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Recent Impacts of Foreign Direct Investment on Growth and Restructuring in Central European Transition Countries

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  • Gabor Hunya

    ()
    (The Vienna Institute for International Economic Studies, wiiw)

Abstract

Recent developments have revealed that (i) advanced transition countries have received most of the FDI to date, especially greenfield projects; (ii) more countries than in the mid?1990s are resorting to FDI in order to accelerate privatization (Czech Republic, Poland and Slovakia); and (iii) countries in South-Eastern Europe are lagging behind in terms of attracting FDI. The impact of FDI on the balance of payments shows that this inflow of capital also creates related outflows. It can further be seen that (i) FDI may increase the trade deficit and the service sector deficit; (ii) FDI-related income outflows may become high; and (iii) problems related to deficit-financing can be avoided by maintaining a country's attractiveness to further investment and encouraging export-oriented investments and spillover effects. With respect to the impact of FDI on the government budget, we conclude that (i) FDI incentives are no substitute for a favourable investment environment; (ii) general investment incentives do not solve regional and labour market problems; (iii) government revenue increases in the wake of FDI on account of high profit rates in the foreign sector; (iv) government revenues can be lost on account of tax allowances; and (v) economic growth and income generation through FDI increase the tax base. Structural change in manufacturing is closely linked to the penetration of foreign capital. Most recent 1999 data show that (i) foreign penetration is high in Hungary and increasing in Poland and the Czech Republic, while remaining low in Slovenia; (ii) the foreign sector enjoys advantages in terms of labour productivity, export propensity, investment propensity and profit rates; (iii) Hungary lies ahead of other countries where the upgrading of export structure is concerned; (iv) the foreign sector specializes in high-tech and export-oriented industries, the domestic sector in low-tech and domestic-market-oriented industries, thus leading to the emergence of an unhealthy duality; and (v) research confirms the existence of technology transfer through FDI, but finds no productivity spillover to the domestic sector.

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Bibliographic Info

Paper provided by The Vienna Institute for International Economic Studies, wiiw in its series wiiw Research Reports with number 284.

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Length: 23 pages including 12 Tables
Date of creation: May 2002
Date of revision:
Publication status: Published as wiiw Research Report
Handle: RePEc:wii:rpaper:rr:284

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Related research

Keywords: foreign direct investment; competitiveness; CEECs; manufacturing; economic policy; EU enlargement;

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Citations

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Cited by:
  1. Christian Bellak, 2004. "The Impact of Enlargement on the Race for FDI," Department of Economics Working Papers wuwp086, Vienna University of Economics, Department of Economics.
  2. Harald Lehmann & Jutta Günther, 2004. "Technology spillovers from external investors in East Germany: no overall effects in favor of domestic firms," IWH Discussion Papers 198, Halle Institute for Economic Research.
  3. Michael A. Landesmann, 2003. "Structural features of economic integration in an enlarged Europe: patterns of catching-up and industrial specialisation," European Economy - Economic Papers 181, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  4. Peter Havlik, 2005. "Structural Change, Productivity and Employment in the New EU Member States," wiiw Research Reports 313, The Vienna Institute for International Economic Studies, wiiw.
  5. Sandrine Levasseur, 2006. "Convergence and FDI in an enlarged EU: what can we learn from the experience of cohesion countries for the CEECS?," Documents de Travail de l'OFCE 2006-12, Observatoire Francais des Conjonctures Economiques (OFCE).
  6. Jutta Günther, 2004. "Technological capability of foreign and West German investors in East Germany," IWH Discussion Papers 189, Halle Institute for Economic Research.
  7. Sandrine Levasseur, 2006. "Convergence and FDI in an enlarged EU : what can we learn from the experience of cohesion countries for the CEECS ?," Sciences Po publications N° 2006-12, Sciences Po.
  8. Gábor HUNYA & Sándor RICHTER, 2011. "Mutual trade and investment of the Visegrad countries before and after their EU accession," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 2, pages 77-91, December.

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