Integration Through Foreign Direct Investment: Making Central European Industries Competitive

The papers here explore whether direct foreign investment (FDI) can contribute to the competitiveness of industries in central Europe and to narrowing the gap between these transition economies and countries within the European Union. The Czech republic, Hungary, Slovakia and Slovenia have attracted substantial FDI since the beginnings of their transition to a market economy. Using exhaustive empirical data, the authors demonstrate that foreign investment enterprises in Central Europe have higher allocative efficiency, promote macro- and microeconomic restructuring and foster the restructuring of the manufacturing sector in accordance with the host countries' comparative advantages. The case of Austria is used to demonstrate the possible benefits of FDI. On the other hand, high foreign penetration leads to the concentration of production and exports and makes the economy more vulnerable to external shocks. In addition, there may be unwelcome pressures on economic policy in order to maintain the country's position as a frequented investment target. However, the analysis here suggests that, on the whole, economies in transition can become more competitive rapidly and more profoundly with the help of foreign direct investment.