Foreign Direct Investment Essay

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Since the late 1980s, Central and Eastern European (CEE) countries switched from a centrally planned economic system to one based on market forces. They privatized many state-owned enterprises, signed foreign trade agreements with other countries in the region, and have generally achieved a significant level of macroeconomic stability with improved growth rates.


(1) Over the same period, these countries also achieved a substantial increase in their exports, especially towards Western Europe.
The question we address in this paper is whether FDI inflows have been a significant determinant of export growth in 12 CEE countries. To do so, we use a pooled data for the period between 1996 and 2004 and attempt to account for the effects of FDI on host economy exports. We separate the potential effects into supply-increasing effects (capacity effects) and FDI-specific effects. The supply-increasing effects arise when FDI inflows induce increases in the host country's production capacity, which, in turn, increases export supply capacity. The FDI-specific effects arise because foreign capital inflows may incorporate different competitive advantages, such as superior knowledge and technology and thus, higher productivity, or better information about export markets as compared to local firms. We believe that differentiating between these two effects of FDI on exports is especially important in terms of policy implications. It is often argued that successful FDI-promoting policies should lead to, among other things, a significant increase in the host country's exports. ...
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