DISTRIBUTIONAL IMPLICATIONS OF AUSTRIAN FDI IN CEE Prepared for

Austrian outward foreign direct investment increased quickly since 1989. For Austria this period was characterised mainly by the opening up of Central and Eastern Europe (CEE) economies. The profitability of Austrian affiliates has been modest until the mid 1990s. The picture changed considerably when Austrian FDI had become older and thereby also more profitable. Whilst the return on equity (RoE) which is used as a measure for profitability has been zero in 1992 this measure increased up to 8.0 % in 2004. However, the rates differ quite substantially by regions. They are 3.3 % for investments in EU-15 but 11.3 for CEE-5 and 9.0 for CEE-14. After some severe start-up troubles Austrian affiliates in CEE currently contribute considerable amounts to the overall competitiveness of Austrian MNEs. However, we show that it was not only the profitability of affiliates which has improved strongly within this period but also the efficiency of Austrian firms at home. Measured in unit labour costs (ULC) the Austrian manufacturing sector has improved its position against the main trading partners tremendously during the second half of the 1990s. One result of this development has been a strong increase of Austrian exports. Austria’s market share in total OECD-exports has improved by 19% between 1994 and 2002. In contrast, the market share of Germany remained constant over this period. It is obvious that increased profitability of Austrian affiliates and a strong decline in ULC in domestic manufacturing developed simultaneously. Among others, this development did lead to large increases in Austrian total exports. In contrast, real wages did stagnate or decline. Hence, it is obvious that distributional issues will be the main challenge for economic as well as political perspectives