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The Determinants of Foreign Direct Investment in Transition Economies

  • Alan A. Bevan
  • Saul Estrin
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    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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    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
    Date of revision:
    Handle: RePEc:wdi:papers:2000-342
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    1. Katherine Terrell & Vit Sorm, 1998. "Labor Market Policies and Unemployment in the Czech Republic," William Davidson Institute Working Papers Series 216, William Davidson Institute at the University of Michigan.
    2. Tito Boeri, 1999. "Transition with Labour Supply," William Davidson Institute Working Papers Series 274, William Davidson Institute at the University of Michigan.
    3. 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 213, William Davidson Institute at the University of Michigan.
    4. 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.
    5. Milan Vodopivec, 1998. "Does the Slovenian Public Work Program Increase Participants' Chances to Find a Job?," William Davidson Institute Working Papers Series 214, William Davidson Institute at the University of Michigan.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. John P Bonin & Istvan Abel, 1998. "Will Restructuring Hungarian Companies Innovate?," Comparative Economic Studies, Palgrave Macmillan, vol. 40(2), pages 53-74, July.
    12. Li, David D, 1998. "Changing Incentives of the Chinese Bureaucracy," American Economic Review, American Economic Association, vol. 88(2), pages 393-97, May.
    13. 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.
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