Multinational investment is one of the striking features of the global economy. Multinational enterprise (MNE) activity has increased at a faster rate than any other international transaction in the last two decades. Foreign direct investment (FDI) can be defined as capital flows resulting from the activities of these enterprises. While countries remove barriers and implement policies to attract FDI inflows, the volume of foreign trade and investment increase.
Central and Eastern European Countries (CEECs) have been receiving large amount of FDI inflows during the last 20 years, covering the process of transition from socialism to capitalism. In a dynamic panel model, we investigate the factors accounting for the geographical patterns of FDI inflows to 11 transition countries of Europe for the period 1990-2009. Whereas traditional FDI determinants, such as market size, labor cost, risk perceptions, are found to be insignificant, we find that transition-specific factors, such as agglomeration economies, trade openness, and EU accession prospects have significant and plausible effects on FDI. From this perspective, efficiency-seeking motives prevail across the region rather than market-seeking and resource-seeking motives during the time horizon of data. Therefore, determinants of FDI inflows should be analyzed in the context of intensive globalization, reshaped by many factors such as regional integration, new information and communication technologies. In other words, the motives that attacked foreign investment in 1970s should be analyzed now in the context of changes in the global economy, i.e., high development of communication and information technology as well as other transition-specific factors. In addition, our empirical analysis implies that integration with the EU is important for FDI in transition economies. We find the effect of EU accession prospects on FDI flows into transition countries to be positive and significant. From this perspective, countries implementing EU accession regulations, enforced by market economy policies, successfully acquire EU membership earlier, which provides an impetus for more FDI that leads to more growth and development. On the other hand, countries implementing EU regulations poorly are further from prospective membership, which may discourage FDI inflows.
Key Words: European Union; FDI; Turkey; Accession; Candidacy;
JEL Classification: F23