engleski

Traditional vs. new explanation of foreign direct investment in transition countries of Central and East Europe

CEEC show significant differences regarding FDI-inflow during the 90s. The aim is to find out which factors contributed mostly to FDI-inflow in transition countries. The main purpose is to empirically investigate the relative importance of factor-proportions and proximity-concentration hypothesis. Despite negative impact of differences in GDP among countries, market-seeking FDI dominate. Trade openness and the share of trade with non-transition countries (access to developed market) played an important role, while unit labour costs were not detrimental factor to foreign investment. Surprisingly, contractual relations with the EU appeared as not significant in regression models as was the case with typical gravity variable – the neighbouring countries. Institutional factors did not play an important role in shaping FDI-inflow in transition countries in the past. However, taking into account that the East European markets will soon reach its full potential, institutional reforms will be finalized and competitive pressure from other markets increase, it can be expected that efficiency-seeking FDI will dominate in the future.

FDI; increasing returns to scale; imperfect competition; factor proportions; economic integration; transition countries

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