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

  • Hans-Werner Sinn
  • Alfons J. Weichenrieder
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    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. Copyright Centre for Economic Policy Research, Centre for Economic Studies, Maison des Sciences de l'Homme 1997.

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    Article provided by CEPR & CES & MSH in its journal Economic Policy.

    Volume (Year): 12 (1997)
    Issue (Month): 24 (04)
    Pages: 177-210

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    Handle: RePEc:bla:ecpoli:v:12:y:1997:i:24:p:177-210
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    1. 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.
    2. Wolfstetter, Elmar, 1996. " Auctions: An Introduction," Journal of Economic Surveys, Wiley Blackwell, vol. 10(4), pages 367-420, December.
    3. Demougin, Dominique & Sinn, Hans-Werner, 1994. "Privatization, risk-taking, and the communist firm," Journal of Public Economics, Elsevier, vol. 55(2), pages 203-231, October.
    4. Eaton, Jonathan & Gersovitz, Mark, 1984. "A Theory of Expropriation and Deviations from Perfect Capital Mobility," Economic Journal, Royal Economic Society, vol. 94(373), pages 16-40, March.
    5. Maxim Boycko & Andrei Shlelfer & Robert Vishny, 1993. "Voucher Privatization," University of Chicago - George G. Stigler Center for Study of Economy and State 85, Chicago - Center for Study of Economy and State.
    6. Hansen, Robert G, 1985. "Auctions with Contingent Payments," American Economic Review, American Economic Association, vol. 75(4), pages 862-65, September.
    7. Weichenrieder, Alfons J, 1996. " Transfer Pricing, Double Taxation, and the Cost of Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(3), pages 445-52.
    8. R. Preston McAfee & John McMillan, 1986. "Bidding for Contracts: A Principal-Agent Analysis," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 326-338, Autumn.
    9. John G. Riley, 1988. "Ex Post Information in Auctions," Review of Economic Studies, Oxford University Press, vol. 55(3), pages 409-429.
    10. Samuelson, William, 1987. "Auctions with Contingent Payments: Comment," American Economic Review, American Economic Association, vol. 77(4), pages 740-45, September.
    11. Bond, E.W. & Samuelson, L., 1988. "Strategic Behavior And The Rules For International Taxation Of Capital," Papers 3-88-10, Pennsylvania State - Department of Economics.
    12. Cremer, Jacques, 1987. "Auctions with Contingent Payments: Comment," American Economic Review, American Economic Association, vol. 77(4), pages 746, September.
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