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Direct Foreign Investment in Eastern Europe the Role of Labor Costs

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  • Klaus E Meyer
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    Abstract

    During the Cold War, Western and Eastern Europe experienced a different economic development that resulted in different industrial structures and a huge gap of real wages. When the Iron Curtain fell, there was widespread expectation that low wages in the East would motivate Western businesses to relocate their production lines, moving jobs from the West to the East.This paper analyzes actual Direct Foreign Investment in the early years of economic transition with respect to the role of labor costs. Are jobs relocated from Western to Eastern Europe? Theoretical basis is the developmental theory of Direct Foreign Investment which is based on Asian experiences. It relates investment flows to stages of development and shows how factor cost differences lead to relocation of productive activity.The evidence in Eastern Europe, however, rejects the transferability of the model. Neither are labor intensive firms more actively investing, nor does investment concentrate in those industrial sectors where the host economy has comparative advantages. The empirical test does, however, find significant support for a proximity pattern of investment and a negative relationship of investment and diversification.

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Comparative Economic Studies.

    Volume (Year): 37 (1995)
    Issue (Month): 4 (December)
    Pages: 69-88

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    Handle: RePEc:pal:compes:v:37:y:1995:i:4:p:69-88

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    Cited by:
    1. Cuyvers, Ludo & Soeng, Reth & Plasmans, Joseph & Van Den Bulcke, Daniel, 2011. "Determinants of foreign direct investment in Cambodia," Journal of Asian Economics, Elsevier, vol. 22(3), pages 222-234, June.
    2. Katona, Klára, 2006. "A magyarországi tőkeimportot befolyásoló tényezők újraértelmezése
      [Reinterpretation of the factors influencing capital imports into Hungary]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 986-1001.
    3. Smarzynska, Beata K., 2000. "Technological leadership and foreign investors'choice of entry mode," Policy Research Working Paper Series 2314, The World Bank.
    4. Jaap Bos & Mindel van de Laar, 2004. "Explaining Foreign Direct Investment in Central and Eastern Europe: an Extended Gravity Approach," DNB Working Papers 008, Netherlands Central Bank, Research Department.
    5. Smarzynska, Beata K., 2001. "Pollution havens and foreign direct investment : dirty secret or popular myth?," Policy Research Working Paper Series 2673, The World Bank.
    6. Kairi Andresson & Janno Reiljan & Ele Reiljan, 2001. "Attractiveness of Central and Eastern European Countries for Foreign Direct Investment in the Context of European Integration: The Case of Estonia," ERSA conference papers ersa01p35, European Regional Science Association.
    7. Smarzynska, Beata K., 2002. "The composition of foreign direct investment and protection of intellectual property rights : evidence from transition economies," Policy Research Working Paper Series 2786, The World Bank.
    8. Cuyvers L. & Plasmans J. & Soeng R. & Van den Bulcke D., 2008. "Determinants of Foreign Direct Investment in Cambodia: Country-Specific Factor Differentials," Working Papers 2008003, University of Antwerp, Faculty of Applied Economics.
    9. Smarzynska Javorcik, Beata, 1999. "Composition of Foreign Direct Investment and Protection of Intellectual Property Rights in Transition Economies," CEPR Discussion Papers 2228, C.E.P.R. Discussion Papers.
    10. Peter Walkenhorst;, 2001. "Determinants of foreign direct investment in the food industry: The case of Poland," Agribusiness, John Wiley & Sons, Ltd., vol. 17(3), pages 383-395.

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