On Determinants of Foreign Direct Investment in Transition Economies

28 Pages Posted: 13 Jul 2016

See all articles by Andrzej Baniak

Andrzej Baniak

Central European University (CEU) - Department of Economics

Jacek Cukrowski

CASE - Center for Social and Economic Research

Jan Herczynski

SKL International

Date Written: December 12, 2002

Abstract

Foreign direct investment (FDI) brings host countries capital, productive facilities, and technology transfer, as well as new jobs and management expertise. Thus, it is important to understand why in many transition countries FDI inflow is lower than expected. The goal of this study is to explore some important factors determining flow of FDI into transition countries. In particular, we analyze the legal environment for FDI in some transition economies. Then we model the impact of stability of the economic and legal environment on the pattern of FDI. Our analysis shows that (1) higher variability of basic macroeconomic fundamentals reduces the flow of FDI, (2) high volatility of fiscal and business regulations makes the inflow of FDI smaller, and (3) macroeconomic and legal instability leads to adverse selection of the investors. Based on theoretical findings we formulate a clear message to policy makers stating that in order to attract significant inflows of long-term and nonspeculative foreign capital, first of all, a stable economic and institutional environment is needed.

JEL Classification: F15, F23, P20, C23

Suggested Citation

Baniak, Andrzej and Cukrowski, Jacek and Herczynski, Jan, On Determinants of Foreign Direct Investment in Transition Economies (December 12, 2002). Available at SSRN: https://ssrn.com/abstract=2808532

Andrzej Baniak (Contact Author)

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary
(36) 1 327-3231 (Phone)
(36) 1 327-3232 (Fax)

Jacek Cukrowski

CASE - Center for Social and Economic Research ( email )

Center for Social and Economic Research,
Warsaw
Poland

Jan Herczynski

SKL International ( email )

Hornsgatan 15
Stockholm, SE-118 82
Sweden

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