FDI in transition: An Empirical Study of the determinants of Foreign Direct Investment in Central and Eastern Europe during the EU accession

Abstract: After the fall of communism, the transition economies in Central and Eastern Europe have experienced a unique type of political and economic change in modern time. While the transition process within the CEE has been characterized by success but also by disappointment, FDI has been seen as a potential catalyst for economic change of the transition countries. This study aims to investigate the determinants of FDI to the CEE countries during the period 1992-2005. Using aggregate data on FDI inflows to the CEE, this study confirms the importance of traditional and transitional determinants for the distribution of FDI within the CEE. In addition, this study investigates the impact of the different steps in the EU accession for inward FDI to the CEE. The findings suggest that an EU membership has a significantly positive impact on FDI inflows to the new EU member countries within the CEE. An EU membership and further EU integration are suggested to contribute a reduction of risk associated with investing in the CEE through guarantees of future economic and political stability within the region.