THE DETERMINANTS OF FDI IN SIX FORMER FSU COUNTRIES: A STUDY OF DATA 1995–2017

Vijay Shenai,Dmitriy Olkhovskyy,Artem Shcherbyna,Sergei Voronin

doi:10.35774/jee2020.01.140

Abstract

Foreign Direct Investment (FDI) can bring in much needed capital, particularly in emerging markets, help improve manufacturing and trade sectors, bring in more efficient technologies, increase local production and exports, create jobs and develop local skills, bring about improvements in soft and hard infrastructure and overall be a contributor to sustainable economic growth in the Gross Domestic Product (GDP). With all these desirable features, it becomes relevant to ascertain the factors which attract FDI to an economy or a group of adjacent economies. This paper explores the determinants of FDI in six Former Soviet Union (FSU): Ukraine, Belarus, Armenia, Russia, Moldova and Kazakhstan. After an extensive literature review of theories and empirical research and using a set of cross-sectional data over the period 1995–2017, an ARDL model is estimated with FDI/GDP as the dependent variable. Inflation, exchange rate changes, openness, economy size (GDP), Income levels (GNI per capita), Infrastructure (measured by the number of fixed line and mobile subscription per 100 persons) are tested as independent variables for explanatory power in long run and short run relationships. Over the period, higher inflows of FDI in relation to GDP appear to be have been attracted to the markets with better infrastructure, smaller markets and higher income levels, with lower openness, depreciation in the exchange rate and higher income levels though the coefficients of the last three variables are not significant. The results show the type of FDI attracted to investments in this region and are evaluated from theoretical and practical view points. Policy recommendations are made to enhance FDI inflows and further economic development in this region. Such a study of this region has not been made in the past. JEL: C21, F21, F23.

Highlights

1.1 BackgroundCountries which are restructuring their economies need capital
While MNC motivation can be seen from these aspects, much empirical research has been conducted on the determinants of Foreign Direct Investment (FDI) from the perspective of the host economy where there does not appear to be any theory
On the effect of some main determinants of FDI, there does not appear to be a consensus among researchers, on the effect of inflation in attracting FDI inflows

Summary

Introduction

1.1 BackgroundCountries which are restructuring their economies need capital. Capital can come into an economy across national borders, in many forms. as it seeks the highest rate of return for that class of investment. The Determinants of FDI in six former FSU countries: a study of data 1995–2017 the other economy. Such investment is usually by way of equity capital, implying long term involvement and is preferred over other private capital flows such as portfolio investments which are considered short-term. The resilience of foreign direct investment during financial crises lead many developing countries to regard it as the private capital inflow of choice (Loungani and Razin (2001)). Portfolio Investment Flows (PFI) are capital flows into a country which seek financial returns in the short and medium terms through investment in the stock and bond markets. PFI is generally not preferred by countries because it is linked with rapid outflows in crisis times, destabilizing the operations of local financial markets

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