Explaining Foreign Direct Investment in Central and Eastern Europe: an Extended Gravity Approach
AbstractIn this paper, we question whether there is a catch-up effect or announcement effect in Foreign Direct Investment (FDI) from the European Union (EU) to the ten EU accession countries. We study FDI outflows from the Netherlands, a small open economy with few historical ties to Eastern Europe, and compare FDI in the transition countries in Central and Eastern Europe to FDI in other regions - most notably to transition countries in Central Asia. In our analysis we try to impose as little structure as possible on the data and allow for heterogeneity within the different regions. In an effrt to improve on past studies in the same area, we use a very broad sample of countries, we present country-specific results and test how robust regional dummies are, we check for omitted variable bias and we try to correct for possiblenon-linearity in the gravity relationships. We find that many of the differences in results of previous studies can be attributed to these specification problems. There is no evidence that an overall catch-up effect or announcement effect exists. Rather, economic fundamentals explain differences in inward investment in the region. FDI and trade are mostly complementary and there is no evidence that there is crowding out between regions.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 008.
Date of creation: Sep 2004
Date of revision:
gravity model; foreign direct investment; Eastern Europe;
Other versions of this item:
- Bos,J.W.B. & Laar,M.,van de, 2004. "Explaining Foreign Direct Investment in Central and Eastern Europe: an Extended Gravitiy Approach," Research Memorandum 041, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O18 - Economic Development, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
- P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
- R58 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Regional Development Planning and Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-12-12 (All new papers)
- NEP-IFN-2004-12-12 (International Finance)
- NEP-MAC-2004-12-12 (Macroeconomics)
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