Political Effects on FDI in the CEE Region: Two Cases of Connectivity and Decoupling from the West

Abstract

The article studies two cases of political impacts on FDI in the Central and Eastern European (CEE) region. The first case covered 15 CEE countries focusing on FDI sensitivity to democracy and elections during their connectivity with the West from 1991–2019. The panel data multi-factor linear regression method gives some arguable results that show that the fall of democracy increases FDI in CEE economies. It is explained by the FDI’s priority of economic scale and growth over the level and direction of democratic development. At the same time, Western connectivity provides an environment for economic growth in the CEE economies. The second case describes the political effects of decoupling from the West on the China–Belarus Industrial Park (CBIP) in 2020–2022. Based on the event study methodology and field survey of 21 residents of the CBIP, the findings show the negative effects of decoupling on the volume of Chinese capital, the number of registered residents, their profit, payback period, and reliance on government support. Both the cases also demonstrate the drop in FDI during election years.

JEL Classification

F21, P16, O52

Keywords

Belarus Central and Eastern Europe foreign direct investments political connectivity and decoupling

Introduction

It is assumed that political and economic connectivity with the West should have visible political effects on foreign direct investments (FDI). Both political linkages with the West and adopting a Western-type political system are expected to provide an attractive environment in a country for FDI. Decoupling from the West and transforming the political system to a less Western-type model, presumably, should have negative political impacts on FDI. However, existing studies prove that Western-type democracies usually have positive effects on FDI and experience higher inflows of foreign investments than autocracies (Busse, 2003; Jensen, 2003). Others argue that the type of political system is less important for foreign investors than the development of a legal system. For example, some researchers show that autocratic countries with strong legislatures can attract more foreign investment than similar countries with poor legal systems (Moon, 2019). The research motivation of this article is to focus on whether foreign investors prefer more or less democratic countries in Central and Eastern Europe (CEE).

It seems that political decoupling from the West provides the opportunity for a country to replace Western FDI with Eastern, for example, Chinese FDI. As decoupling from the West is usually accompanied by Western personnel, technological, trade, and financial sanctions, they also become barriers to Chinese FDI. On the other hand, a country often is reluctant to replace Western investments with Eastern FDI due to cultural, logistical, security, and other reasons. Even if Chinese companies decide to invest in the sanctioned business environment or appear to be in the country before its decoupling from the West, they expect to get support from their headquarters and their native and host governments. Based on the case of the China–Belarus Industrial Park (CBIP), this article studies the research questions about Chinese investors’ reactions to Belarus’s decoupling from the West in 2020–2022.

Any type of political event in a country, such as elections, could present a shock for foreign investors, whether the government is connecting or decoupling from the West. Studies usually outline the negative effects of political events, such as the impact of elections on investments (Alesina & Perotti, 1996; Blum & Grundler, 2020) and financial markets (Girardi, 2018). The negative effects of political events on FDI depend neither on the type of political event nor on the results of the elections. The fact is that any political event occurred is usually enough to raise uncertainty and decrease FDI. When the effect of the political event is over, FDI should return to its typical positive dynamic. The case of CEE countries is used here to explore political foreign investment cycles, that is, FDI drops or slows down during election years and rises after elections.

The rest of the article is presented in four parts. The first part includes the cases and relevant literature reviews. The second part describes the hypotheses, methods, and data. Panel data methodology is used to find political effects on FDI in CEE countries; event study and field survey methods are used to study political impacts on FDI in the CBIP. The third part shows the econometric results of political effects on FDI in CEE in 1991–2019, 2010–2019, and in the CBIP in 2020–2022. The fourth part discusses some reasons for the political effects on FDI in CEE countries during their connectivity with the West and in the CBIP in the 2020–2022 years of decoupling from the West. Finally, the conclusions are presented.

Review of Two Cases and Literature

The Case of 15 CEE Countries During Connectivity with the West

Geographical factors with common political and economic features group the CEE countries. They have become a global phenomenon, as they underwent the fastest transformation from middle-income to high-income economies within the past three decades, according to the World Bank methodology (Gill, 2007). By 2022, there were nine high-income CEE countries (Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, and Slovenia) and eight middle-income ones (Albania, Bosnia and Herzegovina, Bulgaria, Moldova, Montenegro, North Macedonia, Romania, and Serbia). Studies show that FDI had a positive impact on economic growth in CEE countries and supported a fast transition to market-oriented high-income economies (Comes et al., 2018; Vojtovič et al., 2019). Net FDI had an evident share in the GDP of different CEE countries, both middle-income and high-income, and with different levels of democratic development (Figures 1 and 2).

Figure 1.

Source: Data based on the World Bank statistics (World Bank, 2022).

Figure 2.

Source: Data based on statistics from Economist Intelligence Unit 2022 (Democracy Index 2022, 2023).

The case of CEE economies draws the attention of researchers as an evident example of FDI’s bidirectional impacts. On the one hand, some articles outline the channels of foreign investment’s influence on economic growth in the CEE countries: energy consumption falls and labor productivity rises (Barrell & Holland, 2000; Li et al., 2022). On the other hand, other studies explore the different factors affecting FDI in CEE countries, including political impacts (Table 1).

Table 1.

Literature Review About the Factors Impacting FDI in CEE countries.

Factor	Research	Comments
Politics	Avioutskii, & Tensaout, 201; Darrat et al., 2011; Gorynia et al., 2020	FDI is driven by the fast and irrevocable political transformation of CEE countries into democratic regimes due to their imitation of the European Union (EU) political institutes and accession to the EU. All current high-income CEE countries are EU members; six out of eight middle-income CEE countries are not EU members. Studies show that liberal public preferences and EU accession affect foreign investments in CEE countries.
Geopolitics,Russia	Kalotay, 2022; Mirkina, 2018; Weiner, 2018	Russian FDI in five EU member CEE states was dominated by market-seeking and, to a lesser extent, efficiency-seeking projects carried out by Russian state-owned or state-related private firms. Since the start of the Russia-Ukraine military conflict in 2014, Western sanctions and the reputational choices of multinational companies have decreased FDI from Russia. As Russia itself was a relatively big outward investor, it also decreased its FDI from CEE countries.
Policy	Ablonczy-Mihalyka & Kecskes, 2015; Danson, et al., 2003; Gunther & Kristalova, 2016; Mazol, 2021; Paul et al., 2014	Some articles outline the impact of different government policies on FDI in CEE economies: investment inward agencies and government incentives; industrial parks; trade liberal policy; taxation; infrastructure; labor regulation; legislature.
Technology	Lobanov, 2014; Pečarić et al., 2021; Popovici & Călin, 2019; Stephan, 2013	Studies show that investors from developed countries prefer host countries on the basis of their potential for transferring and using technology and for endowing them with strategic assets, while investors from emerging countries are market-oriented and target locations with strategic resources. Some scholars conclude that foreign investments in the industry sector have a bigger economic growth effect in CEE countries than in the service sector. Others argue about the context-specificity of the technological role of foreign investments in CEE economies.
Scale	Becker & Cieslik, 2020; Sass, 2017	Some articles demonstrate the role of different scale effects in attracting FDI in the CEE region: country size, size of the investment project, and distance between host and investor countries.
Epidemiology	Ciobanu, et al., 2020; Kalotay & Sass, 2021	Studies show that the epidemiological effect on FDI was lower at the regional level in CEE than at the global level in 2020. Some argue about the contradictory impact of COVID-19 on FDI in CEE economies.

The Case of the CBIP During Decoupling from the West

In 2010, Belarus and China reached a high-level political agreement to create the biggest Chinese overseas economic zone in Belarus. By 2013, Belarus had provided the territory near its international airport with more than 100 sq. km, legal guarantees, and tax incentives, including zero value-added tax, zero corporate profit tax for the first five years after registration, and a 9% rate of personal income tax in comparison with the 13% rate in the country. Chinese telecommunication giants Huawei and ZTE became the first residents of the CBIP. FDI came to the CBIP in 2017 and became the main source of Chinese FDI in Belarus (Figure 3). By 2019, such Chinese “national champions” as logistical China Merchants Group, industrial Sinomach, Weichai, and Zoomlion had started their operations in the CBIP.

Figure 3.

Source: Data based on China–Belarus Industrial Park (2023) and Rudy (2021a).

But, from 2020 to 2022, the CBIP faced the fall of FDI, affected by political events and decoupling from the West. Although the number of CBIP residents continues to grow, they have become less Chinese and less capital-intensive. The CBIP became more popular among local small and medium enterprises with its new focus on import substitution. Despite the fact that the CBIP was promoted and popularized in Russia, no Russian residents were registered there within the observed period. The CBIP started changing its operational focus from investment to trade cooperation with China.

The case of the China–Belarus industrial park is rarely studied in the literature, mostly due to a lack of reliable data. Some provide general overview on recent history and directions of the CBIP’s development (Rudy, 2021a). There are plenty of related studies about the political effects on Chinese FDI in the CEE region. Researchers show that the factors behind Chinese investments in the CEE region are similar to Chinese investments in Belt and Road countries and Chinese outward direct investments in general (Le & Ke-Cheok, 2020; McCaleb & Szunomar, 2017; Rehman & Noman, 2021).

Politics: History of bilateral diplomatic cooperation, bidirectional political support, and technical assistance, “Belt & Road” cooperation, “14+1” (former “17+1”) format of political cooperation, meaning 14 CEE countries plus China;

Technology: Chinese venture capital was pouring into European tech start-ups, and Chinese state-owned enterprises invested in assembly manufacturing;

Resource-seeking: Chinese investors would like to get access to European technology and high-qualified labor;

European Union (EU) market-seeking: For China, it is the substitution of the US less politically friendly market.

Despite these factors and the overall attractiveness of CEE economies for FDI, the Chinese share of total FDI in CEE countries has been consistently low. In the pre-COVID era, China ranked only 22nd among CEE economies (Sass, 2017, 2020). Among CEE economies, Hungary and Poland attracted the most Chinese investments. The share of Chinese FDI in total FDI was the highest in Hungary, Romania, Slovenia, Serbia, and Albania (from 3% to 9%); in other CEE countries, it was less than 2% (Matura, 2021). In 2020–2021, the share of accumulated Chinese FDI in 11 CEE economies among all 28 European countries was only 4.7% (Kratz et al., 2022).

Hypotheses, Methods, and Data

Hypotheses

This article tests three hypotheses about political effects on FDI: The role of Western-type democracy in attracting foreign investments in the CEE region, the cyclical behavior of FDI in electoral periods in 15 CEE countries, and the FDI short-term reaction and long-term trend in the CBIP during decoupling from the West.

H₁: Foreign investors prefer more democratic countries in the CEE region, so CEE economies with a higher level of democracy face a higher net FDI to GDP ratio than less democratic ones.

H₂: FDI drops or grows slower during election years in CEE countries, and after the election, FDI either rises or grows faster.

H₃: Chinese FDI in the CBIP is unaffected by Belarus’ decoupling from the West, as Chinese companies are secured by friendly bilateral relations with both the governments of the country of origin and the host country.

Methods

Hypotheses H₁ and H₂ were tested with multifactor linear regression analysis of panel data using SPSS 26 software. For both hypotheses, the dependent variable was analyzed: net FDI to GDP (1).

Y_{i t} = β_{0} + β_{1} \times X_{1 i t} + \dots β_{k} \times X_{kit} + ε_{i t}

(1)

i = 1,…, 15 for observed CEE countries;

i = 1,…, 9 for high-income CEE countries;

i = 1,…, 6 for middle-income CEE countries;

t = 1,…, 10 (2010, 2019) for CEE countries with different levels of economic development, and with different levels of political/democratic development;

k= 1,…, 5 for H1 and k = 1,…, 7 for H2;

Y_it = log net FDI to GDP. The indicator of net FDI to GDP was used to smooth the factor of the size of different CEE economies;

X_1it = log GDP per capita—the logarithm of GDP based on purchasing power parity (PPP) per capita in current international dollars. It was used to measure the level of economic development in different CEE countries;

X_2it = log Tr—the logarithm of the sum of exports and imports as a percentage of GDP. It was used to measure connectivity to open market-access;

X_3it = log pp15—the logarithm of a demographic indicator characterizing the ratio of under 15-year-olds to the working-age population (people aged 15–64);

X_4it = log pp65—the logarithm of a demographic indicator characterizing the ratio of the elderly population aged 65 and over to the working-age population (people aged 15–64). These two indicators were used to measure the labor market;

X_5it = log Dem—the logarithm of the Democracy index. This variable was used in H₁.

To test H₂, three variables were added to the model (1):

X_5it = GDP_HP—cyclical component in the dynamics of real GDP calculated as the difference between the natural logarithm of GDP based on PPP in current international dollars and the same indicator filtered through the Hodrick–Prescott filter;

X_6it = ElecY—a Boolean variable assigned value 1 in the presidential election year in presidential countries and in the parliamentary election year in parliamentary countries, and value 0 in other years;

X_7it = Elec(Y+1)—a Boolean variable assigned value 1 in the year following the presidential election in presidential countries and the year following the parliamentary election in parliamentary countries, and value 0 in other years.

Hypothesis H₃ was tested on the data from the CBIP for the period of connectivity with the West in 2017–2019 and the period of decoupling from the West in 2020–2025 with the help of field survey and event study methodology (Kolari & Pynnonen, 2010).

I_{t} = \ln (\frac{P_{t}}{P_{t - 1}})

(2)

I_t is the indicator to find abnormal dynamics in the CBIP parameters like the number of residents, net Chinese FDI in the year t for the period 2020–2021;

P_t is the parameter on the number of residents and net Chinese FDI in the CBIP in the year t;

P_t₋₁ is the similar parameter in the year previous to the year t.

ε_{t} = I_{t} - \bar{I t}

(3)

ε_t is the abnormal difference in the dynamics of the indicator I_t in the year t;

Īt is the average indicator similar to I_t, for the period of connectivity in 2017–2019.

ε_{c} = \sum_{t = 1}^{n} ε_{t}

ε_c is the cumulative abnormal differences in the dynamics of indicators in the period of decoupling in 2020–2021;

n is the number of years analyzed in period of decoupling in 2020–2021.

Data

The data on 15 CEE countries1 was analyzed for 2010–2019. The countries in the sample were divided into several groups:

By level of income, into high-income CEE countries (according to the classification of the World Bank in 2022, these are the countries with a gross national income per capita of $12,696 or more, calculated using the Atlas method) and middle-income countries (gross national income from $4,096 to $12,695).

By level of political development, into democracies, that is, those whose Economist Intelligence Unit Democracy Index of 2019 was above 7; hybrid, and authoritarian regimes—the Democracy Index below 7 (Democracy Index 2019, 2020).

The economic indicators of 15 CEE economies were adopted from the methodology of the World Bank’s data (World Bank, 2022), and political indicators from the Economist Intelligence Unit (Democracy Index 2019, 2020).

CEE countries were divided into parliamentary and presidential systems, and the data were analyzed for election and post-election periods. For parliamentary countries, the dates of parliamentary elections were used, and for presidential countries, the dates of presidential elections were used. The data were analyzed by applying the methods described in the papers (Beck et al., 2001) for 1991–2017 and (Scartascini et al., 2018) for 2018–2019 (Election Guide, 2021).

The field survey was made in June 2022 with the observations of 21 active residents of the CBIP. The respondents had the following characteristics or shares:

Position of the respondent: 37% respondents were CEOs, 27% managers, 16% CFOs, 5% assistants and specialists;

Stage of business: 81% of enterprises had already finished construction and started production, marketing, and trading; 19% were in the preproduction phase of construction, hiring labor, and buying equipment;

Specialization: 43% of companies specialized in industry manufacturing, 14% in trade and logistics, and 10% in telecommunications;

Sales market: 60% focused their sales on the Belarussian market with more than half of sales, 15% on the Chinese market, and less than 10% on the Russian market;

Targeted clients: 55% targeted their products at state-owned clients, 45% at private clients;

Number of employees: 67% of residents had less than 50 employees; 14% had more than 100 employees;

Annual revenue: 67% of companies had annual revenue of less than 1 million US $, and 19% had annual revenue above 5 million US $.

Empirical Results

H₁

Statistical model (1) has a coefficient of determination not higher than 0.163 for the group of all CEE economies and for high-income CEE countries (Table 2). The Pearson correlation coefficient between log (net FDI to GDP) and log (democracy index) was also quite low at −0.104. The regression model showed that the lower the level of democracy in CEE countries, the higher the FDI.

Table 2.

Descriptive Statistics, Correlation, and Regression for Testing H₁.

Group	Variable	Mean	Std. Deviation	N	Pearson Correlation	Adj R2	Durbin–Watson	F	P	β	t
15 CEE	Dep: Log net FDI to GDP	0.477	0.380	143	−0.104	0.163	1.292	10.217	.000	−0.232	−2.325
	Indep: Log Democracy	0.829	0.055
CEE high-income	Dep: Log net FDI to GDP	0.455	0.399	117	−0.070	0.109	1.346	5.718	.001	−0.234	−2.256
	Indep: Log Democracy	0.844	0.046
CEE middle-income	Dep: Log net FDI to GDP	0.573	0.264	26	0.0183	Independent variable Log Democracy was excluded from the model
	Indep: Log Democracy	0.763	0.037
CEE democracies	Dep: Log net FDI to GDP	0.435	0.375	70	−0.016	Independent variable Log Democracy was excluded from the model
	Indep: Log Democracy	0.872	0.018
CEE hybrid and authoritarian regimes	Dep: Log net FDI to GDP	0.517	0.382	73	−0.027	Independent variable Log Democracy was excluded from the model
	Dep: Log net FDI to GDP	0.788	0.045

H₂

The model (1) provided significant results for all CEE economies and for high-income CEE countries only during election years, with no results for the years after the election (Table 3). So, FDI effects were only partly due to the political cycles in CEE countries. These estimation results match the other studies, proving that very few economic indicators followed political business cycles (Alesina et al., 1992, 1999). FDI had a low correlation both with election years (not higher than |0,173|) and with years after the election (not higher than |0,054|) in the CEE region. The regression model demonstrated that elections caused a slowdown in FDI in all CEE countries and in the group of high-income CEE countries in particular.

Table 3.

Descriptive Statistics, Correlation, Regression for Testing H₂.

Group	Variable	Mean	Std. Deviation	N	Pearson Correlation	Adj R²	Durbin–Watson	F	P	β	t
15 CEE	Dep: net FDI to GDP	4.691	6.371	348	−0.108	0.073	1.428		4.891	.000	−0.111	−2.109
	Indep: Election year	0.21	0.406
15 CEE	Dep: net FDI to GDP	4.691	6.371	348	0.045	Independent variable Election Year +1 was excluded from the model
	Indep: Election year+1	0.19	0.390
CEE high-income	Dep: net FDI to GDP	4.678	7.998	194	−0.131	0.123		2.052	7.773	.000	−0.137	−2.024
	Indep: Election year	0.19	0.390
CEE high-income	Dep: net FDI to GDP	4.678	7.998	194	0.054	Independent variable Election Year +1 was excluded from the model
	Indep: Election year+1	0.16	0.0372
CEE middle-income	Dep: net FDI to GDP	4.707	3.373	154	−0.084	Independent variable Election Year was excluded from the model
	Indep: Election year	0.23	0.425
CEE middle-income	Dep: net FDI to GDP	4.707	3.373	154	−0.027	Independent variable Election Year +1 was excluded from the model
	Indep: Election year+1	0.21	0.412
CEE democracies	Dep: net FDI to GDP	4.574	6.360	88	−0.173	Independent variable Election Year was excluded from the model
	Indep: Election year	0.20	0.406
CEE democracies	Dep: net FDI to GDP	4.574	6.360	88	−0.013	Independent variable Election Year +1 was excluded from the model
	Indep: Election year+1	0.19	0.397
CEE hybrid and authoritarian regimes	Dep: net FDI to GDP	3.867	8.411	75	−0.173	Independent variable Election Year was excluded from the model
	Indep: Election year	0.17	0.381
CEE hybrid and authoritarian regimes	Dep: net FDI to GDP	3.867	8.411	75	−0.004	Independent variable Election Year was excluded from the model
	Indep: Election year+1	0.19	0.392

H₃

The test of H3 with the event study method showed that Chinese FDI in the CBIP was affected by decoupling from the West in 2020–2021 with the fall of new residents registered and the fall of FDI (Table 4). The cumulative number of new residents in the CBIP (ε_t) decreased by 91.6% in 2020–2021 compared with 2017–2019. The cumulative abnormal difference of net Chinese FDI outflow in the CBIP (ε_c) was 237.8% in 2020–2021 in comparison with 2018–2019.

Table 4.

Results of the Event Study of Chinese Investments in the CBIP in 2020–2021 (%).

Abnormal difference in dynamics of parameter	2020	2021
ε_t (number of new residents in the “Great Stone”)	−50.7	−40.9
ε_t (Chinese net FDI in the “Great Stone”)	−230.5	−26.0

The test of H₃ with the field survey method demonstrated the low reliance of Chinese residents in the CBIP on the support of two governments during decoupling from the West. Only 15.8% of respondents agreed with the statement that the government of their country of origin would help them. And only 5.3% of respondents agreed that the government of the host country would support them (Figure 4). Foreign enterprises mostly expect to get support from their shareholders and take their own measures to avoid the political effects of sanctions on their business.

Figure 4.

Source: Data based on the field survey in CBIP in June 2022.

Discussion

The Case of 15 CEE Economies During Connectivity with the West

Estimation results showed some political impacts on FDI in CEE countries. FDI has decreased with the rise of democracy and during election years in CEE economies. It was specifically true for the group of high-income CEE states. There could be several explanations for the CEE case.

First, the size of the CEE economy matters more than the type of political system used to attract FDI. Therefore, CEE countries with larger economies attract relatively more FDI, even with comparably less democratic political systems. CEE countries are rather diversified from a political point of view, from authoritarian to hybrid and democratic regimes. In 2010–2021, out of 15 CEE states, 3 (Albania, Bosnia and Herzegovina, and Northern Macedonia) were the countries with authoritarian regimes with an average Democracy Index below 6. This group has small economies and can be neglected in the discussion. Six countries had hybrid regimes, with the Democracy Index ranging from 6 to 7, but relatively large economies: Bulgaria, Croatia, Hungary, Moldova, Poland, and Romania. Also, six countries were democracies with a score above 7: The Czech Republic, Estonia, Latvia, Lithuania, the Slovak Republic, and Slovenia. But the last group of democracies also includes rather small Baltic economies less attractive to FDI than Hungary or Poland.

Second, the dynamic of economic development has a higher impact on FDI than the direction of democratic development in CEE countries. It explains why the fall of democracy increased FDI in the CEE region. Although all CEE countries declared democracy their target, 7 out of 15 states reversed their democratic track in the 2010s. Hungary and Slovenia have faced a sustainable fall of the Democratic Index since 2014, Moldova since 2016, Poland since 2015, Croatia and the Czech Republic since 2016, and Estonia in 2019. So, while FDI fluctuated in the group of CEE countries, the level of democracy in some rising CEE economies constantly fell. This explanation is supported by the study that shows net FDI to GDP in middle-income CEE economies more often depends on economic growth and on a small number of big investment projects than on political or democratic climate (Vojtovič et al., 2019).

Third, elections have either neutral or negative impacts on FDI in CEE countries. This empirical result is supported by other studies as well (Smith & Woodley, 2020). Some reasons could be discussed why foreign investors ignore elections or lead to the fall of FDI in CEE countries. On the one hand, foreign investors may ignore the specifics of election years in their business plans. They do not expect any economic and investment policy changes in these countries during election periods. Generally, the government rarely manages to speed up economic growth and decrease inflation and unemployment by a particular political date (Rudy, 2021b). On the other hand, the economic authorities of CEE countries do not want or cannot influence both the electorate and foreign investors during election years. In election periods, the government usually tries to influence the short-term real incomes of voters rather than keeping long-term foreign investors. The study shows that the government, as a rule, uses budget instruments to target special voting groups, rather than tries to improve the overall business climate for foreign investors by election year (Brender & Drazen, 2004). Elections usually influence FDI when authorities use budget instruments to support employees in a public–private partnership project or a joint venture with a state-owned enterprise. However, this is different from the typical case for CEE countries, as the era of FDI inflow into state-owned enterprises in the CEE region ended in the middle of the 1990s.

The Case of the CBIP During Decoupling from the West

The case of the CBIP showed FDI negative effects from political events: Hard decoupling from the West was accompanied by soft decoupling from the rest, including China. Chinese companies changed their KPIs, business plans, and investment behavior and decreased investments in the CBIP in 2020–2022, partly because of several political events explaining Belarus’ decoupling from the West.

COVID-19. The “zero-tolerance COVID-19 policy” and lockdown started in January 2020 in China. All government and business visits to and from China stopped, and investment activities were postponed in the CBIP. From the Belarusian side, there was neither quarantines nor border closure. It confused Chinese residents of the CBIP. From early 2020, Chinese investors stopped business meetings, focused on health-care indicators, froze their projects, closed construction areas, and made their own quarantine in their industry bases at least until the summer of 2020. In 2021, mass vaccination in the CBIP didn’t protect its residents from new waves of COVID-19.

Elections-2020. Studies show that elections and social unrest can cause an investment downturn (Barret et al., 2021). Belarus faced both of them in May–November 2020: pre-election street activities, postelection social unrest, and weekly street demonstrations. Chinese investors froze their activities. There were cases when Chinese shareholders suspended payments to their subsidiaries in the CBIP. Western countries released financial sanctions against some Belarusian enterprises and banks. Some Chinese companies reacted by restricting operations with Belarussian partners and postponing their plans to register in the CBIP in order to avoid Western secondary sanctions.

Tensions with the EU-2021. There were several political events with the EU that had impacts on the CBIP. First, the Ryanair flight accident in May 2021 intensified EU financial sanctions against Belarus. Second, migration crises in May–November 2021 on the Belarus–EU border influenced logistics routes and plans to export from the CBIP to the EU. Cross-border tensions also influenced the China–EU Railway Express, as the bidirectional number of loaded containers dropped significantly and this railway route became more oriented toward Belarus–China trade. Third, political conflict between Lithuania (Belarus’ neighbor) and China led to Chinese restrictions on economic cooperation with that country, and the trade route between the CBIP and Lithuania’s seaport became less attractive.

Russia-Ukraine military conflict 2022. Belarus faced Western financial, trade, and technological sanctions related to the Russia–Ukraine military conflict. The CBIP residents were also affected. They faced limits on local credits and deposits and moved from USD and Euro to RMB and RUB. They also started using the Russian payment system SBP instead of SWIFT, but not the Chinese international payment system, as the latter did not allow for international transactions without SWIFT. There was less number of Chinese big companies registered in the CBIP, and more local SMEs. In the first quarter of 2022, there were five new residents registered in the CBIP, including four from Belarus and one from Hong Kong. Two of the first residents of the CBIP, Huawei and ZTE, stopped all new projects, focused only on servicing old projects, and relocated some of their Chinese employees from Belarus.

A field survey showed some short-term and long-term political effects of Belarus decoupling from the West on Chinese residents of the CBIP (Table 5).

Table 5.

Chinese FDI Effects in the CBIP from Belarus Decoupling from the West, Share of Respondents who “Agreed.”

Short-term Effects (in 2022)	Long-term Effects (by 2025)
Barriers for import and export to the EU market (85%)	High commercial risk—the fall of solvent demand in the main sales market (52%)
Difficulties in interbank transactions (67%)	Medium commercial risk (33%)
Exchange rate volatility (67%)²	High legal risk—cancelling or decreasing tax benefits in the CBIP³ (33%)
Raise of import prices (67%)	Low political risk—change Belarussian political orientation from Russia to the EU (38%)
Labor resources outflow (52%)

Source: Data compiled based on the field survey in CBIP in June 2022.

Due to long-run political effects, Chinese investors expect their planned first net profit in the CBIP to be a year after the Russia–Ukraine military conflict is over and Western sanctions are lifted (Figure 5).

Figure 5.

Source: Data compiled by the author based on the field survey in the CBIP in June 2022.

Political impacts increased the expected payback period of Chinese investments in the CBIP to above 3–5 years (Figure 6).

Figure 6.

Source: Data compiled based on the field survey in CBIP in June 2022.

Conclusions

The CEE region is located at the European border of connectivity and decoupling from the West. Two case studies show that when economic effects prevail over political impacts, it encourages connectivity and the inflow of FDI. When political effects overcome economic ones, it raises the motives for decoupling and the outflow of FDI. Political turbulence, Western sanctions, and regional military conflicts cause decoupling and decrease the role of FDI, which is used to be an important source of economic growth in the CEE region.

Currently, it would be hard for any CEE economy to find an equivalent economic alternative to Western connectivity to deal with decoupling-caused supply-chain disruption, foreign direct divestments, and the fall in technological and capital intensity of the economy. On the one hand, the reliance on local markets, parallel (shadow) imports, and less sophisticated native technologies may throw CEE economies several years back. On the other hand, Western FDIs can only partially be replaced by Eastern ones, for example, Chinese. There are still some lags in technology in some industries between the West and China, for example, in chips and semiconductors. Big Chinese brands are reluctant to invest in decoupling small economies due to the risk of losing access to Western markets and technology. Some well-known Chinese enterprises are already suffering from US extraterritorial sanctions. A few no-name Chinese companies could be found to replace Western FDI in the CEE region, but their lack of reputation brings risks of technological and financial fraud and corruption.

This study arrives at three conclusions:

First, economic and political connectivity are important factors in economic growth, and the latter has more positive effects on FDI than democracy in CEE economies. The first case of 15 CEE countries, in 1991–2019 during their connectivity with the West, provides an arguable finding that the rise of democracy decreases FDI. Empirically, it is explained by economic and political polarization in the group of 15 CEE countries. FDI has bigger effects from economic scale and economic dynamics than from level of democracy and direction of political development in CEE countries. Political and economic connectivity with the West helps CEE economies grow and move quickly into the group of high-income countries. But it is the secondary political effect of economic growth that increases FDI, rather than democracy itself. This article’s empirical results show that it is specifically true for high-income but small-scale CEE economies. This conclusion could be reversed when more large-scale CEE economies become more democratic and attract more FDI because of both their scale of economy and their level of democracy.

Second, decoupling from the West causes an outflow of FDI not only from Western countries but from politically friendly countries as well, and Western FDI cannot be fully replaced by Eastern ones, for example, Chinese or even local ones. The second case of the CBIP, in 2020–2022 during Belarus decoupling from the West, shows negative political impacts on FDI. Good, friendly, high-level political relations between Belarus and China could not bridge the investment gap caused by decoupling from the West. Moreover, Belarussian recent political events, epidemiology policy, elections, sanctions, tensions with the EU, and the Russia–Ukraine military conflict decreased Chinese FDI in the CBIP. There were negative political impacts on the number of Chinese residents, volume of Chinese FDI, expected return, and payback period. As there was no equivalent government support from both countries, the CBIP had to refocus on new types of industries, markets, scales, and origins of residents.

Third, any big political event, for example, elections, has a negative effect on FDI, no matter whether during connectivity or decoupling from the West. Both cases proved that. Either high-income CEE economies in 1991–2019 or the CBIP in 2020 experienced a FDI drop during the election year. As FDI is not a priority for authorities during elections, there are no political foreign investment cycles found in the studied cases.

Footnotes

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The author received no financial support for the research, authorship and/or publication of this article.

Notes

ORCID iD

Kiryl Rudy

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Political Effects on FDI in the CEE Region: Two Cases of Connectivity and Decoupling from the West

Abstract

Keywords

Introduction

Review of Two Cases and Literature

The Case of 15 CEE Countries During Connectivity with the West

Literature Review About the Factors Impacting FDI in CEE countries.

The Case of the CBIP During Decoupling from the West

Hypotheses, Methods, and Data

Hypotheses

Methods

Data

Empirical Results

H1

Descriptive Statistics, Correlation, and Regression for Testing H1.

H2

Descriptive Statistics, Correlation, Regression for Testing H2.

H3

Results of the Event Study of Chinese Investments in the CBIP in 2020–2021 (%).

Discussion

The Case of 15 CEE Economies During Connectivity with the West

The Case of the CBIP During Decoupling from the West

Chinese FDI Effects in the CBIP from Belarus Decoupling from the West, Share of Respondents who “Agreed.”

Conclusions

Footnotes

Declaration of Conflicting Interests

Funding

Notes

ORCID iD

References

H₁

Descriptive Statistics, Correlation, and Regression for Testing H₁.

H₂

Descriptive Statistics, Correlation, Regression for Testing H₂.

H₃