The CEEC as FDI Attractors: A Menace to the EU Periphery?

The change of economic, social, and political orientation in Central and Eastern European countries (CEEC), together with the accession of a first group into the European Union in 2004, has raised a number of challenging questions. One object of interest has been the implications of Eastern openness in terms of international capital reallocation. This paper concentrates on the issue of foreign direct investment (FDI), a major channel of economic integration. In fact, in the particular case of these countries, a dramatic change in the pattern of FDI inflows took place in recent years. A number of studies have surveyed the determinants of FDI to this region, but the issue still remains relatively unexplored from the empirical point of view. Using a random effects panel data model in the analysis, we try to empirically uncover the main determinants of FDI and to examine the probability of FDI diversion from the EU periphery to these transition economies. This issue is especially interesting for the EU periphery in general, and for cheap labor suppliers such as Portugal in particular, because there are reasons to believe that some diversion of funds from the South to the East may be taking place.