Foreign direct investment in transition economies

Abstract

Chapter 9 performs a meta-analysis of foreign direct investment (FDI) in transition economies. Direct capital flows from abroad are expected not only to increase the financial source of investment for the former socialist countries but also to create the momentum to fundamentally reform their national economies, which were considerably less efficient than those in Western countries. To verify this prediction, many researchers intensively investigated the determinants and economic impacts of FDI in transition economies during the last three decades. As a result, there now exists a wealth of empirical literature on these topics that enables us to perform a meta-analysis. The first part of this chapter examines how transition-specific factors affect FDI in CEE and FSU countries. The latter part explores how large the impact of FDI on macroeconomic growth in the region is. The results of meta-analysis revealed that empirical results reported in previous studies present the close relationship between the progress in transition to a market economy and FDI and a positive effect of FDI on macroeconomic growth in the literature as a whole. This suggests that, in transition economies, the success of transformation towards a market-oriented system and foreign capital flow has created a kind of virtuous cycle.