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Policy Briefing Series

  • 20.07.2018

    The economic impact of FDI on Ukraine

    (Code:PS/01/2018)

    This policy paper by the German Advisory Group and the Institute for Economic Research and Policy Consulting shows that Foreign Direct Investment (FDI) strongly benefits Ukraine. Although only relatively few companies in Ukraine are fully or partly owned by foreign investors, these companies are on average much larger and productive than purely domestic companies and pay higher wages. Raising the limited FDI stock of Ukraine by attracting more FDI would lead to faster growth of the Ukrainian economy and better living standards with higher wages of Ukrainian workers.

    Main results

    1.        The stock of foreign direct investment in Ukraine is relatively low

    The value of the FDI stock in Ukraine is low compared to other countries in the region. In 2016, the last year with good data availability, the FDI stock of Ukraine according to IMF methodology was worth USD 27.5 bn. This translates to ca. USD 650 per citizen of Ukraine and is below the values for Moldova (USD 740), Belarus (USD 1,960) and far lags behind Georgia (USD 4,430), Poland (USD 4,930) or Estonia (USD 14,760).

    1.        The FDI stock has decreased in the past years

    Between 2013 and 2016, the value of the FDI stock has decreased by ca. 60%, from USD 67.3 bn to the USD 27.5 bn of 2016. This was not due to FDI leaving the country, but due to value losses of the existing investments. Roughly half of the decrease was due to the depreciation of the Hryvnia. The other half of the decrease was due to the losses of companies, especially in the financial sector where much capital had to be written off. Since 2016, FDI inflows have been positive, but limited. For 2017 and 2018 no further decrease, but a slight recovery of the FDI stock value should be expected.

    1.        FDI companies are larger than purely domestic companies 

    Among the nonfinancial corporations of Ukraine, only 4.6% of companies in Ukraine are FDI companies. Yet these few FDI companies employ 20.4% of employees and produce 34.9% of total Gross Value Added (GVA), a measure of output. The average FDI company in Ukraine hence produces 11 times as much output than the average domestic company.

    1.        FDI companies are more productive than purely domestic companies 

    FDI companies have a labour productivity that is on average twice as high than that of purely domestic companies, implying that an FDI company produces twice as much GVA per worker than a domestic one. This conclusion also holds if controlling for the value of capital stock per company. Foreign investors hence bring knowledge, technology and networks (e.g. of suppliers or buyers) that enhance the competitiveness of the companies they invest in.

    1.        FDI companies pay higher average wages than purely domestic companies

     Labour costs per employee of FDI companies are 57% higher than for domestic companies. This indicates that the average wage per employee in an FDI company will be around 60% higher than in a purely domestic company. Hence, workers earn higher wages in FDI companies.

    1.        Attracting more FDI will lead to faster growth and better living conditions

    Our analysis clearly shows that Ukraine benefits strongly from existing FDI. FDI improves not only the productivity of FDI companies but also leads to higher wages being paid by them. Efforts should be made to attract more FDI. Also, protectionist reflexes, which run high at present, should be resisted. Economic openness hence benefits Ukraine and its citizens.

    Download short summary 

    Authors:  Kravchuk Vitaliy, Заха Девід, Кірхнер Роберт
    Research spheres:  International economics
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