February 14, 2020
EU membership can hamper local businesses
Eastern European businesses have benefited overall from EU membership but, for local firms, the promise of joining does not always live up to expectation or improve productivity, a report has warned. On the plus side, EU membership results in a significant increase in foreign investment, the report from IZA World of Labor suggests.
However, it results in new member states adjusting subsidies, tax regimes and infrastructure spending in ways that benefit foreign-owned firms to the detriment of domestic businesses and expenditure on education and training.
‘The availability of foreign direct investment introduces improved technology, management and access to markets, encouraging domestic firms, particularly those supplying foreign-owned entities, to improve productivity’, the authors write. ‘An enlarged free market and customs union provide the opportunity to export to previously inaccessible destinations’, while ‘the expansion of foreign banks into the new member states should increase credit availability’.
However, government expenditure in the new states has focused on satisfying multinational enterprises, the report contends. In contrast, domestic firms can be disadvantaged because:
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- they face increased competition from the common market
- Western European banks fail to make credit available except for the most ‘bankable’ propositions and use sophisticated credit scoring that can reduce access to finance
- foreign imports are often used in manufacturing, reducing opportunities for domestic suppliers
- the increased presence of foreign firms does not always improve knowledge and productivity
However, those domestic firms that survive the increased competition do increase their productivity, the authors, Jens H?lscher and Peter Howard-Jones of Bournemouth University, say.
The report covers the accession to the EU of Hungary, Poland, the Czech Republic, the Slovak Republic, Slovenia, Latvia, Estonia and Lithuania (which all joined in 2004), Romania and Bulgaria, which joined in 2007, and Croatia, which joined in 2013.
