FDI in Central and Eastern Europe and Selected Former USSR Countries after 1989: Focus on the Changing Nature of FDI Inflows

In this paper, we add a new dimension to the studies of the foreign direct investments (FDI) in the former communist countries of the Central and Eastern Europe and former USSR after the fall of the Berlin Wall. We analyze a hypothesis that the type of FDI inflows changes based on extend of development and economic transition within these countries. The successful transformation process, democratization and strengthening of the internal market have assured that these economies became more stable and competitive. As a result, the almost non-existent FDI inflows before 1990 play nowadays a very significant role.

Our study uses panel data of 18 countries over period of 20 years. We consider number of explanatory variables, such as the market size, openness, labor cost, EU membership, transition index, secondary education, expenses on R&D, infrastructure, economic freedoms index, corruption perception index and other in order to analyze presence of different types of FDI inflows during various periods. To better capture the changes over time, we looked at the whole time period and then divided it into sub-period samples based on the historical significance.

The general pattern shows that as the economy strengthens and grows, the FDI inflows change from efficiency-seeking (vertical FDI) to market-seeking (horizontal FDI). Especially in the most recent years we can observe superior effect of horizontal over vertical FDI. The EU membership showed also a strong effect as the foreign investors took advantage of the free common market and expanded to new member countries in search of consumers.