The Developmental Consequences of Foreign Direct Investment in the Transition from Socialism to Capitalism: The Performance of Foreign Owned Firms in Hungary

Abstract: This article examines the debate between Neoliberals and Modernization theorists on the one hand and dependency and world systems theorists on the other about the developmental impact of foreign direct investment in post-communist society. I test six hypotheses derived from this debate with logistic regression on a 1996 large-n random sample survey of Hungarian firms to see if foreign owned firms perform better than their private domestic counterparts. I then supplement these findings with three more logistic regression models of performance tested on a 1997 large-n, random sample survey of Hungarian firms. Foreign owned firms are found to have superior performance to domestically owned private firms on 6 of these indicators. Furthermore, while foreign owned firms create less demand for local producers than domestically owned firms, this is not at a level which is statistically significant. These findings support the neoliberal/modernizationist position that foreign investment creates high performing firms - which advocates claim are capable of driving the modernization of the entire post-communist economy.