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

Author

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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.

Suggested Citation

  • Gabor Hunya, 2002. "Recent Impacts of Foreign Direct Investment on Growth and Restructuring in Central European Transition Countries," wiiw Research Reports 284, The Vienna Institute for International Economic Studies, wiiw.
  • Handle: RePEc:wii:rpaper:rr:284
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    Cited by:

    1. repec:taf:ceasxx:v:58:y:2006:i:6:p:881-902 is not listed on IDEAS
    2. Günther, Jutta, 2004. "Technological capability of foreign and West German investors in East Germany," IWH Discussion Papers 189, Halle Institute for Economic Research (IWH).
    3. Lehmann, Harald & Günther, Jutta, 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 (IWH).
    4. Michael A. Landesmann, 2003. "Structural features of economic integration in an enlarged Europe: patterns of catching-up and industrial specialisation," European Economy - Economic Papers 2008 - 2015 181, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    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. Andreea Vass, 2005. "Romania and the trade and the development approaches to CEE convergence with the EU, under the competitive pressures of integration," IWE Working Papers 151, Institute for World Economics - Centre for Economic and Regional Studies- Hungarian Academy of Sciences.
    7. Joze P. Damijan & Marko Glaznar & Janez Prasnikar & Saso Polanec, 2004. "Export vs. FDI Behavior of Heterogenous Firms in Heterogenous Markets: Evidence from Sovenia," LICOS Discussion Papers 14704, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    8. Vasily Astrov & Vladimir Gligorov & Peter Havlik & Leon Podkaminer, 2003. "Monthly Report 03/2003," wiiw Monthly Reports 2003-03, The Vienna Institute for International Economic Studies, wiiw.
    9. Murat Arsel & Andrew M. Fischer, 2015. "Forum 2015," Development and Change, International Institute of Social Studies, vol. 46(4), pages 700-732, July.
    10. Miklos Szanyi, 2006. "Relationship of structural change and competitiveness in Hungarian manufacturing 1998-2003," IWE Working Papers 170, Institute for World Economics - Centre for Economic and Regional Studies- Hungarian Academy of Sciences.
    11. Christian Bellak, 2004. "The Impact of Enlargement on the Race for FDI," Department of Economics Working Papers wuwp086, Vienna University of Economics and Business, Department of Economics.
    12. 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.
    13. 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.

    More about this item

    Keywords

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

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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