Miroslav Mateev

8/16/2019 Miroslav Mateev

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8th Global Conference on Business & Economics ISBN : 978-0-974!!4-"-9

Determinants of Foreign Direct Investment in Central and Southeastern Europe:

New Empirical Tests

Miroslav MateevProfessor of Finance

merican !niversit" in #ulgariaPhone: $%&' (% ))) **+, -.mail: mmateev/au0g10g

#ctober !8-!9th$ 008%lorence$ Ital

!

mailto:[email protected]:[email protected]:[email protected]


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Determinants of Foreign Direct Investment in Central and Southeastern Europe:

New Empirical Tests

#ST2CT

'his (a(er e)amines the ma*or +eterminants of %orei,n irect In.estment /%I flo1s in

Central an+ Southeastern Euro(ean countries2 'he (er.ious research re(orts t1o ,rou(s of

e)(lanator factors: ,ra.it factors /+istance$ mar3et sie an+ factor en+o1ments

/infrastructure$ human ca(ital2 #ther factors that are foun+ to ha.e si,nificant effect are

,eo,ra(hical (ro)imit$ barriers to tra+e$ ta) (olic an+ ta) incenti.es$ labor costs an+

re,ional inte,ration2 5ccor+in, to eme3as et al. /00" ,ra.it factors e)(lain a lar,e (art

of %I inflo1s in transition economies$ inclu+in, Southeastern Euro(ean countries$ but

(olic en.ironment also matter for %I2 6anic3i an+ unna.a /004 fin+ that international

tra+e is (erha(s the most im(ortant +eterminant of forei,n +irect in.estment in this re,ion2

sin, an econometric mo+el base+ on cross-section (anel +ata analsis 1e fin+ that both

,ra.it factors /+istance$ (o(ulation$ an+ G an+ non-,ra.it$ or transition-s(ecific$ factors

/ris3$ labour costs$ an+ corru(tion can e)(lain$ to a lar,e e)tent$ the sie of %I flo1s in

transition economies2 'he e.i+ence about the role of (ri.atiation in e)(lainin, the scale of

in1ar+ in.estment is ambi,uous2 oreo.er$ at the secon+ sta,e of the analsis$ 1e ha.e

i+entifie+ that %I flo1s into +ifferent ,rou(s of transition economies are +etermine+ b the

same macroeconomic factors an+ not b the timin, of their accession to the Euro(ean nion

/E2

;e1or+s: transition econom$ forei,n +irect in.estment$ multinational enter(rise$ +ecision

ma3in,

6E< classification: C==$ %!$ %=



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INTRODUCTION

erha(s the most (rominent face of ,lobaliation is the ra(i+ inte,ration of (ro+uction

an+ financial mar3ets o.er the last +eca+e: that is$ tra+e an+ in.estment are the (rime

+ri.in, forces behin+ ,lobaliation2 %orei,n irect In.estment /%I has been one of the

core features of ,lobaliation an+ the 1orl+ econom o.er the (ast t1o +eca+es2 ore firms

in more in+ustries from more countries are e)(an+in, abroa+ throu,h +irect in.estment

than e.er before$ an+ .irtuall all economies no1 com(ete to attract multinational

enter(rises /NEs2 'he inflo1 of forei,n in.estment is 1i+el thou,ht to be an im(ortant

channel for the +iffusion of ne1 i+eas$ technolo,ies an+ business s3ills across national

bor+ers2 It can im(ro.e the (ros(ects for ,ro1th b increasin, the total le.el of ca(ital

in.estment in the econom an+ b intro+ucin, more (ro+ucti.e technolo, an+ techni>ues2

%orei,n +irect in.estment /%I has ,aine+ si,nificant im(ortance o.er the (ast +eca+e as a

tool for acceleratin, ,ro1th an+ +e.elo(ment of economies in transition2 It is 1i+el belie.e+

that the a+.anta,es that %I brin,s to the stan+ar+ of li.in, an+ (ros(ects for economic

,ro1th of the host nation lar,el out1ei,h its +isa+.anta,es2 %I?s im(ortance lies in its

fun+amental +ifference from other forms of ca(ital in.estment: the nature an+ +uration of the

commitment it in.ol.es /Barrell an+ @ollan+$ 0002 Its (ur(ose is to establish cross-bor+er

commercial relations an+ at the same time e)ert a noticeable mana,erial influence o.er a

forei,n com(an2 S(ecificall$ %I is a tool$ 1hich enables these countries to brea3 1ith their

ob*ecti.e an+ or,aniational ,a(s throu,h the intro+uction of ne1 techni>ues$ both

mana,erial an+ technolo,ical2 'he lon,-term nature of %I fosters a hi,h sensiti.it to ris3

(erce(tion2 olitical an+ macroeconomic stabilit$ as 1ell as trans(arent le,al re,ulations

concernin, forei,n o1nershi( an+ (rofit re(atriation$ are all im(ortant +eterminants of

forei,n in.estment +ecision ma3in, /eme3as et al.$ 00" & Aesmini$ 0002!


=


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'he transition from socialism to ca(italism in Central an+ Eastern Euro(e /CEE is both a

(olitical an+ an economic (rocess /Be.an an+ Estrin$ 000 & eme3as et al.$ 00"2 5n

im(ortant as(ect of the former is the (ossibilit of reinte,ration into Euro(e smbolie+ for

man countries b (ros(ecti.e membershi( of the Euro(ean nion2 Inte,ration into the 1orl+

econom$ notabl throu,h tra+e an+ ca(ital flo1s$ is a crucial an+ relate+ element of the

latter2 %orei,n +irect in.estment /%I is a (articularl im(ortant element of economic

inte,ration$ because it o(ens (ossibilities for accelerate+ ,ro1th$ technical inno.ation an+

enter(rise restructurin,$ as 1ell as ca(ital account relief /Garibal+i et al., 00 & @ollan+

an+ ain$ !9982 'hus Euro(ean nion /E membershi( can be .ie1e+ as a +eterminin,

element of the o(eratin, business en.ironment$ an+ this ma +irectl influence the rate of

%I flo1s in transition economies /Be.an an+ Estrin$ 000 & Bos an+ e


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Soon after the start of the transition (erio+$ it became clear that there 1as a lar,e +e.iation

in the amounts of +irect in.estment recei.e+ b the .arious transition countries a fe1

countries recei.e a lar,e (ro(ortion of the total inflo1s 1hereas most other countries in the

re,ion recei.e+ .er lo1 amounts of %I inflo1s2 5lthou,h man stu+ies /see e2,2$ Be.an

an+ Estrin$ 004 & Brenton$ i auro$ an+ uestion remains 1hether %I flo1s to these transition countries can be e)(laine+ in the

same manner2= S(ecificall$ an announcement effect or a catch-u( effect ma e)(lain the

relati.el hi,h %I flo1s to those transition countries that ha.e been selecte+ first for

accession in the Euro(ean nion /E2 'he more inte,rate+ the accession countries are 1ith

the E$ the smoother the accession to the E is e)(ecte+ to be2 'hus$ the sta,e of an+

relati.e (osition in the accession (rocess influences net in.estment flo1s to the +ifferent

countries enterin, the E /Bos an+ e


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bilateral %I flo1s bet1een ei,ht transition economies an+ t1el.e E source countries2 'he

(anel co.ers the si) ear (erio+ of 00! to 002 Inclusion of the more ,eo,ra(hicall +istant

economies allo1s us to e)amine an effects arisin, from (ro)imit an+ conti,uit to the

Euro(ean nion2

'he rest of the (a(er is or,anie+ as follo1s2 'he ne)t section outlines our conce(tual

frame1or3 an+ summarise the theor on the +eterminants of forei,n +irect in.estment2

Section = elaborates on the %I +eterminants in transition economies2 'he econometric mo+el

an+ +ata (anel analsis are (resente+ in section 42 Section " (resents econometric results

from bilateral FDI cross-section regressions. Some conclu+in, remar3s are offere+

in the final section2

CONCEPTUAL FRAE!OR"

%orei,n +irect in.estment /%I$ its +eterminants$ an+ its effects ha.e been e)tensi.el

stu+ie+2 It has lon, been reco,nie+ that the benefits of %I for the host countr can be

si,nificant$ inclu+in, 3no1le+,e an+ technolo, transfer to +omestic firms an+ the labor

force$ mana,ement im(ro.ement$ (ro+ucti.it s(illo.ers$ enhance+ com(etition$ an+

im(ro.e+ access for e)(orts abroa+$ notabl in the source countr /eme3as et al 2$ 00"2

oreo.er$ since %I flo1s are non-+ebt-creatin,$ the are a (referre+ metho+ of financin,

e)ternal current account +eficits$ es(eciall in +e.elo(in, countries$ 1here these +eficits can

be lar,e an+ sustaine+2 5t the same time$ the ,ro1in, liberalisation of %I an+ other financial

mar3ets$ 1hile offerin, a++itional o((ortunities to 1hich much attention is ,i.en in the

literature$ also (ose si,nificant ris3s an+ haar+s to +e.elo(in, countries2 "

In small economies$ for e)am(le$ lar,e forei,n com(anies can-an+ often +o-abuse their

+ominant mar3et (ositions an+$ es(eciall in +e.elo(in, countries$ attem(t to influence the

+omestic (olitical (rocess2 %I can also ,i.e rise to (otentiall .olatile balance of (ament



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/Bo flo1s$ +ue$ for e)am(le$ to an increase in the im(orts of in(uts b subsi+iaries an+

(aments of +i.i+en+s an+ roalties abroa+2 #ther ac3no1le+,e+ +ra1bac3s are non-

com(etiti.e (ricin, because NEs are able to e)ercise consi+erable mar3et (o1er$ (ossible

%I 1ith+ra1al that ma lea+ to financial instabilit an+ +iscoura,e other in.estors$ an+

(otential #ecrease of $no%-&o% #e'elo(ment b) local *rms +,a'ilo' //01.

#n balance$ ho1e.er$ the consensus .ie1 in the literature is that the benefits of %I ten+ to

si,nificantl out1ei,h its costs for host countries2

'he literature on the +eterminants of forei,n in.estment has i+entifie+ both (olic an+

non-(olic factors as +ri.ers of %I /%e++er3e an+ Aomm$ 002 Non-(olic factors

inclu+e mar3et sie$ +istance$ factor (ro(ortions an+ (olitical an+ economic stabilit2 olic

factors inclu+e o(enness$ (ro+uct-mar3et re,ulation$ labour mar3et arran,ements$ cor(orate

ta) rates an+ infrastructure2 Non-(olic relate+ factors rele.ant to %I fall into a number

of cate,ories2 %irst$ mar3et sie of the host countr$ usuall measure+ b G$ is

consi+ere+ an im(ortant +eterminant of horiontal %I$ because the returns from such

in.estment +e(en+ on economies of scale at the firm le.el2 Secon+$ the effect of

+istance an+ trans(ort costs on %I is .ie1e+ as ambi,uous2 hile the im(l

transaction costs for the in.estors$ %I ma also carr a+.anta,es o.er tr a+e 1hen

+ealin, 1ith +istant countries2

'hir+$ +ifferences in factor en+o1ments bet1een countries are often hel+ to

encoura,e .ertical %I because the ma3e (ossible the e)(loitation of com(arati.e

a+.anta,e2 @oriontal %I b contrast is +iscoura,e+ b +ifferences in factor

en+o1ments because the ma3e (ro+uction of the same ,oo+ in +ifferent countries

+ifficult2 %inall$ (olitical an+ economic instabilit are (re+icte+ to +eter %I since

the creates uncertaint 1hich raises the ris3 (remia on the returns to %I /Barrell$

Gottschal3$ an+ @all$ 0042 In ,eneral$ it mi,ht be e)(ecte+ that that %I is more li3el to


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flo1 from +e.elo(e+ countries into +e.elo(in, economies that are (oliticall stable an+ ha.e

access to lar,e$ re,ional mar3ets27

olic relate+ factors +eterminin, %I also fall into a number of cate,ories2 %irst$

o(enness of the +omestic econom is influence+ b +irect %I restrictions as 1ell as

tra+e barriers2 %I restrictions clearl raise barriers to %I an+ are li3el to influence the

choice NEs ma3e 1ith re,ar+s to the in.estment location2 '1o alternati.e .ie1s of the

moti.es for %I ,i.e contra+ictor (re+ictions re,ar+in, the effects of tra+e

liberaliation on %I /%e++er3e an+ Aomm$ 002 'he .ie1 of %I an+ tra+e bein,

substitutes sees Ftariff-*um(in,F as a moti.e for %I$ an+ hence tra+e liberaliation

shoul+ ne,ati.el affect %I2 In a liberalie+ tra+e en.ironment$ e)(ortin, ,oo+s from

the home countr is relati.el more attracti.e than %I as a 1a to ser.e the re,ional

mar3et2 'he alternati.e .ie1 sees the moti.e for %I as NEs ha.in, +ifferent affiliates

s(ecialiin, accor+in, to the locational a+.anta,es of the host countr2 'his a((lies$ in

(articular$ to .ertical %I 1here a liberal tra+e en.ironment is a (rere>uisite for the

international +i.ision of labour at the firm le.el28

Secon+$ countries 1here +omestic (ro+uct-mar3et re,ulations im(ose unnecessar

costs on business an+ create barriers to entr +iscoura,e %I2 'hir+$ labour mar3et

con+itions that im(ose e)tra costs on in.estors 1ill ten+ to curb the in1ar+ %I (osition of

a countr2 Strict em(loment (rotection le,islation an+ hi,h labour ta) 1e+,es 1ill

+iscoura,e in1ar+ %I in the host countr$ 1hen the costs of *ob (rotection an+ labour

ta)ation are not full shifte+ onto lo1er after-ta) 1a,es2 Strict em(loment (rotection

le,islation not onl lo1ers the returns e)(ecte+ from %I$ but also their .ariabilit$ since

it ma3es it more +ifficult for NEs to res(on+ to su((l an+ +eman+ shoc3s2 'his

increases the ris3 that in.estors face in the host countr /Ni3oletti et al.$ 00=2


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%ourth$ the im(act of cor(orate ta) rates is strai,htfor1ar+2 Since hi,her ta) rates

a((lie+ to cor(orate (rofits lo1ers %I returns$ it 1ill +iscoura,e in1ar+ %I2

5lthou,h the e.i+ence on ta) incenti.es is not conclusi.e$ there are some in+ications that

trans(arent an+ sim(le ta) sstems ten+ to be most attracti.e for %I29 %or e)am(le$

e.ereu)$ ualit of infrastructure /trans(ortation$ communications an+ ener,

su((l ma (ositi.el affect in1ar+ %I$ because ,oo+ infrastructure lo1ers transaction

costs thereb affectin, com(arati.e an+ absolute a+.anta,e2!!

Aecent research literature affirms that (olic en.ironment +oes matter for %I /eme3as et

al.$ 00" an+ 007 &


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benefits of internalisation /I2 'he 1or3 on %I into transition economies has focuse+

(rimaril on locational a+.anta,es of the re,ion /see e2,2$ Aesmini$ 0002

@o1e.er$ there is a ,ro1in, a1areness that %I o(erations are +ri.en b +eterminants not

necessaril e)(resse+ b the (ure$ static$ economic a+.anta,es of the #


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economies$ an+ research on the +eterminants of %I has been e)(an+in, ra(i+l2 'his section

(resents a summer of the main fin+in,s of this research2


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line 1ith the main fin+in,s of the real o(tion theor of in.estments$ 1hose im(lications are

em(iricall teste+ in this stu+2!4

Aesmini /000 analses the Euro(ean nion /E?s %I flo1s into the CEECs at a sector

le.el$ 1hich 1as the less stu+ie+ as(ect of this issue in the !990s2 'he ob*ecti.e is to

in.esti,ate 1hether an+ to 1hat e)tent %I in +ifferent sectors reacts to the same

characteristics of the host countries2 It seems that the E has a com(arati.e a+.anta,e in

scale intensi.e an+ tra+itional sectors 1hile non-Euro(ean in.estors$ i2e2 nite+ States an+

6a(an$ are more s(ecialie+ in hi,h-tech (ro+uctions2 Scale-intensi.e an+ tra+itional sectors

can be consi+ere+ as CEECs stren,ths$ too2 ultinationals ten+ to in.est in those acti.ities

1here host countries sho1 the ,reatest a+.anta,es$ in terms of factor en+o1ments$

,eo,ra(hic location an+ in+ustrial tra+itions2

Be.an an+ Estrin /000 anale the %I flo1s bet1een !8 source countries /E-!4$

;orea$ 6a(an$ S1iterlan+ an+ the S an+ !! transition economies usin, +ata co.erin, ears

!994 to !9982 'he fin+ that %I inflo1s are si,nificantl influence+ b ris3$ unit labour

costs$ host countr?s mar3et sie an+ ,ra.it factors2 ost im(ortantl ho1e.er$ the ha.e

been able to i+entif that the announcements of (ro,ress in E accession ha.e in+ee+ ha+ a

+ifferential im(act u(on a((licant countries2 Contrar to e)(ectations from the e)istin,

literature$ this effect has not occurre+ throu,h countr cre+it ratin,s$ an+ the authors

s(eculate that this ma be because institutional cre+it ratin,s are more li3el to res(on+ to

actions rather than merel announcements2

eichman /00!$ usin, +ata from !990 to !999$ e)ten+s the abo.e mentione+ research

incor(oratin, ne1 .ariables such as annual e)chan,e rate2 eichman?s em(irical mo+el

(resents international tra+e as the most im(ortant +eterminant of in.estment .ia the ar,ument

that tra+e an+ in.estments com(lement one another2 In.estment climate$ measure+ throu,h


!


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the ris3 ratin,$ host trans(ortation infrastructure an+ labour costs are foun+ to be another

,rou( of im(ortant +eterminants of in.estment2

5lmononte an+ Gua,liano /00= construct a (anel of more than =$"00 Euro(ean

multinationals that ha.e in.este+ in Central an+ Eastern Euro(e /CEE an+ the e+iterranean

/E o.er the !990 - !997 (erio+ in 48 in+ustr sectors2 'hree ,eneral %I +eterminants

are inclu+e+ in their mo+el estimation: +eman+-relate+ .ariables$ 1ith the aim of controllin,

for mar3et-see3in, strate,ies of NEs com(arati.e a+.anta,es$ in or+er to ta3e into account

efficienc-see3in, strate,ies an+ institutional .ariables$ since the stu+ is +ealin, 1ith

countries 1hich$ to a +ifferent e)tent$ are e)(eriencin, a transition (rocess to1ar+s a mar3et

econom2 5fter controllin, for in+ustr an+ time-s(ecific effects$ it is foun+ that Central an+

Eastern Euro(e +is(las a ,reater (otential in the attraction of %I flo1s 1hen com(are+ to

the e+iterranean re,ion2!"

Carstensen an+ 'oubal /004 use +namic (anel +ata metho+s to e)amine the +eterminants

of forei,n +irect in.estment /%I into Central an+ Eastern Euro(ean countries /CEECs2

'he ar,ue that the +iscre(anc bet1een +ifferent transition counties cannot be e)(laine+

full b tra+itional %I +eterminants because transition s(ecific factors (la an im(ortant

role in the in.estment +ecision of a multinational com(an in so far as the reflect the actual

state of the transition (rocess$ the o.erall (olic stance$ or e.en future (ros(ects2 Base+ on

the e)istin, theoretical literature$ the authors i+entif a set of tra+itional +eterminants of %I$

such as mar3et sie$ tra+e costs$ (lant an+ firm s(ecific costs$ an+ relati.e factor en+o1ments$

as 1ell as transition-s(ecific +eterminants$ namel$ the share of (ri.ate businesses$ the

metho+ of (ri.atiation$ an+ the ris3 associate+ 1ith each host countr$ that ma influence the

+ecision to in.est in CEECs2

Bos an+ Han +e uestion 1hether there is a catch-u( effect or announcement

effect in %orei,n +irect in.estment /%I from the Euro(ean nion /E to the E accession


!=


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countries2! 'he stu+ %I outflo1s from the Netherlan+s$ a small o(en econom 1ith fe1

historical ties to Eastern Euro(e$ an+ com(are %I in the transition countries in Central an+

Eastern Euro(e to %I in other re,ions - most notabl to emer,in, economies in Central

5sia2 'he authors tr to fin+ out 1h some transition economies recei.e relati.el more %I

than other countries2 'he results sho1 that there is no e.i+ence that an o.erall catch-u( effect

or announcement effect e)ists2 Aather$ economic fun+amentals e)(lain +ifferences in in1ar+

in.estment in the re,ion2

;inoshita an+ Cam(os /004 in an attem(t to (ro.i+e a more com(lete i+entification of

the factors that affect the success an+ failure of transition countries in attractin, %I$ use a set

of " countries co.erin, both the more an+ less a+.ance+ countries in transition bet1een

!990 an+ !9982 'he results sho1 that the main +eterminants of %I inflo1s to these countries

are institutions$ natural resources$ labor costs$ an+ (ersistence2 'he also in.esti,ate 1hether

the set of +eterminants .aries across the re,ion2 'he fin+ that for the Eastern Euro(ean an+

Baltic countries$ institutions$ (ersistence an+ the e)tent of economic reforms are the main

+eterminants$ 1hile for the former So.iet nion economies abun+ant natural resources an+

economic reforms are the main +ri.ers of %I inflo1s2

6aninis3i an+ unna.a /004 e)amines bilateral forei,n +irect in.estments /%I bet1een

the E-!" member states an+ 8 Central an+ East Euro(ean can+i+ate /CEEC economies in

transition /Bul,aria$ the Cech Ae(ublic$ Estonia$ @un,ar$ olan+$ Aomania$ Slo.a3

Ae(ublic$ an+ Slo.enia usin, +ata for !9972 'he stu+ re.eals that the 3e +eterminants of

%I inflo1s in CEECs are sie of the host econom$ host countr ris3$ labour costs in host

countr$ an+ o(enness to tra+e2 Countries that are recei.in, fe1er forei,n in.estments coul+

ma3e themsel.es more attracti.e to (otential +onor nations b focusin, on some of the 3e

+eterminants i+entifie+ b this stu+2


!4


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'he e.i+ence su,,ests that Southeastern Euro(e is lar,el absent from the e)istin,

literature$ in (art o1in, to the lac3 of com(arable +ata2 #ut of o.er 40 ori,inal em(irical

stu+ies re.ie1e+ b eme3as et al. /00"$ onl four co.er some of the Southeastern

Euro(ean countries$ an+ the co.era,e is (atch an+ inconsistent2 eme3as et al. /00" stu+

inclu+es all se.en Southeastern Euro(ean countries!7 an+ com(ares their e)(eriences 1ith

that of their nei,hbors in Central Euro(e$ the Baltics$ an+ the member countries of the

Common1ealth of In+e(en+ent States /CIS2 'he stu+ confirms the (re+ominance of ,ra.it

factors /host mar3et sie an+ ,eo,ra(hical an+ cultural (ro)imit bet1een source an+ host

countr in e)(lainin, %I flo1s to Central an+ Southeastern Euro(e$ in line 1ith the

fin+in,s of the e)istin, em(irical literature on other re,ions2

Stoian an+ %ili((aios /007 use a sam(le of Gree3 firms liste+ on the 5thens Stoc3

E)chan,e /5SE to in.esti,ate the o1nershi( an+ locational +eterminants of the

internalisation an+ internationalisation (rocess2 'he a((l the eclectic (ara+i,m to the mo+e

of entr an+ e)(lore 1hether the factors su,,este+ b the eclectic (ara+i,m can e)(lain the

+ecision to enter a mar3et usin, +ifferent o1nershi( structures2 'he three basic mo+es use+ in

this (a(er are *oint .entures$ mer,ers an+ ac>uisitions an+ Greenfiel+ in.estments2 'he fin+

that locational .ariables such as mar3et sie$ o(enness$ ethnic tensions$ an+ to a certain

e)ten+$ corru(tion$ rule of la1 an+ e)(ro(riation ris3 ma e)(lain forei,n in.estment

acti.ities of Gree3 firms in Central$ Eastern an+ Southeastern Euro(e2

it3o1s3a /007 focuses on the relationshi( bet1een chan,es in business en.ironments in

the ne1 ember States of the Euro(ean nion /E an+ forei,n +irect in.estors? beha.ior2

'he stu+ confirms that t&e EU (olicies an# t&e national incenti'e-base# FDI

(olicies seem to be t&e t%o #ri'ing forces in2uencing business

en'ironment in t&e ne% ember 3tates. All t&e a#4ustments to t&e EU

re5uirements res&a(e con#itions for #oing business in t&e ne% ember


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3tates an# lea# to t&e im(ro'ement of t&eir economic fun#amentals. T&e

national FDI (olicies coul# be treate# as a factor #isturbing t&ese long

term (rocesses an# c&anging economic choices of the establishe+ an+ (otential

in.estors2

'he analsis of em(irical results su,,ests that the +istribution of %I is hi,hl une.en

amon, the countries in Central an+ Southeastern Euro(e /CSE +ue to their +ifferent

transition (ro,ress2 'he .ast ma*orit of %I flo1s has been recei.e+ b @un,ar$ the Cech

Ae(ublic an+ olan+$ 1hich 1ere the first to be,in liberalisation an+ the lar,est amon, the

re,ion2 Bul,aria an+ Aomania ha.e recei.e+ much lo1er le.els of %I +ue to their relati.el

(oor (ro,ress in meetin, the economic an+ (olitical con+itions for their accession to the E2

Southeastern Euro(ean countries ha.e seen lo1 in.estment for the most (art of the nineties

1ith a recent (ositi.e tren+ as a result of the forei,n-oriente+ (ri.atiation (olicies the

im(lemente+ in the late nineties2 'he obser.e+ +ifferences bet1een CSE countries can be

attribute+ to the +ifferent transitional (aths an+ es(eciall the si,nificant +ifferences in the

institutional en.ironment of the countries in the re,ion2 olitical stabilit$ +emocratisation$

rule of la1$ bureaucrac an+ the e)istence of corru(tion an+ ethnic tensions ha.e si,nificantl

influence+ the NE?s +ecision to en,a,e$ or not$ in in.estment acti.it in CSE2

'his (a(er contributes to the e)istin, literature in t1o 1as2 %irst$ the sco(e an+ +e(th of

the +ata set allo1 us to e)(an+ beon+ the stan+ar+ ,ra.it mo+el consi+erabl2 It inclu+es

%I +eterminants for a ,rou( of ei,ht transition economies from Central an+ Southeastern

Euro(e$ o.er a relati.el lon, (erio+ of si) ears2 In a++ition$ the analsis is not limite+ to

basic economic fun+amentals$ but ta3es into account other (olitical an+ institutional factors

/such as ris3$ (ri.atiation an+ infrastructure that ma influence the +istribution of %I

flo1s across the host countries2 'he secon+ contribution is that the (a(er intro+uces a ne1

.ariable /Corru(tion in or+er to account for the corru(tion (ractices in transition economies


!


17/42


an+ their effects on %I flo1s2 e consi+er this factor to be of crucial im(ortance for

in.estment climate since corru(tion has been consi+ere+ b the Euro(ean Commission as the

most im(ortant +etriment for E accession an+ a serious flJ1 in (olitical an+ economic

(ractices of the transition economies2

DATA AND MODEL DESCRIPTION

'his stu+ aims to fill a ,a( in the current +ebate on the +eterminants of %I in Central an+

Southeastern Euro(e b (ro.i+in, an econometric analsis of the factors affectin, the (attern

of in.estment in ei,ht transition economies$ namel$ @un,ar$ olan+$ the Chec3 Ae(ublic$

Slo.a3ia$ Slo.enia$ Bul,aria$ Aomania$ an+ Croatia from E-!" countries o.er the ears

00!-002 e attem(t to e)(lain 1h forei,n in.estors ha.e mo.e+ into these mar3ets so

ra(i+l an+ 1h Bul,aria an+ Aomania ha.e recentl attracte+ more %I than the rest of the

countries in the re,ion2 e +e.elo(e+ a mo+el that combines tra+itional %I +eterminants

an+ transition s(ecific factors /such as the metho+ of (ri.atiation$ infrastructure$ corru(tion

an+ the ris3 associate+ 1ith each host countr that are e)(ecte+ to (la an im(ortant role in

the in.estment +ecision of a multinational com(an that ha.e in.este+ in these countries2

B usin, both tra+itional an+ transition s(ecific .ariables$ 1e e)ten+ the (re.ious 1or3

1hich focuses mainl on the business en.ironment an+ the (ri.atiation (rocess as (rimar

+eterminants of %I in CEECs2 'he (ro(ose+ econometric mo+el rests on a (anel +ata set

recor+in, the %I flo1s from a source count i to a host countr j at time t /cross-countr$

time-series mo+el2 'he obser.ations a.ailable on the i-th source countr o.er time t are %I

flo1s realie+ o.er the set of host countries j2 5s a result the (anel +ata set is balance+2

Dependent 3aria0le


!7


18/42


5lon, the lines of (re.ious research$ +e(en+ant .ariable %I i*t is +efine+ as the bilateral

flo1s of %orei,n irect In.estment /%I from countr i to countr j at time t 2 5 sam(le of !

Euro(ean nion source countries!8 /namel$ 5ustria$ Bel,ium$ enmar3$ %rance$ German$

Greece$ Ital$


19/42


e.elo(ment In+icators2 'his .ariable$ in line 1ith (re.ious research /see 5ltomonte$

!998 & Be.an an+ Estrin$ 000 & Bos an+ e


20/42


the host countr labor force is hi,hl e+ucate+2 'hat is 1h$ 1e e)amine /


21/42


transforme+ into numerical terms on the scale from ! to 82 ata is +eri.e+ from oo+?s

Cre+it Aatin, 5,enc?s 1eb site an+ co.er the (erio+ 00! M 002 In line 1ith Be.an an+

Estrin /000 & Carstensen an+ 'oubal /004 this .ariable is e)(ecte+ to be (ositi.el

correlate+ to %I flo1$ since the ,reater the ris3 of +efault /associate+ 1ith lo1er cre+it

ratin,$ the lo1er the incenti.e for forei,n in.estment an+ .ice .ersa2

2 5nother +eterminant of the in.estment climate in the host countries is /C#AA'I#N2

In our mo+el$ 1e account for its effects on %I throu,h the OCorru(tion In+e)? .ariable2 e

use the format of the in+e) su,,este+ b Transparency International M continuous scale from

! to 2 'he +ata is collecte+ from the 'rans(arenc International?s 1eb site2 5,ain the ran,e

of the +ata is for the (erio+ 00!-002 'he .ariable is e)(ecte+ to ha.e a (ositi.e

relationshi( 1ith the %I flo1$ since a hi,her .alue of the corru(tion in+e) in+icates a less

corru(t business en.ironment in the host countr2"

72 5s a (art of the mo+el$ 1e use t1o +umm .ariables2 'he first is to ta3e into

consi+eration cultural similarities amon, countries an+ is name+ /C


22/42


metho+s of (ri.atiation use+ in +ifferent countries in the sam(le$ 1hile the bottom (art

e)(lains the (ro(erties of the res(ecti.e +umm .ariable2

PInsert 'able ! hereQ

'o summarise$ the estimate+ mo+el assumes the follo1in, form:

ijt jt 8 jt 7 jt 6 jt 5

jt 4 jt 3 jt 2 jt 10ijt

!ion "n#$orrpt % ! "n#&is' % ! "n#(ages % !ctre "n#In)rast %

! "n#Trade % !ion "n#*oplat % ! "n#+,* % !e "n#,istanc % - ! "n#.,I

+++++

+++++=

/!

1here:

i R 5ustria$ Bel,ium$ enmar3$ %rance$ German$ Greece$ Ital$ uation /! usin, cross-section (anel +ata analsis

M a stan+ar+ econometric tool use+ in the em(irical literature of this 3in+2 'he +e(en+ent

.ariable is a cross-section of bilateral %I flo1s /as a (ercenta,e of G bet1een 8 host an+

! source countries o.er the (erio+ 00!-00 from the #EC?s International irect

In.estment atabase /0072 #n the ri,ht-han+ si+e of /!$ 1e use three ,ra.it .ariables:

(o(ulation in a++ition to G (er ca(ita in (urchasin, (o1er (arit / terms M as a (ro)

for mar3et sie an+ (otential +eman+ of local consumers the +istance bet1een source an+

host countr ca(itals an+ a +umm ca(turin, cultural or lan,ua,e similarities bet1een

source an+ host countr2



23/42


In a++ition to the ,ra.it a((roach$ 1e use a++itional factors /re,ressors$ 1e e)(ect to be

si,nificant %I +eterminants: 1a,es /o.erall labor costs$ literac rate /a +umm$ tra+e

o(enness$ infrastructure$ ris3 /so.erei,n cre+it ratin,$ corru(tion in+e)$ an+ metho+ of

(ri.atiation /a +umm2 'he correlation bet1een e)(lanator .ariables is sho1n in 'able 2

'he coefficients of correlation ha.e acce(table .alues2 Coefficients of correlation ,reater than

TU-02"0 are those of G (er ca(ita 1ith


24/42


'he first .ariable /IS'5NCE is si,nificant at ! le.el of si,nificance$ im(lin, stron,

e)(lanator (o1er2 'he ne,ati.e si,n of the .ariable sho1s a stron, ne,ati.e relationshi(

bet1een this .ariable an+ %I flo1s: the closer the ,eo,ra(hical (ro)imit to the main %I

source countries$ the ,reater the %I attracte+2 Since all the .ariables are in Olo,? form$ a

coefficient of -!27" im(lies that one (ercent increase in the .alue of the e)(lanator .ariable

lea+s to !27" (ercents +ecrease in the ma,nitu+e of %I2

'he G .ariable is si,nificant at !0 le.el of si,nificance2 'he si,n of the coefficient

sho1s that there is a (ositi.e relationshi( bet1een this .ariable an+ %I$ 1hich is in line 1ith

our (reliminar e)(ectations: the lar,er the sie of the host econom$ the ,reater the %I

attracte+2 In our case one (ercent increase in the .alue of the .ariable 1oul+ lea+ to !28!"

(ercents increase in the ma,nitu+e of %I flo1s2

'he si,nificance of # .ariable is 1ithin the ! si,nificance le.el2 5s it is e)(ecte+ there

is a stron, (ositi.e relationshi( bet1een this .ariable an+ %I flo1: the lar,er (otential

+eman+ of local consumers$ the ,reater the %I attracte+2 5 coefficient of 2078 here means

that one (ercent increase in the .ariable in+uces an increase of 2078 (ercents in the

ma,nitu+e of %I flo1s2

'he host countr cre+it ratin, .ariable /AIS; is also foun+ to be si,nificantl (ositi.el

correlate+ 1ith %I flo1s im(ro.e+ cre+it ratin,s are therefore associate+ 1ith ,reater %I

recei(ts in our sam(le2 5 coefficient of "2=" means that one (ercent increase in this .ariable

1oul+ lea+ to "2=" (ercent increase in the ma,nitu+e of %I flo1s2

'he 5GE .ariable is 1ithin the !0 si,nificance le.el an+ its si,n (resu((oses a

ne,ati.e relationshi( bet1een this .ariable an+ %I flo1s: the ,reater the increase in the

o.erall cost of labor$ the lo1er the incenti.e for forei,n in.estment in host countries2 'he

.alue of coefficient im(lies that one (ercent increase in the .ariable 1oul+ ,enerall lea+ to

!=209! (ercent +ecrease in the ma,nitu+e of %I flo1s2


4


25/42


'he .ariable re(resentin, C#AA'I#N is si,nificant at !0 le.el of si,nificance an+

im(lies a (ositi.e relationshi( bet1een this .ariable an+ %I flo1s$ as e)(ecte+ in the

(reliminar analsis2 'he .alue of the coefficient im(lies that one (ercent increase in the

.ariable 1oul+ lea+ to 42409 (ercent increase in the ma,nitu+e of %I flo1s2

'he ne)t mo+el s(ecification /5 e)clu+es the most insi,nificant .ariable -


26/42


si,nificant .ariables are IS'5NCE an+ #


27/42


Houchers or Bu-#uts as (rimar metho+s of (ri.atiation$ an+ Sale to #utsi+e #1ners as

secon+ar metho+ of (ri.atiation$ as com(are+ to the countries$ e)(eriencin, (ri.atiation

of t(e 4 /Sale to #utsi+e #1ners2 In contrast to (re.ious research /@ollan+ an+ ain$ !998

& Carstensen an+ 'oubal$ 004$ 1e +o not fin+ e.i+ence that the metho+ of (ri.atiation

ha.e a si,nificant effect on le.el of forei,n in.estment in transition economies in Central an+

Southeastern Euro(e2

'he secon+ (roce+ure is to em(lo an a((roach analo,ous to that use+ b @ollan+ an+ ain

/!998 to hi,hli,ht influential obser.ations in cross-section mo+els2 'he basic i+ea is to see

1hether an in+i.i+ual (anel members ha.e been (articularl influential in obtainin, the

re(orte+ results2 'his can be establishe+ b re-estimatin, (anel 5 e)clu+in, each countr in

turn2 'he full set of results is sho1n in 'able "2 'he e)clusion of Bul,aria lea+s to a shar(

+ecrease of the si,nificance of 5GE .ariable im(lin, that the countr?s contribution to the

im(ortance of this s(ecific %I +eterminant in the full (anel mo+el is relati.el hi,h2 In

o((osite$ 1ith the e)clusion of Croatia an+ Slo.enia from the ,eneral mo+el this .ariable

increases$ meanin, that the 5GE .ariable is less im(ortant +eterminant of %I flo1s in

these t1o CSE countries2

PInsert 'able " hereQ

'he +ata in 'able " sho1 that the inclusion of Croatia an+ Slo.a3ia clearl has an im(ortant

im(act on the re(orte+ effects from the corru(tion (ractices in transition economies2 'he

e)clusion of @un,ar an+ the Cech Ae(ublic also has a noticeable effect on the coefficient

of G an+ AIS; .ariables if @un,ar is e)clu+e+ the fall shar(l$ 1hereas if the Cech

Ae(ublic is e)clu+e+ the rise$ meanin, that these t1o .ariables are much less im(ortant

+eterminants of the Cech Ae(ublic?s %I in the ,eneral mo+el2 'here are no si,nificant


7


28/42


+ifferences in the coefficients on the other .ariables in the mo+el M +istance$ (o(ulation$ an+

tra+e /1hich remains insi,nificant$ su,,estin, that our fin+in,s are reasonabl robust2

C4NC5!SI4N

'he analsis (resente+ in this (a(er has enable+ i+entification of se.eral 3e +eterminants

of %I flo1s into the transition economies of Central an+ Southeastern Euro(e /CSE$ an+

hi,hli,hte+ the im(lications of +ifferent (olitical an+ institutional factors for %I flo1s to the

E?s ne1 member states2 B usin, both tra+itional an+ transition s(ecific .ariables$ 1e

e)ten+ the (re.ious research 1or3 1hich focuses mainl on the business en.ironment an+ the

(ri.atiation (rocess as (rimar +eterminants of %I in these countries2 Base+ on a cross-

section (anel +ata analsis 1e ha.e foun+ that %I flo1s are si,nificantl influence+ b both

,ra.it factors /+istance$ G an+ (o(ulation an+ non-,ra.it factors /ris3$ labour costs$ an+

corru(tion2 oreo.er$ at the secon+ sta,e of the analsis$ 1e ha.e i+entifie+ that %I flo1s

into +ifferent ,rou(s of transition economies are +etermine+ b the same macroeconomic

factors an+ not b the timin, of their accession to the Euro(ean nion /E2

In contrast to (re.ious research$ economic factors such as infrastructure an+ tra+e +o not

seem to ha.e a statisticall si,nificant im(act on %I flo1s into the countries in our sam(le2

e ma e)(ect that these .ariables are im(erfect (ro)ies: the ma be correlate+ 1ith each

other or 1ith other factors that also influence in.estment +ecisions$ an+ their estimate+

coefficients ma thus be har+ to inter(ret2 'he results concernin, institutional .ariables$

ho1e.er$ ha.e sho1e+ hi,h si,nificance2 E)(lanator .ariables that (ur(ort to measure the

si,nificance of (olitical an+ institutional en.ironment$ such as ris3 an+ corru(tion$ are foun+

to be si,nificant +eterminants of %I flo1s into transition economies in CSE2 'his effect

1ea3ens 1hen the countries in the sam(les are +i.i+e+ into +ifferent ,rou(s +e(en+in, on the

timin, of their E accession2


8


29/42


ost im(ortantl ho1e.er$ our frame1or3 has (ermitte+ us to i+entif the im(act the

metho+ of (ri.atiation ma ha.e u(on %I flo1s in transition economies2 e +o not fin+

stron, e.i+ence that the metho+ of (ri.atiation has a si,nificant effect on %I recei(ts$

1hich +irectl contra+icts the (re.iousl assume+ (ositi.e im(act of this .ariable2 #ne

(ossible e)(lanation 1oul+ be that our +ata analsis co.ers the (erio+ 00! M 00$ in 1hich

most transition economies in the sam(le ha.e com(lete+ their (ri.atiation (ro,rams2

5lthou,h the em(irical stu+ies /see Be.an an+ Estrin$ 000 & Be.an$ Estrin an+ Grabbe$

00! su,,est that countries$ 1hich (rocee+ alon, the accession (ath$ ma benefit from a

.irtuous ccle$ hence increasin, the +ifferential bet1een them an+ the accession la,,ar+s$ 1e

+o not fin+ e.i+ence in su((ort of this h(othesis o.er the sam(le (erio+2

#ur fin+in,s can (ro.i+e an analtical foun+ation for the e.aluation of countr (olicies an+

institutions aime+ at ma3in, Central an+ Southeastern Euro(ean countries more attracti.e to

forei,n in.estors2 In line 1ith this fin+in,$ the (a(er (ro.i+es ,ui+ance on 1hich ma*or

macroeconomic an+ institutional +eterminants of %I a stron, em(hasis shoul+ be (lace+ b

(olicma3ers in these countries$ such as liberaliin, the tra+e an+ forei,n e)chan,e re,ime$

controllin, labor costs$ an+ im(ro.in, the o.erall infrastructure2 oreo.er$ 1e fin+ a

si,nificant effect for corru(tion measure$ in+icatin, that efforts to im(ro.e ,o.ernance an+

combat corru(tion an+ bureaucrac 1ill ha.e a #irect im(act on %I in these countries2 2


9


30/42


2EFE2ENCES:

5lfaro


31/42


Blomstrom 2$ & ;o33o$ 52 /!9982 ultinational cor(orations an+ s(illo.ers2 6ournal of

Economic Sur.es$ !/=$ 47-772

Borenstein$ E2$ e Gre,orio$ 62$ &


32/42


e.ereu)$ 22$


33/42



34/42


EBA?s In+e) for Infrastructure Aeform /007$ accesse+ arch 0$ 008$ P5.ailable at:

htt(:UU1112ebr+2comUcountrUsectorUeconoUstatsUsci2)lsQ2

#EC?s International irect In.estment atabase /007$ accesse+ arch "$ 008$

P5.ailable at

htt(:UUtitania2sourceoec+2or,U.lR=94UclRUn1R!Ur(s.Uc,i-binU*searchXoec+V

limittitlesR&cheeseRsearch+b&oec+-

selectRhome2htm&formRe)(ert&search0RinternationalT+irectTin.estment&searchR&fiel+

0Rt3a&sstemRoec+Xall&sortresultsbRre.Xtimestam(&1hatR+!Q2

orl+ Ban3?s orl+ e.elo(ment In+icators /007$ accesse+ arch 0!$ 008$ P5.ailable at

htt(:UU++(-e)t21orl+ban32or,U e)tU[[Umember2+oV

metho+R,etembers&useri+R!&>uerI+R!=" Q2


=4

http://titania.sourceoecd.org/vl=623942/cl=22/nw=1/rpsv/cgi-bin/jsearch_oecd?limittitles=&cheese=searchdb&oecd-select=home.htm&form=expert&search0=international+direct+investment&search=&field0=tka&system=oecd_all&sortresultsby=rev_timestamp&what=d1http://titania.sourceoecd.org/vl=623942/cl=22/nw=1/rpsv/cgi-bin/jsearch_oecd?limittitles=&cheese=searchdb&oecd-select=home.htm&form=expert&search0=international+direct+investment&search=&field0=tka&system=oecd_all&sortresultsby=rev_timestamp&what=d1http://titania.sourceoecd.org/vl=623942/cl=22/nw=1/rpsv/cgi-bin/jsearch_oecd?limittitles=&cheese=searchdb&oecd-select=home.htm&form=expert&search0=international+direct+investment&search=&field0=tka&system=oecd_all&sortresultsby=rev_timestamp&what=d1http://titania.sourceoecd.org/vl=623942/cl=22/nw=1/rpsv/cgi-bin/jsearch_oecd?limittitles=&cheese=searchdb&oecd-select=home.htm&form=expert&search0=international+direct+investment&search=&field0=tka&system=oecd_all&sortresultsby=rev_timestamp&what=d1http://ddp-ext.worldbank.org/%20ext/DDPQQ/member.do?method=getMembers&userid=1&queryId=135http://ddp-ext.worldbank.org/%20ext/DDPQQ/member.do?method=getMembers&userid=1&queryId=135http://titania.sourceoecd.org/vl=623942/cl=22/nw=1/rpsv/cgi-bin/jsearch_oecd?limittitles=&cheese=searchdb&oecd-select=home.htm&form=expert&search0=international+direct+investment&search=&field0=tka&system=oecd_all&sortresultsby=rev_timestamp&what=d1http://titania.sourceoecd.org/vl=623942/cl=22/nw=1/rpsv/cgi-bin/jsearch_oecd?limittitles=&cheese=searchdb&oecd-select=home.htm&form=expert&search0=international+direct+investment&search=&field0=tka&system=oecd_all&sortresultsby=rev_timestamp&what=d1http://titania.sourceoecd.org/vl=623942/cl=22/nw=1/rpsv/cgi-bin/jsearch_oecd?limittitles=&cheese=searchdb&oecd-select=home.htm&form=expert&search0=international+direct+investment&search=&field0=tka&system=oecd_all&sortresultsby=rev_timestamp&what=d1http://ddp-ext.worldbank.org/%20ext/DDPQQ/member.do?method=getMembers&userid=1&queryId=135http://ddp-ext.worldbank.org/%20ext/DDPQQ/member.do?method=getMembers&userid=1&queryId=135


35/42


Ta0le 6: etho+s of ri.atiation

Sale to 4utside

4wner

3oucher

Privati7ation

Management8Emplo"ee

#u".4ut#ulgaria rimar Secon+ar

Croatia rimar

C7ech 2epu0lic Secon+ar rimar

9ungar" rimar

Poland Secon+ar rimar

2omania Secon+ar rimar

Slovenia Secon+ar rimar

Slova 2epu0lic Secon+ar rimar

2aning Primar" Method Secondar" Method

* Sale to #utsi+e #1ners -

% Sale to #utsi+e #1ners Houcher or Bu #ut

; Houcher or Bu #ut Sale to #utsi+e #1ners

6 Houcher or Bu #ut Bu #ut or Houcher

6 Houcher or Bu #ut -/orce: @ollan+ an+ ain /!998 5uthor calculations2


="


36/42


Ta0le ;: Correlation matri) of the e)(lanator .ariables!

DIST


37/42


Ta0le %: Bilateral %I Cross-Section Ae,ressions!$ $ =$ 4

>ithout Privati7ation

Models 6 ; % * &

DIST -!27"]]]

/-=2=80

-!278"]]]

/-=2470

-!2788]]]

/-=2"00

-=298"]]]

/-42!=0

-!2=40]

/-!290


38/42


Ta0le *: Bilateral %I Cross-Section Ae,ressions!$ $ =$ 4

>ith Privati7ation

Models #6 #; #% #* #&

DIST -!279]]]

/-=20

-!27=9]]]

/-=290

-!2708]]]

/-=2"0

-=29]]]

/-42070

-!24!0]]

/-2070


39/42


Ta0le &: Influence 5nalsis of %I eterminants in Cross-Section Ae,ressions!$ $ =$ 4

DIST


40/42



40


41/42

! 6oon,-an Cho /00= (oints out three 3e +eterminants an+ factors associate+ 1ith the e)tent an+ (attern of %I in +e.elo(in, host countries: attracti.eness of the economic con+itions in host countries the (olicframe1or3 to1ar+s the ( ri.ate sector$ tra+e an+ in+ustr$ an+ %I an+ its im(lementation b host ,o.ernments

an+ the in.estment strate,ies of NEs 'here is ,ro1in, e.i+ence that enter(rise (ro+ucti.it$ A& e)(en+iture$ inno.ation an+ com(an (erformance are hi,her in forei,n o1ne+ firms - both in the transition economies an+ in the est countries /see e2,2$ Barrell an+ ain$ !999 &@ollan+ an+ ain$ !9982=

In a++ition$ the (attern of the o(erations un+erta3en in the CEECs b multinational firms is far from bein,homo,eneous: most of the sur.es ha.e$ im(licitl or e)(licitl$ reco,nie+ the hetero,eneit of %I in the re,ions$ in

terms of (ro*ect characteristics an+ in.estment +eterminants at the sectoral an+ ,eo,ra(hical le.el /5ltomonte$ !99824 oreo.er the (ros(ect of E membershi( mi,ht be .ie1e+ b (otential in.estors as re+ucin, countr ris3$ both because meetin, the re>uirements for E a+mission re(resents an e)ternal .ali+ation of (ro,ress in transition$ an+ because ultimate E membershi( im(lies ,uarantees in terms of macroeconomic stabilit$ institutional an+ le,alen.ironment an+ (olitical stabilit2" Some authors such as Schoors et al 2 /00! an+ Blomstrom et al 2 /!998 ar,ue that at least in the initial sta,es of

+e.elo(ment or transition$ %I coul+ ha.e a ne,ati.e im(act on the reci(ient econom2 If +omestic firms are soun(ro+ucti.e in com(arison 1ith forei,n-o1e+ firms$ the former ma be +ri.en out of business lea+in, to a so-calle+Kmar3et stealin,L effect2 @oriontal multinationals (ro+uce the same (ro+uct in multi(le (lants so that the ser.e local mar3ets from local (ro+uction2 @oriontal multinationals arise if (ro)imit a+.anta,es out1ei,h concentration a+.anta,es2 Gi.en the

+ominance of +e.elo(e+ countries as source an+ as host countries$ horiontal mo+els ha.e recei.e+ some1hat moreattention than .ertical mo+els of %I2 'he latter e)(lain the e)istence of NEs b lar,e +ifferences in factor en+o1ment across countries because +ifferent (arts of the (ro+uction (rocess ha.e +ifferent in(ut re>uirements2 Sincein(ut (rices .ar across countries$ it becomes (rofitable to s(lit the (ro+uction (rocess accor+in, to the factor intensities of its +ifferent sta,es2 @ence$ the .ertical mo+el allo1s the se(aration of the 3no1le+,e-,eneratin, acti.itiesfrom (ro+uction27 Earl stu+ies of %I in +e.elo(in, countries ha.e (ut (articular stress on the in+icators of economic an+ (olitical ris3

/see$ e2,2$


42/42

!7 'hese are 5lbania$ Bosnia an+ @ere,o.ina$ Croatia$ the former u,osla. Ae(ublic of ace+onia /hereinafter referre+ to as %A of ace+onia$ Serbia an+ ontene,ro /1hich are sometimes collecti.el referre+ to as the esternBal3ans$ as 1ell as Bul,aria an+ Aomania2!8 ata for source countries? %I flo1s is +eri.e+ from #EC?s International irect In.estment atabase /0072Sam(le inclu+es E-!" countries e)clu+in, %inlan+$ Irelan+$ an+ ortu,al for 1hich com(lete ear +ata is missin,2!9 5ccor+in, to Aesmini /000 ,reater +istance (resents 1ea3er tra+e ties bet1een the %I source countr an+ hostcountr thus (ro.i+in, for lo1er %I flo1 le.els20

ata is +eri.e+ from EBA 'ransition Ae(ort$ 007! #f course 1a,es re.eal onl (art of the stor 1hat matters to the firm are +ifferences in unit costs$ ta3in, account of

the (ro+ucti.it of labour as 1ell as 1a,e le.els2 'heir stu+ fin+s stron, com(lementar effects bet1een %I an+ human ca(ital on the ,ro1th rate of income2 'hisresult is consistent 1ith the i+ea that the flo1 of a+.ance+ technolo, brou,ht alon, b %I can increase the ,ro1thrate of the host econom onl b interactin, 1ith that countr?s absor(ti.e ca(abilit2= 5lso hi,her ma,nitu+e of the 'A5E .ariable 1oul+ (resent better establishe+ an+ maintaine+ tra+e routes an+relations$ 1hich also (ro.i+es for hi,her in.estment le.els24 ata is +eri.e+ from the EBA 'ransition Ae(ort$ 002" Be.an an+ Estrin /000 fin+ that this .ariable /re(resente+ b Obribe ta)? in their analsis is hi,hl si,nificant an+ne,ati.el correlate+ 1ith cre+it ratin,s2 'his result most (robabl ca(tures se.eral transition s(ecific featuressimultaneousl$ inclu+in, notions of institutional ca(acit an+ ca(abilit$ rule of la1 an+ so on$ all of 1hich shoul+ behi,hl ne,ati.el correlate+ 1ith cre+it ratin,s an+ hence 1ith %I inflo1s2

%or a++itional control$ Bul,arian-German an+ Bul,arian-Gree3 relations are ,i.en ! for historical tra+e closenessalso Slo.enian-5ustrian an+ Slo.a3ian-5ustrian relations are ,i.en !$ +ue to the belon,in, of both countries to the@absbur, Em(ire finall Slo.enian-Italian relations are ,i.en !$ to control for both e)ce(tional closeness an+ tra+elin3a,es bet1een the t1o countries27 See @ollan+ an+ ain /!998 EBA 'ransition Ae(ort$ !99728 'he onl .ariable 1hich is not foun+ to be rele.ant in our (reliminar tests is Oculture?2 'hat is 1h it 1as +ro((e+from the re,ression mo+el /!29 Sur(risin,l$ our results +o not (ro.i+e e.i+ence that 'ra+e #(enness an+ Infrastructure are si,nificant +eterminantsof %I flo1s in transition economies2 'he results from em(irical stu+ies attem(tin, to estimate the im(act of these t1oin+i.i+ual factors are ambi,uous /see e2,2$ eme3as et al.$ 00"2=0 #ur (reliminar tests$ similarl to Bos an+ e

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Miroslav Mateev