Foreign Direct Investment in Times of Global Economic Crisis: Spotlight on New Europe

Sergey Filippov & Kálmán Kalotay

#2009-021

This paper examines the potential impact of the economic crisis – started in 2008 – on the dynamics global foreign direct investment, especially in the new member states of the European Union. The global economic crisis that hit the world in 2008 has forced scholars and policy makers alike to rethink their approaches to the global economy, in particular to financial markets (including stock exchanges and portfolio investment). It can be hypothesised that the crisis has been particularly devastating because it has resulted from the coincidence of three factors: a cyclical downturn in the world economy; a structural change that hit certain industries which used to be star performers in the global economy (especially the automotive industry); and the collapse of the previous model of the financial industry based on excesses. This paper asks how this crisis affects foreign direct investment flows, with special attention being paid to the question of which locations are set to lose the least and which ones are set to lose the most. In this respect, particular attention is paid to the activities of subsidiaries of multinational enterprises. These subsidiaries can follow different scenarios as a response to the global economic turmoil, including a reorganization of their production systems, and a reduction or closure of activities that are deemed to be less necessary for the continuation of activities. Finally, the paper examines the policy implications of the crisis. It challenges the view that rising economic nationalism (in the form of protecting one location against locations in other countries) would be the right answer to the problems created by corporate restructurings.

Keywords: foreign direct investment, credit crunch, foreign subsidiaries, Europe

JEL: F01, F23, O30

UNU-MERIT Working Papers ISSN 1871-9872

  


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