Europe’s East Flank May Have NATO to Thank for Investment Jump

(Bloomberg) -- Battalions of foreign troops sent in to quell fears of an invasion may not sound like a boon to investment. But some officials in the Baltic region said the arrival of NATO reinforcements after war broke out in Ukraine would comfort business, as well as deter aggressors.

It’s been 10 months since soldiers from the U.S., Canada and the U.K. were deployed, and data released this month suggest they may have had an economic effect. Foreign direct investment – which plunged as Russia’s annexation of Crimea made many in Estonia, Latvia and Lithuania uneasy – has staged a rousing recovery.

NATO’s beefed-up role in the region is “definitely a factor,” according to Lithuanian Finance Minister Vilius Sapoka. “We now expect stronger investment flows.”

The idea that a Western army presence can boost host nations’ economies isn’t new. A 2011 study looked at the relationship between U.S. troop deployments and economic performance between 1950 and 2000, concluding that a “security-umbrella” effect perked up investment in countries such as Germany.

“The security guarantee of U.S. troops is a powerful signal to foreign investors, perhaps even a deciding factor for multinational firms deciding where to install new capital equipment and where to bring their technology-diffusing organizational capital,” the authors said.

But it would be unusual for military heft alone to sway business. And the turnaround in investment hasn’t just coincided with NATO’s activities.

Before the euro area’s recent upturn, companies were reluctant to commit funds in their home markets, let alone farther-flung foreign ones, according to Tonu Mertsina, chief economist of Swedbank AB in Tallinn. “All these things are being reversed now.” Indeed, countries across eastern Europe have boomed as the euro region recovers.

Whatever the driving force, the effect on FDI is plain to see. In Lithuania alone, companies including travel website Booking.com Ltd., Swedish telecommunications provider Telia Co AB and German auto-parts maker Continental AG have all recently announced plans to open new facilities.

©2017 Bloomberg L.P.

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