Foreign direct investment, political resentment and the privatization process in eastern Europe
AbstractForeign direct investment has been disappointingly low in eastern Europe, which has been reluctant to make existing assets available to foreign investors. To mitigate any such resentment, we propose a participation model in which foreign investors compete for joint venture contracts. Host governments contribute existing assets and receive non-voting stocks. Foreign investors, contributing capital and know-how, receive voting shares and control of operational decisions. This has several advantages over the cash sale of assets to foreigners. First, stock flow problems are eased, raising both asset prices and FDI flows. Second, by retaining some stake in the firm, transition countries share in the risk premium. Third, governments can hand over their shares to households, creating private collateral to foster new small businesses. Fourth, and crucially, compared to cash sales the auction of participation contracts offers higher privatization revenues in cases where governments cannot assess investors’ knowledge and abilities. This reduces the risk of selling the family silver too cheaply, and should alleviate the host countries’ resentment.
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Bibliographic InfoPaper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19562.
Date of creation: 1997
Date of revision:
Publication status: Published in Economic Policy 24 12(1997): pp. 177-210
Other versions of this item:
- Hans-Werner Sinn & Alfons J. Weichenrieder, 1997. "Foreign direct investment, political resentment and the privatization process in eastern Europe," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 12(24), pages 177-210, 04.
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