FDI-based regional development in Central and Eastern Europe: A review and an agenda

Abstract

This review article reflects on thirty years of FDI-dependent development in Central and Eastern European regions (with a special emphasis on the Visegrad countries). The modernisation potential of FDI-led European integration is examined from a critical and comparative perspective. The authors argue that the FDI-led “Dependent Market Economy” (DME) model has fallen short of its anticipated modernisation potential, while other, potentially lucrative development alternatives have been neglected. While early-stage benefits were considerable, the development model now faces signs of exhaustion and an increasing number of contradictions. The paper builds on previous original research by the authors, as well as a review of international academic literature to describe the limitations and trade-offs of the DME development model, followed by an overview of three alternate growth paths for the future. In the macro-level perspective, it is argued that long-term catching-up rates across Central and Eastern Europe over 30 years have been limited, and signs of slowdown are increasingly apparent. Likewise, FDI does not seem to contribute significantly to domestic capital accumulation. On the micro-economic and regional levels, limited income effects are coupled with intangible risks and trade-offs. Strengthened socio-economic and territorial disparities ultimately pose problems for both metropolitan core regions and peripheries, while low capital embeddedness and limited spillovers denote weak territorial integration. It I advanced that the DME model may exacerbate future structural crises and exogenous shocks, and finally, that a development model dependent on exogenous capital structures shows curtailed capability to explore, learn, and benefit from beneficial growth opportunities. The paper makes the case that, while the DME model cannot be realistically dismantled in the foreseeable future without considerable risk to the CEE economies, a comprehensive diversification agenda should seek to gradually reduce its risks and foster alternate sources of growth. Embedding foreign capital into local economic networks represents one possible compromise, coupled with growing supplier networks and anchoring value creation in business services as well as innovation and R&D activities. However, alternate sources of development are also to be explored. The new revival of industrial policies in Europe and across the world opens opportunities before previously ‘inconceivable’ state-led development initiatives, including support for the emergence of new national champions. Last but not least, a strengthening domestic SME sector with competitive medium-sized enterprises and locally embedded production networks should serve to strengthen entrepreneurial ecosystems in domestic capital accumulation and value creation. Together, these and similar steps have the capability to shift the balance from the DME model towards a more competitive and resilient “successor model” where the interests of FDI and domestic development can be fruitfully reconciled.