Corporate Governance in the ten new EU member states (EU-10) as a determinant of Japanese FDI

Abstract

The economic history of the ten new EU member states (EU-10) has been offering economists for some time interesting perspectives on what contributes to a successful transition to the market economy. Since 1990 the ten countries have built new systems and have made progress towards growth and development.It is clearly understood that foreign direct investment (FDI) plays a key role in contributing to the growth of economies; especially for countries undergoing transition FDI is an effective tool because it transfers knowledge and technology, increases productivity, improves state budgets, balances deficits, and most important in the case of the EU-10, it contributed to privatisation and reform. At present the EU-10 economies are competing to attract more FDI since they have outgrown the privatisation-led type. In order to attract higher inflows they need to either offer new attractive determinants or develop existing ones.In trying to find new relevant determinants to attract FDI, corporate governance is signalled out as belonging to a new type of determinants that are part of competitive economies. The aim of this paper is to support the hypothesis that good macro corporate governance principles attract Japanese FDI in the EU-10 countries; corporate governance matters for foreign investors, especially for the Japanese investors who take into careful consideration a number of determinants before entering new markets. An empirical analysis employing OLS pooled regression is carried out to observe the correlation between Japanese direct investments in the EU-10 and corporate governance.Japanese investments are of a high importance for the EU-10 countries since Japan represents a major part of the automotive hub in Central and Eastern Europe. The subcontractors that follow the big corporations are a significant source of inflows. In order to attract Japanese corporations, the EU-10 countries must present attractive determinants for FDI.