Foreign Direct Investment, Political Resentment and the Privatization Process in Eastern Europe

Hans-Werner Sinn, Alfons J. Weichenrieder and Alfons Weichenrieder
Authors registered in the RePEc Author Service: Alfons J. Weichenrieder

No 129, CESifo Working Paper Series from CESifo

Abstract: 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, a participation model could be used in which foreign investors compete for joint venture contracts. Host governments contribute existing assets and receive non-voting stocks. Foreign investors, contributing capital and knowhow, 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.

Date: 1997
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Citations: View citations in EconPapers (36)

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Related works:
Journal Article: Foreign direct investment, political resentment and the privatization process in eastern Europe (1997)
Working Paper: Foreign direct investment, political resentment and the privatization process in eastern Europe (1997)
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