What Moves Capital to Transition Economies

Abstract

The transition economies in Europe and the former Soviet Union between 1991 and 1999 differed widely in terms of total capital flows and the share and composition of private flows. With some exceptions (notably Russia), the main source of private inflows was foreign direct investment. Portfolio investment was volatile, and concentrated in a handful of countries. Regressions show that direct investment can be well explained in terms of economic fundaals, whereas the presence of a financial market infrastructure and a property rights indicator are the only explanatory variables that seem to have a robust effect on portfolio investment.