Determinants of direct foreign investment in transition economies in Central and Eastern Europe

Meyer, Klaus (1997) Determinants of direct foreign investment in transition economies in Central and Eastern Europe. Doctoral thesis, University of London: London Business School.

Abstract

This thesis presents an analysis of direct foreign investment (DFI) in the transition economies in Central and Eastern Europe (CEE). It starts with a review of the previously available statistical and qualitative evidence to develop research questions specific to the region. The theoretical literature on DFI in economics and management is reviewed and extended in two directions: analytical frameworks are presented for the intemalisation of international business, and for DFI in a process of economic development. On this basis, a questionnaire instrument is developed covering business relationships with five countries in CEE. Using a postal survey, evidence from 269 German and British companies has been collected. The empirical analysis investigates the investment decision processes of the firms entering the CEE region. Hypotheses derived from general economic theory are tested under the special conditions of economic transition. With respect to entry decisions, the method of empirical analysis is innovative in that multiple decisions are analysed in the same broad data-set of potential investors, and integrated with a three-step decision model. At the first stage, the firms' propensity to be active is examined, and at the second stage their choice between trade, contracts and DFI. The third analysis tests hypotheses for the entry mode and ownership preferences of actual investors. Most of the theoretical hypotheses are confirmed, although there are several notable exceptions. The study derives implications for both the international business literature and for research and policy in economics of transition. The concluding chapter critically evaluates the transaction cost approach underlying most of this study. The results suggest that more attention should be paid to capabilities of firms to manage an operation, in addition to market failure analysis. The study furthermore provides interesting insights on foreign investment for policy makers within the region.