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ATTRACTIVENESS OF PUBLIC POLICIES FOR FDI IN CENTRAL AND EASTERN EUROPEAN COUNTRIES

Oana Popovici and Adrian Cantemir Calin

Annals of Faculty of Economics, 2012, vol. 1, issue 1, 61-67

Abstract: The paper builds on the burning issue of the attractiveness of the location for foreign direct investments (FDI), assuming its positive and substantial economic impact on the development of the host country. The location decision for FDI in Central and Eastern European (CEE) countries is investigated based on the attractiveness framework designed by policy makers: infrastructure endowment, institutionsâ€(tm) quality, labour market conditions and level of taxation. The analysis assesses the FDI inflows in a country in three years: 2004, 2007 and 2010. Thus the FDI evolution relative to public policies attractiveness is seized starting with the European Union (EU) integration and after the crisis started. The paper follows the literature on the determinants of the FDI related to the L (location) factor described in the eclectic paradigm of Dunning (the OLI model), but focuses on the role of public policies in attracting FDI and captures two of the recent major turning points faced by the CEE countries, scarcely tackled in the literature: the EU integration and the recent economic crisis. We compute a public policy index, constructed as a composite measure, based on the four pillars mentioned above, in order to test the public policies attractiveness in the CEE countries. Moreover, we develop an attractiveness matrix starting from the public policy index, and we rank the most attractive countries for FDI in the three years. We analyze the matrix based on the FDI inflows per capita. We found a positive relation between the increase in the public policies attractiveness and the inward FDI. The increase of the FDI per capita since the EU accession year is, at least partially, due to the increasing attractiveness of the public policies. The crises worsened the CEE countriesâ€(tm) attractiveness. Still, the winners in the race for FDI remained those countries that improved the infrastructure, the institutionsâ€(tm) quality and the labor market conditions. Therefore, short and medium term policy directions can be emphasized. Infrastructure and institutionsâ€(tm) quality can be improved for further attracting FDI during rough budgetary constraints. The literature is enriched with the empirical analysis of the FDI determinants in the recent years. Our paper takes into account the major events faced by the CEE countries in the last years and checks for potential methods of attracting FDI even during difficult economic conditions.

Keywords: foreign direct investments; public policy; Central and Eastern Europe countries; attractiveness matrix (search for similar items in EconPapers)
JEL-codes: C43 F21 H11 O52 (search for similar items in EconPapers)
Date: 2012
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