Attracting FDI in Southeastern Europe: Lessons from the Experience of East Central European Countries Magdolna Sass Institute of Economics of the Hungarian Academy of Sciences and ICEG European Center

Assumption FDI: significant factor in economic transition (positive effects generally outweigh negative ones plus addresses some transition-specific problems) Role in technology transfer and upgrading, company restructuring, spillovers, level of competition, productivity growth, market access, usually the most beneficial form of external financing etc. (however, in some fields empirical evidence inconclusive)

FDI: determinants (theoretical and empirical literature) (Distinction between domestic market oriented and export- oriented FDI) - Market size, growth prospects - Geographic location - Factor endowments (natural resources, labour costs, skillness, infrastructure) - FDI policies (both in narrow and wide sense - stability) - Agglomeration effects – clusters - Other factors (quality of life, ER variability, political stability)

Dealing in detail with two determining factors – experience of ECEC 1. Privatisation policy matters to a great extent 2. Reaching a „critical mass” matters

Privatisation matters 1

Privatisation matters 2

Privatisation matters 3

Accumulating a „critical mass” of FDI Attracting a few „blue chips” –„demonstration effect” for other investors FDI policy in narrow sense (incentives) may matter – especially when choosing between similarly endowed and similar quality locations – ECECs used generous incentives to attract big projects at an early stage of their FDI attraction

Why does a threshold-effect exist? Risks of FDI in a new host country –appearance/activity of a well-known company indicates that the risk of FDI is bearable Channels of FDI attracting further FDI: Same investor: 1. Reinvested earnings, intercompany loans for capacity extensions or new investment Other companies: 1. Competitors 2. „Collaborators” (suppliers, customers) 3. Service-providers

Share of new (equity) and additional (reinvested earnings and other) FDI

Conclusion Some lessons for Hungarian companies/policy makers - after reaching the „critical mass”, the inflow of FDI will/may accelerate (Romania-Bulgaria may be close, EU-accession will accelerate the process) - Companies: it may be worth and profitable appearing before the „crowd” + new opportunities for relocation - State: new competitors especially for the (labour) cost-sensitive investments; growth OFDI