Foreign Investment and Privatization in Eastern Europe: An Overview

Abstract

Privatization, with its ultimate objective of raising economic efficiency, is a process central to the transformation of the economies of Central and Eastern Europe (CEE). It represents more than just a transfer of ownership from the state/social to the private sector; it also forms the basis for the transformation of the former socialist economies. In the first phase, the emphasis was on nationwide privatisation schemes where noncommercial methods of privatization of state/social assets by indigenous private owners prevailed — free distribution, preferential financial schemes and buy-outs. In phase two the emphasis has shifted towards increasing the efficiency of the CEE economies: here, the objective has been to consolidate the ownership structure set up in phase one. The major actors in this phase consist of small shareholders and investment funds operating as sellers and of financial and strategic investors acting as buyers. The first phase of the privatization process was not expected to contribute much to economic efficiency. Only in the second phase would privatisation bring about ‘responsible’ owners with the objectives of improving company profits, efficiency and long-term development. A specific advantage of foreign direct investment (FDI) as an instrument of privatisation in CEE is that it provides active and ‘responsible’ owners, who can make an immediate input to the host’s economic efficiency, internationalization and integration in the world economy.