Foreign Direct Investment in Central and Eastern Europe

Marin Marinov, Svetla Trifonova Marinova

• Publisher: Routledge
• Year: 2018
• Print ISBN:
  9781138707580
• eBook ISBN:
  9781351774574
• Topic: Business
• Subtopic: Business General
• Index: Business

This title was first published in 2003. Covering a diverse range of countries such as Bulgaria, the Czech Republic, Hungary, Poland, Slovakia, Slovenia and Russia, as well as referring to the characteristics of the region as a whole, this book examines the inflow and outflow of foreign direct investment from both home and host company and country perspectives. By analyzing foreign direct investment in terms of process, content and context, the book provides a holist approach towards direct foreign investment in the transitional context of Central and Eastern Europe, embracing both macro- and micro-economic perspectives of the process.

PART I

OVERVIEW OF FOREIGN DIRECT INVESTMENT IN CENTRAL AND EASTERN EUROPE

Introduction

MARIN ALEXANDROV MARINOV and SVETLA TRIFONOVA MARINOVA

Foreign direct investment (FDI) is a part of broader activities bringing internationalization and economic integration of businesses worldwide. Trade among nations dates from ancient times. In the recent historic past Dutch, English, French, Portuguese and Spanish firms promoted international trade in their overseas colonies. Gradually, those firms started establishing production facilities in home markets. These activities can be regarded as initial FDI undertakings. Contemporary FDI started in the early 1950s when multinational firms began creating production networks spreading all over the world.

While after World War II the industrialized world got involved in internationalizing activities through FDI, the countries of Central and Eastern Europe (CEE) were developing inward integration within the Council for Mutual Economic Assistance (CMEA) for both trade and investment activities. The economic climate in the CEE region changed after the fall of the Berlin Wall in 1989. Since then there has been a radical change in the flow of capital from developed countries towards countries of the former Soviet Bloc.

Transition CEE countries have adopted different approaches towards the creation and implementation of FDI policies and strategies. The Czech Republic, Estonia, Hungary and Poland, having appreciated FDI as a major stimulus to transition to market as well as a main boost to economic growth, have adopted open and facilitating inward FDI policies at various periods of their early transition to market. Simultaneously, a number of CEE countries started participating in outward FDI activities. In absolute terms Russia and Hungary are among the best performers in this respect (Marinov, 2002).

Taking the investor’s perspective, FDI has always been associated with the process of resolving a number of issues. The process of international capital flows is associated with the assumption of a certain degree of risk depending on the environmental characteristics, among others; political, economic, commercial, and financial. Drives that can motivate foreign investors to undertake FDI activities can fall into several categories (Dunning, 1993). They are access to resources (natural and labor) unavailable or more expensive in the home country, allowing increase in efficiency; access to markets avoiding import restrictions, reducing transportation and transaction costs, quicker and better responding to the signals of host markets; pursuing of strategic objectives, among others market domination or establishment of strategic alliances, to avoid restrictions that affect the investor’s home country.

A Brief Historic Outlook of FDI in CEE

Historically, Russia and some CEE countries like ex-Czechoslovakia, and to a certain extent Hungary and Poland, received substantial FDI inflows before communist governments came to power. For example, Russia attracted substantial inflows of FDI in the last decade of the nineteenth century and immediately before World War I. Those investment inflows brought about fast economic development and internationalization of the Russian economy at the time (Kuznetsov, 1994). There were very limited FDI inflows in ex-Soviet Union between the end of World War I and the beginning of the 1980s. Due to severely limited economic activities within the boundaries of CMEA and lack of legal support, Western FDI in CEE countries was negligible before the start of transition.

The 1980s saw many changes related to the easing of the restrictions for FDI from developed capitalist economies into CEE. Most of the FDI inflow in the CEE resulted in the creation of international joint ventures (IJVs) with the participation of the respective CEE governments and foreign companies as partners. In the majority of cases the foreign companies were of Western European, North American or Japanese origin. Companies, such as Coca Cola, Pepsi Co, Matsushita and British Leyland, penetrated the region through IJV formation and/or licensing agreements.

Foreign Direct Investment Theories and their Relevance to Central and Eastern European Context

Theories and concepts explaining FDI phenomenon have started to appear, develop, be adjusted, refined and modernized since 1960s. There are certain paradigms that can be used in studying, analyzing, developing, implementing and improving FDI policies in both macroeconomic and microeconomic aspects. For a certain period of time the countries from the Commonwealth of Independent States (CIS) and the European part of the Soviet Bloc, the transition countries, were deprived from theoretical and practical development of FDI policies and their application.

Coase (1937) made the first theoretical contribution to international expansion of firms by introducing the notion of the internalization perspective or transaction cost theory. According to him there may be cond ions under which a firm may find it more efficient to develop an internal market rather than penetrating foreign markets. Later, the minimization of transaction cost became a criterion for foreign market entry (Williamson, 1975) to decrease the probability for market failure. This theory is applicable in the CEE context in explaining the behavior of a company entering this regional market by forming a subsidiary on its own (internalization) or going for a collaborative venture formation with a partner or partners, either from the region (mostly when seeking local intelligence) or with a partner or partners from outside the region (principally when wishing to share the risk of undertaking investment).

Hymer (1960) introduced the monopolistic competition and market imperfection theory founded on the assumption that foreign investors need to exploit imperfections because investments in foreign production facilities are associated with more substantial costs and higher risks than investments in production facility creation in the home country. As additional investments are needed to meet the operational and organizational costs of overseas subsidiaries, coupled with higher marketing and business development expenses, the investing company has to possess a monopolistic advantage derived from market imperfections. Hymer’s approach was further developed by Kindleberger (1969), Horst (1972), Kimura (1989) and Lall (1980). The contributions of Hymer (1960) have been focused on technology- and innovation-based company-specific advantages. Authors after Hymer studied the specific competitive edges of companies, referring to explanatory variables for making foreign investments, such as size of firm, vertical integration, production differentiation. The monopolistic competition and market imperfection theory of FDI can be useful for the host countries and companies in...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Contributors
• PART I OVERVIEW OF FOREIGN DIRECT INVESTMENT IN CENTRAL AND EASTERN EUROPE
• PART II FOREIGN DIRECT INVESTMENT IN CENTRAL AND EASTERN EUROPE: COUNTRY OF ORIGIN EFFECTS
• PART III IMPACT OF FOREIGN DIRECT INVESTMENT ON COUNTRIES IN CENTRAL AND EASTERN EUROPE
• PART IV FORMS OF FOREIGN DIRECT INVESTMENT IN CENTRAL AND EASTERN EUROPE
• Name Index
• Subject Index