Foreign investment as a booster for economic growth
08 December 2022FDI study results & METRO example
Since the 1960s, the world has become increasingly integrated and interdependent. In Europe, this intensified even more after the fall of communism: market liberalization and a facilitated flow of goods and services pushed trade and investments across borders.
The EU’s single market is an exceptional example of how trade has boosted economic growth and prosperity. We all enjoy its benefits in our daily lives – be it free travel, countless work and study opportunities and wide choice of products for citizens, or tariff-free access to 27 national markets, lower production costs and large customers’ base for businesses.
German businesses, including METRO, have especially benefited from the opening of markets Central, East and Southeast Europe (CESEE) after the fall of the iron curtain. Expansion to Eastern Europe has been a crucial ingredient for global competitiveness. METRO, with its brands METRO and MAKRO became one of the first international companies to enter Eastern Europe, opening its first stores in Hungary and Poland in 1994.
To evaluate how FDI flows have in turn contributed to economic growth in the CESEE region, METRO supported a study organised by the German Eastern Business Association and conducted by the Vienna Institute for International Economic Studies. The study assessed the economic and social impacts of FDI in 17 economies from CESEE with a particular attention to FDI from Germany and Austria. METRO countries covered by the study include Czechia, Hungary, Poland, Slovakia, Bulgaria, Croatia, Romania and Serbia.
The results show that foreign direct investments significantly contributed to economic growth and employment in the CESEE. At the same time, they contributed to the reduction of unemployment and social inequality. The policies that the CESEE governments started since the fall of communism to attract FDI therefore proved efficient and brought many international players on these markets. It shows that trade is not a one-way street – it benefits both parties involved. Policies that encourage trade and foreign direct investments should continue, especially in current times of heated geo-political conflicts and associated changes in trade routes.
Even 30 years after its launch, the EU Single Market is far from being complete. The pandemic and permacrisis have clearly shown that to become more resilient and make it through this difficult time, we need a strong Single Market: without it, Europe won’t be able to compete globally for capital.
METRO presence in Central, East and Southeast Europe
How have foreign investments impacted economies and societies?
During the past three decades, the economies of Central, East and Southeast Europe have seen particularly strong inflows of FDI: while the world has been receiving FDI inflows of around 2.5% of global GDP, foreign investment in CESEE have averaged to almost twice as high (4.4% of GDP). As governments were adopting FDI-friendly policies to make their countries attractive investment destinations, many international companies chose to enter these new fast-growing markets.
Perhaps unsurprisingly, it was found that FDI inflows have in general had a positive effect on economic growth in Central, East and Southeast Europe. The positive effect was especially visible with regard to German and Austrian FDI inflows. The results of the study show that GDP growth connected to German and Austrian FDI is 5 times higher compared to total FDI related growth.
The positive GDP effects of German and Austrian FDI have been connected to higher consumption and higher exports. This in turn is the result of lower unemployment and higher wages that the FDI induced. Over the past three decades, unemployment has declined in all but two (Croatia and Serbia) CESEE countries and the impact has been particularly strong from German and Austrian FDI. At the same time, investments from all places of origin, and in all forms, have been found to increase wages in CESEE, and again this is especially the case for FDI from Germany and Austria.
The study has also examined how FDI have impacted social indicators such as income inequality and national poverty rate. The results prove that FDI coming from EU-15 and particularly those from Germany and Austria, reduced both income inequality and poverty. Foreign direct investments therefore especially benefited citizens with lower incomes.
Last but not least, the results point out that investments in the service sector, which covers wholesale and retail trade, as well as in manufacturing, energy and construction, have had stronger effects on GDP than investments in other sectors of economy.
METRO in Central, East and Southeast Europe
Since entering Poland and Hungary in 1994, METRO has expanded to eight CEE countries in total, creating almost 20.000 jobs in the region. In the last 5 years, METRO has invested over 260 Mio. EUR in these countries.
METRO thereby serves two professional customer groups: hotels, restaurants, and caterers (HoReCa) as well as independent traders. In CESEE, the latter traditionally play a crucial role in the food supply chain. In Romania for example, almost half of the population lives in rural areas, and local traders do not only serve as a shopping spot, but also as a meeting and social contact point for many residents.
In terms of actual physical impact of FDI on the ground, one can see how METRO preserves such traditional shops and adds further value to communities with its franchise system, such as “Odido” in Poland or “La Doi Pasi” in Romania. Small business players tend to be vulnerable due to scarce financial resources and high competition in the modern retail world – here METRO can be a strong partner.
By investing in modernisation through digitalisation as well was the remodelling of stores, traders become more professional when they take advantage of METRO’s trader opportunities. “Traders are social ambassadors. We help them to become more professional without taking away the uniqueness as a place of social gathering in their local communities”, says Daniel Quest, who is Senior Vice President Convenience at METRO. “Our ambition is not to become the only supplier of small independent traders but be the main supplier. We see them sourcing locally alongside Metro as a key point of difference that we then add to by giving them a structured toolbox ensuring they can compete in the modern retail world”.
Read more about how METRO supports independent traders here.
Further driving positive change: recommendations for policy makers
As the results of the study clearly show, foreign direct investments indeed produce beneficial economic and social effects. International companies such as METRO have proven to be important drivers of economic growth, by reinvesting locally, creating new jobs and reducing inequality.
For future growth it will be essential to provide an enabling framework for foreign investors. While FDI can be the catalyst for economic growth, one should bear in mind that they are vulnerable not only to economic, but also political risks. Recent geopolitical tensions and related economic developments have highlighted that the benefits we have reaped from free trade and globalisation cannot be taken for granted.
Policymakers need to keep in mind: the EU’s Single Market is now as crucial as never before. As Europe tackle one crisis after another, a well-functioning common market will be the key to a strong, crisis-resistant European Union. We need more, not less Europe.
A strong EU will be essential for businesses and consumers to navigate through current multiple crises and to maintain competitiveness with the world’s major economic players such as the US and China. Geo-political tensions should not lead to the conclusion that trade and globalisation per se are the root of problems.
Policymakers should bring the Single Market back to the top of the political agenda. For this, the already existing basic, but successful tools are essential: harmonisation and closer cooperation.