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On the Determinants of Foreign Direct Investment in Transition Economies

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  • ANDRZEJ BANIAK
  • JACEK CUKROWSKI
  • AND JAN HERCZY�SKI

Abstract

Foreign direct investment (FDI) brings host countries capital, productive facilities, and technology transfer, as well as new jobs and management expertise. Thus, it is important to understand why in many transition countries FDI inflow is lower than expected. The goal of this study is to explore some important factors determining flow of FDI into transition countries. In particular, we analyze the legal environment for FDI in some transition economies. Then we model the impact of stability of the economic and legal environment on the pattern of FDI. Our analysis shows that (1) higher variability of basic macroeconomic fundamentals reduces the flow of FDI, (2) high volatility of fiscal and business regulations makes the inflow of FDI smaller, and (3) macroeconomic and legal instability leads to adverse selection of the investors. Based on theoretical findings we formulate a clear message to policy makers stating that in order to attract significant inflows of long-term and nonspeculative foreign capital, first of all, a stable economic and institutional environment is needed.

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal Problems of Economic Transition.

Volume (Year): 48 (2003)
Issue (Month): 2 (January)
Pages: 6-28

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Handle: RePEc:mes:prectr:v:48:y:2003:i:2:p:6-28

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=106047

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Cited by:
  1. Groh, Alexander P. & Wich, Matthias, 2009. "A composite measure to determine a host country's attractiveness for foreign direct investment," IESE Research Papers D/833, IESE Business School.
  2. Kim, Sokchea, 2006. "Bilateral Investment Treaties, Political Risk and Foreign Direct Investment," MPRA Paper 21324, University Library of Munich, Germany.
  3. Brancu, Laura & Bibu, Nicolae Aurelian, 2008. "The internationalization Strategies of French Companies in Romania," MPRA Paper 9500, University Library of Munich, Germany.
  4. John Anyanwu, 2011. "Working Paper 136 - Determinants of Foreign Direct Investment Inflows to Africa, 1980-2007," Working Paper Series 327, African Development Bank.
  5. Tatiana Danescu & Paula Nistor, 2012. "Foreign Direct Investment In Emerging And Developed Economies," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(14), pages 20.
  6. Clemens, Marius & Fuhrmann, Wilfried, 2008. "Rohstoffbasierte Staatsfonds: Theorie und Empirie
    [Resource-based sovereign wealth funds]
    ," MPRA Paper 16933, University Library of Munich, Germany.
  7. John C. Anyanwu, 2012. "Why Does Foreign Direct Investment Go Where It Goes?: New Evidence From African Countries," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 425-462, November.
  8. Suat TEKER & Hayri TUZLA & Aynur PALA, 2014. "Foreign Direct Investments: Asian and European Transition Economies," International Journal of Economics and Financial Issues, Econjournals, vol. 4(1), pages 71-82.

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