nr 008 - Explaining Foreign Direct Investment in Central and Eastern
- DNB Working Papers
-
Date 1 September 2004
In this paper, we question whether there is a catch-up effect or
announcement effect in Foreign Direct Investment (FDI) from the
European Union (EU) to the ten EU accession countries. We study FDI
outflows from the Netherlands, a small open economy with few
historical ties to Eastern Europe, and compare FDI in the
transition countries in Central and Eastern Europe to FDI in other
regions - most notably to transition countries in Central Asia. In
our analysis we try to impose as little structure as possible on
the data and allow for heterogeneity within the different regions.
In an effrt to improve on past studies in the same area, we use a
very broad sample of countries, we present country-specific results
and test how robust regional dummies are, we check for omitted
variable bias and we try to correct for possible non-linearity in
the gravity relationships. We find that many of the differences in
results of previous studies can be attributed to these
specification problems. There is no evidence that an overall
catch-up effect or announcement effect exists. Rather, economic
fundamentals explain differences in inward investment in the
region. FDI and trade are mostly complementary and there is no
evidence that there is crowding out between regions. Key words:
gravity model, foreign direct investment, Eastern Europe JEL
classification: F02, F21, O16, O18, P34, R58