Challenges and Prospects
Edited by Klaus Liebscher, Josef Christl, Peter Mooslechner and Doris Ritzberger-Grünwald
Chapter 14: Foreign direct investment in South-East Europe: what do the data tell us?
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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