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attract FDI, but policies have been more or less successful in a specific country.
The aim of the paper is to investigate weather the inflows of FDI, portfolio and
other investment in the transition period have positively influenced growth,
employment and external position of the region as a whole.
Many empirical studies have established the existence of high correlation
between economic growth and FDI inward flows especially in the transitional
countries that suffered from a fragile productive structure and high unemployment
rates. Barro and Sala-i-Martin (1999) accentuate the assumption of applied growth
theory that foreign investment shifts technology. The empirical analyses of the
CEE economies support that FDI has incrementally contributed to economic
growth because foreign direct investments deliver technological progress,
production know-how and management expertise and herewith improve the
institutional capacity of the country and the productivity of the economy. 40 On the
other hand, foreign portfolio investment increases the liquidity of domestic capital
markets, and can help develop market efficiency as well.
The scope and impact of various externalities and spill-over efeects has been
considered in most endogenous growth models, but few of them examine the role
of FDI in growth dynamics (Mello, 1997). Recent evidence suggests that besides
the composition of imports, domestic R&D affects the productivity growth more
than the foreign investment (Coe and Helpman, 1995). Bosworth and Collins
(1999) examine three types of long-term private capital flows: foreign direct
investment (FDI), loans and portfolio flows. Mody and Murshid (2005), use two
specifications in estimating the impact– a static one, which shows the simultaneous
effects of capital flows on investment, and a dynamic one, which demonstrates the
long-term impact of foreign financing. FDI may stimulate small amount of
additional investment in other sectors of the domestic economy (“crowding in” or
“spillover” effects).
Mileva (2008) divides transition countries into two groups: new EU member
states, acceding and candidate countries (2005) and the remaining transition
economies. The first group attains higher rank on the EBRD transition index (i.e.
complete or nearly complete transition to market economy), while the second
group has weaker institutions and less developed financial markets. In the countries
from the first group FDI does not produce significant spillovers. She finds out that
in the less advanced transition economies, FDI create considerable positive effect
in the short run, while the effect is even larger in the long term. Limited sources of
local financing as well as the high risk premiums the countries in this group require
mean that foreign investors are better off entering these markets with their own
capital. Konings (2001) finds that foreign investment have lowered firm
productivity in Bulgaria and Romania but has no effect in Poland. Borensztein,
Degregorio, and Lee (1998) find that foreign direct investment stimulates growth
for countries with high levels of education.
40 Deutsche bank research paper.” Foreign direct investment: The growth engine of Central and
Eastern Europe” (July 2006).
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