The Determinants of Foreign Direct Investment in Transition Economies

42 Pages Posted: 29 Jan 2001

See all articles by Alan A. Bevan

Alan A. Bevan

European Bank for Reconstruction and Development (EBRD) - Office of the Chief Economist

Saul Estrin

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: December 2000

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: EU accession, foreign direct investment, transition economies

JEL Classification: C33, F20, P27

Suggested Citation

Bevan, Alan A. and Estrin, Saul, The Determinants of Foreign Direct Investment in Transition Economies (December 2000). CEPR Discussion Paper No. 2638. Available at SSRN: https://ssrn.com/abstract=258070

Alan A. Bevan (Contact Author)

European Bank for Reconstruction and Development (EBRD) - Office of the Chief Economist ( email )

One Exchange Square
London EC2A 2JN
United Kingdom
+44 20 7338 7725 (Phone)
+44 20 7338 6111 (Fax)

Saul Estrin

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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