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The Determinants of Foreign Direct Investment in Transition Economies

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Author Info
Alan A. Bevan
Saul Estrin
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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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number 342.

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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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Find related papers by JEL classification:
F2 - International Economics - - International Factor Movements and International Business
P27 - Economic Systems - - Socialist Systems and Transition Economies - - - Performance and Prospects
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data

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  1. Münich, Daniel & Svejnar, Jan & Terrell, Katherine, 1999. "Returns to Human Capital Under the Communist Wage Grid and During the Transition to a Market Economy," CEPR Discussion Papers 2332, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Carlin, Wendy & Landesmann, Michael, 1997. "From Theory into Practice? Restructuring and Dynamism in Transition Economies," Oxford Review of Economic Policy, Oxford University Press, vol. 13(2), pages 77-105, Summer.
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  3. Susan J. Linz, 1998. "Job Rights in Russian Firms: Endangered or Extinct Institution?," William Davidson Institute Working Papers Series 128, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  4. Li, David D, 1998. "Changing Incentives of the Chinese Bureaucracy," American Economic Review, American Economic Association, vol. 88(2), pages 393-97, May. [Downloadable!] (restricted)
  5. Ham, John C & Svejnar, Jan & Terrell, Katherine, 1998. "Unemployment and the Social Safety Net during Transitions to a Market Economy: Evidence from the Czech and Slovak Republics," American Economic Review, American Economic Association, vol. 88(5), pages 1117-42, December. [Downloadable!] (restricted)
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  6. Lubyova, Martina & van Ours, Jan C., 1999. "Effects of Active Labor Market Programs on the Transition Rate from Unemployment into Regular Jobs in the Slovak Republic," Journal of Comparative Economics, Elsevier, vol. 27(1), pages 90-112, March. [Downloadable!] (restricted)
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  7. Vodopivec, Milan, 1999. "Does the Slovenian Public Work Program Increase Participants' Chances to Find a Job?," Journal of Comparative Economics, Elsevier, vol. 27(1), pages 113-130, March. [Downloadable!] (restricted)
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  8. 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. [Downloadable!] (restricted)
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  9. David D. Li, 1998. "Changing Incentives of the Chinese Bureaucracy," William Davidson Institute Working Papers Series 130, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  10. 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. [Downloadable!] (restricted)
  11. Tito Boeri, 1999. "Transition with Labour Supply," William Davidson Institute Working Papers Series 274, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  12. Susan J. Linz & Gary Krueger, 1998. "Enterprise Restructuring in Russia's Transition Economy: Formal and Informal Mechanisms," William Davidson Institute Working Papers Series 152, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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