Among the transitional economies of Eastern Europe, nowhere has the gap between economic potential and economic performance been wider than in the Ukraine, and nowhere has the gap been more glaring than in the foreign investment statistics. By 2000, total foreign direct investment (FDI) in the Ukraine was still less than $4 billion, compared with $40 billion that had flowed into Poland and $20 billion into Hungary during the same period.
Independence was first greeted by a rush of inward investment. In 1991, the number of joint ventures operating in Ukraine rose from 76 in October 1990 to 189 in October 1991. Following the enactment in March 1992 of a more favorable foreign investment law, joint ventures jumped to 1,400 early in 1993. Most of these ventures were in industry, with a few engaged in foreign trade. The government's 1993 economic plan included tax incentives and other benefits for investors in specific areas including agro-industrial enterprises, energy, and production of consumer goods. However, by 1996 and 1997, rampant official graft and corruption were crippling foreign investment. Several significant multinational corporations withdrew from Ukraine after government decrees were issued that steered business to state-owned firms in which government officials were stakeholders. This action occurred despite the Foreign Investment Law of 1996, which purported to put foreign investors on an equal footing with Ukrainian nationals, and President Kuchma's pledge to battle corruption. The government had declared a need for $40 billion in foreign investment, but only $2.8 billion was invested between 1992 and 1998.
In 1997 the law "On Special (Free) Economic Zones" was adopted, establishing three types of special investment zones: free economic zones (FEZs), territories with a special investment regime (SEZs), and territories of priority development (TPDs). As of 2002, there were nine TPDs and eleven FEZs and SEZs. In 2002, the special zones attracted investment totaling $909 million, both domestic and foreign, but pressure has been brought by the IMF to either eliminate the special zones or curb their tax and regulatory exemptions.
Annual foreign direct investment (FDI) inflow peaked at $747 billion in 1998, up from $623 billion in 1997, before falling to $471 billion in 1999 in the wake of the Russian financial crisis. FDI inflow recovered to $593 billion in 2000, but then fell back to $531 million in the global economic slowdown of 2001. Contrary to the worldwide trend of reduced FDI flow after the 11 September 2001 terrorist attacks, the Ukraine had its best year since independence, with inflow increasing over 15% to an estimated $738.7 million in 2002. As of October 2002, total FDI since 1992 amounted to almost $5 billion.
As of 1 October 2002, according the Ukraine State Statistics Committee, FDI had come from 112 countries. The United States remained the largest source of FDI, with $843 million or 17% of the total. US-based sources were also probably involved in some of the FDI flows from Cyprus (11% of the total) and the British Virgin Islands (6.4%). The United Kingdom accounted for 9.5% of total FDI in the Ukraine since 1992; the Netherlands, 7.8%; the Russian Federation, 6.5%; Germany, 5%; Switzerland, 4.2%; Austria, 3.9%; and Korea, 3.5%. The remaining 24.2% came from 102 other countries. Per capita FDI stock increased from $78 at the end of 2000 to $102 at the beginning of October 2002.