From Reform Socialism to Transnational Capitalism: The Political Economy Of Foreign Direct Investment In Postsocialist Central and Eastern Europe

The existing literature on postsocialist transformations in the former communist ruled states of Central and Eastern Europe (CEE) argue that paths of market reform in the region were largely determined by policies implemented at the moment of transition. This paper, by contrast, argues that reform paths were heavily constrained by each state’s inherited industrial structure and ties to the world economy prior to 1989. Examining flows of foreign direct investment (FDI) in the region during the initial liberalization period, the paper shows that the density of East-West inter-firm ties in the 1970s, and rates of international state indebtedness during the same decade, are better predictors of how rapidly postsocialist states amass FDI stocks in the early 1990s, than their economic, institutional or policy characteristics during the transition period. However, the paper also finds that while industrial structure and inherited ties to the world economy form a powerful structural basis attracting FDI, post-Communist political coalitions were key in enabling or hindering the advancement of foreign investment. The combination of industrial structure and political coalitions at the time of liberalization explain divergent pathways in transitions from state socialism in CEE.