Regional Development Effects of Foreign Direct Investment in Central and Eastern Europe

Following the disintegration of the state socialist political economic system in Central and Eastern Europe (CEE) in the late 1980s and early 1990s, the region was gradually and selectively reintegrated into the periphery of the European economy. This reintegration first took the form of trade, which was liberalized and quickly redirected from the predominantly intra-Council for Mutual Economic Assistance (CMEA) trade to East-West trade. Gradually, CEE was also integrated selectively into the European production and producer services networks. This process was spearheaded by transnational corporations (TNCs) that quickly recognized two basic potential advantages of investing and producing in CEE: its substantial market potential (more than 330 million consumers) and its low production costs. In particular, CEE has a low-cost (given its productivity level), but also relatively skilled and educated labour force, which could be employed in export-oriented manufacturing to supply the Western European markets, in addition to supplying the domestic markets in CEE. In the 2000s, these two advantages were supplemented by the third major advantage in the form of the European Union (EU) membership which was extended to Central and Baltic Europe in 2004 and to Romania and Bulgaria in 2007. Furthermore, CEE has benefited from its geographical proximity to Western European markets which results in low transportation costs of delivering goods to the Western European markets and of supplying CEE manufacturing operations with materials and components from Western Europe (WE).