The relationship between foreign direct investment and economic growth: evidence from transition countries

This paper examines the importance of foreign direct investment on economic growth. Using a panel data set for 27 transition economies over the period 1991–2004 as well as the methodology of panel cointegration and causality tests, the empirical findings show that foreign direct investment does exhibit a significant relationship with economic growth, at least for those transition countries that are characterized by high levels of income and have implemented successful privatization programs.     

CLIMBING TO THE TOP? FOREIGN DIRECT INVESTMENT AND PROPERTY RIGHTS

This article operates at the interface of the literature on the impact of foreign direct investment (FDI) on host countries and the literature on the determinants of institutional quality. We argue that FDI contributes to economic development by improving institutional quality in the host country. This proposition is tested within a large panel data set of 70 developing countries for the period 1981–2005. We show that FDI inflows have a positive and highly significant impact on property rights. Results are very robust and not affected by model specification, different control variables, or estimation technique. To our knowledge this is the first article to empirically test the FDI—property rights linkage. (JEL F23, O43, P48)     

Economic Freedom and Economic Growth in South East Europe

Economic freedom, understood as absence of barriers for business entry, business operations and business exit, is a source of economic development. Its impact is indirect: through institutions framework creation and environment that encourages economic development. Primarily, economic freedoms are a reflection of institutional arrangement, which makes business operations and the realization of business ideas easier for entrepreneurs and managers, who are two extremely important groups for economic development. The aim of the paper is to present empirical analysis of interrelation between economic freedom and economic development, expressed through several indicators, such as gross domestic product, income per capita, foreign direct investment per capita.     

FOREIGN INVESTMENT AND TRADE DEPENDENCE

This article explores the relationship between foreign capital investment and trade dependence in less developed economies. Dependency and world system theorists have argued that foreign investment from the advanced capitalist states promotes export and import dependent forms of development. Using cross-national data for 65 less developed nations between 1960 and 1977, the analysis supports this general claim. Total direct foreign investment has a significant positive impact on the measures of export, import and total trade dependence. However, when the total foreign investment measure is disaggregated by sectoral destination (agriculture, manufacturing, petroleum/extraction) only investment in petroleum/extraction has the expected effect on trade dependence. This finding suggests that a large part of the effect of foreign investment may be due to the structuring influence of investment in mineral/extractive forms of production.     

Structural Risks of Foreign Liabilities: Impact of Investment Income Repatriation in Emerging Economies

This paper explores the structure of foreign liabilities, the extent of capital repatriation in the form of investment income of foreign investors and its impact in emerging markets. The concept “coverage ratio of foreign investment” is introduced, which is defined as the share of total income repatriated by foreign investors in the respective cumulative inflows of the financial account. The impact of foreign investors’ returns onto external imbalances in emerging economies is studied empirically. The tendency of growing role of the investment income balance in the formation of the current account balance reveals new threats for the emerging economies.     

The microfinance promise—can it be kept? A macro perspective

After five decades of rapid expansion of microfinance worldwide, little is known about its aggregate effects and whether the “microfinance promise” of poverty reduction holds at the macro level. Challenging questions have arisen. Here we explore the dynamic response of microfinance on economic growth, financial deepening and income inequality. Countries are grouped into three broad clusters (stable, moderate and poor) based on macro‐institutional variables. Our results show that microfinance has a significant long‐term ability to affect the broader economy. However, the impact and dynamics of microfinance differ substantially across macro‐institutional environments. It grows in weaker environments, reaches its peak in developing economies, and then gradually “dies out” in more stable economies. While there is evidence of a positive impact of microfinance at the aggregate level, the response is different depending on whether countries are poor, moderately developed or economically stable. Once countries climb up the macro‐institutional “ladder,” microfinance can take a different shape and its relationship with other macroeconomic fundamentals can change. Our results indicate that microfinance has the strongest effect when the external environment is supportive and proactive; in weak environments, microfinance cannot grow sufficiently. Therefore, more attention should be given to supporting the socioeconomic dimensions of economies.     

Private Provision of Infrastructure in Emerging Markets: Do Institutions Matter?

Governments in developing countries have encouraged private sector investment to meet the growing demand for infrastructure. According to institutional theory, the role of institutions is paramount in private sector development. A longitudinal dataset of 40 developing economies between 1990 and 2000 is used to test empirically how different institutional structures affect private investment in infrastructure, in particular its volume and frequency. The results indicate that property rights and bureaucratic quality play a significant role in promoting private infrastructure investment. Interestingly, they also suggest that countries with higher levels of corruption attract greater private participation in infrastructure.     

Building Social Capability for Economic Catch-up: The Experience and Prospects of the Post-socialist Countries

The post-socialist countries are, by the standards of the EU, poor countries. The major developmental task facing these countries is, therefore, that of catching up with their more prosperous neighbours. The scope for catch-up is defined in terms of the levels of social capability exhibited by these societies and their capacity to establish technological congruence with the leading firms from the advanced industrial economies. S&T systems in the broadest sense are shown to be key factors in relation to both social capability and technological congruence. Detailed analysis of the transition countries indicates that the catch-up process is hampered across the board by specific gaps in social capability and elements of technological incongruence. These can in turn be traced to specific structural trends, in particular in relation to foreign investment, and to specific weaknesses of institutional development, cutting across the public/private dividing line, notably in relation to R&D systems and banking systems. Consideration of all these factors suggests that there can be no assumption that the transition countries will automatically catch up with western Europe, and that some disfavoured transition countries may, indeed, continue to fall behind.     

International Migration and the Role of Remittances in Eastern Europe

In this paper we analyse the effect of remittances on employment performance for Central and East European (CEE) economies. We show that the impact of remittances on unemployment depends on its effect on productivity growth and investment. In order to empirically analyse the impact of remittances we estimate a productivity equation using a set of 11 transition countries during the 1990 to 1999 period. Our results show support for the view that remittances have a positive impact on productivity and employment both directly and indirectly through its effect on investment.     

INTERNATIONAL R&D SPILLOVERS AND PRODUCTIVITY TRENDS IN THE ASIAN MIRACLE ECONOMIES

This paper examines the importance of the domestic research and development stock and foreign knowledge spillovers on total factor productivity for six Asian miracle economies over the period from 1955 to 2006. The productivity effects of international knowledge spillovers through the following channels are considered: imports, exports, inward foreign direct investment, patents, geographical proximity, and the general channel. The general channel is a transmission mechanism where knowledge spillovers occur automatically and do not pass through any specific channel. The estimates show that knowledge has been transmitted through all the channels considered but that the import channel and the general channel have probably been the most important ones for the Asian miracle economies. (JEL O10, O30, O40)     

Financial Intermediation Modernization in Countries with Transition Economy

During the modern phase of economic reforms directed at the establishment of market economy, many countries with transition economies face the challenge of solving the issue of formation and rational usage of internal sources of financing the real sector of the economy, as well as attracting considerable volume of direct foreign investment. In general, financial market imperfections hold back innovation and growth, and that public policy can complement financial markets. Therefore, the most relevant issue at the present time is the formation of attendant and complex supervision institutions, as well as an exigency of innovative economy governance as mainframe principles for further banking system elaboration and financial sector development in general. We have taken Armenia as a case study for transition economy as far as Armenia is currently in the stage of capital market development through integration into international financial markets.      

Bilateral Investment Treaties and Foreign Direct Investment: Evidence of Asymmetric Effects on Vertical and Horizontal Investments

Bilateral investment treaties (BITs) are legal instruments used by developing and transition countries to provide investor protection and, by extension, promote higher levels of inward foreign direct investment (FDI). While the link between BITs and FDI has been extensively studied, little is known about the impact of the treaties on different forms of investment. Motivated by this observation, we examine the effects of BITs on vertical and horizontal FDI. We find that BITs are more positively related to vertical than to horizontal FDI. We also find that BITs tend to act as stronger substitutes for better institutions in the case of vertical relative to horizontal investments. The findings inform BIT strategies that are compatible with development objectives in developing and transition countries.     

The Celtic Tiger and home leaving among Irish young adults

This paper examines the effect of local economic growth on whether young adults move out of the parental home to form new households—an important milestone in the transition to adulthood. I use the placement of foreign direct investment during the Celtic Tiger, the large economic expansion in Ireland during the 1990s, to estimate the impact of local job growth on the likelihood that young adults leave home. This paper contributes to the literature by exploiting an exogenous shock to the local labor market to identify the main effect of employment growth on home leaving behavior. The results show that local economic growth increases the probability that young adults leave home particularly for the well-educated young adults most likely to be employed in the factories that opened during the period.     

Wages,Skills, and Integration in Poland,Hungary and the Czech Republic: an Industry-level Analysis

This paper analyzes the manufacturing sector of Poland, Hungary, and the Czech Republic between 1993 and 2001 and provides a set of stylized facts regarding the changes occurring in the skill composition of the workforce and in the earning structure by skills, on one hand, and in trade flows and foreign presence through direct investment, on the other hand. All three countries have experienced sharp increases in earning inequality which have concerned almost all manufacturing industries; relative skilled employment has, instead, decreased in almost all Hungarian and Czech industrial branches, while showing the opposite trend in the Polish counterparts. At the same time, the three countries have reoriented and expanded their trade flows and modified the merchandise composition of both exports and imports in favour of high-tech and capital-intensive sectors and against more traditional industries. Foreign direct investment has acquired progressively more importance in the three economies and the high-tech sector – as well as chemicals and machineries – has significantly gained relevance on total stocks. Correlation analysis comes in favour of a prevalently vertical nature of multinational enterprises; moreover, trade flows are in general negatively correlated with relative wages and employment, whereas the sign of the relation between foreign direct investments and earning inequality is clearly positive in Poland only.     

The Behavioral Equilibrium Exchange Rate of the Czech Koruna

The behavioral equilibrium exchange rate (BEER) model of the Czech koruna is derived in this paper and estimated by three methods suitable for nonstationary time series. The considered potential determinants of the real equilibrium exchange rate are the productivity differential, the interest rate differential, the terms of trade, net foreign direct investment, net foreign assets, government consumption, and the degree of openness. We find that the Czech koruna was on average undervalued over the period from 1994 to 2004 by about 7 percent with respect to the estimated BEER. The significant determinants of the equilibrium exchange rate of the Czech koruna appear to be the productivity differential, the real interest rate differential, the terms of trade, and the net foreign direct investment.     

Developing a civilised society in transition economies: The Post Keynesian paradigm

A Post Keynesian paradigm of transition requires the exposition of what I define as primary elements: economic analysis; definition of a good society; speed; political structure; ideological structure and the role of initial conditions. The next step is to identify secondary elements, the desired changes with respect to: price liberalisation-stabilisation; privatisation; institutional structure; monetary policy and the financial system; fiscal policy; international trade and social policy. It is argued that Post Keynesianism clarifies the reasons why the orthodox model of transition implemented in transition economies was inappropriate and unsuccessful. The Post Keynesian recommendations would have resulted in a more sensible and successful transition.     

Does foreign bank entry contribute to financial development? Examining the role of income thresholds

This article examines the relationship between foreign bank entry and financial development in a panel framework covering 57 emerging market and developing economies (EMDEs) between 1995 and 2009. Using various measures of financial sector deepening, the article also explores the degree to which the relationship between foreign bank entry and financial sector depth varies by different income thresholds of the EMDEs. The empirical findings suggest that while foreign banks have a direct positive impact in furthering financial depth, the marginal effects of foreign bank entry diminish over time with greater levels of economic development. In other words, the impact of foreign bank entry tends to diminish as the per capita income of the country rises.     

Child and Family Policies in a Time of Economic Crisis

At the beginning of 2008, a number of the world’s major economies began to experience the effects of the biggest economic financial crisis in history. By the end of that year, the financial crisis was a global recession, and governments responded with changes to a suite of social and economic policies. Two broad stages of government response are identifiable: a period of stimulus followed by a move towards austerity. This study views the crisis period from the perspective of children and family policies and assesses the justification for the changes in the economic context and in the context of the recommendations for spending on children outlined in Doing Better for Children (OECD, 2009) of early investment with a focus on at‐risk children. Across Europe, with few exceptions, child and family policies have more often than not avoided direct cuts; cash benefits are most often amended (and subject to temporary reduction in coverage or amounts); and (so far) during the crisis child and family policies continue to be advanced in many European countries.     

FOREIGN DIRECT INVESTMENT AND COUNTRY‐SPECIFIC HUMAN CAPITAL

This paper exploits an international bilateral data set over the period 1963–1998 to investigate the relationship between foreign direct investment (FDI) and foreign‐educated labor in an FDI host country. Workers educated abroad acquire country‐specific human capital that is more productive in the host country of study. A foreign subsidiary sharing a parent firm's technology will invest more if it has more foreign‐educated labor, since it can utilize this labor more productively because of the country‐specific human capital. Consistent with our predictions, our empirical findings show that foreign‐educated labor accounted for a sizable portion of growth in FDI flows. (JEL F21, F10)     

The role of mediatory myths in sustaining ideology: the case of Cuba after the ‘special period’

After the collapse of the Soviet bloc, management researchers devoted considerable energy to investigating ways to operate the transition to market economies. However, one country of the former Soviet bloc, Cuba, resisted transition and reaffirmed loyalty to the values of La Revolucion. Little is known about management in Cuba. This study seeks to approach one particular aspect of management in this country: the relationship between national ideology and management practice. To analyse the topic, qualitative data from Cuban managers and management professors were gathered over a 10‐year period. Results suggest that the dynamics of managerial ideology can be understood as the interplay of several processes operating at distinct levels: institutional, professional, organizational and individual. The interplay between conformance to the ideology and its use as a practical resource is a potential source of change and of conflict demands that are tackled with recourse to mediatory myths.