The Relationship between FDI, Privatization and Structural Change in Central and Eastern European Countries

Abstract

FDI is a specific form of international capital flows, more long-term, more company-related than portfolio or other investments. By FDI foreign investors (basically multinational corporations: MNCs) establish a controlling position over their foreign affiliates. For these reasons costs and risks of investment are considered in a long-term perspective. Factors determining FDI are summarized by Dunning (1993) under the headings of ownership, location and internalization. These terms relate to company-specific assets which, if utilised internally by the MNC and located internationally, result in the optimum utilization of these assets. FDI is motivated by the expansion to new markets, by increases of production efficiency via international relocation and by the acquisition of natural resources and of strategic assets including knowledge. The expansion to new markets appears to be a primary motivation of FDI worldwide, including the Central and Eastern European countries (Szanyi, 1998). Efficiency improvements and cost advantage of the location come second (Pye, 1997). Cost advantages in Central and Eastern European countries are mainly related to labour costs (Havlik, 1996) and in some countries also to energy and transport costs. Transactions costs, on the other hand, tend to be high in transforming economies (Dietz, 1991). The acquisition of natural resources and of strategic assets including knowledge appear to be secondary but important motives in some FDI cases. The primary objectives of investment change during the operation of affiliates and are modified by further investments.