Foreign Direct Investment

and Institutional Environment

in Transition Economies

Henry Sichel Doing business in C.E.E. Elizabeth Pyle Wirtschaftuniversitaet - Wien

Industrialized economies

Transition economies

Positive externalities

Human capital intensification

Technological diffusion

Profits

Corporate growth

Henry Sichel Doing business in C.E.E. Elizabeth Pyle

Determinants of FDIs inflows

Quality of the Institutional framework

Private property rights

Law of contracts

Strong and limited government role

Generally

Quality of regulation

Formal institutions development

Perceived risk

Intellectual property protection

In transition economies…

I – The evolution Central- Baltic

South-East

Former U.S.S.R

% o

f to

tal F

DIs

1992 2004

Henry Sichel Doing business in C.E.E. Elizabeth Pyle

Slow down in privatizations

Increase in net outflows

Repayments

Acceleration in privatizations…

Increase in trust

… and greenfield investments

Oil

Retail

II – Why?

Henry Sichel Doing business in C.E.E. Elizabeth Pyle

III – The Impact

Beyond FDIs, other influential variables

Long-run growth • Gross fixed capital; • Labour; • Human capital

Short-run movements • Inflation; • Budget deficit

Dependent variable: GDP per capita

Per

cap

ita

GD

P

FDIs

+

-

1° Regulation

2° Property rights protection

3° Black market existance

4° Capital mobility

5° Wages level

IV – Which are the drivers?

Finding out the different aspects of Institutional Quality

Economical aspects

Legal aspects FDIs

climate

Based on the Heritage Foundation 10 variables- Index

V –FDIs climate… and what else?

1° FDIs climate

2° Budget deficits

3° Typology of privatizations

4° Labour costs (positive effect!)

Henry Sichel Doing business in C.E.E. Elizabeth Pyle