OREANDA-NEWS. March 15, 2010. Five bumper years of foreign direct investment (FDI) in Central and Eastern Europe took a hammering last year as the effects of the credit crunch and recession bit, according to PricewaterhouseCoopers (PwC) economists, reported the press-centre of PwC.

And the evidence suggests that FDI in the region is likely to recover only modestly from 2010 onwards, says the report entitled Foreign Direct Investment in Central and Eastern Europe: A case of boom and bust?

The PwC research reveals that the CEE region enjoyed a five-fold increase in FDI inflows between 2003 and 2008, rising from USD30 billion to USD 155 billion. Russia has been the major beneficiary, as inflows here rose from less than USD 8 billion in 2003 to more than USD 70 billion in 2008.

But estimates show that in 2009, FDI to the region slumped by 50% to USD 77 billion. Much of the blame for this collapse can be laid at the door of the real estate sector, where FDI declined by a massive 71% in 2009 compared to the previous year.

The picture has not been uniform across the region; analysis by the PwC economists revealed that FDI as a share of GDP varied from country to country, depending on such factors as income levels, manufacturing labour costs, investment risks, and status of EU membership.

However, the research does show that, even without the impact of the global recession, sharp rises in labour costs in the run-up to 2008 in the region may well have caused a slowdown in FDI.

“And we suggest that FDI inflows will not immediately bounce back to previous highs,” says Yael Selfin, PwC's head of macro consulting. “The bust which followed the long boom will have persistent effects in the region; it could take until 2014 for the region’s FDI inflows to surpass the 2008 level.”

Two important factors to determine the recovery path of FDI flows to the region will be the speed with which investors’ perception of country risk moderates, and how quickly the region’s wages - relative to countries like Germany - start to pick up again.