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The Determinants of Foreign Direct Investment in Transition Economies

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  • Alan A. Bevan
  • Saul Estrin
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    Abstract

    Using a panel dataset containing information on FDI flows from market to transition economies, we establish the determinants of FDI inflows to Central and Eastern Europe: country risk, unit labour costs, host market size and gravity factors. In turn, we find country risk to be influenced by private sector development, industrial development, the government balance, reserves and corruption. By introducing structural shift dummy variables for key announcements of progress in EU accession we show that announcements have impacted directly upon FDI receipts but have not influenced country credit ratings. The Agenda 2000 announcement by the European Commission induced a bifurcation between the 'first wave' transition countries and the remainder of our sample. The underlying dynamics of the process illustrate that increases in FDI improve country credit ratings with a lag, hence increasing future FDI receipts. Consequently we suggest that the accession progress has the potential to induce virtuous cycles for the frontrunners but may have serious consequences for the accession laggards.

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    File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp342.pdf
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    Bibliographic Info

    Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 342.

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    Length: pages
    Date of creation: 01 Oct 2000
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    Handle: RePEc:wdi:papers:2000-342

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    Keywords: foreign direct investment; EU accession; transition economies;

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    1. Milan Vodopivec, 1998. "Does the Slovenian Public Work Program Increase Participants' Chances to Find a Job?," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 214, William Davidson Institute at the University of Michigan.
    2. Terrell, Katherine & Sorm, Vit, 1999. "Labor Market Policies and Unemployment in the Czech Republic," Journal of Comparative Economics, Elsevier, vol. 27(1), pages 33-60, March.
    3. John Ham & Jan Svejnar & Katherine Terrell, 1998. "Unemployment and the Social Safety Net During Transitions to a Market Economy: Evidence from the Czech and Slovak Republic," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 169, William Davidson Institute at the University of Michigan.
    4. Daniel Munich & Jan Svejnar & Daniel Munich, 1999. "Returns to Human Capital under the Communist Wage Grid and During the Transition to a Market Economy," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 272, William Davidson Institute at the University of Michigan.
    5. Boeri, Tito, 2001. "Transition with Labour Supply," IZA Discussion Papers 257, Institute for the Study of Labor (IZA).
    6. Susan J. Linz & Gary Krueger, 1998. "Enterprise Restructuring in Russia's Transition Economy: Formal and Informal Mechanisms," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 152, William Davidson Institute at the University of Michigan.
    7. Li, David D. & Liang, Minsong, 1998. "Causes of the Soft Budget Constraint: Evidence on Three Explanations," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 104-116, March.
    8. Martina Lubyova & Jan C. van Ours, 1998. "Effects of Active Labor Market Programs on the Transition Rate from Unemployment into Regular Jobs in the Slovak Republic," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 213, William Davidson Institute at the University of Michigan.
    9. Li, David D, 1998. "Changing Incentives of the Chinese Bureaucracy," American Economic Review, American Economic Association, American Economic Association, vol. 88(2), pages 393-97, May.
    10. David D. Li, 1998. "Changing Incentives of the Chinese Bureaucracy," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 130, William Davidson Institute at the University of Michigan.
    11. Wendy Carlin & Micheal Landesmann, 1998. "From Theory into Practice? Restructuring and Dynamism in Transition Economies," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 155, William Davidson Institute at the University of Michigan.
    12. Susan J. Linz, 1998. "Job Rights in Russian Firms: Endangered or Extinct Institution?," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 128, William Davidson Institute at the University of Michigan.
    13. John P Bonin & Istvan Abel, 1998. "Will Restructuring Hungarian Companies Innovate?," Comparative Economic Studies, Palgrave Macmillan, vol. 40(2), pages 53-74, July.
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