“Nowadays everything depends on relationships and acquaintance”: Location decisions of foreign investors in Transcarpathia in the light of informal ethnic relations

Abstract

Although after the onset of the armed conflict in Donbas in 2014, FDI inflows in Ukraine (as well as in Transcarpathia) drastically declined, Transcarpathia is still an attractive region to foreign investors. In 2016, almost 630 companies with foreign interests were active in the oblast (“county”), with capital coming from more than 50 countries. This number shows that the favorable geographical location of Transcarpathia, the highly-skilled and cheap labor force and the low energy prices might counterbalance the significant economic risks foreign companies face in Ukraine. However, foreign investments cannot be treated uniformly. Each investor can prefer different economic sectors and the motivation of the location choices also differ. We can identify numerous factors influencing the location of business investments from wages and tax incentives to the informal personal contacts and networks. The present study attempts to highlight the role of the latter, that is, the system of informal relationships and its economic impacts and, in particular, their ethnic aspect.

The main goal of the research is to find out how social capital (most notably, including contacts and networks) is organized on an ethnic basis and how it influences foreign entrepreneurs investing in Transcarpathia in their decision about the location of their business. It also discusses the role of informal contacts and networks in company launching and business management decisions. The study focuses on Hungarian, Russian, Romanian and Slovak investors.

The main data source was the company register obtained from the Transcarpathian Statistical Office, which, besides the company name, also lists the company locations’ exact address and the foreign investors’ country of origin. Clarifying the database made it possible to map the geographical locations of the business premises used by foreign investors. Besides the quantitative analysis, the research also included twenty in-depth interviews with foreign entrepreneurs investing in Transcarpathia, managing directors of companies with foreign interests, heads of customs offices, members of Transcarpathian economic organizations and local representatives.

Based on the results of the investigation I argue that informal contacts and networks played a key role in the establishment and running of foreign companies operating in Transcarpathia. However, behind the motivation of location decision, considerable diversity exists among different ethnic groups of investors. Hungarian investors’ decisions are usually based on the linguistic-ethnic basis when choosing their location, thus prefer areas inhabited by the Hungarian minority. The main reasons behind this phenomenon are the exploitation of existing Hungarian–Hungarian relations and the linguistic-cultural similarities. In contrast, non-Hungarian investors tend to take into consideration economic and commercial aspects, thus launched a business in economically more prosperous settlements. This can be explained by two factors: on the one hand, these communities are less numerous than Hungarians in Transcarpathia, and because their relationship with their mother country is less active, it is more difficult to establish and cultivate contacts. On the other hand – in the case of Russian and Slovakian investors – there was no need for intermediary people of the same nationality, due to the proximity both in terms of language and business attitude.