The CEECs as FDI attractors: are they a menace to the EU periphery?

Abstract

The change of economic, social and political orientation in Central and Eastern European countries (CEEC), together with their expressed intention of joining the European Union (EU) in a foreseeable future, have 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), which is considered 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 labour suppliers such as Portugal in particular, since there are reasons to believe that ‘the east may be getting what would otherwise come south’.