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Policy Papers

  • 12.04.2015

    Foreign Direct Investment in Ukraine: Past, Present, and Future

    (Code:PP_02_2015)

    Ukraine is currently in a very tense macroeconomic and financial situation. One problem area is the attraction of foreign direct investment (FDI). In 2014, only about USD 300 m (equivalent to 0.2% of GDP) have been attracted on a net basis, which is a multi-year low. The inward stock of FDI declined by about USD 15 bn to USD 63.8 bn (48.4% of GDP) over the year. These adverse developments give rise to a number of concerns, as FDI flows serve a dual purpose: They provide stable, long-term capital inflows that can support the external balance of the country, which is still rather shaky, and add to the country’s overall investment levels, which are under severe pressure, despite significant reform efforts to improve and deregulate the business and investment climate. In order to gain more insights into the past performance of FDI in Ukraine, we look at past trends between 2004 and 2014, also in comparison to neighbouring Poland and Romania, which can be considered natural benchmarks. This analysis reveals that Ukraine had a very mixed success of FDI inflows over this period. While Ukraine’s inward FDI stock expressed in % of GDP is at first glance similar to Poland and Romania, serious doubts remain regarding the special role of Cyprus. Accounting for likely “round-tripping” of domestic capital, the genuine FDI level appears much lower in Ukraine than in Poland and Romania. Key differences can be also observed in the sectoral structure, as Ukraine attracted comparatively fewer inflows into export-oriented industries. In particular machine building and the chemical industry (which are the most important subsectors in both Poland and Romania) are not among the main targets of FDI in Ukraine, but metallurgy and food processing. Finally, a high share of FDI in the financial sector in Ukraine means that shareholder loans account for about 14% in the total reported FDI stock.

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