The Effects of FDI on Economic Growth in Central and Eastern Europe: Mergers & Acquisitions, and Greenfield Investment

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: In the last decade Central and Eastern Europe faced surge in foreign capital inflows and economic growth. Foreign direct investment played significant role in forming government policies, development in the infrastructure and national income generation. While most research has been done on FDI impact on per capita real GDP growth, this paper takes alternative approach and examines the effects of two main FDI modes - greenfield investment and M&A - on economic growth in CEE. As methods are different in nature, there is expected to be different impact too. The theoretical analysis of linkages between multinational corporations’ presence and economic growth in host countries advocates for the positive impact, despite some negative spillovers. Transfer of modern technology, the know-how, managerial and markets knowledge from more advanced countries’ multinational enterprises contributes to relevant experience accumulation and welfare development of the CEE region. In the empirical part, panel data for the period 1992 - 2012 is analyzed. In order to control for differences within each country, the fixed effects model is employed. The results are ambiguous. Greenfield investment demonstrates positive effect, but it either loses its significance or becomes even significantly negative when more control variables are added. M&A does not show any high importance. Simultaneously, the interaction between greenfield investment and human capital is sturdy and shows positive effect on the growth in CEE, what is promising. This indicates that a certain threshold of education is required in order for new technologies, training programs and other advantages brought by transnational corporations to be successfully absorbed.

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