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Explaining Foreign Direct Investment in Central and Eastern Europe: an Extended Gravity Approach

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  • Jaap Bos
  • Mindel van de Laar

Abstract

In 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 Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 008.

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Date of creation: Sep 2004
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Handle: RePEc:dnb:dnbwpp:008

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Keywords: gravity model; foreign direct investment; Eastern Europe;

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References

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Citations

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Cited by:
  1. Sova, Robert & Albu, Lucian Liviu & Stanciu, Ion & Sova, Anamaria, 2009. "Patterns of Foreign Direct Investment in the New EU Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 6(2), pages 42-51, June.
  2. Ilya Bolotov & Kateřina Gajdušková, 2013. "Srovnání otevřenosti trhů Brazílie, Ruska, Indie a Číny a zemí střední a východní Evropy," Současná Evropa, University of Economics, Prague, vol. 2013(3), pages 9-34.
  3. Mulaj, Isa, 2009. "Tax reform in emerging transition: Is Kosovo’s Government and NGOs mathematical economics rational?," MPRA Paper 12642, University Library of Munich, Germany.
  4. Christian Aubin & Jean-Pierre Berdot & Daniel Goyeau & Jacques Léonard, 2006. "Investissements directs américains et européens dans les PECOs. Quel rôle des effets de change ?," Revue économique, Presses de Sciences-Po, vol. 57(4), pages 771-792.
  5. Elvira Sapienza, 2009. "The interaction between Export and FDI: Central-Eastern Europe and EU15," Quaderni DSEMS 13-2009, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.

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