The Determinants of Foreign Direct Investment in Transition Economies

Alan A. Bevan and Saul Estrin

No 342, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: 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.

Keywords: foreign direct investment; EU accession; transition economies (search for similar items in EconPapers)
JEL-codes: C33 F2 P27 (search for similar items in EconPapers)
Pages: pages
Date: 2000-10-01
New Economics Papers: this item is included in nep-eec, nep-ifn and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (119)

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