The Potential Magnitude and Impact of FDI flows to CEECs

Abstract

This paper uses a simple gravity model of bilateral FDI flows to assess the commonly heard assertion that FDI inflows into transition economics in Central ad Eastern Europe have been disppointingly low. The results show that the amounts of overseas investment bY EU countries in the more advanced transition economies are already greater than one would expect given their current level of income, market size and relative proximity. A flood of FDI into these countries is therefore unlikely. For the less advanced countries in the region current FDI flows are considerably below their potential level. We proceed to try and indentify some implications of overseas investment for the home country. We find that FDI and exports appear to be complementary activites. However, we also find a positive relationship between FDI and imports suggesting that relationship between trade and FDI is more complex than standard theories and aggregate data analysis can provide for.

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