Foreign direct investment slump. A pause or a deeper shift?

This article is a part of Poland Unpacked. Weekly intelligence for decision-makers

For years, commentators have argued that Poland’s development model – built on inflows of foreign direct investment – is running out of steam. The central claim is that the country’s main competitive advantage, low labor costs, is steadily eroding. Until recently, the data did not bear this out. But in 2024 the value of foreign direct investment fell to its lowest level since 2013. Is this merely a cyclical trough, or a symptom of a lasting shift in the trend?

Foreign investment slows

Foreign direct investment (FDI) has been one of the key forces behind Poland’s rapid growth since 1990. It provided an infusion of two critical resources the economy lacked: technology and know-how.

On average, foreign direct investment accounted for about 3% of Poland’s GDP between 2000 and 2024. These flows are highly volatile, reflecting the investment cycle, which in turn follows the broader business cycle in Europe and globally. In the years before the pandemic, FDI as a share of GDP was broadly stable, albeit slightly below the long-term average. A sharp upswing came later.

In 2021, FDI reached 4.4% of GDP, rising further to 5.1% in 2022. In 2023, it fell back to 3.7%, still above the long-term mean. In 2024 – the latest year with full data – FDI dropped to just 1.5% of GDP, one of the lowest readings in the past 25 years. Lower levels were recorded only in 2012–13.

Should this decline be a cause for concern? As with most economic questions, the answer is: it depends. Above all, the strong inflow of foreign capital in recent years reflected a confluence of specific factors. One was nearshoring – the relocation of production facilities, mainly from Asia, closer to end markets – in response to supply-chain disruptions during the pandemic. Another was friendshoring, as companies placed production in countries that are political allies. This was reinforced by generally favorable economic conditions in Europe in 2021–22.

These drivers of investment inflows are now fading, and the economy may simply be awaiting the next investment cycle. This interpretation is supported by declining investment values in several other large Central and Eastern European economies (Romania, Bulgaria, and Hungary).

A sharp rise in labor costs for foreign investors

That said, it is worth examining a second factor behind the decline in foreign direct investment: the steep increase in labor costs in Poland when measured in euros or dollars. Between 2020 and 2024, the nominal average hourly cost of employing a worker – covering wages as well as employer-paid taxes and social-security contributions – rose by 59% in Poland. This was the second-highest increase in the European Union, after Bulgaria (61%). Moreover, the rise was not evenly spread over the period, but concentrated mainly in 2022–24.

Such a rapid increase in labor costs is a relatively new phenomenon in Poland. Previously, growth had been modest, below the median for other Central and Eastern European countries, and the gap relative to the EU average was smaller.

The recent surge largely reflects the strong appreciation of the zloty. In Poland, this occurred alongside much higher inflation and faster nominal wage growth than in Western Europe. As a result, wage growth measured in euros was stronger than would be suggested by pay dynamics expressed in zlotys. To assess the macroeconomic implications, this would need to be set against changes in productivity.

For a foreign investor, however, the calculation is more straightforward. Regardless of where a new factory is located, worker productivity is likely to be similar – assuming comparable skill levels across countries. What matters, then, is where employees can be hired at lower cost, and whether those costs are likely to rise significantly in the years ahead. In terms of absolute wage levels, Poland still compares favorably. But the prospect of further cost increases may already be enough to give some investors pause.

This effect is partly offset by other shifts in the Polish economy. Continued growth is expanding the domestic market, which can attract foreign investors looking to serve rising demand. At the same time, the quality of human capital and broader measures of innovation are improving – factors that also help to draw investment.

What next?

My instinct is that the investment cycle is the more important factor behind the recent decline. Rising labor costs are not irrelevant, but they play a secondary role, as Poland is attracting fewer low-tech investments. Wage levels are a decisive consideration in proverbial “assembly plants”. In more advanced projects, qualitative factors matter far more.

That said, foreign investment into Poland may be constrained by the structural problems facing European industry. A prime example is automotive manufacturing, where global markets are being flooded with Chinese vehicles. Another is the home-equipment sector, including consumer electronics and household appliances, where Chinese producers are also expanding rapidly.

To reduce reliance on foreign investment, domestic investment needs to increase. Corporate capital expenditure in Poland remains well below both the EU average and the regional norm.

A sharp drop in foreign investment in 2024. FDI inflows fell to 1.5% of GDP - the lowest level since 2013 - largely as one-off drivers faded, including nearshoring, friendshoring, and the strong economic upswing in Europe.
A surge in labor costs is eroding Poland’s appeal. Between 2020 and 2024, labor costs measured in euros rose by 59%, one of the steepest increases in the EU. While wage levels remain competitive, rapid increases may deter investors, particularly in lower-value-added projects.
A largely cyclical trend, but with potential structural headwinds. The decline in FDI appears mostly cyclical. Still, mounting pressure on European industries – such as automotive manufacturing and household appliances – and intensifying competition from China could weigh on future inflows. Boosting domestic investment is therefore becoming increasingly important.