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European Economic Integration and South-East Europe

European Economic Integration and South-East Europe

Challenges and Prospects

Edited by Klaus Liebscher, Josef Christl, Peter Mooslechner and Doris Ritzberger-Grünwald

With both transition dynamics and the EU integration process having shifted to the south-east of Europe, a region fairly marginalized in the literature, this book fills a gap by taking stock of where South-East Europe’s economies and institutions stood in 2004. The authors evaluate the potential for investment and growth within the South-East European region, including the role of trade and FDI, and discuss the challenges associated with unemployment, poverty and ‘brain drain’. The book also provides insights into the particular monetary and exchange rate policies applied, including cases of ‘euroization’, and finally makes an assessment, against this background, of the European perspective of the countries of South-East Europe.

Chapter 14: Foreign direct investment in South-East Europe: what do the data tell us?

Dimitri G. Demekas, Balázs Horváth, Elina Ribakova and Yi Wu

Subjects: economics and finance, regional economics, urban and regional studies, regional economics


Dimitri G. Demekas, Balázs Horváth, Elina Ribakova and Yi Wu1 INTRODUCTION: WHY ANOTHER PIECE ON FOREIGN DIRECT INVESTMENT? Foreign direct investment (FDI), its determinants and its effects, has been extensively studied. It has long been recognized that the benefits for the host country can be significant, including knowledge and technology transfer to domestic firms and the labour force, productivity spillovers, enhanced competition, and improved access for exports abroad, notably to the source country. Moreover, since FDI flows are non-debt creating, they are a preferred method of financing external current account deficits, especially in developing countries, where these deficits can be large and sustained. At the same time, FDI can be a mixed blessing. In small economies, large foreign companies can – and often do – abuse their dominant market position. Large investors are sometimes able to coax concessions in return for locating investment there, and aggressively use transfer pricing to minimize their tax obligations. Multinational corporations attempt to influence the domestic political process, especially in developing countries. And FDI can give rise to potentially volatile balance of payment flows.2 Graham (1995), Borensztein et al. (1995) and Lim (2001), to name but a few, provide useful overall surveys of the literature on the impact of FDI on the host country. Holland and Pain (1998) present the evidence on diffusion of innovation, and Javorcik (2004), Javorcik et al. (2004) and Alfaro et al. (2003) discuss productivity spillovers. Finally, Lipschitz et al. (2002) present a good...

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