This chapter provides an overview of trends and qualities of foreign direct investment (FDI) in Austria. It first shows how investment and trade integration has contribution to economic growth and development in Austria. The chapter then examines FDI trends in more details, including in terms of sectoral distribution. The second part of the chapter provides an overview on how existing FDI and activities of foreign affiliates of multinational enterprises (MNEs) have contributed to competitiveness and the low-carbon transition of the Austrian economy.
FDI Qualities Review of Austria
Closing Gender Gaps and Empowering Women
Abstract
FDI has importantly contributed to Austria’s economic growth and increasing per capita incomes over the past decades. It has risen with the emergence of global value chains (GVCs), supported productivity growth and innovation, and contributed to Austria’s transition to a low carbon economy. This chapter offers an assessment of FDI trends and qualities and provides some insights on the contribution of investment to competitiveness and decarbonisation. Key findings in this chapter include:
FDI contributed to Austria’s growth performance. FDI peaked in the mid‑2000s, but Austria experienced comparatively low or repeatedly negative FDI inflows since 2009, translating into a stagnant stock of FDI (40% of GDP) which is significantly lower than FDI stocks relative to GDP in average OECD economies (80% of GDP).
FDI inflows have grown with the rise of GVCs in the 2000s. Importing intermediate goods and services from abroad and integrating them in domestic value creation for export has become more important over time, corresponding to 20% of gross exports in the 1990s and 30% today. By 2010, foreign MNEs contributed to almost 30% of total value added (or total GDP) and 40% of total exports in Austria. Yet, the GDP contribution of these affiliates has not increased since then while other European economies such as Ireland, the Slovak Republic and Slovenia continued to benefit from rising FDI inflows and thus the contribution of foreign firms continued to increase over recent years.
FDI is concentrated in professional services and manufacturing. Professional activities were responsible for almost 50% of total FDI stocks in 2021. These activities include primarily activities of head offices and management consulting. Manufacturing has also received considerable FDI (about 10% of the total stock), particularly in the production of higher technology goods such as pharmaceuticals, motor vehicles, and electronics. New establishments of foreign MNEs (greenfield investments) are an important component of total FDI and can directly bring new knowledge and technologies to the host economy. Austria’s greenfield FDI is concentrated in manufacturing (55%). In services, advanced information, communication, and transportation activities have received most greenfield FDI.
FDI contributes to higher productivity in Austria. Labour productivity, i.e. GDP per hour worked, is lower than productivity in comparators such as Ireland, Sweden, Denmark and Belgium, and productivity growth has considerably slowed in recent years compared to a stronger growth period in the 1990s and 2000s. Greenfield investment is concentrated in relatively more productive sectors in Austria. Moreover, productivity premia of foreign compared to domestic firms in Austria are higher than in most comparator economies, and foreign firms are more likely to invest in R&D, to use foreign technologies and to innovate than domestic firms in Austria.
Foreign investment is an important source of finance for Austria’s decarbonisation process. Austria has a remaining gap in renewable energy production relative to its comparators. While countries like Denmark, Germany, the Netherlands, and Switzerland produce on average about 27% of their electricity from renewable energy sources, the share of renewable energy in Austria is 16%. Investments in renewable energy have increased in Austria in recent years, accounting for 100% of energy FDI and 2% of total greenfield FDI inflows over 2017‑20. Nonetheless, Austria lags considerably behind peers such as Denmark, Germany and the Netherlands that receive almost two to four times the amount of FDI in renewables per USD of GDP.
Investment contributed to economic growth and rising incomes
Austria has experienced considerable economic growth in recent decades (Figure 1.1, Panel A). Over the past two decades, economic growth has followed a trend similar to the average growth of European Union (EU) and OECD countries. The global economic crisis of 2008, the euro crisis and the recent COVID‑19 pandemic led to a sharp slowdown of the Austrian economy. Together with its peers1, Austria emerged from the pandemic with a strong economic recovery in 2021 (OECD, 2021[1]), but now faces new economic frictions related to Russia’s war in Ukraine, a deepening energy crisis and rising inflation. Economic growth has contributed to the increase in per capita income in Austria (Figure 1.1, Panel B). Real incomes have risen by more than 30% since 1995 and have consistently been higher than the average for EU and OECD economies.
Austria’s integration in the global economy through trade and investment contributed to economic growth and rising incomes. Like in many European and OECD economies, Austrian trade contracted significantly at the height of the global financial crisis and again during the euro and COVID‑19 crises. Yet, the role of exports in Austria’s gross domestic product (GDP) has steadily increased over recent decades. In the mid‑1990s, exports accounted for just over 30% of GDP (Figure 1.1, Panel C). Today, Austrian exports correspond to close to 60% of GDP. Foreign firms play a significant role in driving exports: they are responsible for about 40% of exports (OECD, 2017[2]). Other EU countries have experienced a similar trend of export integration growth, albeit at slightly lower levels than their GDP. The pace of trade integration in the OECD has been slower and remains at a lower level on average, with exports accounting for less than 30% of GDP in 2021.
FDI inflows also contributed to Austria’s expanding economic integration and growth in recent years. While FDI inflows as a share of GDP in many European and OECD economies increased in the late 1990s, Austria only experienced an increase in FDI in the mid‑2000s, before the global economic crisis (Figure 1.1, Panel D). Annual FDI inflows as a percentage of GDP peaked in 2005 at over 25% of GDP, and in 2007 at 18%, compared to average inflows of less than 2% of GDP over the 1995‑2021 period. In the 2000s, Austria attracted significantly more FDI than an average EU or OECD economy.
Austria has the potential to attract more FDI. Since 2009, it has experienced relatively low or repeatedly negative FDI inflows, not observed to the same extent in many other EU and OECD countries. The low and negative FDI inflows have resulted in a stagnant FDI stock of around 40% of GDP in Austria, compared to the continuously growing investment integration in the rest of the EU and OECD since the 2008 crisis. In the pre‑crisis years, the average share of FDI in GDP reached 80% in the EU and 60% in the OECD. Furthermore, over the past 15 years, Austrian multinationals have increasingly sought investment opportunities abroad. Outward FDI stocks correspond to 50% of GDP, which is clearly higher than the level of inward FDI of about 40% in 2021.
Source: OECD elaboration based on the World Bank (2023[3]), World Bank - All Indicators, https://data.worldbank.org/indicator/?tab=all.
FDI increased with the rise of global value chains
The growth in investment and trade is the result of the emergence of global value chains (GVCs) in recent decades, i.e. the fragmentation of production processes of goods and services across multiple countries. The OECD’s Trade in Value Added indicators reveal that Austria’s integration into GVCs is somewhat in line with that of other EU and OECD countries. For example, the share of foreign value added (or imported value added) in gross exports in Austria has increased from around 20% to 30% since the mid‑1990s, a trend like that observed in countries such as Germany, Sweden, and Switzerland (Figure 1.2, Panel A). Thus, the import of intermediate goods and services from abroad and their integration into domestic export value creation has become more important over time.
The growth of GVCs was particularly important in the 2000s, when FDI inflows into Austria also increased considerably. In 2010, the value added generated by foreign affiliates of GVCs contributed almost 30% of the total value added (or total GDP) in Austria (Figure 1.2, Panel B). Since then, however, the GDP contribution of these foreign affiliates in Austria has not increased. This can be explained by the stagnation of FDI after the 2008 crisis. Although a downward trend in FDI inflows was observed in other OECD and non-OECD economies, mainly explained by a slowdown in the expansion of GVCs, other small open economies such as Ireland, the Slovak Republic and Slovenia continued to benefit from increased FDI inflows.
Source: OECD elaboration based on OECD (2023[4]), Trade in Value Added (TiVA) ed. 2021, https://stats.oecd.org/Index.aspx?DataSetCode=TIVA_2021_C1; Eurostat (2023[5]), Foreign-controlled enterprises in EU: value added, https://ec.europa.eu/eurostat/web/products-eurostat-news/-/ddn-20200414-1.
FDI is concentrated in professional services, but manufacturing attracts significant greenfield investment
Austria has attracted primarily FDI in services. Professional activities accounted for almost 50% of total FDI stocks in 2021 (Figure 1.3, Panel A). The bulk of these professional activities include activities of head offices and management consulting,2 which may concern any sector of the economy and partly reflect Austria’s role as a regional business hub for MNEs. Finance and trade each receive about 10% of total FDI stocks and real estate activities about 5%. Manufacturing also receives considerable FDI (about 10% of the total stock), particularly in the production of higher technology goods such as pharmaceuticals, motor vehicles, and electronics but also in basic metals. A strong FDI position in the motor vehicles industry plays an important role in GVC integration, with foreign firms accounting for 80% of total value added, and almost 80% of the industry value added meeting foreign final demand (OECD, 2017[2]).
New establishments of foreign MNEs in host economies or ‘greenfield investments’ are an important component of total FDI, along with cross-border mergers and acquisitions (M&As). Greenfield FDI brings new knowledge and technologies to the host economy directly through the establishment of affiliates, while in the case of M&As, the transfer of knowledge may take longer and is likely to occur in both directions between affiliates in the home and host economies (OECD, 2019[6]).
Most new establishments (or expansions) of foreign MNEs in Austria are concentrated in the manufacturing sector (55%) (Figure 1.3, Panel B). In the period 2003‑20, high-tech manufacturing was particularly attractive for greenfield FDI projects: motor vehicles received 17% of total greenfield FDI, electronics and pharmaceuticals received 14% and 7%, respectively. Services – advanced information, communication and transport activities – also received the most greenfield FDI over the same period. Greenfield FDI in high-tech manufacturing and advanced services can open up new opportunities for growth and productivity (see section on productivity).
In addition, greenfield FDI in higher productivity sectors also generates high-paid jobs for qualified professionals (see Figure 2.16 and Figure 2.17), increasing the total number and quality of jobs available in Austria. Machinery, construction and motor vehicles are the best performing sectors in terms of job creation per USD million of greenfield FDI. They create between three and five jobs per USD million invested, compared to a lower sector average of just over two jobs per USD million.
Note: Panel A follows the sector classification provided in the OECD FDI Statistics, while Panel B uses sector classifications from the Financial Times’ fDi Markets database. In Panel B: horizontal reference line = average jobs per USD million invested across sectors; greenfield FDI shares based on cumulated capital expenditure on open and announced greenfield FDI projects over 2003‑20.
Source: OECD elaboration based on OECD (2022[7]), OECD’s FDI Statistics, https://stats.oecd.org/; Financial Times’ fDi Markets (2023[8]), Database of crossborder greenfield investments, https://www.fdimarkets.com/.
In addition to its role for GVC integration, growth, incomes and job creation, FDI can play a crucial role in making progress toward the sustainable development goals (SDGs) more generally. From the perspective of host countries, it has the potential to increase productivity and innovation, improve environmental performance, create better quality jobs and develop human capital, also with a view to promoting gender equality in the labour market (OECD, 2019[6]; 2021[9]). However, positive contributions of FDI to sustainable development do not always materialise and it is therefore important to carefully examine how FDI relates to sustainable development. Using the tools developed by the OECD FDI Qualities Initiative (Box 1.1), the rest of this chapter will provide initial insights into how FDI contributes to productivity, innovation, and the low carbon transition. Fostering gender equality – and consequently job quality – is a particular concern for the Austrian Government. Chapter 2 will therefore provide an analysis on how FDI contributes to gender equality in Austria and what opportunities and challenges may exist to close remaining gender gaps.
Foreign direct investment (FDI) is a key source of funding to achieve the sustainable development goals (SDGs) and commitments made in the Paris Agreement on climate change. However, the benefits of FDI do not always materialise, and the impact of investment can vary across countries and sustainability areas. Moreover, policies and institutional arrangements play a critical role in maximising the positive impact of FDI. The FDI Qualities Initiative shows how governments can improve the contribution of FDI to achieving the SDGs. It provides governments with the tools and data to develop and implement evidence‑based policies that encourage investments leading to the key objective of sustainable development. It comprises three main pillars:
FDI Qualities Indicators help governments assess the impact of investment across four areas of the SDGs: decarbonisation; job quality and skills; gender equality; and productivity and innovation.
FDI Qualities Policy Toolkit helps governments improve the impact of investment on sustainable development through decarbonisation, quality of work and skills, gender equality, productivity and innovation. The Toolkit complements the OECD’s Policy Framework for Investment (PFI) by providing governments with detailed, tailored policy guidance and best practices for attracting and retaining sustainable investment. The Policy Toolkit also includes guidance on strengthening the role of development co‑operation in mobilising FDI and enhancing its positive impact in developing countries.
OECD Council Recommendation on FDI Qualities complements the Policy Toolkit by incorporating a concise set of key policy principles from the Policy Toolkit into a legal instrument. Adopted at the 2022 OECD MCM, it is the first government-backed standard on how to improve the positive contribution of international investment to the SDGs.
Source: OECD (2021[9]), FDI Qualities Policy Toolkit, https://www.oecd.org/daf/inv/investment-policy/FDI-Qualities-Policy-Toolkit-Consultation-Paper-2021.pdf; OECD (2019[6]), FDI Qualities Indicators: Measuring the sustainable development impacts of investment, https://www.oecd.org/fr/investissement/fdi-qualities-indicators.htm.
FDI contributes to higher productivity in Austria
Labour productivity in Austria is relatively high, but productivity growth slowed since the global financial crisis. Although labour productivity levels in Austria were about 30% above the OECD average in 2021, average productivity growth has been slightly lower than in other OECD members in recent years (Figure 1.4, Panel A and B). Low productivity growth in the services sector, together with limited business dynamics (i.e. entry and exit of firms) and reduced diffusion of innovation weigh on productivity growth (OECD, 2021[1])
Greenfield FDI is concentrated in those sectors that have on average higher productivity levels than in other sectors in Austria. The expansion of these higher productivity sectors through FDI has probably contributed to an increase in aggregate productivity. With almost half of greenfield FDI concentrated in technology-intensive sectors such as motor vehicles, electronics, pharmaceuticals manufacturing, and ICT services, the concentration patterns reflect both the ability of highly productive sectors to attract FDI and the contribution of FDI to higher productivity and growth (Figure 1.3, Panel B). Beyond sectoral differences, foreign firms contribute to higher productivity given their generally higher labour productivity levels compared to domestic firms. While in other European economies foreign firms are on average about 28% more productive than domestic competitors, the average productivity of foreign firms in Austria exceeds that of domestic competitors by 65% (Figure 1.4, Panel C).
Note: Panel A shows labour productivity as GDP per hours worked (USD, constant prices, 2015 PPPs in 2000 and 2021) while Panel B shows labour productivity growth over time. Panel C presents the foreign ownership premium of labour productivity across different countries computed as ((median labour productivity of foreign firms / median labour productivity of domestic firms) ‑1). A foreign ownership premium above 0 indicates that foreign firms are more productive than domestic peers.
Source: OECD elaboration based on OECD (2023[10]) “GDP per hour worked”(indicator), https://doi.org/10.1787/1439e590-en; World Bank Enterprise Surveys (2021[11]), World Bank Enterprise Survey: Austria (2021), https://www.enterprisesurveys.org/en/data/exploreeconomies/2021/austria.
Foreign firms increase Austria’s innovation capacity
Austria invests a competitive share of its GDP in research and development (R&D), and FDI has helped unlock its innovation potential. The share of GDP spent on R&D amounts to about 3.2%, exceeding the OECD average of 2.2% and almost aligning with other OECD champions like Sweden and Belgium that spend around 3.5% of GDP on R&D (World Bank, 2023[3]). Foreign firms are important investors in R&D in Austria. While about a quarter of domestic firms in Austria invest in R&D, the share of foreign firms investing in R&D exceeds that of domestic firms by 15 percentage points (Figure 1.5, Panel A). FDI can thus help to close the R&D gap in sectors where innovation in Austria is currently lagging behind, such as higher tech sectors (OECD, 2021[1])
In Austria the share of foreign firms investing in R&D is higher than that of domestic firms (Figure 1.5, Panel A). Moreover, foreign firms are more likely to use technology from abroad than domestic firms (Figure 1.5, Panel B). The relatively high use of foreign technology among foreign firms can further boost and diversify innovation in Austria thereby contributing to knowledge and technology spillovers to local entities. The great innovation potential of foreign firms is also reflected in the proportion of foreign firms that have launched a product, service, or process innovation (Panel C and D). With more than 70% of foreign firms introducing a new product or service and almost 40% of foreign firms carrying out a process innovation, foreign firms in Austria are not only above the OECD average, but also significantly exceed the share of domestic firms reporting such innovations.
Note: This figure shows the share of domestic and foreign firms that (A) invest in R&D, (B) use foreign technology, (C) introduced a new product, service or (D) process. Foreign firms are defined as firms with a minimum of 10% foreign ownership. Due to data availability, these charts do not include Australia, Canada, Switzerland, Germany, the United Kingdom, Iceland, Japan, Korea, Norway, New Zealand, and the US in the OECD average.
Source: OECD elaboration based on data from the World Bank (2021[11]), World Bank Enterprise Survey: Austria (2021), https://www.enterprisesurveys.org/en/data/exploreeconomies/2021/austria.
Foreign investment is an important source of finance for the low carbon transition
The transition of the Austrian economy into a carbon-free and environmentally sustainable economy is underway, but there is room for more investment into green technologies and renewable energy. Austria’s level of air pollution and carbon emission are similar to those of an average OECD country and comparator countries such as Denmark, Germany, the Netherlands, and Switzerland (Figure 1.6, Panel A). Yet, Austria needs to accelerate its low-carbon transition. There remains a gap in electricity generation from renewable energy sources relative to its comparators. While countries like Denmark, Germany, the Netherlands, and Switzerland produce on average about 27% of their electricity from renewable energy, the share of renewables in Austria is 16%.
FDI in renewables contributes to Austria’s decarbonisation process. Over the past ten years, investments in renewable energy have increased significantly in Austria. Over 2013‑16, the share of renewable energy in all greenfield FDI was around 0.2% and accounted for 49% of FDI in the energy sector (Figure 1.6, Panel B). Compared to this period, investments in renewable energies have increased by a factor of almost 17, so that the share of renewable energies in total greenfield FDI has grown to 2% between 2017 and 2020. With 100% of greenfield energy FDI in renewables in the same time period, Austria clearly exceeds the OECD average of about 60% (OECD, 2022[12]).
Note: Panel A shows Austria’s performance with respect to carbon emissions, renewable energy production and air pollution compared to the OECD average and reference countries. Categories of the y-axis differ according to the different indicators in panel A, as indicated in brackets. Comparator economies include Denmark, Germany, the Netherlands, and Switzerland. Panel B shows the share of renewables and fossil fuels in all opened and announced greenfield FDI projects from 2013 until 2020.
Source: OECD elaboration based on the World Bank (2023[3]), World Bank - All Indicators, https://data.worldbank.org/indicator/?tab=all; OECD (2023[13]), Green Growth Indicators, https://stats.oecd.org/Index.aspx?DataSetCode=GREEN_GROWTH; Financial Times’ fDI Markets (2023[8]), Database of crossborder greenfield investments, https://www.fdimarkets.com/.
Although Austria succeeded in attracting more greenfield FDI in renewables over the past few years, it is not fully exploiting the potential of its renewable industry. Even taking into account its economic size, Austria lags far behind in greenfield FDI in renewable energy. Denmark, Germany, and the Netherlands receive almost two to four times the amount of greenfield FDI in renewables per USD of GDP. This is not the case when comparing Austria to Switzerland: Switzerland receives only half as much investment per USD of GDP as Austria (Figure 1.7). Ninety-nine percent of Austria’s greenfield FDI in the renewable energy sector in the period from 2017 to 2020 came from Germany whereas the remaining 1% came from the Netherlands. While Germany is the largest investor in renewable energy in Austria, other economies like Denmark, Germany, and the Netherlands have received large investments from other economies, namely Denmark, Spain and France, but also from Norway and Switzerland.
Greenfield FDI in renewables, weighted total 2017‑20
Note: This chart shows the value of all opened and announced greenfield FDI projects in renewables in Austria and comparator economies. To control for differences regarding the economic size of host countries, the chart is based on total capital expenditure values weighted by average GDP.
Source: OECD elaboration based on Financial Times’ fDi Markets (2023[8]), Database of crossborder greenfield investments, https://www.fdimarkets.com/.
← 1. The comparator countries selected for Austria include those with similar traditional family models. These are Germany and Switzerland, as well as several Nordic countries, Sweden, Finland, Denmark, and Norway, which have some of the most equal labour markets in the world, and several high-income OECD economies, such as France, Belgium, the United Kingdom, Ireland, the Netherlands, and Italy. Depending on the availability of data and topics, other comparison countries are used.
← 2. Activities of head offices and management consultancy activities involve: overseeing and managing of other units of the company; undertaking the strategic or organisational planning and decision-making role of the enterprise. These units exercise operational control and manage the day-to-day operations of their related units. More precisely, they include: head offices; centralised administered offices; corporate offices; district regional offices; subsidiary management offices.