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Foreign direct investment, political resentment and the privatization process in eastern Europe

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  • Hans-Werner Sinn
  • Alfons J. Weichenrieder

Abstract

type="main" xml:lang="en"> Foreign 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.

Suggested Citation

  • Hans-Werner Sinn & Alfons J. Weichenrieder, 1997. "Foreign direct investment, political resentment and the privatization process in eastern Europe," Economic Policy, CEPR;CES;MSH, vol. 12(24), pages 177-210, April.
  • Handle: RePEc:bla:ecpoli:v:12:y:1997:i:24:p:177-210
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    References listed on IDEAS

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    1. Weichenrieder, Alfons J, 1996. " Transfer Pricing, Double Taxation, and the Cost of Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(3), pages 445-452.
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    10. Hans-Werner Sinn, 1995. "Staggering along: wages policy and investment support in East Germany," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 3(4), pages 403-426, December.
    11. Wolfstetter, Elmar, 1996. " Auctions: An Introduction," Journal of Economic Surveys, Wiley Blackwell, vol. 10(4), pages 367-420, December.
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