FDI in Southeastern Europe
| Author | Dimitri G. Demekas |
| Position | IMF European Department |
| Pages | 233-243 |
Page 233
How significant a role do the right policies play in a country's ability to attract foreign direct investment (FDI)? Not as much as some policymakers might hope, but enough to suggest that the right policies can make a difference and their effects can vary above and below a certain FDI threshold. Southeastern Europe, which has attracted limited FDI, is a case in point, according to a recent IMF study. It stands to benefit from policies that encourage FDI, notably infrastructure reforms and a liberalization of foreign exchange and trade regimes.
Page 242
Policymakers trying to attract foreign direct investment (FDI) to their countries often have exaggerated expectations of what their efforts can accomplish. A recent IMF Working Paper confirms that factors outside the reach of policymakers are at least as important as policies. But policies do matter, and the paper discusses what influences FDI and what does not. It also argues that above a certain level of foreign investment, some policies lose significance while others become more important. By estimating "potential FDI" and contrasting this with actual levels of FDI, the paper tries to give authorities a more realistic expectation of what the right policies can achieve.
The benefits of FDI for a host country have long been recognized: knowledge and technology transfer, productivity spillovers, enhanced competition, and improved access for exports abroad, notably in the source country. But FDI can have negative aspects, too. Large foreign companies often try to coax concessions from host country governments, and sometimes abuse their dominant market position or use transfer pricing to minimize their tax obligations.
On balance, however, the consensus is that the benefits of foreign investment tend to outweigh its costs, especially in transition economies that have extensive restructuring and modernization needs and limited domestic capital and other resources.
The decidedly mixed experience of the European transition economies provides an interesting case study (see chart, this page). Some Central European countries, like Hungary and the Czech Republic, have been very successful in attracting...
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