Anderson, T.W. and C. Hsiao, 1981, “Estimation of Dynamic Models with Error Components,” Journal of American Statistical Association, Vol. 76, pp. 598–606.
Arellano, M., and S. Bond, 1991, “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equation,” Review of Economic Studies, Vol. 58, pp. 277–97.
Barrell, R., and N. Pain, 1999 “Domestic Institutions, Agglomerations, and Foreign Direct Investment in Europe,” European Economic Review, Vol. 43, pp. 925–34.
Berg, A., E. Borensztein, R. Sahay, and J. Zettelmeyer, 1999, “The Evolution of Output in Transition Economies: Explaining the Difference,” IMF Working Paper 99/73 (Washington: International Monetary Fund).
Bevan, A., and S. Estrin, 2000, “The Determinants of Foreign Direct Investment in Transition Economies,” University of Michigan William Davidson Institute DP 342.
Borensztein, E., J. DeGregorio, and J-W. Lee, 1998, “How Does Foreign Direct Investment Affect Economic Growth?” Journal of International Economics, Vol. 45, pp. 115–35.
Campos, N.F., 2000, “Context is Everything: Measuring Institutional Change in Transition Economies,” World Bank Policy Research Paper No. 2269 (Washington: The World Bank).
Campos, N.F., and F. Coricelli, 2002, “Growth in Transition: What We Know, What We Don’t, and What We Should,” Journal of Economic Literature, Vol. XL (3): pp. 793–836.
Campos, N.F., and Y. Kinoshita, 2002, “FDI as Technology Transferred: Some Panel Evidence from Transition Economies,” The Manchester School, Vol. 70, No. 3, pp. 398–419.
Cheng, L., and Y. Kwan, 2000, “What Are the Determinants of the Location of Foreign Direct Investment? The Chinese Experience,” Journal of International Economics, Vol. 51, pp. 379–400.
De Melo, M., C. Denizer, A. Gelb, and S. Tenev, 1997, “Circumstance and Choice: The Role of Initial Conditions Policies in Transition Economies,” World Bank Policy Research Working Paper 1866 (Washington: The World Bank).
Esanov, A., M. Raiser, and W. Buiter, 2001, “Nature’s Blessing or Nature’s Curse: The Political Economy of Transition in Resource-Based Economies,” EBRD WP No. 65, (London: European Bank for Reconstruction and Development).
Estrin, S., K. Hughes, and S. Todd, 1997, “Foreign Direct Investment in Central and Eastern Europe,” London: Royal Institute of International Affairs.
European Bank for Reconstruction and Development, 2000, Transition Report 2000 (London: European Bank for Reconstruction and Development).
Fujita, M., P. Krugman, and A. Venables, 1999, The Spatial Economy: Cities, Regions, and International Trade (Cambridge, Massachusetts: MIT Press).
Garibaldi, P., N. Mora, R. Sahay, and J. Zettelmeyer, 2001, “What Moves Capital to Transition Economies?” Staff Papers, International Monetary Fund, Vol. 48, pp. 109–45.
Gylfason, T., and G. Zoega, 2001, “Natural Resources and Economic Growth: The Role of Investment,” CEPR Discussion Paper No. 2743. (London: Center for Economic Policy and Research).
Hanson, G., 2000, “Should Countries Promote Foreign Direct Investment?” Unpublished, Department of Economics, University of Michigan.
Head, K., J. Ries, and D. Swenson, 1995, “Agglomeration Benefits and Location Choice: Evidence from Japanese Manufacturing Investments in the United States,” Journal of International Economics, Vol. 38, pp. 223–48.
Johnson, S., P. Boone, A. Breach, and E. Friedman, 2000, “Corporate Governance in the Asian Financial Crisis,” Journal of Financial Economics, Vol. 58, pp. 141–86.
Kinoshita, Y., and A. Mody, 2001, “Private Information for Foreign Investment Decisions in Emerging Markets,” Canadian Journal of Economics, Vol. 34, pp. 448–64.
Kravis, I. B., and R. Lipsey, 1982, “Location of Overseas Production and Production for Exports by U.S. Manufacturing Firms,” Journal of International Economics, Vol. 12, pp. 201–23.
Lankes, P., and A. Venables, 1996, “Foreign Direct Investment in Economic Transition: The Changing Pattern of Investments,” Economics of Transition, Vol. 4, pp. 331–47.
La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, 1998, “Law and Finance,” Journal of Political Economy, Vol. 106(6), pp. 1113–55.
Lucas, Jr., R.E., 1990, “Why Doesn’t Capital Flow From Rich to Poor Countries?” American Economic Review Paper and Proceedings, Vol. 80, pp. 92–96.
Lucas, R., 1993, “On the Determinants of Direct Foreign Investment: Evidence from East and Southeast Asia,” World Development, Vol. 21(3), pp. 391–406.
Markusen, J., and A. Venables, 1998, “Multinational Firms and the New Trade Theory,” Journal of International Economics, Vol. 46, No. 2, pp. 183–203.
Mody, A., A. Razin, and E. Sadka, 2002, “The Role of Information in Driving FDI: Theory and Evidence,” NBER Working Paper No. 9255 (Cambridge, Massachusetts: National Bureau of Economic Research).
Noorbakhsh, F., A. Paloni, and A. Youssef, 2001, “Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence,” World Development, Vol. 29(9), pp. 1593–610.
Portes, R., H. Rey, and Y. Oh, 2001, “Information and Capital Flows: The Determinants of Transactions in Financial Assets,” European Economic Review, Vol. 45, pp. 783–96.
Prasad, E., K. Rogoff, S. Wei, and M.A. Kose, 2003, Effects of Financial Globalization on Developing Countries: Some Empirical Evidence, IMF Occasional Paper No. 220 (Washington: International Monetary Fund).
Robinson, J., R. Torvik, and T. Verdier, 2002, “Political Foundations of the Resource Curse,” CEPR Discussion Paper No. 3422 (London: Center for Economic Policy and Research).
Resmini, L., 2000, “The Determinants of Foreign Direct Investment in the CEECs,” Economics of Transition, Vol. 8 (3), pp. 665–89.
Shiells, C., “FDI and the Investment Climate in the CIS Countries,” IMF Policy Discussion Paper, forthcoming (Washington: International Monetary Fund).
Singh, H., and K. Jun, 1996, “The Determinants of Foreign Direct Investment in Developing Countries,” Transnational Corporations Vol. 5, No. 2, August, pp. 67–105.
Wei, S. J., 2000a, “How Taxing is Corruption on International Investors?” Review of Economics and Statistics, Vol. 82 (1), pp. 1–11.
Wheeler, D., and A. Mody, 1992, “International Investment Location Decisions: The Case of U.S. firms,” Journal of International Economics, Vol. 33, pp. 57–76.
University of Newcastle and International Monetary Fund, respectively. We thank Burkhard Drees, Joshua Greene, Gordon Hanson, Shigeru Iwata, Mark Knell, Saleh Nsouli, Istvan Szekely, Clint Shiells, Bernard Yeung, and participants at the IMF Institute and the CEPR-WDI Transition Conference for valuable comments, and Aurelijus Dabušinskas, Anna Ratcheva, Evis Sinani, and Dana Žlábková for excellent research assistance.
In per capita terms, the larger recipients were Hungary, Estonia, Czech Republic and Poland. Russia, Kazakhstan, and Azerbaijan also received a large share of total inflows. See EBRD (2000), p. 74.
The 11 transition countries analyzed in Bevan and Estrin (2000) are Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia, and Ukraine.
What distinguishes our work from Garibaldi and others (2001) is the addition of institutional variables and the employment of a generalized-method-of-moments (GMM) estimator.
The economies covered in the data are Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia, Ukraine, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, the Russian Federation, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
The CIS stands for the Commonwealth of Independent States, which consists of all former Soviet Union countries (excluding the Baltic States): Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, the Russian Federation, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
The mode of horizontal FDI is typically “greenfield investment.”
As reported in Esanov and others (2001), most FDI in resource-rich countries of the CIS is of this type.
World Investment Report (UNCTAD, 2002) suggests that, with the accession of various CEEB countries envisaged in 2004, the integration of operations by EU transnational corporations will be accelerated and that more efficiency-seeking FDI will be directed to the accession countries.
Marshall (1920) argues that industrial districts arise because of technology spillovers, the advantages of thick markets for specialized skills, and the backward and forward linkages. A new economic geography emphasizes the linkages effect: users and suppliers of intermediate inputs cluster near each other because the large market provides greater demand for goods and supply of inputs. See Krugman (1991), for example.
More recently, Johnson and others (2000) show that differences in institutional quality of law and corporate governance can also explain the depth and severity of the Asian financial crisis.
The data used for estimation are unbalanced, because certain observations for the key variables are missing.
The main sector for inward FDI in the CEEB countries is manufacturing, while it is the resource sector in the CIS countries (UNCTAD, 2002).
The base year is 1996.
Unit labor cost is an alternative measure for wage cost. However, due to the paucity of the data on unit labor cost, we only report the results from nominal wage rate.
This variable is constructed by De Melo and others (1997). We also used more direct measures (e.g., proven oil and gas reserves), but the results were not significantly different.
One alternative for the infrastructure variable is the percentage of paved roads in the country. But this variable can be misleading: if there is one main road in the country and it is paved, then the value for this will be 100. Thus, only large values may not necessarily indicate better infrastructure.
The cumulative internal liberalization index (CLII) and cumulative private sector condition index (CLIP) were also tested. Due to high multicollinearity, CLII and CLIP were dropped.
The index covers the categories on approval requirements, the extent to which profits can be remitted abroad, ease in liquidating assets, and preferential treatment of direct investment. See Appendix in Garibaldi and others (2001).
It reflects the degree to which citizens are willing to accept the established institutions for making and implementing laws and adjudicating disputes.
We tried to distinguish different types of agglomeration by including the interaction terms of agglomeration with the share of the industry and with urbanization in the initial year. Neither term was significant, however.
Campos and Kinoshita (2002) find that both initial income level and FDI are important determinants of growth for 25 transition economies.
Other initial conditions were tested but none of them were statistically significant.
One alternative is to use the ratio of FDI to GDP. In transition economies, GDP is quite volatile during the initial years of transition. Thus, we prefer to choose per capita FDI to FDI/GDP.
The Hausman test rejects the random effects model.
Cheng and Kwan (2000) test for strict exogeneity of the following four variables: income, wage, education, and infrastructure. They find that the first two are endogenous, or weakly exogenous, in explaining FDI in Chinese regions.
All time-invariant variables (natural resources, distance from Brussels, trade dependence and restrictions on FDI) drop out after first-differencing, so we first transform them by multiplying by a time trend. Similar coefficients are obtained when we re-estimate the models using the individual means of Y and X over time. See Hsiao (1986) for further discussion.
We also estimated the GMM when market size and labor cost are weakly exogenous, but the estimators are similar. Since a small sample bias may be severe when the instrument matrix gets larger, we report here the results from strictly exogenous instrumental variables.
The insignificance of market size and labor cost may be associated with endogeneity of these variables. We also estimated the model by treating both variables as weakly endogenous, but their statistical insignificance remained.
However, the benefits of technology transfer are more relevant to FDI made in the manufacturing sector than in the primary sector.