The Effects of Economic Factors in Determining the Transition Process in Europe and Central Asia

This paper examines how economic determinants affect foreign direct investment into a sample of Western European and transition countries from 1990 to 2003. The observed differences in the flow of foreign investment into the transition countries, relative to those in Western Europe, provokes the question of whether this phenomenon was determined by the economic factors present in those countries. Using a conceptual model constructed from economic factors that affect FDI inflows, this study considers the sample set for two sub-periods in the transition process, namely the early period from 1990 to 1998 and the later period from 1998 to 2003. In the first period, economic factors do not account for comparatively higher rates of capital inflows into the Central European and former Soviet economies. This result is reconciled with the obvious difference observed in reality, by suggesting that the higher than expected FDI flows into the transition countries of Central Europe specifically were due to the transition process. In the second period, the rates of capital inflow remain relatively similar between Western and Central European economies, though the former Soviet economies were shown to experience different rates of FDI inflows based on the economic factors specified. The lack of difference between Central European and Western European FDI flows proves that the transition period had come to any end by 2003 for Poland, Hungary and the Czech Republic.