As part of the project “Opportunity in Crisis – Empowering Ukrainian Refugees to Rebuild the Ukrainian Economy,” this report assesses Ukraine’s prospects for growth and development through deeper trade integration and foreign direct investment (FDI), with a particular focus on ties to Germany and Austria. The analysis highlights a set of opportunities—and binding constraints—that should inform medium- and long-run reconstruction and industrial strategy.

Ukraine’s development and growth conundrum (Section 2). Compared to its peers in Central and Eastern Europe, Ukraine has underperformed in export growth and in attracting FDI. After the collapse of the USSR, Ukraine’s inherited value-chain relationships unraveled, producing not only a decline in export volumes but, importantly, a downgrade in export so- phistication. Over time, Ukraine’s export basket shifted away from complex industrial goods toward lower-complexity agricultural products; geographically, exports reoriented away from Russia and toward the European Union. While EU demand is large and expanding, Ukraine’s export volumes and complexity to the EU have not yet reached a scale that would meaningfully accelerate structural transformation.

Learning from past experience (Section 3). Several Eastern European economies achieved rapid development through export-led growth anchored in global value chains (GVCs) linked to Western Europe. Many of these countries climbed a familiar development ladder—from textiles into machinery, electronics, and vehicles. As a result, their GVC-related exports soared, rising by factors between 8 and 14 over the last 25 years. Simultaneously, FDI played an outsized role: in some countries, employment in foreign-owned establishments exceeded 8% of the over- all labor force. This successful pivot away from Soviet-era value chains toward value chains centered on Western Europe, and especially on Germany and Austria, suggests that Ukraine may be able to follow a comparable pathway. We therefore document how central and eastern European Union members (EU-CEE countries) integrated into Western European GVCs and identify which opportunities plausibly translate to Ukraine. This includes original methods to infer salient upstream–downstream product linkages from trade data and to track FDI-driven employment over time.

Opportunities (Sections 3 and 4). In EU-CEE countries, the surge in GVC-related ex- ports and inward FDI concentrated in a small set of value chains and industries. Based on the trajectories of these countries, prominent opportunities for Ukraine are in GVCs related to vehicles and electronics. In terms of foreign investments, the most promising sectors simi- larly relate to motor vehicles and electronics, but also to professional, scientific, and technical services, including IT.

Challenges and feasibility (Section 4). Ukraine faces additional frictions relative to many EU-CEE peers: it is geographically farther from Western Europe and has only recently entered the formal EU accession trajectory. We therefore evaluate potential GVC opportunities by combining information on expected scale, the extent to which certain exports can be driven by FDI, sensitivity to distance, the boost historically associated with EU candidacy and mem- bership, and the fit with Ukraine’s existing industrial know-how. This yields sets of products that are both accessible and strategically valuable for pivoting toward Western European value chains, with particularly strong candidates in vehicle- and electronics-related industries.

Regional fit (Section 5). Ukraine’s economy and capability base differ across regions. East- ern regions have strong capabilities in electronics, vehicles, and (especially in the south-east) 1 heavy manufacturing, though proximity to the frontline currently constrains investment attrac- tiveness. Several of these activities are also compatible with western regions. Kyiv and central regions are particularly suited for a range of business services, including IT and software-related activities.

Software development (Section 6). Ukraine has a substantial software sector with strengths in high-value activities such as advanced app development and DevOps. These capabilities can complement future manufacturing-oriented value-chain linkages, as software constitutes an in- creasingly valuable input in many global value chains. Ukraine also has a sizeable diaspora of programmers abroad, with relatively greater activity in AI and machine learning tasks as well as cloud computing. Connecting to this diaspora could provide an additional pathway for capability upgrading and economic development.

Further recommendations. Beyond deepening trade and investment links to Germany and Austria, Ukraine may be able to integrate more with neighboring EU-CEE economies. While outward FDI from these countries is still limited today, over time Ukraine’s own economic scale may shift parts of Europe’s manufacturing geography further eastward. This could gen- erate spillover opportunities—especially along Ukraine’s western border—that merit targeted analysis. Finally, we use the framework developed here to score priorities put forward by the Ukrainian government.