of total exports to these countries. At ATS 3.4 billion, intra-company imports by Austrian multinationals from neighbouring countries were markedly lower. Intracompany trade with the CEECs produced a surplus of ATS 5 billion in 1996, evidence to bear out the assumption that direct investment in Eastern Europe creates rather than destroys jobs.