Foreign Direct Investment, Stock Exchange Development, And Economic Growth In Central And Eastern Europe

Abstract

Understanding economic development in the transition economies of Central and Eastern Europe (CEE) requires an analysis of investment in these economies. Previous analyses, however, have focused primarily if not singularly on the role of foreign direct investment (FDI; Akbar & McBride, 2004; Clague & Rausser, 1992; Uhlenbruck & De Castro, 2000). This focus follows that of regional policy-makers, who heavily encouraged FDI through acquisition or greenfield investments (Frydman, Rapaczynski, & Earle, 1993). These policy-makers, however, additionally established stock exchanges in each of their countries. There are now at least 24 operating stock exchanges in CEE and the countries that previously made up the former Soviet Union and the former Yugoslavia.1 The role of the development of these local stock exchanges in the development (LSED) of local economies (primarily through foreign portfolio investment) has not yet been systematically examined, nor has it been linked explicitly to the role of FDI. Finally, the role of local companies’ listings on foreign exchanges (FSEL) has not been examined in tandem with the role of FDI or LSED (for an examination of the relationship between FDI, LSED, and FSEL, however, see Claessens, Klingebiel, & Schmukler, 2001).